Agency Partnership Outline 2d Shorter

Agency & Partnership Outline
I Formation of Firms Agency Relationships....................................................................4 II Contractual Dealings by Agents.....................................................................................5 A. Firms liability in contract for acts of its agent..........................................................5 B. Firms rights under contracts entered into by its agents-disclosure of principal........5 C. Agents Liability for Contractual Dealings..................................................................7 a). Agents duty to fully disclose principal/Problems with D.B.A.................................7 b) Liability of Attorneys..............................................................................................7 c) Agents Implied Warranty of Authority...................................................................8 d) Election of Remedies .............................................................................................8 IV Actual Authority of Agents and Its Consequences........................................................9 A. Express Actual Authority...........................................................................................9 B. Implied Actual Authority (Authorized Transactions!)...............................................10 C. Agents Duties of Care and Loyalty.........................................................................10 1. Introduction to the Fiduciary Duties of Agents and Servants...............................10 2. Duty of Care......................................................................................................... 11 3. Duty of Loyalty.....................................................................................................11 a) In general..........................................................................................................11 b) Conflicts of Interest...........................................................................................11 c) Duty to Account for Profits................................................................................12 d) Other Aspects of the Agents Duty of Loyalty...................................................12 e) Principals Remedies.........................................................................................13 V. Power of Agents to Bind the Firm by Unauthorized Acts.............................................13 B. Apparent Authority (PR has done something to create liability)..............................13 C. Estoppel (PR has done something to create liability)..............................................14 D. Inherent Agency Power (PR has done nothing; AG is unauthorized).......................15 E. Liability for Representations by Agent.....................................................................16 VI. Firms Accountability for notification to/knowledge of the Agent..............................17 1. Knowledge of An Agent...........................................................................................17 2. Prior or Casually Obtained Knowledge of an Agent..................................................18 3. Notification to an Agent...........................................................................................18 4. Time from which notification or knowledge affects the principal.............................18 5. Adverse Agents........................................................................................................19 VII. Ratification of Unauthorized Transactions................................................................20 A. Affirmance...............................................................................................................20 B. Knowledge of Agents: effect on ratification.............................................................21 X. Liability for Wrongful Acts of Servants (Respondeat Superior)...................................21 A. Introduction............................................................................................................. 21 B. Masters Liability for Acts of Servants......................................................................22 1. Liability for Acts of a Servant within the Scope of Employment...........................22 2. Masters RS Liability for Servants Abuse of Position Rest. 219(2).....................23 XI. Liability for Wrongful Acts of Independent Contractors.............................................24 Page 1 5-Jun-11 14:12:00 a6/p6

A. Non-liability for Acts of Independent Contractors....................................................24 B. Exceptions to the Independent Contractor Rule employer will be VL liable for torts of a non-servant agent/independent contractor..........................................................24 Non-delegable duty (NDD) doctrine..........................................................................25 Apparent Authority/Estoppel ...................................................................................25 XIII Dissociation of Non-owner Agents............................................................................26 A. Voluntary Terminations...........................................................................................26 B. Terminations by operation of law............................................................................28 1. Death ...................................................................................................................28 2. Termination of the Agency Relationship/Statutory Responses to the Death Issue ................................................................................................................................. 29 C. Irrevocable Agencies...............................................................................................30 I Formation of Firms - B. General Partnerships...............................................................30 i. Attorneys..................................................................................................................33 VI. PShips Accountability for notification to/knowledge of Partners...............................33 VIII. Management and Conduct of Firm Business - GP....................................................34 1. Partners as Agents (Creating Partnership Obligations)............................................34 a) Apparent Authority...............................................................................................34 b) Partnership by Estoppel (purported partners, purported partnerships)................36 2. Partners as Managers..............................................................................................38 a) Generally..............................................................................................................38 b) Transactions Outside the Usual & Regular Course of Business............................39 IX. Managerial Discretion and Fiduciary Duties...............................................................39 A. Duty of Loyalty - General Partnerships....................................................................39 X. Partnership Liability for Wrongful Acts of Partners (RS)..............................................42 C. RS Liability of Partnerships & Partners (Creating PShip Liability in Tort).................42 XII Ownership of the Firm v. Ownership of Firm Assets GP...........................................44 A. Ownership of the Firm (Firm Property)....................................................................44 B. Rights of Assignees and Creditors...........................................................................45 1. Assignees............................................................................................................. 45 2. Creditor Rights - Charging Orders - a) General Partnerships................................46 C. Ownership interests in the firm - Distributions on Liquidation.................................48 I Formation of Firms - LP.................................................................................................50 II. Liability for Contracts entered into before formation of a LL firm...............................52 a) Limited Partners: when face liability if problems in forming LPship.........................52 VIII. Management and Conduct of Firm Business - LP.....................................................53 1. Rights of General Partners.......................................................................................53 2. Voting Rights of Limited Partners............................................................................54 3. Limits on Contractual Expansion of LP Rights..........................................................54 IX. Managerial Discretion and Fiduciary Duties...............................................................56 Duty of Loyalty- 2. Limited Partnerships......................................................................56
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XII Ownership of the Firm-LP Rights of Creditor of Limited Partner..............................57 2. Creditor Rights - Charging Orders-b) Limited Partnerships .....................................57 I Formation of Firms - LLC...............................................................................................59 II. Liability for Contracts entered into before formation of a LL firm...............................60 b) Members of a LLC: when face liability if problems in forming LLC...........................60 VIII. Management and Conduct of Firm Business - LLC...................................................62 1. Actual & Apparent Authority of Members or Managers............................................62 XII Ownership of the Firm LLC Rights of a Creditor of a Member...............................64 2. Creditor Rights - Charging Orders............................................................................64 I Formation of Firms LLP & LLLP...................................................................................65 VIII. Management and Conduct of Firm Business-Corporations.......................................67 IX. Managerial Discretion and Fiduciary Duties...............................................................67 A. Business Judgment Rule..........................................................................................67
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Agency & Partnership Outline *** Agency *** I Formation of Firms Agency Relationships
1. Rest 1 Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other to so act. a. Mutual Consent b. One person will act on behalf of another, and i. E.g., restaurants in Houston Center are not agents of HC because they only comply with lease requirements in the way they operate the restaurants; they do not act on behalf of HC. c. That person will act subject to the other persons control d. Intent or awareness of the creation of an agency relations IS NOT required (the fiduciary relation which results from not is intended to result from) 2. Attributes of the agency relationship (MO says these attributes are required; MD says these attributes are factors only and not determinative) a. Rest 12 Agent has the power to alter the legal relations between the principal and 3rd persons and between the principal and himself. i. E.g., power to bind principal to contract, power to settle, VL for agents torts b. Rest 13 Agent is a fiduciary with respect to matters within the scope of his agency c. Rest 14 The principal has the right to control the conduct of the agent with respect to the matters entrusted to the agent. i. Control the result (ultimate outcome or objective) but not the minutia of achieving the result. 3. Rest 26 Creation of (Actual) Authority; General Rule: Except for the execution of
instruments under seal or for the performance of transactions required by statute to be authorized in a particular way, authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal's account.
a. The principals authorization of the agent need not be in any particular form. Written, spoken, or conduct, reasonably interpreted by the agent such that he believes the principal desires him to act on his behalf. Exceptions (Equal Dignities Rule): i. For instruments under seal executed by agent (e.g., CL instruments required to bear the seal of the principal; principals authorization to agent must be granted in a sealed instrument) or ii. When a statute requires the principals authorization to be in a particular form (not a statute that requires the underlying transaction to be in a particular form) (e.g., statutory requirement when agent is executing a deed for the conveyance of land on behalf of the principal, the principal must authorize the agent in a written instrument that complies with same formalities as a deed). E.g., Power of attorney
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Agency & Partnership Outline II Contractual Dealings by Agents

A. Firms liability in contract for acts of its agent
1. Authority is the agents power to bind the principal by acts done in accordance with the principals manifestations of consent to the agent (authorized acts). 2. Agent sometimes has power to bind the principal even though the agent is not authorized, such as where the agent has apparent authority, or inherent agency power or where the principal is estopped from denying the agents authority. 3. An agent who acts beyond the scope of his authority is liable for the acts beyond the authority. Principal is bound by the authorized acts, as far as they can be plainly separated from the unauthorized acts for which AG had no power to bind. 4. When an agent deals with a 3rd party, the agent gives an implied warranty that the agent is authorized to do what he is doing; if the agent has no such authority, then the agent becomes liable for breach of the implied warranty of authority to the 3P. Rest 329 5. A principal without the capacity to give legal consent to the agency relationship/enter into the underlying transaction or to do the act he is authorizing the agent to do cannot be bound by the acts of the agent. 6. An agent must have the physical or mental capability to do the thing he has been appointed to do. Anyone who can receive and convey information can be an agent, even a minor (infant).
B. Firms rights under contracts entered into by its agentsdisclosure of principal

1. Issue: When can a principal enforce a contract against 3P? Rest 4(1)-(3) (disclosure is assessed at time of contracting) a. Rest 292 Disclosed 3rd party has notice of the existence and identity of the principal; principal can enforce contract against 3rd party b. Rest 292 Partially disclosed 3rd party has notice of the existence of a principal but not his identity; principal can enforce contract against the 3rd party c. Rest 302 Undisclosed 3rd party has no notice of the existence nor the identity of the principal; 3rd party thinks it is dealing just with the agent; principal can enforce the contract against the 3rd party if agent intended to act on behalf of principal and had power to bind the principal, i. Rest 302 General Rule: A person who makes a contract with an agent of an
undisclosed principal, intended by the agent to be on account of his principal and within the power of such agent to bind his principal, is liable to the principal as if the principal himself had made the contract with him, unless he is excluded by the form or terms of the contract, unless his existence is fraudulently concealed or unless there is set-off or a similar defense against the agent.
ii. Exceptions where A. Principal is excluded by form/terms of contract B. Principals existence is fraudulently concealed (related to iv below) Rest 304 C. Rest 306 There is a set-off or similar defense against the agent (protects the interest of the 3rd Party; 3rd party thinks hes dealing only with the
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agent, who owes him money so should be able to reduce any liability 3rd party has by the amount owed the 3rd party from the agent) (1) Agent must have been authorized to conceal the principals existence. (2) Agent must have been acting within power to bind the principal. (3) The liability of the agent to the 3rd party must exist at the time of contracting (preexisting claim against the agent). (4) 3rd party can avoid liability to the undisclosed principal up to the amount of the obligation of the agent to the 3rd party 2. Rest 304 3rd party can rescind contract with undisclosed principal if
i. A person with whom an agent contracts on account of an undisclosed principal can rescind the contract if he was induced to enter into it by a representation that the agent was not acting for a principal and if, as the agent or principal had notice, he would not have dealt with the principal.
b. Agent misrepresents not acting for a principal and i. Affirmative misrepresentation that agent is not acting for a principal ii. Cm. a. If AG knows (mere suspicion is not enough) 3P will not deal with PR and fails to disclose that he is acting for such PR, that could constitute a misrepresentation. Some facts have to show knowledge e.g., history between the parties, express statement by principal, express statement by 3rd party c. 3P must show he would not have dealt with PR at time of contracting if he had known who PR was or known what the principal was going to do with land ( 304 il. 5) and d. PR/AG had notice that 3P would not deal with PR i. A mere suspicion by the undisclosed principal that the 3rd party will not deal is not sufficient to constitute notice. (Kelly Asphalt) Some facts have to show knowledge to constitute notice e.g., history between the parties, express statement by principal, express statement by 3rd party e. Affirmative misrepresentation v. failure to disclose both might satisfy the condition of induced to enter into it by a representation.
3. 4. 306(1) liability by 3P on a contract with an undisclosed principal can be offset by any claim the 3P has against the agent at time of making contract and until the principal becomes known 306(2) liability by 3P on a contract where agent only authorized to contract in principals name cannot be offset by a claim against the agent unless the agent took possession of the chattels he is disposing of with the 3P or the principal otherwise misled the 3P into extending credit to the agent.
5. Generally an undisclosed principal can substitute his performance for that of the agent unless doing so would substantially change the nature of the transaction from the perspective of the 3rd party. a. E.g., agent contracts to convey real property and contracts to give the agents warranty deed; principal steps in and says agent was acting for him and that the buyer will be getting the principals warranty deed b. E.g., attorney contracts to perform services; another attorney steps in and says the first attorney was acting as his agent and the other attorney is going to provide the services 6. An undisclosed principal can generally require the 3rd party to render the contracted services to the principal instead of the agent unless the contract deals with personal services 310
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C. Agents Liability for Contractual Dealings
a). Agents duty to fully disclose principal/Problems with D.B.A.
1. An Agent can become a party to the contract (making him liable): a. Rest 320 - Unless otherwise agreed, an agent does not become a party to the contract he makes for disclosed principal. b. Rest 321 - Unless otherwise agreed, an agent does become a party to the contract he makes for a partially disclosed principal. c. Rest 322 - An agent purporting to act upon his own account, but in fact making a contract on account of an undisclosed principal, is a party to the contract. d. But must also consider the agreement of the parties: language of the contract and the conduct of the parties and the circumstances. 2. Problem areas for businesses - Trade Names (DBA) a. Sign contracts as the principal d/b/a the trade name Example i. Principal d/b/a trade name ii. By: person, title (agent) b. Filing an assumed name certification may constitute sufficient notice to the third party (not in all jurisdictions) A. Some states have a dual indexing system. 3P has obligation to look into public records to find the true principal. B. Some states impose no duty to research assumed names. Too much of a burden on the 3P. Agent knows the information and should disclose it if it wants to avoid personal liability for the contract. C. No definitive authority in Texas on this point. Probably would side with dissent. Cases emphasize the agents burden to disclose. 3. What happens when an agent becomes a party to the contract? Defenses a. All defenses that arise under the contract because he is a party. b. Also have any defenses that are personal to the agent e.g., 3P owes the agent money from a prior transaction (set off), Agent does NOT have any defenses that are personal to the principal e.g., if 3P owes principal money.
b) Liability of Attorneys
1. In general, an attorney is not personally liable for the obligations incurred on behalf of his fully disclosed principal (the client), unless there is a specific agreement otherwise. But, courts require attorneys to make clear to 3P that attorney will not be personally liable for the clients obligations. But a. Copp Court holds attorney liable for the 3P fee even though the attorney is an agent for a disclosed principal because the attorney did not make clear to 3P that firm would not be personally liable, there was a custom that 3P could expect the attorney to pay the bill whether or not the attorney is paid by the client, and 3P is looking primarily to the attorney for payment of fee (3P provider is primarily relying on the standing of the law firm and expecting payment from the firm, not the client). (modern trend)
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b. Eppler, Guerin 685 sw2d 737 Texas law is not settled; Dallas Ct. App. says attorney not liable unless otherwise agreed.
c) Agents Implied Warranty of Authority

1. Rest 329 Agent Who Warrants Authority: A person who purports to make a contract, conveyance
or representation on behalf of another who has full capacity but whom he has no power to bind, thereby becomes subject to liability to the other party thereto upon an implied warranty of authority, unless he has manifested that he does not make such warranty or the other party knows that the agent is not so authorized.
a. Knows means actual knowledge; not reason to know or should know. b. E.g., death terminates agency powers; AG contracting after PRs death will breach IWoA. c. 3P can recover actual damages as a result of the breach and any expectation damages (benefit-of-the-bargain damages) 2. Applicability of 329 to Disclosed, Partially Disclosed, Undisclosed principals a. If the principals identity was fully disclosed, agent gives IWoA. b. If the principals identity was partially disclosed, agent still gives IWoA; agent becomes a party to the contract if he is acting within his authority. Agent has potential liability either way, unless otherwise agreed. c. If the principals identity is undisclosed, agent does not give IWoA because he does not purport to act on behalf of another, but the agent is a party to the contract. 3. If agent acts in an unauthorized manner, as long as the agent has power to bind the principal (i.e., through apparent authority, estoppel, or inherent agency power), the agent is not liable to the third party for breach of the implied warranty of authority. a. But, whenever the agent binds the principal by acting in an unauthorized way, the agent is liable to the principal for any loss the principal incurs. By acting in an unauthorized way, the agent breaches his or her duty of obedience to the principal. Rest 401, an agent is liable to the principal for any loss caused by a breach of duty. Thus, whether the agent binds the principal through apparent authority, estoppel, or inherent agency power, the agent is subject to liability to the principal 4. SoL Accrual a. Does breach occur at time of agreement or when discover? 329 When discover the lack of authority or suffer damages or fails to gain the benefits. b. KS Law: Breach of IWA can be either a tort action or a contract action. Under tort action, date of discovery is when the action accrues.
d) Election of Remedies
1. Election of remedies The liability of an agent and an undisclosed principal is only in the alternative (one or the other). 3P must choose which entity will satisfy the liability; discharges the liability of the other entity. a. If had a partially disclosed principal, agent & principal are J&S liable as parties to the K. b. If had a fully disclosed principal and agent was a party, then agent and principal are J&S liable.
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2. Some courts abandon EOR doctrine in AGY context; P is not choosing between inconsistent remedies and can only get one satisfaction. Policies in favor of EOR are not implicated. 3. Policy: Plaintiff should only be able to collect the amount from one person (one satisfaction) and not get a second recovery from the second entity (windfall of a remedy). 4. Election of Remedies doctrine is broader than the Principal/Agent context. a. Forces P to choose between inconsistent remedies. i. E.g., P makes contract and has two theories for recovery; courts require the P to choose his remedy. A. Rescission does not recognize existence of contract B. Damages for breach - recognizes existence of contract 5. Generally only a judgment against the principal operates as an election; P simply telling the agent that he will only get satisfaction from the principal is not enough to constitute an election, unless the agent detrimentally relies on that representation. 6. EOR can also protect the undisclosed principal when 3P learns of PRs existence and then gets a judgment against AG. a. Principal can raise defense that 3P has elected his remedy against the agent and discharged liability against principal. b. Exception: If 3P gets judgment against the agent before learning of the principals identity, this is not an election; 3P can pursue the principal for unsatisfied portion but 3P must make choice upon discovery of the identity of the principal. 7. Texas Cts App. apply the election of remedies in Principal/Agency context.
IV Actual Authority of Agents and Its Consequences

A. Express Actual Authority
1. Express Authority: a. Rest 26 Creation of Authority; General Rule: Except for the execution of
instruments under seal or for the performance of transactions required by statute to be authorized in a particular way, authority to do an act can be created by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal's account.
i. express conveyance by written/oral words or conduct, reasonably interpreted by the agent, that causes the agent to believe the principal desires the agent to so act on the principals behalf except A. Execution of instruments under seal B. If the state statute requires the principals grant of authority to comply with a particular form. b. Rest 33 General Principle of Interpretation: An agent is authorized to do, and to do
only, what it is reasonable for him to infer that the principal desires him to do in the light of the principal's manifestations and the facts as he knows/should know at the time he acts.
c. Actual Authority i. Express manifestation by Principal to Agent directly Page 9 5-Jun-11 14:12:00 a6/p6

ii. Implied e.g., agent has implied actual authority to represent the scope of his authority to 3P, unless Principal instructs Agent not to. 27 cm. c 2. Duty of loyalty requires the Agent to act in the best interest of the principal. a. Agent is only authorized to make a gift when the intent on that issue is very clear; broad, boilerplate language is not specific enoughneed an express referral of such authority unless the power arises as a necessary implication from the conferred powers or it is clearly intended by the parties, as evidenced by the surrounding facts and circumstances. A. The principal must make some manifestation by words or conduct that shows he authorizes the agent to make a gift. 3. If unforeseen circumstances arise and the agent cannot communicate with the principal, the agent is authorized to take steps he reasonably believes are necessary to protect the principals interests. a. Rest 47 Inference of Authority to Act in an Emergency: Unless otherwise agreed,
if after the authorization is given, an unforeseen situation arises for which the terms of the authorization make no provision and it is impracticable for the agent to communicate with the principal, he is authorized to do what he reasonably believes to be necessary in order to prevent substantial loss to the principal with respect to the interests committed to his charge.
B. Implied Actual Authority (Authorized Transactions!)

1. Rest 35 When Incidental Authority Is Inferred: Unless otherwise agreed, authority to
conduct a transaction includes authority to do acts which are incidental to it, usually accompany it, or are reasonably necessary to accomplish it.
a. 35 Agent must have honest and reasonable belief based on manifestations of the principal that he had authority to do the act. b. Prior course dealing with the principal, knowledge of the principal about what needs to be done, acts and conduct of the parties, totality of the circumstances. c. Implied actual authority: Actual authority circumstantially proven which the principal actually intended the agent to possess and includes such powers as are practically necessary (incidental to it, usually accompany it or are reasonably necessary) to carry out the duties actually delegated. 2. 77 General Rule: The authority to appoint agents, subagents or subservants of the
principal can be conferred in the same manner as authority to do other acts for the principal, and the interpretation of the manifestations of the principal is governed by the rules generally applicable to the interpretation of authority.
3. 78 Inference as to Authority to Delegate Authority: Unless otherwise agreed,

authority to conduct a transaction does not include authority to delegate to another the performance of acts incidental thereto which involve discretion or the agent's special skill; such authority, however, includes authority to delegate to a subagent the performance of incidental mechanical and ministerial acts.
C. Agents Duties of Care and Loyalty

1. Introduction to the Fiduciary Duties of Agents and Servants
1. 13 An agent is a fiduciary with respect to matters within the scope of his agency
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a. A fiduciary is a person having a duty, created by his undertaking, to act primarily for the benefit of another in matters connected with his undertaking.
2. Duty of Care
1. 377 under ordinary circumstances, the promise to act as an agent is interpreted as being a promise only to make reasonable efforts to accomplish the directed results 2. 379(1) Unless otherwise agreed, a paid agent has duty to act with standard care and skill and to use any special skill he has, if he has a special skill. 3. Rest 377 Contractual Duties: A person who makes a contract with another to perform
services as an agent for him is subject to a duty to act in accordance with his promise.
4. Rest 379 Duty of Care and Skill: (1) Unless otherwise agreed, a paid agent is subject to
a duty to the principal to act with standard care and with the skill which is standard in the locality for the kind of work which he is employed to perform and, in addition, to exercise any special skill that he has. (2) Unless otherwise agreed, a gratuitous agent is under a duty to the principal to act with the care and skill which is required of persons not agents performing similar gratuitous undertakings for others.
3. Duty of Loyalty
a) In general
1. 387 Agent is subject to duty to act solely for the principal in all matters connected with his agency. a. Agent cannot put agents own interests or those of a 3rd party above the principals. b. Rest 387 General Principle: Unless otherwise agreed, an agent is subject to a duty to
his principal to act solely for the benefit of the principal in all matters connected with his agency.
2. The Duty of Loyalty is a deterrent rule to prevent agents from profiting from transactions conducted for the principal (creates conflict of interest);
b) Conflicts of Interest
1. 389 Unless otherwise agreed, an agent can act as an adverse party to the principal only if the principal knows the agent is adverse; a. 389 Agent must disclose to the principal when the agent acts as an adverse party i. Rest 389 Acting as Adverse Party Without Principal's Consent: Unless
otherwise agreed, an agent is subject to a duty not to deal with his principal as an adverse party in a transaction connected with his agency without the principal's knowledge.
2. 390 When AG acting adversely, AG must fully disclose all relevant facts he knows or reasonably should know that would affect PRs judgment. a. Failure to so disclose is a breach of the duty of loyalty. PR can bring an action against the AG even if PR has suffered no harm and can recover any benefit accrued to AG. i. Rest 390 Acting as Adverse Party with Principal's Consent: An agent who, to
the knowledge of the principal, acts on his own account in a transaction in which he is employed has a duty to deal fairly with the principal and to disclose to him all facts
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which the agent knows or should know would reasonably affect the principal's judgment, unless the principal has manifested that he knows such facts or that he does not care to know them.
ii. Rest 407 If an agent has received a benefit as a result of violating his duty of loyalty, the principal is entitled to recover from him what he has so received, its value, or its proceeds and also the amount of damage caused thereby.
c) Duty to Account for Profits

1. 388 An agent who makes a profit in connection with transactions conducted by him is under a duty to give such profit to the principal a. the duty applies whether or not the principal is harmed or is better off as a result of the transaction. Loyalty is to principal; example of otherwise agreed: waiter keeping a tip. b. Rest 388 Duty to Account for Profits Arising Out of Employment: Unless
otherwise agreed, an agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal.
d) Other Aspects of the Agents Duty of Loyalty

1. 391 Agent must disclose to principal when agent is representing an adverse party a. Rest 391 Acting for Adverse Party Without Principal's Consent: Unless otherwise
agreed, an agent is subject to a duty to his principal not to act on behalf of an adverse party in a transaction connected with his agency without the principal's knowledge.
2. 392 Agent must disclose all material facts regarding the adverse representation. a. Rest 392 Acting for Adverse Party with Principal's Consent: An agent who, to the
knowledge of two principals, acts for both of them in a transaction between them, has a duty to act with fairness to each and to disclose to each all facts which he knows or should know would reasonably affect the judgment of each in permitting such dual agency, except as to a principal who has manifested that he knows such facts or does not care to know them.
3. 393 The agent must not compete with the principal whilst acting as agent, without principals consent. Doesnt matter if agent is doing so on his own time. Agent can compete after the agency relationship terminates. a. Rest 393 Competition as to Subject Matter of Agency: Unless otherwise agreed,
an agent is subject to a duty not to compete with the principal concerning the subject matter of his agency.
4. 395 AG must not use confidential information about PR for his own benefit or for anyone elses; this rule applies during and after termination of the agency relationship (continuing duty) a. Rest 395 Using or Disclosing Confidential Information: Unless otherwise agreed,
an agent is subject to a duty to the principal not to use or to communicate information confidentially given him by the principal or acquired by him during the course of or on account of his agency or in violation of his duties as agent, in competition with or to the injury of the principal, on his own account or on behalf of another, although such information does not relate to the transaction in which he is then employed, unless the information is a matter of general knowledge.
b. Rest 396 Using Confidential Information After Termination of Agency: Unless

otherwise agreed, after the termination of the agency, the agent: i. (a) has no duty not to compete with the principal;
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ii. (b) has a duty to the principal not to use or to disclose to third persons, on his own account or on account of others, in competition with the principal or to his injury, trade secrets, written lists of names, or other similar confidential matters given to him only for the principal's use or acquired by the agent in violation of duty. The agent is entitled to use general information concerning the method of business of the principal and the names of the customers retained in his memory, if not acquired in violation of his duty as agent; iii. (c) has a duty to account for profits made by the sale or use of trade secrets and other confidential information, whether or not in competition with the principal; iv. (d) has a duty to the principal not to take advantage of a still subsisting confidential relation created during the prior agency relation.
e) Principals Remedies
1. 401 Actual damages: Rest 401 Liability in Tort for Loss Caused: An agent is
subject to liability for loss caused to the principal by any breach of duty.
2. 403 Constructive Trust: Rest 403 Liability for Things Received in Violation of
Duty of Loyalty: If an agent receives anything as a result of his violation of a duty of loyalty to the principal, he is subject to a liability to deliver it, its value, or its proceeds, to the principal.
3. 404 Principal can recover the value of the use by the agent a. Rest 404 Liability for Use of Principal's Assets: An agent who, in violation of duty
to his principal, uses for his own purposes or those of a third person assets of the principal's business is subject to liability to the principal for the value of the use. If the use predominates in producing a profit he is subject to liability, at the principal's election, for such profit; he is not, however, liable for profits made by him merely by the use of time which he has contracted to devote to the principal unless he violates his duty not to act adversely or in competition with the principal.
4. Rest 407 Principal's Choice of Remedies: (1) If an agent has received a benefit as a
result of violating his duty of loyalty, the principal is entitled to recover from him what he has so received, its value, or its proceeds, and also the amount of damage thereby caused; except that, if the violation consists of the wrongful disposal of the principal's property, the principal cannot recover its value and also what the agent received in exchange therefor. (2) A principal who has recovered damages from a third person because of an agent's violation of his duty of loyalty is entitled nevertheless to obtain from the agent any profit which the agent improperly received as a result of the transaction.
V. Power of Agents to Bind the Firm by Unauthorized Acts

B. Apparent Authority (PR has done something to create liability)
1. Rest 8 Apparent authority is the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other's manifestations to such third persons. 2. Rest 27 Except for the execution of instruments under seal or for the conduct of transactions required by statute to be authorized in a particular way, apparent authority to do an act is created as to a third person by written or spoken words or any other conduct of the principal which, reasonably interpreted,
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3. causes the third person to believe that the principal consents to have the act done on his behalf by the person purporting to act for him. Rest 49 The rules applicable to the interpretation of authority are applicable to the interpretation of apparent authority except that: (a) manifestations of the principal to the other party to the transaction are interpreted in light of what the other party knows or should know instead of what the agent knows or should know, and (b) if there is a latent ambiguity in the manifestations of the principal for which he is not at fault, the interpretation of apparent authority is based on the facts known to the principal. Elements of Apparent Authority a. Manifestation by the principal i. Manifestation direct/indirection communication to 3P, appointing a person to a position, a broadcast to the community that AG has authority, allowing or acquiescing in AGs unauthorized conduct, especially if AG has acted in such manner before without objection by PR. b. Manifestation must reach the 3P: direct, indirect (e.g., via another agent) c. Manifestation must cause the 3P to actually believe the agent is authorized. i. For actual authority, 3Ps state of mind is irrelevant. AGs state of mind is relevant. ii. For apparent authority, AGs state of mind is irrelevant. 3Ps state of mind is relevant. d. The 3Ps belief must be reasonable in the circumstances. BUT 3P may have a duty to inquire further to establish a foundation for a reasonable belief. There is no requirement that there be detrimental reliance from the 3Ps belief that the agent was authorized. Apparent authority is a two way street: Principal can use apparent authority to enforce the agreement and the 3P can use apparent authority enforce the agreement. Apparent authority cannot be established when the principal is undisclosed.
4.
5. 6.
7.
C. Estoppel (PR has done something to create liability)

1. Rest 8B - A person who is not otherwise liable as a party to a transaction purported to be done on his account, is nevertheless subject to liability to persons who have changed their positions because of their belief that the transaction was entered into by or for him, if a. he intentionally or carelessly caused such belief, or b. knowing of such belief and that others might change their positions because of it, he did not take reasonable steps to notify them of the facts 2. Change of position indicates $, labor, suffering a loss, or subjection to legal liability. 3. Estoppel General Rules a. CL rule: Merely giving possession of property to someone else does not create apparent authority or estoppel slight additional circumstances can create apparent authority or estoppel such as, giving the indicia of ownership to the Page 14 5-Jun-11 14:12:00 a6/p6

agent along with the property (e.g., giving agent the property and the title document to it) b. UCC provision: A merchant can only transfer the rights of the entruster to a buyer. A thief as the entruster had no rights at all so the merchant acquired no rights it could transfer to Buyer. 4. Estoppel v. Apparent Authority a. Mere failure to act by PR can give rise to estoppel. Mere failure to act normally does not give rise to apparent authority because it is not seen as a manifestation by PR. (Mere failure to act when the reasonable principal would have though might create apparent authority) b. To assert estoppel, the 3P must have changed his position in detrimental reliance on his belief that the agent was authorized. Mere entering into the contract is not a change of position. 3P must show he has suffered from some damage based on his belief. With apparent authority, the 3P does not have to show reliance. c. Apparent authority is a two-way street; estoppel is a one way street 3P can assert to hold the principal liable. d. With either theory, an undisclosed principal cannot be bound. e. Most situations where apparent authority exists, estoppel also exists. In situations where estoppel exists, apparent authority does not usually exist.
D. Inherent Agency Power (PR has done nothing; AG is unauthorized)

1. Rest 3 a. (1) A general agent is an agent authorized to conduct a series of transactions involving a continuity of service. i. indicates a fairly close relationship between agent and principal; no fresh authorization required for each transaction (aka enterprise liability) similar to RS where only servants can subject principal to liability in tort) b. (2) A special agent is an agent authorized to conduct a single transaction or a series of transactions not involving continuity 2. Rest 8A Inherent agency is a term used in the restatement to indicate the power of an agent which is derived not from authority, apparent authority or estoppel, but sole from the agency relation and exists for the protection of 3Ps harmed by or dealing with a servant or other agent. a. Treat Principal as bound merely because of the agency relationship. b. Remember: Respondeat Superior: Principals are vicariously liable for torts committed by servants in some situations. The agent has to be (1) a servant principal has right to control his work and (2) has to commit the tort while acting in the scope of employment. RS is a form of inherent agency power for binding principal in tort. 3. Rest 161 Unauthorized Acts of General Agent - A general agent for a disclosed or partially disclosed principal subjects his principal to liability for acts done on his account which usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the
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principal, the other party reasonably believes that the agent is authorized to do them and has no notice that he is not so authorized. a. Elements i. A general agent ii. for a disclosed or partially disclosed principal iii. Unauthorized acts done on behalf of the principal iv. The acts are those which usually accompany or are incidental to transactions which the agent is authorized to conduct A. Acts must not be too far removed for the agents authorized conduct. v. 3P reasonably believes AG is authorized and has no notice that AG is not authorized. 4. Rest 194 Acts of General Agents - A general agent for an undisclosed principal authorized to conduct transactions subjects his principal to liability for acts done on his account, if usual or necessary in such transactions, although forbidden by the principal to do them. a. Elements undisclosed principal. i. A general agent ii. For an undisclosed principal iii. Unauthorized act done on behalf of the principal iv. Usual or necessary in such transactions A. The act was not too far removed from what the agent is authorized to do. v. NO belief by 3P that AG is authorized because PR is undisclosed. 5. No fault on part of Principal required to be bound by inherent authority (similar to RS). With apparent authority and estoppel, the Principal is somehow at fault.
E. Liability for Representations by Agent

1. Representations of PR to 3P are central for defining apparent authority. In contrast, inherent authority originates from the customary authority of the person in the particular AGY relationship and no representations beyond the fact of the existence of the relationship need be shown. 2. Issue: Is the principal liable for the representations by the agent? a. Likely yes, due to Inherent Agency. n.3, p.270, problem based on Dyer v. Johnson b. AG is liable to the 3P for his misrepresentations. AG is always liable for his own misconduct. c. AG has liability to PR if 3P recovers from PR. AG must indemnify PR for any loss due to a breach of his duty. i. 383 an agent is subject to a duty to the principal to act in the principals affairs except in accordance with the principals manifestations of consent. ii. 401 If agent breaches a duty and causes a loss to the principal, the agent has a duty to make good on that loss. p.271
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3. An agents false statements can be attributable to the principal if the agent is acting within the course and scope of employment. The attribution to the principal occurs because of the inherent power of the agent in that position. a. Inherent agency power in the contractual context bears a lot of resemblance to respondeat superior. The principal is bound to a contract under IAP not because the principal has done anything wrong, but solely because of the existence of the agency relationship. The IAP requirement that the agent be a general agent seems similar to the requirement in respondeat superior that the agent be a servant. Further, the IAP requirement that the agents conduct be incidental to the agents authorized conduct seems similar to the requirement in respondeat superior that the servant commit the tort while acting in the scope of employment. b. Policy: avoid constant recourse by third persons to the principal, which would be corollary of denying agent any latitude beyond his exact instructions. 3P ought to be able to rely on agents authority without having to constantly check with the principal. c. 161 The act of the agent must usually accompany or be incidental to the agents authorized conduct. Is the agents action the type of thing that is within or not too far removed from his authorized conduct?
VI. Firms Accountability for notification to/knowledge of the Agent

1. Knowledge of An Agent
1. Knowledge v. Notification a. Knowledge is conscious awareness p397, n3 Rest 9, cm. c b. Notification is an act intended to convey information to another person. p400, n1 9(3),cm. f c. Notice describes a legal consequence of a person being charged with information because the person has acquired knowledge [should know/has reason to know] or received notification. p397, n3, 9(1), cm. b i. Knowledge or notification leads to the legal consequence of notice. ii. Notice can be found if the person should know or has reason to know a fact. 2. Rest 272 General Rule for Attributing Agents Knowledge to Principal: a. Knowledge of an agent is attributable to PR regarding matters as to which i. (1) AG acts within his power to bind the principal or A. Power to bind, not authority. So agents knowledge can be attributable even if the agent commits an unauthorized act. ii. (2) it is the AGs duty to give the principal the information. A. Normally expect AG to pass the information to PR. Knowledge is attributable when AG has a duty to pass along the information to PR and when we expect AG would follow through on his duty to tell PR about information that would affect the PRs affairs B. 381 Duty to Give Information, cm. a
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(1) Unless otherwise agreed, an agent is subject to a duty to use reasonable efforts to give his principal information which is relevant to affairs entrusted to him and which, as the agent has notice, the principal would desire to have and which can be communicated without violating a superior duty to a third person. (2) Cm. a An agent may have a duty to act upon, or to communicate to his principal or to another agent, information which he has received, although not specifically instructed to do so. The duty exists if he has notice of facts which, in view of his relations with the principal, he should know may affect the desires of his principal as to his own conduct or the conduct of the principal or of another agent the duty of the agent is inferred from his position, just as an authority is inferred. C. The knowledge of an employee may be imputed to an employer if the employee holds a position of management or control in the exercise of which a duty to report known dishonesty of a fellow employee can be found to exist either explicitly or by fair inference from a course of conduct.
2. Prior or Casually Obtained Knowledge of an Agent

1. Rest. 276 Time, Place, or Manner of Acquisition of Agent's Knowledge a. Except for knowledge acquired confidentially, the time, place, or manner in which knowledge is acquired by a servant or other agent is immaterial in determining the liability of his principal because of it. i. 281 Agent Privileged Not to Disclose Knowledge: A principal is not affected by the
knowledge of an agent who is privileged not to disclose or act upon it and who does not disclose or act upon it.
A. E.g., info conveyed by a client to an attorney, physician/patient, priest/parishioner
3. Notification to an Agent
1. Notification to the agent results in notification to the principal if the agent has actual or apparent authority to receive the notification at the time the notification is given to the agent. a. 268 General Rule i. (1) Unless the notifier has notice that the agent has an interest adverse to the principal, a notification given to an agent is notice to the principal if it is given: A. (a) to an agent authorized to receive it; B. (b) to an agent apparently authorized to receive it; b. Knowledge 272, 276, Notification 268
4. Time from which notification or knowledge affects the principal

1. When knowledge is effective: Principal attributable with knowledge when a. 278 Time When Agent's Knowledge Affects Principal
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i. PR is affected by the knowledge which AG has when acting for him or, if it is the duty of AG to communicate the information and not otherwise to act, PR is affected after the lapse of such time as is reasonable for its communication. Cm. a: Knowledge is important only if, because of it, one can intelligently choose his course of action. b. Before Principal may be charged with Agents knowledge or notice, i. AG must have had both a reasonable time to communicate the information to PR and ii. PR must have had a reasonable opportunity to act on it. (e.g., time to disseminate it to others) 2. Notification- when effective: Notification can be intended to do two things: a. Notification to determine the parties rights from a specific point in time. Notification is effective immediately. i. E.g., mall tenant has to provide notification of intent to renew by 5pm on Friday. That notification is to determine the parties rights from a specific point in time. b. Notification to require action on the part of the person notified. Notification is effective when the person notified has reasonable opportunity to convey that information to the decision maker and decision maker has to have reasonable amount of time to act. If the person notified is also the decision maker, notification is effective immediately.
5. Adverse Agents
1. Whether PR is affected by AGs knowledge/notification to AG when AG is acting adversely to PR? 2. Knowledge: Lanchile v. CIGNA Exception to 272: Adverse Agent Exception a. 282 Agent Acting Adversely to Principal: (1) A principal is not affected by the knowledge of an agent in a transaction in which the agent secretly is acting adversely to the principal and entirely for his own or another's purposes, except as stated in Subsection (2). i. Policy: AG is not really acting for PR; we normally expect AG will convey information he has a duty to convey and so attribute knowledge to PR; if AG is acting adversely, he is not going to abide by that duty; hes gone off on a frolic so knowledge not attributable to PR. b. An agent is not acting adversely merely because he has a conflict of interest with the principal or because he is not acting primarily for his principal. 3. Sole Actor Doctrine 282(2)(b)&(c) Principal cannot claim the benefit of the agents services and at the same time disavow any knowledge the agent had about the transaction (really just (2)(c)). Policy: Estoppel. a. Exception to the adverse agent exception: 282 (2) The principal is affected by the knowledge of an agent who acts adversely to the principal: i. (b) if AG enters into negotiations within the scope of his powers and the person with whom he deals reasonably believes him to be authorized to conduct the transaction; or
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ii. (c) if, before he has changed his position, the principal knowingly retains a benefit through the act of the agent which otherwise he would not have received. 4. Notification: Dvoracek v. Gillies a. Notification to the agent results in notification to the principal if the agent has actual or apparent authority to receive the notification at the time the notification is given to the agent. Notification to an adverse agent is also effective unless the 3P has notice that the agent is acting adversely. i. Rest 271 Notification; Agent's Interests Adverse to Principal's: A notification
by or to a third person to or by an agent is not prevented from being notice to or by the principal because of the fact that the agent, when receiving or giving the notification, is acting adversely to the principal, unless the third person has notice of the agent's adverse purposes.
VII. Ratification of Unauthorized Transactions

A. Affirmance
1. Two aspects: can a transaction be ratified and was it ratified? 2. 82 Ratification is the a. Affirmance by a person i. Rest 83 Affirmance is either (a) a manifestation of an election by one on whose account an unauthorized act has been done to treat the act as authorized, or (b) conduct by him justifiable only if there were such an election to affirm. A. PR does not have to communicate the affirmance to 3P for it to be effective. B. Rest 94 Failure to Act as Affirmance: An affirmance of an unauthorized transaction can be inferred from a failure to repudiate it[, in certain circumstances.] (1) Silence under such circumstances that, according to the ordinary experience and habits of men, one would naturally be expected to speak if he did not consent b. of a prior act which did not bind him i. Has to have knowledge of the material facts of the transaction, at the time of affirmance. c. but which was done or professedly done on his account, d. whereby the act, as to some or all persons, is given effect as if originally authorized by him. 3. There is no ratification unless an act has been done which the purported or intended PR could have authorized ( 84), by one who purported to act as AG or intended to act as servant ( 85); and unless the act is affirmed ( 93-99), while still capable of ratification ( 88-90), by a person who, at the time of affirmance, knows the facts ( 91), ( 86), and who is the person for whom AG purported or intended to act. 87. 4. Can it be ratified?
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a. Undisclosed PR cannot ratify a contact - Rest 85 Ratification does not result from
affirmance of a transactionunless the one acting purported to be acting for the ratifier.
i. A disclosed or partially disclosed principal may ratify. b. p430, n4 In order to ratify, PR must have been able to undertake the transaction at the point the agent entered into and at the point of affirmance. If PR could not ratify at either point, then PR cannot ratify it at all (e.g., if principal
was a minor at time contract made)
c. Rest 91 p430, n3 A principal can rescind his affirmance when he is ignorant of any material fact at the time of affirmance.
i. 91 Knowledge of Principal at Time of Affirmance
A. (1) If, at the time of affirmance, the purported PR is ignorant of material facts
involved in the original transaction, and is unaware of his ignorance, he can thereafter avoid the effect of the affirmance.
B. (2) Material facts are those which substantially affect the existence or extent of the
obligations involved in the transaction, as distinguished from those which affect the values or inducements (e.g., AG sells PRs stock at a price lower than it was worthcannot rescind affirmance) involved in the transaction.
5. p430, n5 When a principal ratifies a transaction, he may create actual authority and/or apparent authority for future (similar) transactions.
Principal must tell AG & 3P that, although he ratified the particular transaction, it was unauthorized and he will not ratify further transactions.
B. Knowledge of Agents: effect on ratification

1. Knowledge only attributed when AG acts within the scope of her authority. Rest 272 says knowledge of AG is attributable to PR if AG has power to bind or a duty to convey the information. a. If an agents knowledge can be attributable to the principal, then that affects the principals ability to rescind ratification of a transaction.
X. Liability for Wrongful Acts of Servants (Respondeat Superior)

A. Introduction
1. Rest. 219(1) Respondeat Superior/VL (form of strict liability liable not because principal has done something wrong or negligent but simply because of the principal/agent relationship): a. A principal (master) is vicariously liable for the torts committed by an agent if i. the agent is a servant ii. acting in the scope of his employment. 2. A principal is directly liable if negligent in selecting or hiring an agent.
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B. Masters Liability for Acts of Servants
1. Liability for Acts of a Servant within the Scope of Employment
1. Rest 228 Conduct is within the scope of employment if, but only if (all must be met): a. it is of the kind he is employed to perform; b. it occurs substantially within the authorized time and space limits; c. it is actuated, at least in part, by a purpose to serve the master, and i. Courts are willing to stretch on scope of employment especially on this factor (purpose to serve the master) d. if force is intentionally used by the servant against another, the use of force is not unexpectable by the master. i. Torts: Negligent, intentional as long as not force is not unexpectable (Sage Club as opposed to Noah v. Ziehl) ii. The employer need not have foreseen the precise act or the exact manner of injury so long as the general type of conduct may have been reasonably expected. 2. Rest 229 Use as further guidance in helping to determine if the test in 228 is met. a. (1) To be within the scope of the employment, conduct must be of the same general nature as that authorized, or incidental to the conduct authorized. b. (2) In determining whether or not the conduct, although not authorized, is nevertheless so similar to or incidental to the conduct authorized as to be within the scope of employment, the following matters of fact are to be considered: i. (a) whether or not the act is one commonly done by such servants; ii. (b) the time, place and purpose of the act; iii. (c) the previous relations between the master and the servant; iv. (d) the extent to which the biz of master is apportioned between different servants; v. (e) whether or not the act is outside the enterprise of the master or, if within the enterprise, has not been entrusted to any servant; vi. (f) whether or not the master has reason to expect that such an act will be done; vii. (g) the similarity in quality of the act done to the act authorized; viii. (h) whether or not the instrumentality by which the harm is done has been furnished by the master to the servant; ix. (i) the extent of departure from the normal method of accomplishing an authorized result; and x. (j) whether or not the act is seriously criminal. 3. Frolic if conduct is so clearly outside the scope of employment; detour if it is only a slight deviation. Labels only, not analysis. When does a servant return from a frolic?
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a. When a servant has departed from the scope of employment, there is an issue as to when the servant has returned to the scope of employment. 4. Henderson traveling to/from work is generally not considered within the scope of employment a. Special Errand Rule exception: if the employee while commuting does a special errand that would otherwise require a separate trip, the employee is acting within the scope of employment. (e.g., customarily stop by the post office on the way to work to pick up employers mail p463, n.1). The errand does not necessarily have to be requested by the employer as long as the errand is to serve a business interest of the employer.
2. Masters RS Liability for Servants Abuse of Position Rest. 219(2)

1. Employer is VL even though servant is acting outside his scope of authority. An exception to RS employer is liable for torts of employee outside the scope of employment. 2. Rest 219(2) A master is not subject to [vicarious] liability for the torts of his servants acting outside the scope of their employment, unless:
a.
b. (c)the conduct violated a non-delegable duty of the master, or (see section XI below) c. (d) the servant purported to act or to speak on behalf of the principal and there was reliance upon apparent authority, or he was aided in accomplishing the tort by the existence of the agency relation. 3. Example: Sexual harassment is outside the scope of employment. Employer cannot be VL under 219(1). But 219(2)(d) provides a basis for VL where: a. Quid pro quo: supervisor makes threats of adverse employment action if employee does not go along and those threats are carried out. Actionable under 219(2)(d) 1st clause the servant purported to act or to speak on behalf of the principal and there was reliance upon apparent authority is always met because there is an adverse employment action which affects the employee (reliance) i. Employer has no defense for QPQ cases. b. Hostile Work Environment no adverse employment action; threats but not carried out; or just a hostile environment. Employer actionable under 219(2)(d) 2nd clause because the supervisor might have been aided in accomplishing the tort by the existence of the agency relation. Results in VL but employer has a defense i. The employer exercised reasonable care to prevent and correct promptly any sexually harassing behavior, and ii. The employee unreasonably failed to take advantage of any preventive or corrective opportunities provided by the employer or to avoid harm otherwise.
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Agency & Partnership Outline XI. Liability for Wrongful Acts of Independent Contractors
A. Non-liability for Acts of Independent Contractors
1. Issue: when is an agent classified as a servant (~employee) as opposed to an independent contractor? If a person is an independent contractor, generally the principal is not liable. a. Rest. 2 i. Servants are a subcategory of agents ii. Independent contracts may be agents but are not always. b. Rest. 219 Principal is only VL for torts of its servants. i. All servants are agents. (servant agents) ii. Some independent contractors are agents (non-servant agents) iii. Some independent contractors are not agents (non agent service providers) 2. Employee v. Independent Contractor Analysis Rest 220 factors a. extent of control is most important; All of the other factors point to this factor. b. Distinct occupation or business it is separate from the principals business and unlikely to result in control by the principal. c. the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the employer or by a specialist without supervision; d. Skill required to do the work points to lack of control if the person has to have a special skill which the principal is unlikely to understand much less able to control. e. Supplies his own instrumentalities control is less likely f. Length of time less time, less detailed control g. Method of payment by time or by job; if by time, the employer exercises more control. h. Work is part of the regular business of the employer if it is, more likely control is exercised by employer. i. whether or not the parties believe they are creating the relation of master and servant; and j. whether the principal is or is not in business.
B. Exceptions to the Independent Contractor Rule employer will be VL liable for torts of a non-servant agent/independent contractor
1. Liability for acts of independent contractors. a. Once independent contractor status is established through the 220 factors, the principal is not liable unless it was a NDD or ostensible agency.
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Non-delegable duty (NDD) doctrine
1. PR is liable for the torts of an independent contractor if the IKR is performing a NDD. a. Non-delegable duties arise by statute or common law (e.g., tort law duty arises through the relationship; contract law duty imposed by contract), NOT agency law. (e.g. LL duty to maintain premises in a safe way; duty arises through the LL/T relationship. b. A duty is non-delegable if i. Not clearly defined, but liability usually attaches when the responsibility is so important to the community that the employer should not be permitted to transfer it to another. c. When a duty is non-delegable means that the person who has the duty is liable for breach of that duty even if the breach is committed by an independent contractor. i. E.g., process serving is a non-delegable duty of lawyers.
Apparent Authority/Estoppel
1. Elements Ostensible Agency 267 (Texas). NOTE: Ostensible Agency applies only to tort actions; contract actions use the separate theories of apparent authority and estoppel) a. PR represents by its conduct or otherwise that a person is its AG or servant (employee). Generally an affirmative misrepresentation. b. PRs representation causes 3P to reasonably believe that person was AG/employee of PR. c. 3P justifiably relied on the appearance of agency. Must show 3P relied on the representation of PR that the actor was its AG or servant. i. For hospitals, the general rule is that if you are admitted without objection to the hospital, the court treats you as having relied on the appearance of agency. (covers conscious and unconscious patients sort of reads the reliance out of the rule) 2. Ostensible Agency v. RS a. RS focuses on the relationship between the employee (servant) and employer (principal). Third partys expectations have no relevance here. b. OA focuses on the relationship between the third party and the principal. Third partys expectations are key. 3. Ostensible agency applies in other settings powerful doctrine for when independent contractors are used a. Funeral home contracts for drivers to drive family to cemetery. b. Independent franchisee owners of hotels of national chain subject to national advertising. c. Independently owned services station where national advertising indicated you can trust your car to the man who wears the star.
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Agency & Partnership Outline XIII Dissociation of Non-owner Agents

A. Voluntary Terminations
1. In general, agency relationship terminates in one of three ways a. (1) Voluntary action of the principal or the agent i. Rest 119 Manner of Revocation or Renunciation: Authority created in any manner terminates
when either party in any manner manifests to the other dissent to its continuance or, unless otherwise agreed, when the other has notice of dissent. Cm a: An agreement that the authority is to be revoked or renounced only in a particular manner is ineffective; despite such an agreement any form of manifestation made known to the other party is effective. The authority terminates when either party knows or should know of the manifestation of the other (see 10), or has been given a notification by the other.
ii. Termination of the agency relationship occurs when one party has notice that the other party manifests dissent to the continuance of the relationship. A. Manifestation can be by word or conduct (inconsistent with authority previously given). Notice to AG means AG knows, has reason to know, should know or has been given a notification. (1) Rest 134 When Principal or Agent Has Notice of Termination of Authority
(a) Unless the parties have manifested otherwise to each other, a principal or agent has notice that authority to do an act has terminated or is suspended if he knows, has reason to know, should know, or has been given a notification of the occurrence of an event from which the inference reasonably would be drawn: (i) (a) by the principal, that the agent does not consent to act;
(ii) (b) by the AG, that RP does not consent to the act or would not if he knew the
facts;
(iii)(c) by either, that the transaction has become impossible of execution because
of incapacity of the parties, destruction of the subject matter, or illegality.
B. If the principal terminates the relationship, it is revocation. (1) It terminates all agency powers but not apparent authority of a general agent unless the third party has notice. (a) Rest 124A Effect of Termination of Authority Upon Apparent Authority and
Other Powers - The termination of authority does not thereby terminate apparent authority. All other powers of the agent resulting from the relation terminate except powers necessary for the protection of his interests or of those of the principal.
(2) It terminates all agency power, including apparent authority, of a special agent except in the cases mentioned in Rest 132 C. If the agent terminates the relationship, it is renunciation iii. The principal and the agent always retain the power to terminate the relationship. A. Rest 118 cm. a, b. Power is retained but if exercised wrongfully, it may result in breach of a contract between the agent and principal. The power is retained even if the contract says the relationship is irrevocable. Rest
118 Revocation or Renunciation: Authority terminates if the principal or the agent manifests to the other dissent to its continuance.
b. (2) By operation of law See next section c. (3) By intervening events p682, n7
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i. When an intervening event that should cause the agent to realize he is no longer authorized. A. Rest 109 a change in the value of the subject matter or business conditions B. Rest 110 the loss/destruction of the subject matter of the agency C. Rest 116 a change in law of which the agent has notice that will make the act the subject of the agency illegal D. Rest 113, 114 the bankruptcy or substantial impairment of the assets of the agent or principal of which the agent has notice E. Rest 115 the outbreak of war of which the agent has notice 2. Zukaitas v. Aetna Casualty & Surety Co. Lingering Apparent Authority a. Distinction between general agent and special agent i. Notification to a general agent affects the principal when the agent has actual or apparent authority to receive the notification. ii. Agent does not have actual authority to receive notification when the agency relationship is terminated but he can have apparent authority (lingering apparent authority of general agent).
iii. Rest 127 Apparent Authority of General Agent
A. Unless otherwise agreed, if the principal has manifested that an agent is a general
agent, the apparent authority thereby created is not terminated by the termination of the agent's authority by a cause other than incapacity or impossibility, unless the third person has notice thereof. iv. Rest 132 Apparent Authority of Special Agent
A. Unless otherwise agreed, if the principal has manifested to the third person that the agent
is to do a single act or perform a single transaction, the apparent authority terminates with the termination of the agent's authority, unless: (1) (a) the principal has specially accredited the agent to the third person; (2) (b) the agent has begun to deal with 3P as the principal has notice; (3) (c) the agent is in possession of indicia of authority entrusted to him by the principal and shown by him to the third person; or (4) (d) the principal has manifested that the agent has authority to represent the nonexistence of the terminating event and the agent does so represent. v. Rest 136 Notification Terminating Apparent Authority A. (1) Unless otherwise agreed, there is a notification by the principal to the third person of revocation of an agent's authority or other fact indicating its termination: (1) (a) when the principal states such fact to the third person; or
(2) (b) when a reasonable time has elapsed after a writing stating such fact has been
delivered by PR (a) (i) to the other personally; (b) (ii) to the other's place of business; (c) (iii) to a place designated by the other as one in which business communications are received; or (d) (iv) to a place which, in view of the business customs or relations between the parties is reasonably believed to be the place for the receipt of such communications by the other. B. (2) Unless otherwise agreed, a notification to be effective in terminating apparent authority must be given by the means stated in Subsection (1) with respect to a third person:
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(1) (a) who has previously extended credit to or received credit from the principal through the agent in reliance upon a manifestation from the principal of continuing authority in the agent; (2) (b) to whom the agent has been specially accredited; (3) (c) with whom the agent has begun to deal, as the principal should know; or
(4) (d) who relies upon the possession by the agent of indicia of authority entrusted to him
by the PR. C. (3) Except as to the persons included in Subsection (2), the principal can properly give notification of the termination of the agent's authority by: (1) (a) advertising the fact in a newspaper of general circulation in the place where the agency is regularly carried on; or
(2) (b) giving publicity by some other method reasonably adapted to give the information
to such 3P D. Comment b: b. The requirements of Subsection (1) are not met by mailing a letter to the third person; the letter or message must reach him personally, his place of business, or other designated place; if delivered to a person there or elsewhere, it must be delivered to a person who has authority or apparent authority to receive it. The principles of agency are applicable and a notification given to an agent of the third person with power to bind his principal by its receipt is notification to the principal. See 268.
3. Rest 3d simplifies the rules around termination; no distinction between general & special AGs.
B. Terminations by operation of law

1. Death
1. Common Law Rule Rest 120 Death of Principal a. (1) The death of the principal terminates the [actual and apparent] authority of the agent without notice to him, except as stated in subsections (2) and (3) and in the caveat. b. (2) Until notice of a depositor's death, a bank has authority to pay checks drawn by him or by agents authorized by him before death. c. (3) Until notice of the death of the holder of a check deposited for collection, the bank in which it is deposited and those to which the check is sent for collection have authority to go forward with the process of collection. i. The effect of the common law rule on the agent means that the agent has breached his implied warranty of authority (he has no power to bind when principal dies). 2. Modern Trend in some Courts & in Rest. 3d, AG would still have apparent authority to act. This authority would last until 3P had notice of the death of the principal. Schock v. United States remember that there must be some manifestation from the principal to 3P before apparent authority will exist. If there has been no manifestation of authority from principal to 3P, there would be no apparent authority. Possible scenarios a. If PoA provided the basis for the apparent authority, perhaps because his actual authority terminated at death, his ability to create apparent authority (by showing the PoA under his implied actual authority) also terminated at death.
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b. If AGs actual authority continued until AG had notice of the death, then his ability to create apparent authority (implied actual authority to show the PoA to create apparent authority) also continued. i. Policy for Shock rule: the point of apparent authority is to protect 3Ps based on manifestations from the principal. They should continue to be protected until have notice of the death. The risk of termination should fall on the estate of the principal and not on the business. Protect business instead of the estate. ii. Rest 3d on p23 (KNOW THIS) A. The death of a principal terminates the agents actual authority. The termination is effective only when the agent has notice of the principals death. The termination is also effective against a 3P with whom the agent deals when the 3P has notice of the principals death. 3. Rest 124A cm a Apparent authority. Authority and apparent authority,may exist concurrently or
there may be one and not the other. In any event, they are created by independent means, one by a manifestation to the agent, the other by a manifestation to third persons. If before the termination of authority, there was no apparent authority, there is none afterwards, unless AG retains indicia of authority or other basis of apparent authority, in which case the termination of authority does not affect it. If there was apparent authority previously, its existence is unaffected until the knowledge or notice of the termination of authority comes to 3P, except when all agency powers are terminated without notice by death, loss of capacity by PR or by an event making the authorized transaction impossible.
4. Rest 133 Incapacity of Parties or Other Impossibility a. The apparent authority of an agent terminates upon the happening of an event which destroys the capacity of the principal to give the power, or an event which otherwise makes the authorized transaction impossible.
2. Termination of the Agency Relationship/Statutory Responses to the Death Issue

1. Three types of statutory responses a. Written power of attorney i. Uniform Durable Power of Attorney Act 4 Timing of Termination of Agency Powers: If PR grants authority to AG in a written PoA, the death or incapacity of PR does not terminate actual authority until AG has notice of PRs death or incapacity. AGs apparent authority does not terminate until 3P has notice of PRs death or incapacity. A. Texas Probate Code 486 (1) Texas version is the same but applies only to durable powers of attorney not regular written powers of attorney (2) Durable Power of Attorney is one that says it is not affected by PRs incapacity. b. Durable Power of Attorney i. Uniform Durable Power of Attorney Act 2 If a PoA expressly says it is not affected by PRs incapacity, those words are given effect if PR becomes incapacitated. A. Death of principal terminates durable power of attorney; no PoA survives the death of the principal. Authority does continue as per UDPA 4 above. Page 29 5-Jun-11 14:12:00 a6/p6

B. Texas Probate Code 484 c. Durable Healthcare Power of Attorney i. Grants power to agent to make healthcare decisions on the principals behalf. ii. Also execute a living will that states what the principals desires are regarding the level of medical care the principals wishes to receive. A. Texas Health & Safety Code 166.151 166.166
C. Irrevocable Agencies
1. Irrevocable Agency - Two Types a. Power coupled with an interest A power coupled with an interest in the subject matter of the power, not just an interest in the proceeds from the exercise of the power. (e.g., mortgage granted where mortgager transfers title to the property to the mortgagee and grants a power to sell the property in the event of default) i. Courts will stretch to classify possession only as power coupled with an interest. e.g., Fisher v. NY&MCFR&C Co if grantor delivers to the holder of the power the property securing the debt, it creates a power coupled with an interest. A. Lee v. OBrien -S1 did not have an interest in S4s interest in the property so no power coupled with an interest. S4 could voluntarily terminate. The power must be coupled with an interest in the subject matter of the power. ii. Death does not terminate power coupled with an interest because Agent has his own interest in the property and thus, is acting in his own name when he exercises that power after the principals death. (different from security interest!) b. Power given as security for an obligation of the PR; a power given for security or for consideration in return for consideration from the AG. i. Voluntary termination by principal does not terminate this power. ii. Death of the principal does terminate this power. A. Policy: Majority rule that death terminates an irrevocable agency created through power given as security is based on the principle that an Agent is acting for the agents own benefit when he exercises his power, not for the principal. Because the agent exercising power would be acting in the name of the principal, if principal is deceased, the agent can no longer act in the name of the principal.
*** General Partnerships ***
I Formation of Firms - B. General Partnerships

1. UPA 6(1) Partnership is an association of two or more persons to carry on as co-owners a business for profit (RUPA 101(6) "Partnership" means an association of two or more persons to carry on as co-owners a business for profit formed ) a. RUPA 201 association of 2 or more persons to carry on as co-owners a business for
profit forms a partnership, whether or not the persons intend to form a partnership.
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b. UPA 15. Nature of Partner's Liability: All partners are liable: Jointly and severally for
everything chargeable to the partnership and for all other debts and obligations of the partnership;
c. RUPA 306(a). PARTNER'S LIABILITY: Except as otherwise provided in subsections

(b) and (c), all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed
2. Elements a. Association - Consensual agreement of the parties (an aggregation of persons) i. Pship can be formed in very informal manner, even accidentally. b. 2 or more persons person can be another business entity i. Defn: Persons UPA 2, RUPA 101.10 c. To carry on as co-owners shared control of the business i. UPA 18(e). Rules Determining Rights and Duties of Partners: All partners have equal
rights in the management and conduct of the partnership business.
ii. RUPA 401(f). PARTNER'S RIGHTS AND DUTIES: Each partner has equal rights in the
management and conduct of the partnership business.
d. A business an activity that rises to the level of being a business (e.g., not mere co-owners of land) UPA 2, RUPA 101.1 A business is a series of acts directed towards an end. e. For profit to make money (there doesnt have to actually be profits for there to be a partnership; only need the intent for there to be profits) 3. Characteristics of an employment relationship v. Partnership a. Employers right to the employees labor b. Employers right to control the employees performance i. 18(e) All partners have equal rights in the management and conduct of the partnership ii. The partners have the right to control employees performance, as long as neither of them has contracted that right away in the formation of their partnership. c. Employees rights to compensation for the performance i. 15 partners have personal liability for partnership obligations employee can go after the partners personal assets if they do not pay her for her performance 4. UPA 7. Rules for Determining the Existence of a Partnership:
a. Except as provided by 16 persons who are not partners as to each other are not partners as to 3Ps b. Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not of itself establish a partnership, whether such coowners do or do not share any profits made by the use of the property.
c. The sharing of gross returns does not of itself establish a pship, whether or not the
persons sharing them have a joint or common right or interest in any property from which the returns are derived.
d. The receipt by a person of a share of the profits of a business is prima facie evidence
that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:
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A. As a debt by installments or otherwise. (e.g., creditor)
B. As wages of an employee or rent to a landlord,
C. As an annuity to a widow or representative of a deceased partner, (e.g., law firm)

D. As interest on a loan, though the amount of payment vary with the profits of the business.
E. As the consideration for the sale of a good-will of a biz or other property 5. Partnership UPA 6, RUPA 202(a) (fact intensive inquiry to determine if partnership formed; a. There must be an agreement to share profits (necessary prerequisite but not definitive; other non-partnership relationships also involve profit sharing; normally sufficient to submit the issue to the fact finder). Intent to share profits + shared control of the business will generally be enough to find a partnership (but not always P&M Cattle). Actual profits are not required. b. RUPA 202(c)(3) a person who receives a share of the profits of a business is presumed to be a partner in the business
Factors Profit sharing? (intent to share profits); necessary but not determinative; creates presumption of partnership 202(c)(3)-(4); distinguish partner profit sharing from compensation profit sharing Loss sharing TBOC 152.052(a)(4)(a)sharing of losses is a factor suggesting a pship BUT TBOC 152.052(c) agreement to share losses is not necessary to create a partnership Equal rights to participate in the control of the business (shared control over the business)? Carry on as a co-owner. Property contributions by parties? A person does not have to contribute property to be a PN; a PN could simply provide services and still be a PN. Intent of the parties? What did the parties think their relationship was? BUT the parties do not have to intend to (purpose to) create a pship in order to be PNs. Evidence of conduct and dealings can establish pship. 202(a) whether or not the persons intend to form a partnership; (dont have to have the intent to be a partner to become one; Tax treatment by the parties Dalton Analyzed, found intent to share Not analyzed P&M Analyzed, agreed to share profits but not losses Analyzed, not found
Analyzed, both operated biz Analyzed, both contributed ppty Yes; used the term partner
Analyzed, both ctrld when sell Not analyzed
Analyzed but D did not think of himself as a in partnership;
Not analyzed
Analyzed, pship treatment not found
6. Views of partnership a. Aggregate the partnership is not separate and distinct from the partners; the individual partners are the partnership; partnership is merely a way of describing
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the relationship among the partners (like a family and its members family describes the relationship of the persons) b. Entity the partnership is an entity separate and distinct from the partners. It is a separate legal person with its own rights & liability. i. RUPA 201(a) PARTNERSHIP AS ENTITY: (a) A partnership is an entity distinct from its
partners.
ii. TBOC 152.056. PARTNERSHIP AS ENTITY: A partnership is an entity distinct from its
partners.
c. Approach to analyzing partnership liability questions i. Conceptual analysis of partnerships - Determine entity v. aggregate, then analyze facts. ii. Functional approach emphasizes looking at issues on the merits and determines which view of partnership makes the most sense.
i. Attorneys
1. Entity/aggregate view has particular relevance to attorneys R1.13 attorney for an organization is the attorney for the organization itself, not the constituents. 2. Can the partners in a partnership bring suit against the attorney for malpractice? a. Conceptual View i. If partnership is seen as an aggregate, the individual partners can sue the attorney. ii. If the partnership is seen as an entity, only the partnership can sue the attorney, not the individual partners. Arpadi Conceptual approach partnership is an aggregate so individual partners can sue the attorney for malpractice; if partnership was considered an entity, only it could sue the attorney for malpractice b. Functional View i. What were the expectations of the parties when the attorney began doing work for the LP; did the partners think that the attorney was also their attorney? If they did not (e.g., if the partners are geographically dispersed, not likely to think the attorney was their attorney too), then no, the individual partners cannot sue the attorney for malpractice; if they did (e.g., if have few partners, geographically compact, they all meet with the attorney, might all think the attorney is their attorney, too), then, yes, they can.
VI. PShips Accountability for notification to/knowledge of Partners

1. Knowledge: RUPA & UPA consistent with agency rules a. UPA 12. Partnership Charged with Knowledge of or Notice to Partner. Notice to any
partner of any matter relating to partnership affairs, and the knowledge of the partner acting in the particular matter, acquired while a partner or then present to his mind, and the knowledge of any other partner who reasonably could and should have communicated it to the acting partner, operate as notice to or knowledge of the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner
b. RUPA 102(a) knowledge = actual knowledge only; cognitive awareness; different from UPA
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i. UPA 3-actual knowledge thereof, but also when he has knowledge of such other facts as in the circumstances shows bad faith; actual knowledge + reason to know or should know. c. RUPA 102(c) - A person notifies or gives a notification to another by taking steps reasonably required to inform the other person in ordinary course, whether or not the other person learns of it. An Act intended to convey information. d. RUPA 102(b) Notice of a fact i. A person has notice of a fact if the person: (A) knows of it; (B) has received a notification of it; or (C) has reason to know it exists from all of the facts known to the person at the time in question. ii. RUPA 102(f) - A partners knowledge, notice, or receipt of a notification of a fact relating to the partnership is effective immediately as knowledge by, notice to, or receipt of a notification by the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner. A. All partners are agents of the partnership; knowledge is attributable to the partnership when it concerns a matter regarding the partnership. B. Exception if partner is committing fraud or assisting fraud, it is not notice to partnership, even if the 3P is not aware that the partner is committing/assisting fraud. The knowledge of a partner who is acting adversely in the sense of fraud is not attributable to the partnership. 2. Dvoracek - If an agent has actual or apparent authority to receive the notification, it operates as notice to the principal. Partners by being a partner have actual or apparent authority to receive notification regarding partnership business. 3. What Dvoracek had been a limited partnership? a. Notice to or knowledge of a limited partner does not constitute notice to the partnership, as long as the persons only role is a limited partner (e.g., if the person is also an employeethus he is an agent toapply general agency rules, not partnership rules).
VIII. Management and Conduct of Firm Business - GP

1. Rules that regulate intra-partnership relations may be modified by agreement. Rules that regulate partnership-3rd party interactions cannot be modified, unless agreed with the 3P (e.g., UPA 9).
1. Partners as Agents (Creating Partnership Obligations)

a) Apparent Authority
1. A partner has express actual authority if the partnership agreement grants specific authorization to do certain acts. 2. A partner has implied actual authority by virtue of the agreement to be partners in a partnership. a. UPA 9(1) Every partner is an agent of the partnership
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b. Rest. 35 An agent has implied actual authority to commit its principal to 3P to the extent that the commitments are incidental to, usually accompany or are reasonably necessary to accomplish the business of the partnership. (RUPA all tasks within the ordinary course of the business of the partnership) c. UPA 18(e) all partners have equal rights in management and control of the partnership and thus have some authority to bind the partnership. d. UPA 18(b) authorized acts qualify for indemnification; unauthorized acts dont if partner has actual authority to bind the partnership, his act binds the partnership Partner Apparent Authority Ordinary Course Transactions a. UPA 9(1). Partner Agent of Partnership as to Partnership Business. i. (1) Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority. b. RUPA 301(1) - Subject to the effect of a statement of partnership authority under Section 303: (1) Each partner is an agent of the partnership for the purpose of its business. An act of a partner, including the execution of an instrument in the partnership name, for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority. c. Partner has bound the partnership because he has apparent authority based on his status of a partner and doing something in the usual way the business of the partnership. d. The party seeking to bind the partnership bears the burden of proving the transaction was in the ordinary course of business. Extraordinary Course Transactions UPA 9(2) addresses acts outside the ordinary course a. UPA 4 says the law of estoppel and agency apply to partnerships so a partnership could be bound through estoppel or inherent agency power. b. 9(2) An act of a partner which is not apparently for the carrying on the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners. i. If the partner does an act that is outside the ordinary course of business (for which the partner would have no apparent authority), the partnership is still bound if the partner acted with actual authority (the other partners agree) Consent from all partners required for these acts: UPA 9(3). Unless authorized by the other partnersall partners are required to consent to
a. Assign the partnership property in trust for creditors or on the assignee's promise to pay the debts of the partnership,
3. 4.
5.
6.
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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 in arbitration or reference.
7. The partner has no apparent authority to make the UPA 9(3) decisions; the partner must have been granted actual authority from all the partners to make such a decision; otherwise all partners have to consent. a. RUPA 301 does not contain this laundry list of actions BUT b. Comment 4. UPA 9(3) contains a list of 5 extraordinary acts that require unanimous consent of the partners before the partnership is bound. RUPA omits that section. That leaves it to the courts to decide the outer limits of the agency power of a partner. Most of the acts listed in UPA Section 9(3) probably remain outside the apparent authority of a partner under RUPA, such as disposing of the goodwill of the business, but elimination of a statutory rule will afford more flexibility in some situations specified in UPA Section 9(3) 8. UPA 9 v. RUPA 301 Differences a. 9 Actual knowledge (conscious awareness only) v. 301 knowledge (knew or should have known) or notice b. 9 Scope of ordinary course of business transactions: limited to the partnership itself v. 301 consideration of the way other businesses of the same kind conduct the business c. Handling of extraordinary acts which require consent of all partners: 9 list v. 301 no list
b) Partnership by Estoppel (purported partners, purported partnerships)

1. UPA 7. Rules for Determining the Existence of a Partnership; In determining whether a partnership exists, these rules shall apply: (1) Except as provided by 16 persons who are not partners as to each other are not partners as to third persons 2. UPA 16. Partner by Estoppel; a. When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to any one, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such person to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made: i. When a partnership liability results, he is liable as though he were an actual member of the partnership. ii. When no partnership liability results, he is liable jointly with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately. Page 36 5-Jun-11 14:12:00 a6/p6

b. When a person has been thus represented to be a partner in an existing partnership, or with one or more persons not actual partners, he is an agent of the persons consenting to such representation to bind them to the same extent and in the same manner as though he were a partner in fact, with respect to persons who rely upon the representation. Where all the members of the existing partnership consent to the representation, a partnership act or obligation results; but in all other cases it is the joint act or obligation of the person acting and the persons consenting to the representation. 3. A person is liable if a. (1) There is a representation that the person is a partner in actual or purported partnership. b. (2) Spoken, written or conduct-based representation made by or with the consent of the purported partner. Consent can be implied but i. UPA: a mere failure to act does not create consent merely knowing youve been held out as a partner is not enough to say you have consented. ii. RUPA 308: a mere failure to act also does not create consent. iii. Failure to act in circumstances where the reasonable person would have corrected the mistaken belief might be seen as consent. c. 3P, on the faith of the representation, extends credit to the actual or apparent partnership. i. 3p has to rely on the representation. ii. Credit has been interpreted broadly an executory contract that says, I agree to extend you credit in the future is sufficient to be extending credit A. RUPA 308(a) is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership (Not just extend credit) d. Public broadcast of the representation i. 3P has to show that it detrimentally relied on the public representation in extending the credit. Estoppel always requires detrimental reliance. ii. To be liable, the partnership does not have to have knowledge that the representation has come to the attention of this 3P. A. RUPA 308(a) If the representation, either by the purported partner or by a person with the purported partners consent, is made in a public manner, the purported partner is liable to a person who relies upon the purported partnership even if the purported partner is not aware of being held out as a partner to the claimant. e. Liability extends to i. Where no actual partnership exists, the purported partner and with anyone else who consenting to the contract or the representation ii. Where an actual partnership exists, the partnership is liable, and by extension, all the actual partners. 4. Analysis a. Does an actual partnership exist? i. No 16(1)(b) purported partner and other consenters ii. Yes
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A. Was a partnership obligation created (did the person bind the partnership when he acted)? (1) No 16(1)(b) purported partner and other consenters (2) Yes 16(1)(a) partnership, partners, & purported partner are all liable 5. TBOC 152.054/152.307: Texas has abandoned partnership by estoppel
a. TBOC 152.054 i. A false representation or other conduct falsely indicating that a person is a partner with another person does not of itself create a partnership. ii. A representation or other conduct indicating that a person is a partner in an existing partnership, if that is not the case, does not of itself make that person a partner in the partnership. b. TBOC 152.307
i. The rights of a person extending credit in reliance on a representation

described by Section 152.054 are determined by applicable law other than this chapter and the other partnership provisions, including the law of estoppel, agency, negligence, fraud, and unjust enrichment. ii. The rights and duties of a person held liable under Subsection (a) are also determined by law other than the law described by Subsection (a).
2. Partners as Managers
a) Generally
1. Partners by virtue of being partners have implied actual authority; the principal is the partnership that was formed by the agreement of the partners; the formation of the partnership itself can cause each partner to reasonably believe that he is authorized to act to execute transactions in the ordinary course of the partnerships business. a. 9(1) Every partner is an agent of the partnership. b. Rest 35 Implied actual authority an agent has implied actual authority do acts that are incidental to or reasonably necessary to accomplish the partnerships business c. 18(e) all partners have implied actual authority. d. 18(b) partnership has to indemnify every partner for expenses reasonably incurred by him in the ordinary and proper conduct of its business. 2. When partners are acting with actual authority, they not liable to each other. 3. 18(h) (h) Any difference arising as to ordinary matters connected with the partnership business may 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. a. Difference as to ordinary matters connected with partnership may be decided by a majority vote of the partners. Default rule is: 1 vote per partner ( 18(e) partners have equal rights to control), unless modified by partnership agreement. 18; RUPA 401(f),(j)
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b. TBOC 152.209(a) default rule is a majority-in-interest (partners who own more than 50% of the current percentage in the profits of the partnership) not a majority in numbers. i. TBOC 152.202(c) default rule, partners share profits equally; Default rule on share of profits is UPA 18(a), RUPA 401(b) c. If the partner acts knowing there is a disagreement about the matter, the partner has committed an unauthorized act (act without actual authority). This is a breach of duty to the partnership. If the act results in damage to the partnership, the partner (AG) is liable to the partnership (PR).
b) Transactions Outside the Usual & Regular Course of Business

1. UPA 18(h) a. Disagreement on ordinary matters requires a majority vote to resolve. b. Action in contravention of an agreement among the PNs (i.e., changes to a formal written pship agreement) or an extraordinary transaction requires a unanimous vote to resolve. i. RUPA 401(j), cm. 11 Amendments to the pship agreement and matters outside the ordinary course of the partnership business require unanimous consent of the partners
UPA Disagreement on ordinary matters Action in contravention of an agreement among the partners (i.e., changes to a formal written partnership agreement) an extraordinary transaction Addition of new partners Majority in number 18(h) Unanimous 18(h) RUPA Majority in number 401(j) Unanimous 401(j) TBOC Majority in interest 152.209(a), 151.001(4) Unanimous 152.208
Unanimous 18(h) Unanimous 18(g)
Unanimous 401(j) Unanimous 401(i)
Unanimous 152.209(b) Unanimous 152.201
IX. Managerial Discretion and Fiduciary Duties

A. Duty of Loyalty - General Partnerships
1. UPA 21 a. Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners (unanimous consent) from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property 2. Fiduciary duties supplementing partner duties to each other under UPA 21 (general agency principles added to 21)
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a. Duty of loyalty partners are considered fiduciaries of each other; each partner has a duty of loyalty to each other partner; occupy a position of trust b. Affirmative Duty of full disclosure disclose when dealing on own account (acting adverse) and disclose all material facts regarding the transaction. Rest. 390 c. Duty to account for all profits/benefits gained through the agency relationship without consent of the other partners Rest 380. d. Consent of all partners is required unless the partnership agreement specifies otherwise. e. Duty of due care to conduct partnership business with due care; breach by gross negligence, reckless and willful misconduct. i. UPA 21 does not list a duty of care but courts typically impose a duty of care on partners to each other. 3. RUPA 404(a) a. The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c). b. A partners duty of loyalty to the partnership and the other partners is limited to the following: i. to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity; ii. to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and A. If an unauthorized sale was in connection with the start up of the partnership, his action might be excluded from the duty of loyalty not prohibited from profiting or acting as an adverse party. B. Different from UPA; RUPA excludes actions in the formation of the partnership C. Different from UPA; other partners consent is not listed here; it is listed in RUPA 103/ also TBOC 152.002(a). (1) RUPA 103(a) says everything is a default rule; (a) Except as otherwise provided in subsection (b), relations among the partners and between the partners and the partnership are governed by the partnership agreement. To the extent the partnership agreement does not otherwise provide, this [Act] governs relations among the partners and between the partners and the partnership. (RUPA rules are default rules unless partnership agreement modifies them) (2) RUPA 103(b) is the list of things that cannot be changed by the partners; these are mandatory rules / TBOC 152.002(b). Partners cannot (a) RUPA 103(b)(3)/TBOC 152.002(b)(2) eliminate the duty of loyalty under Section 404(b) or 603(b)(3), but
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(i) (i) the partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; or (ii) (ii) all of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty; (b) RUPA 103(b)(4)/ TBOC 152.002(b)(3) unreasonably reduce the duty of care under Section 404(c) or 603(b)(3); (c) RUPA 103(b)(5)/ TBOC 152.002(b)(4) - eliminate the obligation of good faith and fair dealing under Section 404(d), but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable iii. to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership. c. A partners duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. d. A partner shall discharge the duties to the partnership and the other partners under this [Act] or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing. Not a fiduciary duty but a contractual duty; no further defn. e. A partner does not violate a duty or obligation under this [Act] or under the partnership agreement merely because the partners conduct furthers the partners own interest. 4. Texas Rules a. TBOC 152.204 (fiduciary duty is not used anywhere because dont want partners held to standard of trustee)
i. A partner owes to the partnership, the other partners, and a transferee of a deceased partner's partnership interest as designated in Section 152.406(a)(2):
A. a duty of loyalty; and B. a duty of care. (not exclusive list, may be other duties)
ii. A partner shall discharge the partner's duties to the partnership and the other partners under this code or under the partnership agreement and exercise any rights and powers in the conduct or winding up of the partnership business:
A. in good faith; and B. in a manner the partner reasonably believes to be in the best interest of the
partnership. iii. A partner does not violate a duty or obligation under this chapter or under the partnership agreement merely because the partner's conduct furthers the partner's own interest.
iv. A partner, in the partner's capacity as partner, is not a trustee and is not held to
the standards of a trustee.
b. TBOC 152.205 A partner's duty of loyalty includes (not an exclusive list):
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i. accounting to and holding for the partnership property, profit, or benefit derived by the partner: (1) in the conduct and winding up of the partnership business; or (2) from use by the partner of partnership property; ii. refraining from dealing with the partnership on behalf of a person who has an interest adverse to the partnership; and iii. refraining from competing or dealing with the partnership in a manner adverse to the partnership.
c. TBOC 152.206 PARTNER'S DUTY OF CARE. i. A partner's duty of care to the partnership and the other partners is to act in the
conduct and winding up of the partnership business with the care an ordinarily prudent person would exercise in similar circumstances. ii. An error in judgment does not by itself constitute a breach of the duty of care.
iii. A partner is presumed to satisfy the duty of care if the partner acts on an
informed basis and in compliance with Section 152.204(b). (business judgment rule)
X. Partnership Liability for Wrongful Acts of Partners (RS)

C. RS Liability of Partnerships & Partners (Creating PShip Liability in Tort)
1. Two basis issues a. When is a partnership VL for a partners wrongful conduct? b. If the partnership is VL, what is the form of the partners liability? 2. UPA 13. Partnership Bound by Partner's Wrongful Act. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the [actual] authority of his co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act. 3. UPA 14. Partnership Bound by Partner's Breach of Trust. a. The partnership is bound to make good the loss: i. Where one partner acting within the scope of his apparent authority receives money or property of a third person and misapplies it; and ii. Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership. 4. UPA 15. Nature of Partner's Liability. a. All partners are liable: i. Jointly and severally for everything chargeable to the partnership under 13 and 14. A. Plaintiff can sue the partners and the partnership at the same time or separately; each is liable for the whole obligation.
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ii. Jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract. A. Jointly liable means liable only collectively. Plaintiff must exhaust partnership assets before reaching partner assets. BUT the plaintiff must join the partnership and all the partners in the same suit. 5. RUPA 305. PARTNERSHIP LIABLE FOR PARTNERS ACTIONABLE CONDUCT. a. A partnership is liable for loss or injury caused to a person, or for a penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with [actual or apparent] authority of the partnership. b. If, in the course of the partnerships business or while acting with [actual] authority of the partnership, a partner receives or causes the partnership to receive money or property of a person not a partner, and the money or property is misapplied by a partner, the partnership is liable for the loss. 6. RUPA 306. PARTNERS LIABILITY. a. Except as otherwise provided in subsections (b) and (c), all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law. i. J&S liable for all partnership obligations. Different from UPA even though J&S liable, plaintiff has to exhaust partnership assets before judgment can be satisfied against a partner. b. RUPA 307(d) A judgment creditor of a partner may not levy execution against the assets of
the partner to satisfy a judgment based on a claim against the partnership unless the partner is personally liable for the claim under Section 306 (Go after partnership assets first) TBOC 152.304(a). NATURE OF PARTNER'S LIABILITY. (a) Except as provided by Subsection (b) or Section 152.801(b), all partners are liable jointly and severally for a debt or obligation of the partnership unless otherwise: (1) agreed by the claimant; or (2) provided by law TBOC 152.306(a) ENFORCEMENT OF REMEDY. (a) A judgment against a partnership is not by itself a judgment against a partner. A judgment may be entered against a partner who has been served with process in a suit against the partnership. (Go after partnership assets first)
7. Correlation a. UPA 13 (excludes injury to other partner) RUPA 305(a) (includes injury to other partner) TBOC 152.303 (includes injury to other partner) b. UPA 14(a) (apparent authority only) RUPA 305(a) authority means actual or apparent authority TBOC 152.303 8. LLP note: a. An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such an obligation solely by reason of being or so acting as a partner. This subsection applies notwithstanding anything inconsistent in the partnership agreement that existed immediately before the vote required to become a limited liability partnership under Section 1001(b).
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i. No liability based on status as partners; a partner is still liable for wrongs he personally commits (e.g., Pedestrian could sue partnership and the partner that hit him) ii. WARNING w.r.t. LLP: if a state has a full shield LLP statute, it operates like 306(c) no liability for tort & contract obligations of the partnership; partial shield LLP statutes only cut off liability for tort obligations
XII Ownership of the Firm v. Ownership of Firm Assets GP

A. Ownership of the Firm (Firm Property)
1. UPA 24 property rights of partner a. (1) his rights in specific partnership property, i. UPA 25 Nature of a Partner's Right in Specific Partnership Property A. A partner is co-owner with his partners of specific partnership property holding as a tenant in partnership. The partners are owners of partnership property aggregate theory of partnership.
B. The incidents of this tenancy are such that
(1) Equal right to possess for business purposes only without consent of
partners
(a) Partner cannot use partnership property for his own purposes or to satisfy his own liabilities. UPA 25(2) exceptions to UPA 25(1) tenants in partnership concept constrict use of partnership property to partnership purposes and not assignable without all partners assigning. (2) Partners Interest is not assignable unless all partners are assigning their
interests
(3) Partners interest is not subject to attachment or execution, unless for a

claim against the partnership.
b.
(2) his interest in the partnership, and

i. UPA 26. Nature of Partner's Interest in the Partnership: A partner's interest in the partnership is his share of the profits and surplus, and the same is personal property.
ii. A partner has a beneficial interest in partnership property considered as a whole. As

profits accrue, he has a right to be paid his proportion, and on winding up the business, after obligations to 3rd parties have been met, he has a right to be paid in cash his share of what remains of the partnership property. The rights are considered his interest in the partnership and he may assign this in whole or in fractional part as indicated by 27.
c. (3) his right to participate in the management. - UPA 18(e) 2. RUPA a. 203, 501 The partnership owns partnership property (UPA 25(1) - partners own partnership property); entity theory partnership is separate from partners; no longer necessary to define the tenancy-in-partnership used under UPA. b. 401(g) Partners can only use partnership property for partnership purposes. (UPA 25(2))
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c. 502 The only transferable interest of a partner is his interest in profits/losses of the partnership and distributions. (UPA 26)
B. Rights of Assignees and Creditors

1. Assignees
2. UPA 27(1) A conveyance by a partner of a partners interest in the partnership does not of itself dissolve the partnership a. UPA 29 Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying of the business. (aggregate theory)
i. Reasons for dissolution 31 death, term ends, at will of partner (partner always has the power to walk away), etc. ii. 31(1)(b) Dissolution is caused without violation of agreement among the partners by the express will of a partner when no definite term has been undertaken (at will partnership partner can trigger dissolution at any time) iii. 31(2) Dissolution is caused in contravention of an express agreement among the partners (e.g., partnership for a period of time); partner can still walk away at any time but will affects his rights at time of withdrawal
A. UPA 31. Causes of Dissolution. Dissolution is caused: (1) Without violation of the agreement between the partners: (a) By the termination of the definite term or particular undertaking specified in the agreement, (b) By the express will of any partner when no definite term or particular undertaking is specified, (c) By the express will of all the partners who have not assigned their interests or suffered them to be charged for their separate debts, either before or after the termination of any specified term or particular undertaking, (d) By the explusion of any partner from the business bona fide in accordance with such a power conferred by the agreement between the partners; (2) In contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this section, by the express will of any partner at any time; (3) By any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership; (4) By the death of any partner; (5) By the bankruptcy of any partner or the partnership; (6) By decree of court under 32.
b. Assignment of a partners interest in the partnership does not automatically make the assignee a partner. UPA 18(g) No person can become a member of a partnership
without the consent of all the partners., 27(1), RUPA 503(3)
c. Assignment of a partners interest in the partnership does not give the assignee rights to that partners share of partnership property. UPA 27(1) merely entitles the assignee to the profits to which the assigning partner would otherwise be entitled. 25(2)(a)(b)(c) interest in partnership property is undivided; a partner has no interest which she can convey; cant be attached for personal debts; RUPA 501 d. An assignee cannot force the partnership to make managerial decisions favorable to it. UPA 27(1) assignee has no rights to interfere in management or administration of
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RUPA 503(a)(3); Bauer v. Blomfield partners owe assignee no fiduciary duty w.r.t. distribution; dissent says they should e. Rights of assignee i. Receive share of profits allocated to assigning partner ii. Sue if fraudulent action by the partners in making no distributions. iii. Petition for judicial dissolution, if it is a partnership at will (not for a definite term of for a specific undertaking); UPA 32(2)(b) (no equitable requirement under UPA)/RUPA 801(6) (court can order dissolution if it deems such action equitable) iv. Texas Rule: Assignees cannot seek judicial dissolution of partnership TBOC 11.314 (only a partner can seek judicial dissolution)
partnership;
2. Creditor Rights - Charging Orders - a) General Partnerships

1. A judgment creditor cannot seek attachment of partnership assets to satisfy a partners individual debts. a. UPA 25(2)(c) A partner's right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership. b. Same result under RUPA no access to partnership property (stated less obviously) i. RUPA 203. PARTNERSHIP PROPERTY. - Property acquired by a partnership is property of the partnership and not of the partners individually. ii. RUPA 501. PARTNER NOT CO-OWNER OF PARTNERSHIP PROPERTY. - 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. 2. A judgment creditor may seek a charging order against the partners interest in the partnership to satisfy a partners individual debts. a. UPA 28(1) On due application to a competent court by any judgment creditor of a partner, the court which entered the judgment, order, or decree, or any other court, may charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest thereon; b. RUPA 504(a) On application by a judgment creditor of a partner or of a partners transferee, a court having jurisdiction may charge the transferable interest of the judgment debtor to satisfy the judgment. c. Texas & Charging Order i. Texas dropped the charging order provision for GPs in 1993. ii. Texas retains charging orders for LPs and LLCs. iii. TBOC 154.002 allows a creditor of a partner has no right to get access to partnership assets. ~ UPA 25(2)(c). 3. The charging order does not entitle the judgment creditor to the partners interest in partnership property. The charging order is a lien on the partners interest in the partnership. a. 25(2)(c) A partner's right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership.
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a. RUPA 504(b) A charging order constitutes a lien on the judgment debtors transferable interest in the partnership. b. UPA 28/RUPA 504 authorize the court to appoint a receiver to receive distributions from the partnership (e.g., if there were 5 creditors with a judgment); also allow court broad authority to issue orders as appropriate in the case. BUT 28/504 dont give much guidance on what is appropriate; Court says local procedural law dealing with creditor rights to fill in the gaps. c. Once the debt is satisfied, creditor is not entitled to further distributions due the debtor PN. i. No provisions from UPA & RUPA that state this exactly. ii. RUPA 504(b) nature of charging order is a lien on a judgment debtors transferable interest . It is a form of garnishment; once paid, no further rights to distributions. 4. A judgment creditor can seek foreclosure against PNs interest subject to the charging order. a. UPA 28(2) foreclosing on the partnership interest - (2) The interest charged may be redeemed at any time before foreclosure, or in case of a sale being directed by the court may be purchased without thereby causing a dissolution: b. RUPA 504(b) The court may order a foreclosure of the interest subject to the charging order at any time. The purchaser at the foreclosure sale has the rights of a transferee. c. At the court directed sale of the interest, three possible buyers i. Other partners creditor will be paid proceeds up to the judgment amount ii. Third parties creditor will be paid proceeds up to the judgment amount iii. The creditor creditor gains the partners interest in the partnership outright becomes an assignee by purchase; as an assignee, creditor is then A. Entitled to ALL future distributions from the partnership B. May institute judicial dissolution of the partnership and get ALL amounts due to the debtor partner at termination. (but not in TEXAS) 5. Charging Order Summary
General Partnership UPA/RUPA Can creditor seek a charging order? If get a C/O, can creditor seek appointment of a receiver If get C/O, can creditor seek foreclosure on the partnership interest Assignors rights: If creditor forecloses and buys partnership interest or gets a voluntary assignment of the Yes Yes UPA 28(1) Yes TBOC No N/A RULPA Yes, RULPA 703 RULPA 1105 RULPA does not address so use UPA 28(1) RULPA 1105 RULPA does not address so use UPA 28(1) No, RULPA 802 (makes foreclosure less valuable with a LP no right to seek judicial dissolution) LP TBOC Yes TBOC 153.256(a) No? (not in statute)
N/A
No? (not in statute prior version allowed) No, TBOC 11.314 (partner or owner only)
Yes UPA 32(2)(b), RUPA 801(6)
No TBOC 11.314 (partner or owner only)
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interest, can creditor seek dissolution
C. Ownership interests in the firm - Distributions on Liquidation

1. Balance Sheet Left side is assets; right side shows who has a claim on the assets a. The default rule is that partners are not entitled to salary for services rendered in the business of the partnership. Default rule can be changed by agreement. Partners are compensated through their share of the profits.
i. UPA 18(f) - No partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs.
b. Service Contributions: It is generally not appropriate to treat service contributions as a capital contribution. cm. 3, UPA 40. Partners must agree to treat the services as a capital contribution.
i. In the absence of an agreement to such effect, a partner contributing only personal services is ordinarily not entitled to any share of partnership capital pursuant to dissolution. Personal services may, however, qualify as capital contributions to a partnership where an express or implied agreement to such effect exists.
c. Loss Sharing Default rule - each partner shares the loss equally.
i. UPA 18(a) -- Each partner shall be repaid his contributions, whether by way of capital or advances to the partnership property and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied; and must contribute towards the losses, whether of capital or otherwise, sustained by the partnership according to his share in the profits.
2. Order of distributions a. UPA 40(b)The liabilities of the partnership shall rank in order of payment, as follows: i. Those owing to creditors other than partners, ii. Those owing to partners other than for capital and profits, (e.g., if a partner has also made a loan to the partnership, a partners agreed but unpaid salary, expenses incurred under 18(b) activities; fee due to partner for services in winding up partnership) iii. Those owing to partners in respect of capital, ($, equipment, property The partners are repaid the VALUE of their contributions, not necessarily what they actually contributed (e.g., dont necessarily get their property back). A. UPA 40(d) The partners shall contribute, as provided by 18 (a) the amount necessary to satisfy the liabilities; but if any, but not all, of the partners are insolvent, or, not being subject to process, refuse to contribute, the other partners shall contribute their share of the liabilities, and, in the relative proportions in which they share the profits, the additional amount necessary to pay the liabilities. B. UPA 40(b) lists the liabilities iv. Those owing to partners in respect of profits. (no profits because there was a loss)
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v. UPA 40. Rules for Distribution. In settling accounts between the partners after dissolution,
the following rules shall be observed, subject to any agreement to the contrary: A. The assets of the partnership are: (1) The partnership property, (2) The contributions of the partners necessary for the payment of all the liabilities specified in clause (b) of this paragraph. B. The liabilities of the partnership shall rank in order of payment, as follows: (1) Those owing to creditors other than partners, (2) Those owing to partners other than for capital and profits, (3) Those owing to partners in respect of capital, (4) Those owing to partners in respect of profits. C. The assets shall be applied in the order of their declaration in clause (a) of this paragraph to the satisfaction of the liabilities. D. The partners shall contribute, as provided by 18 (a) the amount necessary to satisfy the liabilities; but if any, but not all, of the partners are insolvent, or, not being subject to process, refuse to contribute, the other partners shall contribute their share of the liabilities, and, in the relative proportions in which they share the profits, the additional amount necessary to pay the liabilities.
3. Becker v. Killarney When one partner puts in only services and the other puts in only capital, the service partner should not have to contribute to the loss to allow the capital partner to be repaid at termination (fairness argument). Otherwise, capital contributions are favored over service contributions. Other courts disagree this approach is inconsistent with the UPA. a. UPA 40(d)- the partners shall contribute the amount necessary to satisfy the liability of the
partnership it does not say partners who contributed capital.
b. RUPA 401 cm. 3 expressly rejects Becker & Kovacek; recommends partners amend default rule. 4. If a partnership is an LLP, LPs have no obligation to contribute to obligations outstanding at termination, even to even out each others capital accounts. a. Under a full shield LLP statute, the partners have no obligation to contribute any funds to cover any tort or contract liabilities outstanding at termination. b. Under a partial shield LLP statute, the partners must contribute towards contract liabilities outstanding but not tort liabilities. (partial shield only protects against tort type actions, not contract type actions). 5. UPA does not expressly recognize capital accounts of partners in the equity portion of balance sheet; RUPA 401(a) does.
6. RUPA 401. PARTNERS RIGHTS AND DUTIES. (a) Each partner is deemed to have an account that is: (capital account) (1) credited with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, the partner contributes to the partnership and the partners share of the partnership profits; and (2) charged with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, distributed by the partnership to the partner and the partners share of the partnership losses. (b) Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partners share of the profits. (h) A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership. 7. RUPA 807. SETTLEMENT OF ACCOUNTS AND CONTRIBUTIONS AMONG PARTNERS. (a) In winding up a partnerships business, the assets of the partnership, including the contributions of the partners required by this section, must be applied to discharge its obligations to creditors,
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including, to the extent permitted by law, partners who are creditors. Any surplus must be applied to pay in cash the net amount distributable to partners in accordance with their right to distributions under subsection (b). Each partner is entitled to a settlement of all partnership accounts upon winding up the partnership business. In settling accounts among the partners, profits and losses that result from the liquidation of the partnership assets must be credited and charged to the partners accounts. The partnership shall make a distribution to a partner in an amount equal to any excess of the credits over the charges in the partners account. A partner shall contribute to the partnership an amount equal to any excess of the charges over the credits in the partners account but excluding from the calculation charges attributable to an obligation for which the partner is not personally liable under Section 306. If a partner fails to contribute the full amount required under subsection (b), all of the other partners shall contribute, in the proportions in which those partners share partnership losses, the additional amount necessary to satisfy the partnership obligations for which they are personally liable under Section 306. A partner or partners legal representative may recover from the other partners any contributions the partner makes to the extent the amount contributed exceeds that partners share of the partnership obligations for which the partner is personally liable under Section 306. After the settlement of accounts, each partner shall contribute, in the proportion in which the partner shares partnership losses, the amount necessary to satisfy partnership obligations that were not known at the time of the settlement and for which the partner is personally liable under Section 306. The estate of a deceased partner is liable for the partners obligation to contribute to the partnership. An assignee for the benefit of creditors of a partnership or a partner, or a person appointed by a court to represent creditors of a partnership or a partner, may enforce a partners obligation to contribute to the partnership.
(b)
(c)
(d)
(e) (f)
*** Limited Partnerships (LP) *** I Formation of Firms - LP

1. RULPA 101(7) Limited partnership: "Limited partnership" and "domestic limited
partnership" mean a partnership formed by two or more persons under the laws of this State and having one or more general partners and one or more limited partners.
a. Partnership with i. At least one general partner 403 rights to manage and control the business (rights of a partner in a GP); personal liability for business obligations (liability of a partner in a GP) ii. And at least one limited partner 302 voting rights granted in LP agreement; 303 no rights to manage and control the business A. but no personal liability (beyond investment amount) for the business obligations; RULPA 303(a). LIABILITY TO THIRD PARTIES: Except as provided in
subsection (d), a limited partner is not liable for the obligations of a limited partnership unless he is also a general partner or, in addition to the exercise of his [or her] rights and powers as a limited partner, he participates in the control of the business. However, if the limited partner participates in the control of the business, is liable only to persons who transact business with the limited partnership reasonably believing, based upon the limited partner's conduct, that the limited partner is a general partner.
iii. LP is often seen as a hybrid entity/aggregate. Agents of the partnership owe a fiduciary duty to both the partnership (collective interests of the partners) and the partners (interests of individual partners). However, the duty to the partnership itself takes precedence over the duty to the partners when there
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is a conflict between the interests of the partnership and the interests of the partners. This duty applies to GPships also. A. If the agent is accused of violating its fiduciary duty to either the partnership or the partners, it must produce evidence that it was acting in the best interests of the partners or the partnership. 2. Creation a. File a document with the appropriate state office; "certificate of limited partnership."
RULPA 201(a).
i. Texas: certificate of formation. TBOC 1.002(6), 3.001(a), 3.011(a). ii. Must be signed by all general partners. RULPA 204; TBOC 3.004(b)(1),
153.553(a)(1).
iii. Information required is very basic. See RULPA 201(a); TBOC 3.005, 3.011(c). b. Limited partnership is formed at the time the certificate is filed (or on a later date specified in the certificate). RULPA 201(b); TBOC 3.001(c), 4.051, 4.052. Note:
RULPA provides limited partnership is formed upon filing if "there has been substantial compliance with the requirements"
c. There is some fee. 3. Limited Partnership Agreement a. RULPA and Texas do not require a written agreement, but limited partnerships normally have a written limited partnership agreement. b. The limited partnership agreement is not filed with the state. c. The typical limited partnership agreement is very detailed, and spells out the rights and obligations of the partners, such as: i. Each partner's share of profits and losses. ii. How much capital each partner is required to contribute to the partnership. iii. Voting rights of partners. 4. Limited Partnership Name a. Typically, state statutes require the partnership name to contain the words "limited partnership" or an abbreviation of those words. See RULPA 102(1); TBOC 5.055(a). b. Under many state statutes, the name of the limited partnership cannot contain the name of a limited partner, unless certain exceptions apply. See RULPA 102(2). i. If name is used, LP is personally liable to creditors who extend credit to the LPship without actual knowledge that the partner is not a general partner. RULPA 303(d). ii. Texas: the TRLPA contained this prohibition; the TBOC does not. 5. Limited Partnership Name Reservation & Registration a. Reservation of a name. TBOC 5.101 to 5.106. i. Sets the name aside for exclusive use for a short period of time (120 days in Texas). b. Registration of a name. TBOC 5.151 to 5.155. i. Sets the name aside for a longer period of time (one year in Texas).
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Agency & Partnership Outline II. Liability for Contracts entered into before formation of a LL firm
a) Limited Partners: when face liability if problems in forming LPship
1. Who incurs liability for obligations entered into before limited liability status achieved? 2. ULPA 11. Status of Person Erroneously Believing Himself a Limited Partner: A
person who has contributed to the capital of a business conducted by a person or partnership erroneously believing that he has become a limited partner in a limited partnership, is not, by reason of his exercise of the rights of a limited partner, a general partner with the person or in the partnership carrying on the business, or bound by the obligations of such person or partnership; provided that on ascertaining the mistake he promptly renounces his interest in the profits of the business, or other compensation by way of income.
3. RULPA 304. PERSON ERRONEOUSLY BELIEVING HIMSELF A LIMITED PARTNER. a. Except as provided in subsection (b), a person who makes a contribution to a business enterprise and erroneously but in good faith believes that he [or she] has become a limited partner in the enterprise is not a general partner in the enterprise and is not bound by its obligations by reason of making the contribution, receiving distributions from the enterprise, or exercising any rights of a limited partner, if, on ascertaining the mistake, he: i. causes an appropriate certificate of limited partnership or a certificate of amendment to be executed and filed; or ii. 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.
b. A person who makes a contribution of the kind described in subsection (a) is liable as a general
partner to any third party who transacts business with the enterprise (i) before the person withdraws and an appropriate certificate is filed to show withdrawal, or (ii) before an appropriate certificate is filed to show that he is not a general partner, but in either case only if the third party actually believed in good faith that the person was a general partner at the time of the transaction.
c. Key point: erroneously belief at the time of contribution that he is becoming a limited partner. i. Objectively reasonable test for erroneous belief: honest & reasonable d. ULPA 11 focus is on promptness, how quickly the person renounces, after realizing the mistake i. policy protect 3Ps expectations in dealing with the entity; reduces the risk that there will be creditors that thought the person was a GP); ii. Unclear whether person has to renounce all profits, past and future, or just future; e. RULPA 304 (focus is on reliance by 3P on persons status, not how quickly withdraws) i. On ascertaining the mistake A. Causes certificate of LP to be executed and filed showing not a GP or (1) Requires the agreement of the voting partners and GP would have to sign & file it. B. Withdraws from future equity participation by filing a certificate of withdrawal with the State ii. Upon complying, limited liability for future obligations is established. Page 52 5-Jun-11 14:12:00 a6/p6

iii. BUT person is liable to creditors who transact business with the enterprise before corrective action was taken, if the creditor actually believed in good faith that the person was a GP at the time of the transaction. f. TBOC 153.106 109 i. 153.106 Erroneous but good faith belief that the person is a limited partner and within a reasonable time after ascertaining the mistake the person takes corrective action A. cause certificate of formation to be filed by GP, B. withdraw from participation in future profits, C. file a written statement that shows person tried to get a cert of formation to be filed by the GP and claims status as an LP(1) gets partner 180 days to persuade the GP to file the certificate of formation; after that partner must withdraw or bring an action against GP to compel filing the certificate of limited partnership ii. 153.109 Person is liable as a GP to a 3P who transacts business with the partnership before corrective action is taken if A. The person knows or has notice that no certificate has been filed or it was filed inaccurately and B. 3P reasonably believes that based on the person who believes himself to be a LPs own conduct that the person was a GP at the time of the transaction and extended credit to the partnership in reasonable reliance on the contributor.
VIII. Management and Conduct of Firm Business - LP

1. Rights of General Partners
1. 1916 ULPA 9(1) a. A general partner shall have all the rights and powers b. and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners, c. except that without the written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to i. Do any act in contravention of the certificate, ii. Do any act which would make it impossible to carry on the ordinary business of the partnership, iii. Confess a judgment against the partnership, iv. Possess partnership property, or assign their rights in specific partnership property, for other than a partnership purpose, v. Admit a person as a general partner, vi. Admit a person as a limited partner, unless the right to do so is given in the certificate, vii. Continue the business with partnership property on the death, retirement or insanity of a general partner, unless the right to do so is given in the certificate. Page 53 5-Jun-11 14:12:00 a6/p6

2. RULPA 403 a. (a) Except as provided in this [Act] or in the partnership agreement, a general partner of a limited partnership has the rights and powers and is subject to the restrictions of a partner in a partnership without limited partners. b. (b) Except as provided in this [Act], a general partner of a limited partnership has the liabilities of a partner in a partnership without limited partners to persons other than the partnership and the other partners. Except as provided in this [Act] or in the partnership agreement, a general partner of a limited partnership has the liabilities of a partner in a partnership without limited partners to the partnership and to the other partners. c. Leaves out the enumerated list of disallowed acts from ULPA; must be specified in the partnership agreement.
2. Voting Rights of Limited Partners

1. Voting Rights of LPs generally (basic deferral to partnership agreement) a. RULPA 302 Voting rights are determined by the partnership agreement. Can be on a per capita basis or a percentage basis or other basis) b. RULPA 401 LPs have voting rights on the admission of a GP, only if the matter is not addressed in the partnership agreement c. RULPA 301(b)(1) LPs have voting rights on the admission of an LP, only if the matter is not addressed in the partnership agreement. d. RULPA 801(4) - LPs have voting rights on whether the business continues after the withdrawal of a general partner, only if the matter is not addressed in the partnership agreement.
3. Limits on Contractual Expansion of LP Rights

1. ULPA 7 (1916) A limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business. a. LP acting as an employee must act without the oversight and control of the GP to waive limited liability. If LP has authority to make decisions without GP oversight, waives limited liability. b. LPs should be held liable under 7 only when a creditor has mistakenly assumed the LPs are GPs. The whole issue is creditor reliance: did the creditor rely on the individual LPs creditworthiness rather than the credit status of the corporation? i. Liability: If the LPs dont make clear the role in which they are acting (as agent of disclosed principal corp), they may face liability. ii. Liability: If the corp-as-GP is a sham corporation and not really being conducted as a corp (e.g., failing to hold required meetings, keeping minutes, under capitalization, etc.), then the officers/directors are really acting directly as a GP-corp, not agents of the GP-Corp. c. Delaney - TX S Ct said LPs are liable if they are acting as officers of the corporate GP. 2. Under RULPA 303(a) & (b)
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a. Element 1: a limited partner is not liable for the obligations of a limited partnership unless he is also a general partner or, in addition to the exercise of his rights and powers as a limited partner, he participates in the control of the business AND i. (b) A limited partner does not participate in the control of the business within the meaning of subsection (a) solely by doing one or more of the following: A. (1) being a contractor for or an agent or employee of the limited partnership or of a general partner or being an officer, director, or shareholder of a general partner that is a corporation; b. Element 2: if the limited partner participates in the control of the business, he is liable only to persons who transact business with the limited partnership reasonably believing, based upon the limited partners conduct, that the limited partner is a general partner c. LP is liable for pship obligations if i. LP participates in control of the business (see list in 303(b)) and
A. 303(b) A limited partner does not participate in the control of the business within the meaning of subsection (a) solely by doing one or more of the following: (1) being a contractor for or an agent or employee of the limited partnership or of a general partner or being an officer, director, or shareholder of a general partner that is a corporation; (2) consulting with and advising a general partner with respect to the business of the limited partnership; (3) acting as surety for the limited partnership or guaranteeing or assuming one or more specific obligations of the limited partnership; (4) taking any action required or permitted by law to bring or pursue a derivative action in the right of the limited partnership; or (5) requesting or attending a meeting of partners; (6) proposing, approving, or disapproving, by voting or otherwise, one or more of the following matters: (a) the dissolution and winding up of the limited partnership; (b) the sale, exchange, lease, mortgage, pledge, or other transfer of all or substantially all of the assets of the limited partnership (c) the incurrence of indebtedness by the limited partnership other than in the ordinary course of its business; (d) a change in the nature of the business; or (e) the admission or removal of a general partner.; (f) the admission or removal of a limited partner; (g) a transaction involving an actual or potential conflict of interest between a general partner and the limited partnership or the limited partners; (h) an amendment to the partnership agreement or certificate of limited partnership; or (i) matters related to the business of the limited partnership not otherwise enumerated in this subsection (b), which the partnership agreement states in writing may be subject to the approval or disapproval of limited partners; (7) winding up the limited partnership pursuant to Section 803; or
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(8) exercising any right or power permitted to limited partners under this [Act] and not specifically enumerated in this subsection (b).
ii. Element 3: 3P must reasonably believe based on that LPs conduct that the LP was a GP. 3. ULPA 303 (2001). NO LIABILITY AS LIMITED PARTNER FOR LIMITED PSHIP OBLIGATIONS. a. An obligation of a limited partnership, whether arising in contract, tort, or otherwise, is not the obligation of a limited partner. A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the limited partnership. i. Control rule has been eliminated; LPs can control at will without liability. The burden is on the 3P to verify with whom it is transacting. ii. The control rule is anachronism because parties are free to choose LLC, LLLP, LLP where partners can choose to participate and still have limited liability. iii. Texas still follows the control rule: TBOC 153.102, 153.103 4. EXAM: LP can become personally liable if a. Participate in the control of the business. b. LPs name is used as part of the name of the Lpship not under one of the exceptions (RULPA 303(d)) A. A limited partner who knowingly permits his [or her] name to be used in the name of the limited partnership, except under circumstances permitted by Section 102(2), is liable to creditors who extend credit to the limited partnership without actual knowledge that the limited partner is not a general partner. B. Texas has abandoned this rule; in Texas the LPs name can be used in the partnership name. c. LP is defectively formed (Briargate condominium); liable to 3Ps who think the LP is a GP d. LP personally causes injury to a 3p (commits a tort - e.g., negligence) e. LP agrees to be personally liable for an obligation f. The first two can be ameliorated by registering the LP as an LLLP (so LPs can get benefits from being in an LLLP as well).

Duty of Loyalty- 2. Limited Partnerships
1. GP cant prospectively limit is his liability for breach of fiduciary duty of loyalty. Contract cant eliminate the duty of loyalty by giving GP sole discretion for distributions. Court says complete waiver of fiduciary duties is not allowed in a partnership. 2. GPs are agents of the partnership and so under agency principles the GP has a fiduciary duty to the partnership. They are entrusted with other peoples assets or welfare. Fiduciaries naturally possess discretion. To argue that he has discretion and Page 56 5-Jun-11 14:12:00 a6/p6

so cant be liable turns the relationship on its head. It is precisely when a person has discretion that he has fiduciary duty, which constrains that discretion. 3. Partnership agreement can modify the fiduciary duty of loyalty for extraordinary transactions; contracted around the duty and replaced it with voting rights of LP; a. Competing views of fiduciary duties i. Traditionalists fiduciary duties are imposed by virtue of a persons status (e.g., agent, partner, corporate director); duties are mandatory by virtue of status ii. Modernists - Fiduciary duties are default rules; the rules most people would choose to apply if they could negotiate without cost; the parties are free to contract around fiduciary duties. 4. Instituting limited partner voting to approve a transaction in place of the duty of loyalty. How courts might interpret the vote: a. Insulates transaction from attack: LPs have given actual authority to do the transaction so they give up their cause of action. b. Give no effect to the vote of approval; still assess whether the transaction is fair & reasonable with burden of proof on the fiduciary GP. The vote is a just a factor in determining whether the transaction is fair & reasonable. c. Give some effect to the vote by shifting the burden to LPs to prove not fair or reasonable. Standard is still fairness with challengers bearing burden. d. Give more effect to the vote and shift the standard from fairness to the business judgment rule. Code words for challengers lose. Plaintiffs would have to show gross negligence, fraud, gift or waste of partnership assets. 5. Does RUPA allow elimination of duty of loyalty? What if pship had been a GP subject to RUPA: would the contractual provision in pship agreement be permissible under 103(b)? a. 103(b)(3)(i) & (ii) would not allow elimination of duty of loyalty but can contract for specific types and categories of transactions that do not violate the duty or specify authorization/ ratification after full disclosure of all material facts (by all partners [default rule] or number specified in partnership agreement).
XII Ownership of the Firm-LP Rights of Creditor of Limited Partner

2. Creditor Rights - Charging Orders-b) Limited Partnerships
1. RULPA sections a. RULPA 101.10 - (10) Partnership interest means a partners share of the profits and losses of a limited partnership and the right to receive distributions of partnership assets. b. RULPA 702 Except as provided in the partnership agreement, a partnership interest is assignable in whole or in part. An assignment entitles the assignee to receive, to the extent assigned, only the distribution to which the assignor would be entitled. (UPA 27/RUPA 503). Except as provided in Page 57 5-Jun-11 14:12:00 a6/p6

the partnership agreement, a partner ceases to be a partner upon assignment of all his partnership interest. c. RULPA 704(a) Assignee can become a LP - (a) An assignee of a partnership interest, including an assignee of a general partner, may become a limited partner if and to the extent that (i) the assignor gives the assignee that right in accordance with authority described in the partnership agreement, or (ii) all other partners consent. 2. An assignee has no right to sue for judicial dissolution under RULPA. RULPA provides a rule for judicial dissolution a. RULPA 802. JUDICIAL DISSOLUTION. On application by or for a partner the 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. b. RULPA 1105. RULES FOR CASES NOT PROVIDED FOR IN THIS [ACT]. In any case not provided for in this [Act] the provisions of the Uniform Partnership Act govern. i. UPA/RUPA provide for judicial dissolution by an assignee; RULPA does not. 3. A creditor of a partner in a LP may seek a charging order. a. RULPA 703. RIGHTS OF CREDITOR. On application to a court of competent jurisdiction by any judgment creditor of a partner, the court may charge the partnership interest of the partner with payment of the unsatisfied amount of the judgment with interest. 4. Texas Rules TBOC 153.256 (2007) a. On application by a judgment creditor of a partner or of any other owner of a partnership interest, a court having jurisdiction may charge the partnership interest of the judgment debtor to satisfy the judgment. (Charging order) b. To the extent that the partnership interest is charged in the manner provided by Subsection (a), the judgment creditor has only the right to receive any distribution to which the judgment debtor would otherwise be entitled in respect of the partnership interest. c. A charging order constitutes a lien on the judgment debtor's partnership interest. d. The entry of a charging order is the exclusive remedy by which a judgment creditor of a partner or of any other owner of a partnership interest may satisfy a judgment out of the judgment debtor's partnership interest. e. This section does not deprive a partner or other owner of a partnership interest of a right under exemption laws with respect to the judgment debtor's partnership interest. f. A creditor of a partner or of any other owner of a partnership interest does not have the right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited partnership.
*** Limited Liability Companies (LLC) ***
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Agency & Partnership Outline I Formation of Firms - LLC

1. TBOC 1.002(46). DEFINITIONS.: "Limited liability company" means an entity governed
as a limited liability company under Title 3 or 7. The term includes a professional limited liability company.
2. TBOC 101.001(1), (3). DEFINITIONS: "Company agreement" means any agreement,

written or oral, of the members concerning the affairs or the conduct of the business of a limited liability company. A company agreement of a limited liability company having only one member is not unenforceable because only one person is a party to the company agreement. "Limited liability company" or "company" means a domestic limited liability company subject to this title.
3. TBOC 101.052. COMPANY AGREEMENT: (a) Except as provided by Section 101.054, the
company agreement of a limited liability company governs: (1) the relations among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself; and (2) other internal affairs of the company.
4. LLC compared to Corporation & Partnerships

Corporation Perpetual Existence Centralized Management Transferable interests Limited Liability Structure Yes (change of shareholders does not dissolve the corp) Yes (board of directors) Yes (xfer shares) Yes Rigid, formal, Partnership No (change of partners dissolves the partnership) No No No Flexible, informal, easily changed LLC Maybe, depends on statute Optional Maybe, depends on statute Yes Flexible and more formal (Operating agreement defines reln btwn mbrs) Pass through taxation
Taxes
Taxed at corporate level & shareholder dividend level
Pass through taxation
5. Purpose of LLC limited liability without the rigidity of a corporation and favorable tax treatment. 6. Entity/Aggregate theories are still applicable to analyzing legal issues with an LLC (Elf Atochem v. Malek, LLC). 7. Most states permit single-member LLCs. See TBOC 101.101(a); Del. LLCA 18101(6). a. LLC might be managed by its members (member-managed LLC), or by one or more managers (manager-managed LLC). See TBOC 1.002(51). b. Members and managers are not, by virtue of being members or managers, liable for the debts and obligations of the LLC. TBOC 101.114; Del. LLCA 18-303. 8. Creating a Limited Liability Company a. File a document with the appropriate state office. b. Fees TBOC 4.152, 4.154 c. Most common name: articles of organization." ULLCA (1995) 202(a). d. Texas: certificate of formation. TBOC 1.002(6), 3.001(a), 3.010.
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e. Information required in the certificate is very basic. See Del. LLCA 18-201(a); TBOC 3.005, 3.010. f. LLC is formed at the time the certificate is filed (or on a later date specified in the certificate). Del. LLCA 18-201(b); TBOC 3.001(c), 4.051, 4.052. g. There is no financial responsibility requirement. 9. Operating Agreement of LLC a. Delaware and Texas do not require a written agreement, but LLCs normally have a written operating agreement. b. Terminology: i. Most common: operating agreement. ii. Delaware: limited liability company agreement. Del. LLCA 18-101(7). iii. Texas: company agreement. TBOC 101.001(1). c. Operating agreement is not filed with the state. d. The typical operating agreement is very detailed, and spells out the rights and obligations of members and managers, such as: i. Each members share of profits and losses. ii. Rules regarding voting by members and managers. iii. Procedure for calling meetings of members and managers 10.Limited Liability Company Name a. Typically, state statutes require the LLC name to contain the words "limited liability company" or an abbreviation of those words. i. Del. LLCA 18-102(1): name must contain the words "Limited Liability Company" or the abbreviation "L.L.C." or the designation "LLC" ii. TBOC 5.056: must contain the phrase limited liability company or limited company or an abbreviation of one of those phrases 11.Terminology & General Concepts a. LLC might be managed by its members (member-managed LLC), or by one or more managers (manager-managed LLC). See TBOC 1.002(51). b. Typical default rule: LLC is member-managed. See Del. LLCA 18-402. c. Texas: does not have a default rulecertificate of formation must state how LLC is managed. See TBOC 3.010; see also 101.251, 101.252.
II. Liability for Contracts entered into before formation of a LL firm

b) Members of a LLC: when face liability if problems in forming LLC
1. PROMOTERS: Issue: what liability for members for obligations entered into before LLC formed? a. Who is party to ta contract when the LLC is not yet formed? Agent acting on behalf of undisclosed principal, the agent is a party to the contract (Water, Waste and Land case) because the 3P likely intended to contract with the person he was personally dealing with.
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b. 326 Principal Known to Be Nonexistent or Incompetent: Unless otherwise agreed, a person
who, in dealing with another, purports to act as agent for a principal whom both know to be nonexistent or wholly incompetent, becomes a party to such a contract.
c. There is an inference that a person intends to make a present contract with an existing person. d. Other members may be liable as GPs in a general partnership since the LLC has not been formed. Courts in equity might say that a simple investor in the venture is not liable because he was just an investor. There is no corrective provision, as there is for LPs, for persons who erroneously believe they are members in an LLC. 2. Lessons a. File correctly. b. No business until confirmation that your filing was successful. c. If do pursue business, make the contract clear about who will be parties and if there will be an substitution of parties. d. TBOC 4.051, 3.001(c) LLCs existence commences upon the filing of the cert of formation. 3. In the absence of intent to the contrary, a promoter becomes liable on contracts he signs for an unformed limited liability entity. Courts presume 3P intended to contract with the person who signs the contract. a. Unless the other party knows of the nonexistence of the LL entity and agrees to look solely to the LL entity. b. While LL entity remains unformed, the persons trying to form the entity are likely operating as a GPship and are J&S liable for all obligations created on behalf of the Pship. c. LL entity does not automatically become liable on contracts signed on its behalf preformation. It must adopt the contracts either expressly or by conduct. i. When the LLC adopts the contracts, it does not relieve the promoters (the members of the unformed LLC at the time the contract was made) of liability, unless the 3P agrees to release them from liability (executes a novation). 4. The members of the unformed LLC might raise defenses a. Corporation [LLC] by estoppel 3P is estopped from denying LLC existence because the 3P acted as though the LLC existed. i. Some states say the doctrine applies only where both the 3P and the agents (both parties to the contracts) have no constructive notice of the nonexistence of the LL entity. Rest 326 b. De facto [LLC] corporation A bona fide, colorable attempt has been made to create the LLC i. Policy: protect individuals from personal liability when they were legitimately conducting corporate business before the corporate formalities were complete ii. Elements A. Valid law authorizing formation of the LLC/corporation B. Attempt in good faith to form the entity C. Actual use of LLC/corporate powers
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(1) 1 & 3 are always found because 3 gets the parties into trouble and 1 authorizes the creation of the LL entity. iii. Doctrine is no longer valid because the statute says LLC does not exist until the issuance of the certificate of formation. Legislature has overruled the CL de facto corporation doctrine with the statute. Before issuance, there is no LL entity and therefore, there can be no limited liability. TX probably wont apply the doctrine but no settled law. A. TX LLC act 4.051, 3.001(c) LLC comes into existence on the date of filing. c. Election of remedies does not apply; Agents of the preformed corporation and the subsequently formed corporation are liable unless novation or the agreement provides that performance is solely the responsibility of the corporation. State LLC statutes generally do not specify the liability of agents of the preformed LLC for contracts formed before formation. Use agency concepts to hold the agents liable for contracts formed before the LLC comes into existence.
VIII. Management and Conduct of Firm Business - LLC

1. Actual & Apparent Authority of Members or Managers
1. LLC formed by filing articles of organization (Tx Certificate of Formation); contains limited info. 2. LLC Operating Agreement (Tx company agreement; previously regulations of the LLC) governs the details of the relationship among the members. a. LLC governance structure i. Member-managed (partnership-like) company is managed by its members ii. Manager- managed (corporation-like) company is managed by an appointed manager(s) iii. Default rule is member managed. Texas has no default rule. The Certificate of Formation must specify which type. 3. EXAM: Texas law (very corporate like in terms of procedure): TBOC does not define actual authority either. TBOC repeats UPA 9 definition of apparent authority. a. TBOC 101.251 governing authority is members or managers, depending on type of structure. b. TBOC 101.254(a) each governing person ( 1.002(37)) is an officer and agent of the LLC with (implied) actual or apparent authority to conduct transactions for carrying out the business of the company (ordinary transactions). c. To approve extraordinary transactions, have to get approval of other members i. TBOC 101.353 a majority of members must be present to constitute a quorum for voting purposes. ii. TBOC 101.354 default rule is that each member gets one vote iii. TBOC 101.355 a majority of the quorum present is required for the governing authority to authorize a transaction in the ordinary course of business. Page 62 5-Jun-11 14:12:00 a6/p6

iv. TBOC 101.356 if a fundamental business transaction ( 1.002(32) a sale of all or substantially all assets) or the transaction is not apparently for carrying out the ordinary course of business, there must be a vote by an absolute majority of the members. If the transaction would make it impossible to carry out the ordinary business. ULLCA 301(a) a. Apparent Authority of an LLC Member (1) Each member is an agent of the limited liability company for the purpose of its business, and an act of a member, including the signing of an instrument in the company's name, for apparently carrying on in the ordinary course the company's business or business of the kind carried on by the company binds the company, unless the member had no authority to act for the company in the particular matter and the person with whom the member was dealing knew or had notice that the member lacked authority. (Similar to Apparent Authority of Partners in UPA 9 Burns v. Gonzalez) i. Nothing in the ULLCA addresses a members actual authority. ii. Members have actual authority by virtue of agreeing to be members together in an LLC. 303(1) each member is an agent; all agents have implied actual authority to do things reasonable & necessary in the course of biz for transactions in the ordinary course of biz b. (2) An act of a member which is not apparently for carrying on in the ordinary course the company's business or business of the kind carried on by the company binds the company only if the act was authorized by the other members. ULLCA 301(c) - Unless the articles of organization limit their authority, any member of a member-managed company or manager of a managermanaged company may sign and deliver any instrument transferring or affecting the company's interest in real property. The instrument is conclusive in favor of a person who gives value without knowledge of the lack of the authority of the person signing and delivering the instrument. a. EXAM: Under TX There is no Texas equivalent of ULLCA 301(c). ULLCA 404 (a) In a member-managed company: a. each member has equal rights in the management & conduct of company's business; and b. except as otherwise provided in subsection (c), any matter relating to the business of the company may be decided by a majority of the members. ULLCA 404(c) The only matters of a member or manager-managed company's business requiring the consent of all of the members are:
a. the amendment of the operating agreement under Section 103; duty of loyalty; an amendment to the articles of organization under Section 204; the compromise of an obligation to make a contribution under Section 402(b); the compromise, as among members, of an obligation of a member to make a contribution or return money or other property paid or distributed in violation of this [Act]; the making of interim distributions under Section 405(a), including the redemption of an interest; the admission of a new member;
4.
5.
6.
7.
b. the authorization/ratification of acts/trans under 103(b)(2)(ii) which would otherwise violate the
c. d. e. f. g.
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h. i. j. k. the use of the company's property to redeem an interest subject to a charging order; the consent to dissolve the company under Section 801(b)(2); a waiver of the right to have the company's business wound up and the company terminated under Section 802(b); the consent of members to merge with another entity under Section 904(c)(1); and sale, lease, exchange, or other disposal of all, or substantially all, of the company's property with or without goodwill.
l.
8. Two points a. Members are not agents of a manager managed LLC. b. Include managers and members list in the articles of organization so the public is on notice of who is authorized to act for the LLC. Specify LLC mgmt mode in the articles of org.
Default Rules - Ordinary Matters Extraordinar y Matters Fundamental Biz Trans/Act makes it impossible to carry out business Absolute majority of members 101.356(c) Amend certificate of formation
Member managed
Majority of members present at meeting where a quorum is present 101.355 Majority of the managers present at a meeting where a quorum is present; members do not have to approve 101.355
Absolute majority of members 101.356(b) Absolute majority of managers; 101.356(b)
Unanimous approval 101.356(d)
Manager managed
Approval by a majority of managers at a meeting with a quorum 101.355 and by an absolute majority members 101.356(c)
Approval by a majority of managers at a meeting with a quorum 101.355 and unanimous approval of members 101.356(d)
XII Ownership of the Firm LLC Rights of a Creditor of a Member

2. Creditor Rights - Charging Orders
1. TBOC 101.112 provision is identical to TBOC 153.256 for Limited Partnerships a. Creditor i. Can get a charging order. ii. Cannot seek appointment of receiver iii. Cannot seek foreclosure of the partnership interest iv. Cannot seek judicial dissolution of partnership if gets assignment of partnership interest.
2. TBOC 101.112. (2007) MEMBER'S MEMBERSHIP INTEREST SUBJECT TO CHARGING ORDER. a. On application by a judgment creditor of a member of a limited liability company or of any other owner of a membership interest in a limited liability company, a court having jurisdiction may charge the membership interest of the judgment debtor to satisfy the judgment.
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b. If a court charges a membership interest with payment of a judgment as provided by Subsection (a), the judgment creditor has only the right to receive any distribution to which the judgment debtor would otherwise be entitled in respect of the membership interest. A charging order constitutes a lien on the judgment debtor's membership interest. The entry of a charging order is the exclusive remedy by which a judgment creditor of a member or of any other owner of a membership interest may satisfy a judgment out of the judgment debtor's membership interest. This section may not be construed to deprive a member of a limited liability company or any other owner of a membership interest in a limited liability company of the benefit of any exemption laws applicable to the membership interest of the member or owner. A creditor of a member or of any other owner of a membership interest does not have the right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.
c. d.
e.
f.
*** LLP & LLLP *** I Formation of Firms LLP & LLLP
1. TBOC 1.002(48). DEFINITIONS: "Limited liability partnership" means a partnership
governed as an LLP under Title 4.
2. Registering an LLP requirements are hard and fast; substantial compliance is not sufficient a. 152.802 File an application with the secretary of state with required information i. 4.158 pay $200 filing fee per partner; renew annually ii. Failure to renew LLP status causes partnership to lose the limited liability shield. b. 152.803 proper name for the company; 5.063 name must include LLP in some form c. 152.804 $100k of liability insurance/set aside for liability purposes i. Failure to maintain the financial responsibility requirements means that the partnership does not have the limited liability shield. 3. Registration of LLLP a. 153.351 If LP registers as an LLLP and the partnership agreement allows for the change in status or if the partners required to vote consent to the change in status. b. Pay the registration fees $200/partner c. Get $100k liability insurance or set aside $100k for liability d. 5.055 Modify their name to include LLP or LLLP e. 153.353 GP of LP now gets limited liability protection such that 152.801 applies to the GP; LP who is personally liable for the debts and obligations of the partnership (such as when the LP agrees to or is reasonably seen as a GP by a 3rd party doing business with the LLLP) also now has limited liability. f. LLLP v. LLP i. LLP is a GP that has registered and obtained limited liability ii. LLLP is an LP that has registered and obtained limited liability
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iii. There is no difference in the functioning of the liability shield between the two; GPS and LPs get liability shield against VL for obligations that the GP or LP would otherwise have had personal liability for in the GP or LP construct. 4. TBOC 152.801(a) protects partners from VL for both contract and tort type liability incurred by the partnership. a. Texas is a full-shield or second generation statute protects from VL for both contract and tort type liability. (RUPA has full shield provision 306(c)) b. Partial shield or first generation statute only protects the partner from VL for tort-type obligations of the partnership 5. TBOC 152.801(e)(2) a. VL - person has liability not because he has done something wrong but because of his status. i. A partner in an LLP/LLLP is not VL for the tort misconduct of another partner. (partial and full-shield statutes) ii. A partner in an LLP/LLLP is not VL for the contract misconduct of another partner. (full-shield statutes) iii. 152.801(b) VL does attach to a partner if A. (b)(1) the partner was directly managing or directing the partner committing the tort misconduct; (1) Supervise or direct might mean reviewer of billing, bringing in the client, managing partner of the firm, or performs performance assessments of persons. B. (b)(2) the partner was directly involved in the activity during which the misconduct was committed by another (1) Directly involved must be interpreted. C. or had notice of the misconduct but failed to take steps to mitigate the effects (b)(3). (1) Notice has to be interpreted. b. Direct liability a partner is liable for a partners own actions. i. A partner in an LLP is always directly liable for his own tort misconduct. The liability shield of an LLP does not protect one from ones own misconduct. ii. Direct liability can attach to the partner for someone elses misconduct such as for negligent hiring or negligent supervision by the partner. 6. Formality required. Four points a. When GP becomes an LLP, it is the same GP but has purchased the attribute of limited liability for the partners. It is still subject to the UPA/RUPA. Procedure for becoming an LLP 4 requirements! i. Filing application with appropriate state office. ii. Paying appropriate fee; renew yearly iii. Name TBOC 5.063 (contain LLP in some form), iv. financial responsibility TBOC 152.804 (liability insurance. or $100k cash separated) b. (Some states) Registration must be renewed annually or limited liability shield is lost for the period of time not renewed. TBOC 152.802(g)
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c. In some states, including Texas, both a GP and an LP can register to become an LLP. i. If LP becomes an LLP, name must include LLLP. GP of LPship gains limited liability for partnership obligations. The Limited Partner may also benefit where he would have had liability by operation of law in the LPship: 1) if participated in control of LPships business or 2) LPs name has been used in the name of the LPship. If LP assumed personal liability for a specific debt, becoming an LLP would not cut off that liability.
*** Miscellaneous *** VIII. Management and Conduct of Firm BusinessCorporations

1. Partnership: Partners are agents of partnership; partners have equal rights to manage the partnership; governance of a partnership is very informal. a. Corporation: Shareholders in a corporation are not agents of the corporation; shareholders have no management rights; shareholders delegate management responsibility to a board of directors; the board of directors delegates operation authority to the corporate officers; governance structure is very formal (required meetings, minutes, reporting, etc.) b. Shareholders have limited voting rights: election of the board of directors and extraordinary matters (e.g., merger, amendment to articles of incorporation) c. Shareholders in a small corporation can enter into an agreement that fundamentally alters the governance structure of the corporation.

A. Business Judgment Rule
1. The business judgment rule describes a standard of review that courts apply when they assess whether corporate directors/partnership managers have breached their duty of care. BJR does not apply to asses whether attorneys are liable for malpractice. Attorney liability is assessed by applying an objective standardthe attorney is not liable if they make a decision which a reasonably prudent attorney could make under the same or similar circumstances. 2. In contrast, when courts apply the BJR in the context of corporate directors or other managers, the courts do not ask what a reasonably prudent director or manager would have done. Instead, if the BJR applies, the court refuses to question the director or managers decision at all. Circumstances in which a court will not apply the BJR, include, e.g., the director or manager did not act in good faith or acted out of self interest. 3. Attorney a. Objective good faith: Attorney acts in good faith and in an honest belief that his advice and acts are well founded and in the best interest of the client is not answerable for a mere error in judgment or for a mistake on an unsettled point of law on which well informed lawyers my reasonably disagree.
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i. The attorney must have been acting as a reasonably prudent attorney in the same or similar circumstances. Did the attorney fail to act reasonably in interpreting the law? b. Wood v. McGrath even if an attorneys interpretation of unsettled law is reasonable, he can still be liable to the client if he fails to make adequate disclosure for the basis of his interpretation. 4. Regular Business a. Business judgment rule courts are reluctant to second guess the business decisions of corporate directors. Not sufficient to allege an imprudent decision; more than imprudence or mistake in judgment must be shown, even if results are unwise or inexpedient. b. Kamin v. Amex Co i. Court will second guess a manager, such as general partner or board when A. The person acts with self-interest, apart from any interest of the partnership B. The person acts with self-interest gross negligence in informing himself regarding the decision, mere negligence is not enough; RUPA 404(c) partner must refrain from grossly negligent, reckless or willful misconduct. C. The person is not acting in good faith for the best interest of the entity. Subjective standard: good faith means persons primary purpose must be profitable. Directors have acted or are about to act in bad faith for a dishonest purpose. Good faith and reflect legitimate business concerns. D. GPs actions amount to a gift or waste of partnership assets. No reasonable person could conclude the business is getting fair value for what it is being paid. (e.g., charitable contribution of assetsget nothing in return, might be a waste of assets) ii. Court applies a subjective good faith rule not an objective good faith rule. Shareholders expect the board to take risks to increase return for all shareholders. Fear of liability should something go wrong would hamper the decision making of boards; would not take justifiable risks for fear of liability.
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