Partnerships

Post -Dissolution Obligations - RUPA Sections 804 and 805

-A partnership will be bound by a partner's act after dissolution if the act is appropriate for winding up the partnership business. -A partnership will also be bound by a partner's post-dissolution act - even an act that is not appropriate for winding up the partnership, such as entering into a contract to carry out new business, where the party with whom the partner dealt did not have notice of the dissolution.

Transfer of Partnership Interests

-Default Rule: RUPA 502: can transfer economic, but not management rights. -An ownership interest in a partnership is not freely transferable in its entirety. The only transferable interest of a partner in the partnership is: +The partner's share of the profits and losses of the partnership +And the partner's right to receive distributions."

Fiduciary Duties (2)

-Duty of Care: +Duty to refrain "from engaging in grossly negligent or reckless conduct, +intentional misconduct, +or a knowing violation of law +in connection with the partnership business."

Liability Exposure - Joint and Several

-General partners in a general partnership may be held personally liable for a company's debts. -Each partner is personally liable for the obligations of the partnership. UPA 18 (e), RUPA 306 (a) (torts and contracts.) +E.g. if a general partnership business fails, and it defaults on a bank loan, the bank can sue any of the partners personally to collect on the loan. +Will have to pay out of his or her own personal assets -Under the UPA (1914), partner's liability is joint and several for torts and joint but not several for contracts. -Under RUPA, partners are jointly and severally liable for all partnership obligations. -Creditors must first exhaust partnership assets before partners' personal assets may be used to satisfy creditors claims (known as the "exhaustion rule"). -Entitled to contribution and indemnification

Management of Partnership (1)

-Generally specified in the partnership agreement. Common approaches include: +The partners select a managing partner generally vested with the authority to make all decisions +The partners select a management committee composed of partners generally with the authority to make all decisions. +The partners all get a say in managing the business, with each partner having an equal vote +The partners all have a say in managing the business with each partner having voting power in accord with the partner's capital contribution to the partnership

General Partnership (1)

-Governed by the partnership statute of the state in which it is organized (each state has its own partnership statute) +Uniform partnership Act (UPA) (still used in some states) - superseded by: +Revised Uniform Partnership Act (RUPA) -A for profit business with two or more owners who have not filed the paperwork to operate the business in some other legal form -Also called a general partnership to distinguish it from a limited partnership -Owners are referred to as partners

Persons entering into a partnership should always execute a partnership agreement to address issues such as:

-Management -Voting, -Sharing of profits and losses, -The continuation of the business when a partner withdraws, -retires or is expelled -Valuation of interests in the partnership

Management of Partnership (2)

-Managing partner or committee structure will typically require a partnership vote on matters outside of the ordinary course of business. (for example, admitting a new partner, expelling a partner, or selling the business). -The partnership agreement will specify the required vote for approval. (majority, supermajority, or unanimous). -Default rule for partnership management if the partnership agreement is silent on a particular issue is that each partner has equal rights in the management of the partnership business. See RUPA 401(f).

Partnership Agreement

-Most partnerships have a written agreement signed by each partner -Agreement addresses, inter alia: +Management structure +Allocation of profits and losses among the partners, +Partner taxation, admission and withdrawal of partners, and dissolution -The partnership statutes are default rules, which the parties can contract around. -The partners can tailor these rules to their specific desires. For example: +Sharing of profits

Aspects of formation

-No formalities are required to form a partnership. -Formed when: (1) two or more people associate to carry on as co-owners a business for profit, and (2) they do not file the paperwork (i.e. articles of incorporation/organization) to operate the business in some other form. (UPA 6, RUPA 202). -Once these elements are met, the parties have created a partnership even if they did not know that they were actually forming a partnership (inadvertent partnership). -If parties had the intention to form a partnership, normally, they would express that intention in a written partnership agreement.

Fiduciary Duties (1)

-Partners owe each other and the partnership fiduciary duties -RUPA codified these duties as follows: +The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care. +Duty of Loyalty: =Duty to account to the partnership and hold as trustee for it any property, profit, or benefit ... derived from a use by the partner of the partnership property and =Prohibitions against self-dealing and competing against the partnership.

Obligation of good faith and fair dealing

-RUPA 404(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."

Dissociation - RUPA 601

-RUPA 601 - default rule for dissociation -A partner can dissociate at any time by notifiying the partnership of her express will to withdraw -RUPA provides for automatic dissociation upon a partner's +Expulsion from the partnership pursuant to the partnership agreement, +Bankruptcy, or +Death -Additionally, the other partners can cause a partner's dissociation through unanimous vote if "there has been a transfer of all or substantially all of that partner's transferable interest in the partnership...

Dissociation

-RUPA 601:Term used by RUPA for when a partner departs a partnership +A partner can dissociate at any time by notifying the partnership of his or express will to withdraw +Automatic dissociation upon a partner's 1. expulsion from the partnership pursuant to the partnership agreement 2. bankruptcy, or 3. death Also allows the other partners to cause a partner's dissociation through a unanimous vote if, subject to limited exceptions, "there has been a transfer of all or substantially all of that partner's transferable interest in the partnership

Dissolution: RUPA Chapter 8

-RUPA 801 (4):Dissolution is triggered by "an event that makes it unlawful for all or substantially all of the business of the partnership to be continued . . . -The "winding up" of the partnership -Triggered by various events in RUPA 801 -Any of the events listed will cause a "winding up" of the partnership -See Official Comment 2 to RUPA 801 -Partnership continues for the limited purpose of winding up the business ....

Dissolution - Partnership At Will

-Section 801: "A partnership is dissolved, and its business must be wound up, only upon the occurrence of any of the following events: -(1) in a partnership at will, the partnership's having notice from a partner, other than a partner who is dissociated under Section 601(2) through (10), of that partner's express will to withdraw as a partner ...;" +Partners can contract around Section 801 to avoid termination of the business if one partner dissociates from the partnership. -General Rule for a Partnership at will: A partnership at will is dissolved and its business must be wound up when a partner notifies a partnership of his intent to withdraw.

What if no intention to form a partnership?

-See RUPA 202(c). -" [a]person who receives a share of the profits of a business is presumed to be a partner in the business. . .. " (this is an evidentiary requirement, not an element of formation) +Rebuttable presumption -Exceptions: profits paid on a debt or as compensation.

Partnership at Will

-See Section 101 of RUPA: "In this [Act] . . . - (8) Partnership at will" means a partnership in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking." -If no agreement to continue the partnership for a certain period of time, then the partnership is at will.

Agreement

-Statute is relevant because there are some rules that the partners cannot contract around -If there is a partnership agreement, this is the starting point in providing advice on any issues that may arise -If no agreement in place, then start with the statute (default) -Agreement can be oral, but advisable to put in writing +For future disputes +To allow for rule tailoring (harder to tailor the agreement to your needs if it's oral)

General Partnership (2)

-This is a default entity - do not need a written or even oral agreement. As long as you associate together to carry on as co-owners of a business for profit, there is a partnership. -Written agreement signed by each partner -Each partner personally liable for the obligations of the partnership -Normally taxed under subchapter K of the Internal Revenue Code (IRC) +Not required to pay taxes, allocates its profits or losses to its partners according to the partnership agreement

Dissolution - RUPA 891

-Triggered by events specified in RUPA 801 -Once triggered, the partnership's business must be wound up. -See comment 2 to RUPA 801.

Liquidation Rights (UPA, 38, RUPA 807)

-Unless otherwise agreed, dissolution creates liquidation rights in "each partner as against his co-partners." (UPA 38(1), -RUPA 807(a) +"Each partner is entitled to a settlement of all partnership accounts upon winding up the partnership business."

General partnership formation

A general partnership, like an agency relationship, may be created through express agreement of the parties or may arise by operation of law when the parties have entered into an arrangement having the legal attributes of a partnership. UPA 303, 304.

Agency - Actual Authority Example

Example: If Mays says to Spence, "I authorize you to charge dinner on my account for the BA students at Pot Belly Sandwich Shop." This statement will be a manifestation by Mays (The Principal) to Spence (the agent) that Mays wants Spence to charge dinner on May's behalf. Thus, Spence has actual authority to do so, and when I charge dinner for the students at Pot Belly, Mays is bound to the contract (dinner in exchange for a promise to pay).

Scope of Employment: Restatement (Third) of Agency 7.07 (2)

o "An employee's act is not within the scope of employment when it occurs within an independent course of conduct not intended to serve any purpose of the employer." o Note: The Restatement (Third) employs an "intent" factor. Rejects the "foreseeability" test

Remedies for Breach of Fiduciary Duty

o 1. should Braums be liable? - participated in the violation of Gelfand's fiduciary duty owed to Horizon (see Restatement (Second) of Agency 312. o 2.Should Horizon recover from a share of the profits from all who participated in the violation of the duty? Most courts may allow on the theory that even if the principal ends up with a windfall, the recovery serves a deterrent purpose to deter breaches of fiduciary duty. Other courts may allow double recovery based on the following: o Based on theories of: Unjustment enrichment - a party should not retain the fruits of a tortious transaction o Disgorgement of profits o Forfeiture (whole or partial)

When is a Principal Bound to a Contract?

o A Principal is bound to a contract made on the principal's behalf by an agent if the agent acted with actual or apparent authority. (See Restatement (Third) of Agency, 6.01).

Agency - Actual Authority

o Actual authority: An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, (1) the agent reasonably believes, (2) in accordance with the principal's manifestations to the agent, (3) that the principal wishes the agent so to act. o Actual authority can be express or implied Express: Principal expressly tells Agent to act Implied: Agent has authority to do acts necessary or incidental to achieve the principal's express objective Can also arise from manifestations by the principal that reasonably lead the agent to believe he or she has authority to take a particular action.

Authority of Agent

o Agent's authority is based on common law rules of agency. o Without authority, the agent's signature binds only the agent and not the person represented by the agent, i.e., the purported principal. o Generally, an agent does NOT want to be personally liable since s/he is acting on behalf of a principal. Therefore, to avoid personal liability, agent must disclose the (1) name of the principal, and (2) the representative capacity in which the agent is acting.

Employment Context

o All employees are agents of their employers because employment is a consensual relationship o The employee is the agent, subject to the control of the employer, the principal Does not mean that all employees have the power to bind their employers Also, not all individuals hired by a business are employees (i.e. "independent contractors") An "independent contractor" will only be an agent if the three elements of agency are met • These individuals are known as "nonemployee agents" under the Restatement (Third) of Agency

Analysis

o Analysis: The "motive" test or the "enterprise liability test" (See Restatement (Third) of Agency, 7.07(2)). o Respondeat Superior and reasonable foreseeability o Forseeability here is different from the foreseeable standard used in the law of negligence o Question: isn't there an argument that everything is foreseeable? o Lane's actions foreseeable ... why? o Custom of seamen to frolic and detour? o The characteristic risk of the shipping business: How did the court articulate this test under the doctrine of Respondeat Superior o Lane's actions relate to his seafaring activity (is the employee's behavior a characteristic risk of the shipping business?) o If Lane had set fire to a bar, then Gov will not be liable o If Lane had shot a Bushey security guard, his wife's paramour, then no respondeat superior liability because domestic (not related to the seafaring activity) o Rule: An employee's act is not within the scope of employment when it occurs within an independent course of conduct not intended by the employee to serve any purpose of the employer o Held: Government responsible for damage to drydock

Agency - Apparent Authority (also referred to as "ostensible" authority)

o Apparent authority is the power held by an agent or other actor to affect a principal's legal relations with third parties when (1) a third party reasonably believes the actor has authority to act on behalf of the principal AND (2) that belief is traceable to the principal's manifestations. (Restatement (Third) of Agency, 2.03). o Focus on the communication by the principal and the reasonable interpretation of this communication by the third party Apparent authority to do any act can be created only some conduct of the principal, which when reasonably interpreted, causes a third party to believe that the principal consents to have the apparent agent act for her in that matter Apparent authority requires that the principal engage in some conduct that the principal "should realize" is likely to cause a third person to believe that the agent has authority to act on the principal's behalf As long as the information can be traced back to the principal, the third party does not have to receive the information from the principal herself. Can receive it through some other source or method, as long as it can be traced back to the principal's conduct

Vicarious Liability for Negligent Act - Kane v. Miranda

o Control Test Servant or employee (control present) Independent Contractor (no control) Subagency (need control) - if a subagent, would be subject to a duty to indemnify the principal for conduct of people you hire) Coagency (need control) o Restatement (Second) of Agency 220 (see factors for control) o Was Kraus under Kane's control? No. o Independent contractor? Yes.

Agency Law

o Every corporate lawyer needs to know agency law o Why? o Agency law governs when a business will be bound to third party when an individual performs actions on the company's behalf. o Agency law establishes the legal consequences of consensual relationship where one person (the principal) manifests assent that another person (the agent) shall, subject to the principal's right of control, have power to affect the principal's legal relations where the agent acts on the principal's behalf.

The Doctrine of Ratification Example

o Example . .. Back to Mays/Spence Spence knows that Mays is looking to buy a used Panini Press for the student café. While driving home from work, Spence notices one for sale outside Panera Bread. After looking at it, Spence realizes it is a great deal. Spence calls Mays on her cell but is unable to reach her. Afraid that the press will be sold to someone else, Spence tells the manager that she is buying the press on behalf of Mays, and writes the manager a check for the down payment. The next day, when Spence tells Mays about the deal, Mays responds "thanks for getting me such a great deal!" Mays has manifested assent to be bound to the deal and therefore is bound under the doctrine of ratification.

The Doctrine of Estoppel (also referred to as "ostensible" authority) Example

o Example: P has two coagents, A and B. P has notice that B, acting without actual or apparent authority, has represented to T that A has authority to enter into a transaction that is contrary to P's instructions. T does not know that P's instructions forbid A from engaging in the transaction. T cannot establish conduct by P on the basis of which T could reasonably believe that A has the requisite authority. T can, however, establish that P had notice of B's representation and that it would have been easy for P to inform T of the limits on A's authority. T detrimentally changes position in reliance on B's representation by making a substantial down payment. If it is found that T's action was justifiable, P is estopped to deny B's authority to make the representation. (See Restatement (Third) of Agency 2.05, cmt. d, illust. 1.)

Authority of Agent Example

o Example: Does Pot Belly know who is bound on the contract? Whether Spence is bound on the contract depends on whether Pot Belly has actual or constructive knowledge that Spence is acting for a principal, and that Mays is that principal. If Pot Belly so knows, Spence is not bound on the contract (see Restatement (Third) of Agency, 6.01) If Pot Belly does not know Spence is acting for a principal, or even if Pot Belly knows she is but does not know the principal's identity, then Spence (the agent) is personally bound on the contract • However, this is a situation that will trigger implied actual authority • Spence repeatedly charges food to the account at Pot Belly. Spence tells Mays that she is doing this, and Mays "high-five" Spence, or just shrugs her shoulders • Mays manifestation (high-five, shrug) likely gives rise to implied actual authority for Spence to charge the food.

Agency - Apparent Authority (also referred to as "ostensible" authority) Example

o Example: Let's say Mays calls Pot Belly and tells the manager that "I have authorized Spence to buy food on my account." This statement will be a manifestation by Mays (the principal) to Pot Belly (a third party) that Spence has authority to charge food on May's account. Note: for apparent authority analysis, the focus is on communication by the principal and the reasonable interpretation of this communication by the third party.

Duties of Principals and Agents

o Principals Compensate the agent Right of indemnification for actions arising in the natural course of business (but not for agent's own negligence, illegal acts, or wrongful conduct) • Also depends on reasonable inferences for agent actions based on the nature of the business • Agents: o Duty of care: under Restatement (Third) of Agency 8.08, an agent must act "with the care, competence, and diligence normally exercised by agents in similar circumstances." o Principal may recover for any damages caused by agent's negligence (employers usually will get insurance to prepare for this situation) Attorney practice note: make sure you check for an indemnity clause in the employer/employer contract, or company policy for low-level employees' negligence

Bushey- Doctrine of Respondeat Superior

o Restatement (Third) of Agency) 7.07: Employee Acting Within Scope of Employment Issues: (a) Is government, employer, liable where Seaman Lane, who was returning to ship, while drunk, and intentionally caused damage to floating dry dock (b)Was Lane within the scope of employment when he damaged the drydock? (c) Can an enterprise disclaim the actions of its employees where the employee's action constitutes a characteristic risk of the enterprise? Gov's theory: Seaman, Lane not in scope of employment (not in the employment of the ship) (Restatement (Second) of Agency, 228 (1) - The "motive" test)

Creation of Agency Relationship

o Roughly speaking, an "agent" is a person authorized to act on behalf of another person called the "principal." o Business law is heavily based on statutory law, but o Agency law consists largely of state common law o The agency relationship is created when an agent-to-be and a principal consent to their association with each other. Arises when: 1. a principal "manifests assent" to the agent that 2. "the agent shall act on the principal's behalf and subject to the principal's control," and 3."the agent manifests assent or otherwise consents to so act." o (See Restatement (Third) of Agency, $1.01)

Agent's duty of disclosure

o See Restatement (Third) of Agency, 8.11 An agent has a duty to use reasonable effort to provide the principal with facts that the agent knows, has reason to know, or should know when . . . • Materiality of facts o "The matter is material if a reasonable person would attach importance to its existence or nonexistence in determining his choice of action in the transaction in question." (Restatement (second) of Torts, 538(2)(a). • Facts can be provided without violating a superior duty agent owes to another person o See note on bottom of page 42.

The Doctrine of Inherent Agency Power

o Under the Restatement (Second) of Agency, inherent agency power is defined as: "the power of an agent which is derived not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent." (Restatement (Second) of Agency, 8A). • This term is not used in the Restatement (Third) because the drafters decided not to use this term because the other doctrines encompass inherent power. o However, courts invoke inherent agency power on principles of equity. (courts are not bound by the Restatement terms, and are free to use their own terms.)

The Doctrine of Ratification

o Under the Restatement (Third) of Agency: o Ratification is "the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority." (Restatement (Third) of Agency, 4.01) "A person ratifies an act (a) by manifesting assent to be bound by the act, or (b) through conduct that justifies a reasonable assumption that the person so consents." (Id.)

The Doctrine of Estoppel (also referred to as "ostensible" authority)

o Under the doctrine of estoppel, a business may be bound to a contract by a person or an agent lacking both actual and apparent authority o Under the Restatement (Third) of Agency): "A person who has not made a manifestation that an actor has authority as an agent and who is not otherwise liable as a party to a transaction purportedly done by the actor on that person's account is subject to liability to a third party who justifiably is induced to make a detrimental change in position because the transaction is believed to be on the person's account, if (1) the person intentionally or carelessly caused such belief, or (2)having notice of such belief and that it might induce others to change their positions, the person did not take reasonable steps to notify them of the facts." (See Restatement (Third) of Agency, 2.05).

Manifestation

o Written or spoken words or other conduct o Example: Dean Mays tells Professor Spence: "I'd like to hire you to teach students Business Associations and help the students prepare to pass the bar exam by compelling the students to write bar-style essays." When I nod my head in agreement, we have the requisite manifestations - spoken words by Dean Mays, the principal-to-be, and conduct by Spence, the agent-to-be. o Thus, an agency relationship is created making Spence the agent of Mays, the Principal.