California Bar Exam Lecture Notes - Agency

8/12/2019 California Bar Exam Lecture Notes - Agency

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California

Agency and Partnership

I. THE NATURE AND SCOPE OF AGENCY

A. In General (OL I.):

Law of agency is concerned with how actions made on behalf of another person consequently binds that other person

Contract Context:

When is the principal bound by the agents agreement?

Tort Question:

When is the principal responsible for what the agent did?

! Agencyis a fiduciary relationship that arises when one person" the principal" manifests assent to another person" the

agent" that the agent shall act on the principals behalf and be sub#ect to the principals control" and the agent

manifests assent or otherwise consents so to act!

$! Types of Relationships

a! Master and Servant (!ployer and !ployee)

EXAMPLE:

%ichael wor&s as a dental hygienist for 'r! (erry! The doctor sets %ichaels hours" pro)ides all the equipment

%ichael needs to clean a patients teeth" and super)ises his actions! %ichael is 'r! (errys employee*ser)ant*agent

and the doctor is the master*principal!

+, -nder the doctrine of respondeat superior:

a master is generally liable for his ser)ants torts committed within scope of employment

b! !ployer and Independent "ontractor

+, The distinction between employer and independent contractor lies in the right to control . the

degree to which employer could inter)ene in the control of the employees manner of performance

EXAMPLE:

Michael gro#s $ored #ith his %o$ and tells the doctor he is leaving and #ants a severance pac&age.

'hen the doctor refses Michael hires an attorney to negotiate #ith the doctor on his $ehalf. Michael

tells the attorney ho# !ch he $elieves he is entitled to $t leaves the particlars of the negotiation

to the attorney. *ence the attorney is a nonservant agent and therefore an independent contractor.

/! +or "onse,ences of Agency

a! duties arise between the principal and agent

b! agent has power to bind principal and act on his behalf without the principal ha)ing to act personally"

but under the principals control

c! liability is imposed on the principal for the agents actions within the scope of the agency" and

d! &nowledge of the agent is imputed to the principal


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II. FORMATION: CREATION OF THE AGENCY RELATIONSHIP

A. 0n agency relationship is created when (OL II.A.)

1rincipal grants authority to the agent to act for him! 2t can be express or implied! be )erbal or e)idenced by conduct!

HYPOTHETICAL

Lee as&s 3ara to purchase his boo&s for 4usiness 0ssociations for him! 3ara says" 56ure!7 3ara goes to the

boo&store" where she sees that their 8)idence textboo& is finally in stoc&! 3ara buys the 8)idence boo& for

Lee! Lee wants to than& 3ara for going to the boo&store" so he guesses her school 2' and password and

registers her for a seminar once the waitlist opens! Which of these actions fall within an agency relationship?

3ara is Lees agent! 4ut when she bought the different boo& is not part of the agency relationship! What

Lee did is definitely not a principal9agent relationship!

-. "apacity (OL II.".)

! Agent

a! generally" anyone with minimum mental capacity may act as an agent including minors and incompetents

$! rincipal

a! any person who has capacity to effect his own transactions has capacity to appoint an agent on his behalf

EXAMPLE:

0n incompetent may not act as a principal!

". roof of Agency (OL II./)

! 0gency relationship is a question of fact and burden of proof lies with person asserting agency relationship!

$! ele)ant factors include:a! the situation of each party; and

b! their words" actions and circumstances!

HYPOTHETICAL

1ierre" upset that he #ust lost a ton of money at the gambling tables" calls his financial ad)isor and complains that his retirement

fund is losing money and promptly hangs up! The ad)isor then calls his trader and tells him to sell 1ierres 24% stoc& and buy

energy futures! 2n this situation" what is the relationship created between 1ierre and the ad)isor! The ad)isor and the trader?

0d)isor is 1ierres agent also there are still questions about whether the stoc&s sold were within scope of the relationship! The

trader is the ad)isors agent because the ad)isor has as&ed trader to sell the stoc&! 2f 1ierre either expressly or by implication

ga)e his ad)isor permission to use the trader" and then trader is 1ierres sub agent!

/. Types of rincipals (OL II.)

! /isclosed 0ndisclosed and artially /isclosed rincipals

a! 0 principal is disclosedif:

at the time of the transaction" the third party has notice that the agent is acting for a principal and has notice of the

principals identity

EXAMPLE:


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0 potential customer enters a car dealership that has a sign outside stating that it is 504C 0utomoti)e of

%anhasset7 and is met by a salesperson who assists the customer! 2t is clear that the salesperson is an agent of

the disclosed principal" 504C 0utomoti)e!7

b! The principal is ndisclosedif:

third party has no &nowledge of the existence or identity of a principal

EXAMPLE:

'onald Trump wants to purchase land to build a new casino in 0tlantic City but is concerned that possible sellers would raise

the price if they &new he was the buyer! 4ecause of 'onald Trumps fear that it would li&ely be impossible to conceal his

identity for too long" he instructs the agent to say nothing about a principals existence and to negotiate the deal as if the agent

were the ultimate purchaser!

c! 0n nidentified (partially disclosed) principalis:

one whose existence" but not identity" is &nown to the third party

EXAMPLE:

The result is the same as in the example abo)e except that because he is concerned that possible sellers would

raise the price if they &new he was the buyer" he instructs his agent to ma&e it clear that the agent is acting on

behalf of a reputable businessman whose existence is disclosed but whose identity is not!

. Types of Agents (OL II.+)

! General and Special Agents

a! General Agent+, 0 general agent:

is employed by a principal to transact all of his business of a particular &ind!


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/! So!e+actors to "onsider

a! the amount of control the principal exerts o)er how the agent performs his wor&;

b! who supplies the tools required for the agents wor& and the place of performance;

c! the length of time the agent is engaged by the principal

HYPOTHETICAL

=im and 1am hire 'wight to babysit their child in their home four days a wee&! They will pay him >@@ a wee&! 'wight does some

grocery shopping and light housewor&! 2s 'wight an employee or an independent contractor?

'wight is an employee! =im and 1am exert control o)er 'wight four days a wee&! 'wight does not #ust watch a baby but

does general tas&s such as shopping and housewor&! The #ob is four days a wee&" he is paid by the wee&" and probably

does not bring his own tools to wor& so he is in a employer9employee relationship! 2f he was to commit a tort within scope

of his employment" =im and 1am would be responsible!

III. POWER OF AGENT TO BIND PRINCIPAL

Introdction

We are loo&ing at the contract context:

Who is bound" who is responsible for the contract!


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+$, re)ealed to the third party

c! -nder the doctrine of apparent authority" a principal is accountable for:

a third partys beliefs about an agents authority to act as an agent when the belief is reasonable

and is traceable to a manifestation of the principal

EXAMPLE:

1rincipal hires a housepainter" =oe" to paint house" but tells =oe" 52 hate blue paint" dont use any blue paint!7

1rincipal calls paint store and tells them =oe will be coming in to buy paint and tells store to put it on 1rincipals bill!

=oe buys blue paint! 1rincipal will be liable for the other blue paint which =oe purchases because 1rincipal granted0gent apparent authority to buy paint" and the third party doesnt &now about the specific color authoriBation!

1rincipal could ha)e claim against 0gent for exceeding authority and )iolating instructions!

! stoppel

a! 8stoppel arises when:

The principal does something wrong and is estopped from denying existence of the agency relationship!

b! 0 third party can assert an estoppel claim by showing entered into transaction because:

+, 1rincipal intentionally or carelessly caused such belief A

principal &new or should ha)e &nown of such a belief and that it may induce others to

change their positions" but did not ta&e reasonable steps to notify them of the facts and

+$, Third party reasonably relied to his detriment upon the authority of the purported agent

EXAMPLE:

Landlord &no#s that tenant6s 78 year3old son acts as door!an so!e afternoons for tips. The landlord

thin&s it6s cte and does not say anything to the $oy. -oy sells so!e frnitre fro! the lo$$y to a

passer$y. asser$y co!es to pic& p frnitre. Is there apparent athority for the $oy to sell the

frnitre9 May$e!ay$e not. stoppel co!es into play.

! Lia$ility of 0ndisclosed rincipal

a! (ormerly9called 5inherent agency power"7 this arises when:

the principal has placed the agent in a position to mislead the third party!

b! Liability is imposed when:

to protect the interests of innocent third persons!

Dou will frequently see the initials 1 and 0 in agency questions!

EXAMPLE:

2f 1 hires 0 to employ a caterer for one day at a price not to exceed >@" and 0 hires C for >E@" 1 may be held

liable" e)en if C does not &now that 1 exists!

HYPOTHETICAL

0 general building contractor contacts the local business manager of a ma#or glass manufacturer about the manufacture and

installation of glass walls for a new office building! The manager informs the contractor that he has se)eral panes from a

canceled order sitting in a sal)age yard a)ailable for a significant discount" but only if the contractor pays in cash! The

contractor agrees but soon finds the glass is defecti)e! 2f the contractor sues the manufacturer for damages" will the court

find that the manager acted with authority to bind the manufacturer?

2t is unclear that manager has express authority! 4ut if the manager typically sold glass" than he has implied authority!

Fowe)er" since it is within scope of the employment to sell glass as a glass manufacturer" manager has apparent

authority! =ust the fact that the manager wor&s on the premises creates a reasonable assumption of apparent authority!

6o manager has apparent authority in the least" absent actual authority! The only wrin&le here is the sale of glass for cash"

and whether it should ha)e alerted the buyer that this was not typical to sell glass!

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HYPOTHETICAL

Carrie wants to return a pair of shoes to 6amanthas 6wan&y 6hoe 6tore on odeo 'ri)e! The salesperson" Charlotte"

agrees to return the shoes for cash" e)en though the owners policy" which is printed on the receipt" is only to return shoes

for credit! The owner" 6amantha" calls Carrie later to tell her the mista&e and notify her that her credit card will be charged

again for the amount! 6amantha offers her store credit! 2s 6amantha bound by Charlottes actions?

Ho actual authority here" but quite the contrary on the receipt saying no refunds! There might be apparent authority here if

Carey can show that salespeople ha)e discretion to gi)e refunds! Carey could assert that 6amantha is estopped fromdenying authority if other stores ha)e similar practices . o)erriding their written policy! (ailing that" Carey would probably

-. Ratification (OL III.-)

! atification happens when a principal:

etroacti)ely grants authority for his agents earlier action!

EXAMPLE:

3ara bought Lees 8)idence boo& for him" and after the fact he tells her than& you" but tries to renege when her credit

card bill comes!

EXAMPLE:

0gent buys a building saying that he is Trumps agent when he is not! 0gent later goes to Trump and offers him a deal

on the building" to which Trump agrees! Trump has ratified 0gents actions" ma&ing it an enforceable contract as though

0gent was always wor&ing for Trump!

$! Rles a$ot Ratification

a! 1rincipal must ha)e been in existence and had capacity to enter into the agreement

b! 1erson ratifies by manifesting assent that the act shall affect persons legal relations or conduct such as accepting

the benefits"

c! Ance ratified" it has the effect as if it were originally done by the agent

/! Li!itations on Ratification

a! atification is not effecti)e if the ratification occurs after:+, %anifestation of intention to withdraw from transaction by the third party

+$, %aterial change in the circumstances that would ma&e it inequitable to bind the third party

EXAMPLE:

If Agent contracts to sell rincipal6s hose to -yer #ithot rincipal6s athority and the hose is

destroyed $y fire rincipal6s later ratification of Agent6s act #ill not $ind -yer. (*o#ever if -yer still

#ishes to proceed the changed circ!stances #ill not prevent his doing so.)

! More Rles A$ot Ratification:

a! 0 principal may not:

1artly ratify an act; ratification of any part of the act or contract is deemed to constitute ratification of the whole

b! 0ct must ha)e been performed on behalf of the principal and the principal must &now all material facts regardingthe transaction

c! atification must ha)e same formalities that would ha)e been required to gi)e authoriBation! 2n the sale of real

estate" same formalities requirement means ratification must be in writing" #ust as original authoriBation would ha)e

been" due to statute of frauds!

EXAMPLE:

1aul writes no)els! 1auls wife ma&es a deal with 1auls publisher for him to write childrens boo&s! The contract

that his wife negotiates has some random foolish terms included in it! 4efore writing" 1aul recei)es a chec&! 2f 1aul

cashes the chec& thin&ing it is for his next adult no)el" he has no reason to &now the terms of the deal! 0 principal

cant ratify a contract without &nowing the specific terms of that deal

! Retroactive ffect of Ratification


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a!


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a!


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3e)in wor&s as a stoc&er at the local 0I1 mar&et! Fe erroneously belie)es a group of teenagers are attempting to steal some

extremely expensi)e cuts of meat! 0fter telling the teenagers to stop" he grabs the two teenagers and slams them into the glass

meat case" causing se)ere physical in#ury to both! Will 0I1 be liable for 3e)ins actions?

3e)in is an employee so he is an agent of 0I1! Fis actions appear to fall within the scope of his employment when he

battered the teenagers to ser)e his employer so 0I1 would be liable! 2t doesnt matter if 0I1 has ne)er authoriBed the

)iolence"

V. DUTIES, RIGHTS AND REMEDIES OF PRINCIPAL,

AGENT AND THIRD PARTIES

A. /ties of rincipal to Agent (OL ;.A.)

! 0bsent an agreement to the contrary" the principal is obligated to his agent to:

a! compensate the agent for ser)ices rendered

b! reimburse the agent for reasonable expenses incurred by the agent in scope of agency

c! indemnify and exonerate the agent for any liability that results from his good faith performance of his duties

d! cooperate with the agent in the performance of his duties

e! exercise due care toward the agent

HYPOTHETICAL

0 law firm partner as&s you" an associate" to fly from Los 0ngeles to Hew Dor& to meet with a client! An the way bac&"

your 0merican 0irlines flight is delayed se)eral hours! 2n order to get bac& in time for an afternoon hearing in court" you

purchase a tic&et on a -nited 0irlines flight that is boarding! 2s the law firm required to reimburse the associate for the

extra plane tic&et?

Des it is reasonable that the firm is oin to reimburse the a ent!

HYPOTHETICAL

The


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+/, act with the care" competence" and diligence normally exercised by agents in similar circumstances"

and if the agent is possessed of a higher le)el of s&ill to exercise that le)el of s&ill;

+, indemnify the principal against the loss caused by the agents wrongful beha)ior or failure to act with

reasonable care

$! /ty of Loyalty

a! Self /ealing

+, agent who acts for his own benefit instead of that of principal is said to be self9dealing

+$, agent must prefer the interests of the principal to his own or others in acting for the principalb! 0srpation of -siness Opportnity

+, 0 business opportunity is:

one that is so closely related to the business that it could be deemed incidental to the business

+$, The only exception is when the employer &nows about the opportunity and consents!

EXAMPLE:

A ne# associate6s la# fir! sends that associate to loo& for ne# office space for the fir!. The associate

finds so!e great ndervaled space that #old $e great for the $siness his spose is starting. If the

associate arranges for his spose to se the space for her ne# $siness the associate has srped a

$siness opportnity.

/! Other /ties

a! duty of confidentiality . agent may not use confidential information obtained from the principal to the detriment of

the principal" e)en if the information is not obtained through his agency

b! duty to account . agent has duty to account for money or property recei)ed for the principal and to &eep the

principals assets separate from his own assets

c! duty of candor . agent must fully disclose to the principal any rele)ant facts to a transaction that he reasonably

belie)es the principal might want to &now

d! duty not to compete" which falls under duty of loyalty

! /al Agency Rle

a! when an agent acts for more than one principal in negotiations between multiple principals" the transaction is

)oidable by either principal" unless both principals are fully informed of the representation and consent

". The Agent6s /ties and O$ligations to Third arties (OL ;.".)

! Liability to a third party:

a compensated agent may be held liable for damages to the principal that result from the agents breach of duties!

Liability to a third party depends on whether the principal was disclosed

$! 2f the third party &nows of the principals existence and identity at the time of the transaction +a disclosed principal,:

then the agent will not ha)e personal liability under contract unless it says specifically that he is liable

/! 2f the principal is partially disclosed" or left unidentified:

at the time of transaction" then the agent is presumed to be party to contract

a! 8xception:

the contract specifically says the agent is not liable

! The third party may sue:

sue either the principal or the agent

BAR EXAM APPLICATION

Question 1

0pplicants might be as&ed to answer questions based upon facts similar to the following:


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0t a meeting of the board of directors of 4uildco" a corporation that operates a commercial warehouse" the board passed a

resolution stating that the president of the corporation may not enter into any contract o)er > million without the express prior

appro)al of the board of directors! 1res" the president of 4uildco" attended the meeting! Two months later" 1res proposed to

the board that 4uildco purchase a for&lift" an essential item for the business" from 4eta! 0lthough the board passed a resolution

disappro)ing the proposed purchase" 1res" without the boards &nowledge" signed a contract as president of 4uildco to

purchase a for&lift from 4eta for >$"@@@! 4eta had no &nowledge of the boards disappro)al! 0fter learning of the contract with

4eta" the board repudiated it!

Can 4eta reco)er damages from 4uildco?

0pplicants must consider whether there is actual or apparent authority" including a third partys reasonable belief!

2f 4eta can reco)er from 4uildco" does 4uildco ha)e a cause of action against 1res?

0pplicants must examine the relationship between an agent and principal" including an agents liability to a principal!

An agent can bind a principal. Its clear that Pres was an agent of Buildco, and if he had actual authority, the contract

would be enforceable. Pres did not have express authority to enter into contract because the Board pass a resolution

restricting his ability. owever, the court !ay find the existence of apparent authority because by hiring Pres and

!a"ing hi! President, Buildco has !ade a !anifestation to other third parties that Pres has the power to enter into

transactions on behalf of the corporation. President of corporations can usually !a"e such decisions, and it is

reasonable for a third party to assu!e that Pres would have had ability to purchase a #$%%% for"lift, an essential

business ite! for the business, even though the board has passed a resolution prohibiting the purchase. Absent

contrary "nowledge on the part of Beta, Buildco will be bound to the contract as Pres had apparent authority to bind

the! and can be sued for breach. Beta can recover da!ages fro! Buildco. Agents have certain duties, including the

duty of care to their principal. Buildco has a cause of action against the Pres as the Pres violated duty of care andcandor when he entered into transaction with Beta despite explicit disapproval fro! the board. e failed to obey the

boards instructions when he !ade the purchase of the for"lift, and thus, explicitly violated his duty of care as an

agent.


Question 2

0pplicants might be as&ed to consider a scenario similar to the following:

'ealer agreed to deli)er an 6-J to ichs home following ichs purchase! 'ealer does not usually deli)er )ehicles but" after

ich offered to pay >K to the dri)er" 'ealer agreed to ha)e 6ales" a full9time salesperson employed by 'ealer" deli)er the

6-J to ichs house! 0t the end of a normal wor&day" 'ealer ga)e 6ales directions to ichs house and told him 5'ri)e straightto ichs house" no detours! 'ri)e carefully and no speeding! 2 dont want any dents in that 6-J!7 An the way to ichs house"

6ales stopped to )isit (riend" who was in the middle of mo)ing! 4ecause the mo)ers had not shown up" (riend offered 6ales

>$@@ to transport 5a few loads7 in the 6-J and 6ales agreed! This too& se)eral hours and 6ales was running late! 2n his rush to

ichs house" 6ales negligently ran o)er 1ed" who was crossing the street causing serious in#uries! When 'ealer learned that

6ales had used the 6-J to help (riend mo)e" he demanded the >$@@ (riend had paid 6ales!

Can 1ed reco)er from 'ealer for 6aless negligence?

%ust 6ales gi)e 'ealer the >$@@ he earned helping (riend mo)e?

0pplicants must consider the issues of )icarious liability of a principal for an agents negligence and of the fiduciary duties

agents owe to the principal!

Yes, Ped can recover from Dealer for Sales negligence. Agent can bind a principal for tortious conduct that occurs withinscope of employment. t is clear that Sales is an agent for Dealer, who is the principal as this is an employer!employee

relationship. "herefore, dealer is liable for torts committed by Sales during course of employment. "he tortious conduct

occurred when Dealer as#ed Sales to deliver an S$% to Richs home after Richs purchase of the S$%. &hen Sales hit Ped,

he was within scope of his duties, even though he had ta#en a detour earlier to help his friend. Dealer can then ma#e a claim

against Sales for his negligent driving. 'owever, Dealer would be able to recover the ()** that Sales earned from helping his

+riend move. An agent has fiduciary duty of loyalty to his principal. An agent cannot receive a material benefit from a third

party by use of his possession or subect matter of agency. "he S$% is the subect matter of agency and Sales used it to gain

()** when he helped his friend move. Sales violated his duty and has to give the ()** to dealer.

VI. GENERAL PARTNERSHIPS


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A. General (OL I.-)

! 0 general partnershipis:

an association of two or more persons to carry on as co9owners of a business for profit!


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if someone " that person has power to bind the partnership!

VII. RELATIONSHIP BETWEEN PARTNERS AND THIRD PARTIES

A. o#ers (OL II.A.)

! 0 general partner is:

both a principal and an agent of the general partnership for the purpose of its business

$! 0 general partner who acts for the apparent purpose of carrying on the ordinary course of the general partnershipsacti)ities can bind the general partnership" unless:

a! the


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c! 0n inco!inggeneralpartner:

is not liable for obligations incurred before admission

VIII. RELATIONSHIP BETWEEN PARTNERS

A. artnership Agree!ent (OL III.A)

! elations among partners are go)erned by partnership agreements! -10 operates as gap filler!

$! The partnership agreement may not:a! )ary rights and duties with respect to filing of certain statements

b! unreasonably restrict a partners right to access the partnerships boo&s and records

c! eliminate duty of loyalty

d! unreasonably reduce duty of care

e! eliminate obligation of good faith and fair dealing

f! )ary the power to dissociate as a partner" )ary the right of court to expel a partner" )ary requirement to win up the

partnership business in certain cases" )ary law applications to LL1s" restrict rights of third parties

-. "ontri$tions rofits and Losses (OL III.-.)

! artner6s "ontri$tions and Shares

a!


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+a, partners share in profit and losses

+b, right to recei)e distributions

+$, management rights . not freely transferable

+a, right to )ote!

HYPOTHETICAL

1atsy and 1aul #ointly operate the 1I1 'eli in 6anta %onica together! When the deli runs into credit problems with their

main meat supplier" 1atsy agrees to pledge "@@@ shares of a company she owns as collateral! The supplier agrees to use

the shares as collateral" but only if they are put in the name of the partnership! 6e)eral years later" and well after the

liquidity crisis" 1atsy sells her share of the deli and wants to sell her stoc& shares so that she can open a restaurant in

1asadena! 1aul ob#ects" claiming that the stoc& belongs to the partnership! Who owns the shares?

-nless there is specific agreement to the contrary" any shares put into the partnership belongs to the partnership and

becomes partnership property! There is no indi)idual interest in partnership property! 1atsy cannot reco)er her shares

from the partnership!

b! Transfer of General artnership Interest

+, interest is bro&en down into two pieces . economic and management

+$, 0 partner can freely transfer:

economic interest i!e! interest in personal property

+/, 2f economic rights are transferred:

partner retains management and )oting rights and still has duties of general partner

+, 6uch a transfer does not entitle the transferee" in the absence of a contrary agreement" to:

+a, participate in the management or conduct of the


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EXAMPLE:

0 law professor owns a restaurant or writes a no)el! The professor has not breached a duty to compete!

+$, /ty to Accont

+a, 'uty to account to the


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8ach partner in a


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disassociation

$! /issociated artner6s o#er to -ind artnership

a! 0 general partner can still bind a partnership for t#o yearsafter dissociation if:

+, the other party reasonably belie)es that disassociated partner was still a


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by express will to dissol)e and wind up business when a ma#ority of general partners )ote for dissolution

+b, in a partnership for a definite term:

then it ends when the term or underta&ing is completed unless ma#ority want to continue

+c, When the last general partner dissociates:

the partnership can )ote to continue by ma#ority )ote or it will be dissol)ed

+d, e)ent agreed upon in the partnership agreement

+e, e)ent that ma&es it unlawful for all or substantially all of the


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customers! Could the partners 5cure7 by re)amping as a free gambling site that sold ad)ertising?

2f it is illegal to carry on business"


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+$, Ane or more limited partner" who contribute capital and share in profits" but ta&e no part in management and

their only liability is their contribution

b! While limited partners ha)e limited liability:

the limited partnership is distinct from its partners and ha)e perpetual duration

$! +or!ation

a! 0 limited partnership is formed by:

(ile a certif icate of limited partnership with the state

+, the name of the limited partnership;+a, The name must include the words 5limited partnership7 or 5L17 or 5L!1!7

+$, the address of the designated office; and

+/, the name and address of the initial agent for ser)ice of process!

b! The partners must also enter into a limited partnership agreement!

+, The limited partnership is go)erned by a limited partnership agreement! To the extent the limited partnership

agreement does not otherwise pro)ide" relations among the partners and between the partnership and the

partners is go)erned by the Limited 1artnership 0ct!

-. Manage!ent of Li!ited artnerships (OL ;II./)

! 8ach general partner has equal rights in management and conduct of the limited partnerships acti)ities and any matter

relating to the limited partnerships acti)ities may be decided by a ma#ority of the general partners

$! The consent of all partners is required to:

a! amend the partnership agreement; and

b! sell" lease" exchange or otherwise dispose of all or substantially all of the limited partnerships

property other than in the usual or regular course of business

/! The partnership agreement may pro)ide for the creation of classes of general partners or limited partners and shall

define the rights" powers" and duties of those classes" including rights" powers" and duties senior to other classes of

general partners or limited partners! The partnership agreement may also pro)ide to all or to specified classes of

general partners or limited partners the right to )ote separately or with all or any class of the general partners on any

matter!

HYPOTHETICAL

(our college classmates decide to form a consulting firm! The cost of starting the firm is >@@"@@@" and each contributes in

the following manner: 0li gi)es >/@"@@@; 4lair gi)es >@"@@@; Carlos gi)es >$@"@@@; and 'anielle gi)es >@"@@@! The

agreement says that 4lair and Carlos are to recei)e management fees of >@"@@@ per year as the general partners of the

firm" but is otherwise silent as to the distribution of profits! Fow will profits be allocated?

This is different from


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partners participation in control and with a reasonable belief" based upon the limited partners

conduct that the limited partner is a general partner at time of transaction

+/, 0 limited partner does not participate in the control of the business solely by:

+a, being:

a contractor" agent" employee of the limited partnership or of a general partner or an officer" director or

shareholder of a corporate general partner" member or manager or officer of the LLC that is general partner"

limited partner of a partnership that is a general partner A trustee" officer" ad)iser" shareholder" beneficiary"

of an estate or trust that is a general partner

+b, consulting with and ad)ising general partner with respect to the business

b! Mista&en Stats

+, 0 person who erroneously" but in good faith" belie)es himself a limited partner is not liable as a general partner

if" on learning his mista&e:

he causes an amended certificate to be executed and filed and withdraws from future equity

participation in the enterprise

+$, Fowe)er:

he is liable as a general partner to any third party who has transacted business with the enterprise"

if the third party belie)ed in good faith that he was a general partner

HYPOTHETICAL

1ascal is the general partner in a small import*export business he runs with his wife" 1auline! 1auline" whose family owns

significant real estate throughout the state" holds a limited partnership sta&e in the business! A)er the years" 1auline has

tended to the paperwor& duties of the business" such as responding to correspondence" ordering supplies" and paying the

bills! When 1ascal is away on o)erseas trips to )isit clients" 1auline tends to the partnerships business! 0 trade creditor

has since attempted to attach 1aulines rights to the family property on the grounds that she is more than a mere limited

partner! Will the creditor succeed? Would the outcome be different if 1ascal and 1auline deposited their profits from both

businesses into a #oint chec&ing account? 2f 1auline recei)ed a salary" would that change the outcome?


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b!


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b! an e)ent agreed upon in the partnership agreement;

c! the persons expulsion as a limited partner pursuant to the partnership agreement;

d! the persons expulsion as a limited partner by unanimous consent of the other partners if:

+, unlawful to continue limited partnership with person as limited partner

+$, transfer of all of the limited partners transferable interest or a court order charging the interest

+/, the limited partner is a corporation that has filed a certificate of dissolution" or an LLC that has been dissol)ed

e! the persons expulsion by #udicial order because:

+, person engaged in wrongful conduct that ad)ersely and materially affected L1s acti)ities

+$, person willfully committed a material breach of the partnership agreement or obligation of good faith and fair

dealing or engaged in conduct that ma&es it not reasonably practicable to carry on acti)ities with the person as

limited partner

/! ffect of /issociation

a! -pon a persons dissociation:

contrary to


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must identify as LL1 and must file registration with secretary of state

$! Anly accountants" lawyers or architects! 'issol)ed upon death" resignation" expulsion or ban&ruptcy of a partner

XIV. LIMITED LIABILITY COMPANIES

A. General (OL IB.A.)

! professionals may not form LLCs" must form 1Cs or LL1s$! most flexible entity

/! taxed li&e a partnership but members ha)e limited liability as though they were s*h in corporation

! member managed or manager managed

-. +or!ation (OL IB.-.)

! To form an LLC:

one or more persons must file 0A2 with secretary of state" pay filing fee" identify the business as an LLC" name an

address of agent for ser)ice of process" decide whether member9managed or manager managed

$! The articles of organiBation must state:

a! whether the LLC will be member9managed or manager9managed;

b! the name of the LLC" which must contain the abbre)iation LLC; and

c! the name and address of the initial agent for ser)ice of process!

". O#nership and Governance of LL" Affairs (OL IB./.)

! Operating Agree!ent

a! members should enter into operating agreement" whether written or oral! 4ut failure to do so is not a defect in

formation of the LLC

b! Aperating agreements control most aspects of the LLCs business and management unless illegal

c! The LLCs members ha)e the power to adopt" alter" amend" or repeal the operating agreement and the articles of

organiBation" or a written operating agreement may prescribe the manner in which the alteration" amendment" or

repeal is to ta&e place!

$! Me!$ers and Managers

a! The responsibilities of the indi)idualsdiffers depending:

upon whether it is member9managed or manager9managed

b! -nless otherwise stated in the operating agreement:

managers ma&e decision by ma#ority )ote

c! 0 member may transfer his interest in the LLC:

only to the extent of members right to recei)e profits and losses! The transferee will not ha)e management rights

unless he becomes a member with consent of all the partners

/. Rights /ties and O$ligations of Me!$ers Managers and Officers (OL IB..)

! Me!$ers

a! members are not entitled to remuneration" may be indemnified by agreement and ha)e the right to access" inspect

and copy records

b! %embers in a member9managed LLC ha)e apparent authority to bind the LLC!

c! 2n a manager9managed LLC" they ha)e no authority to bind the LLC!

$! Managers and Officers

a! 8ach manager is an agent of the LLC for purposes of its business or affairs and the act of any manager for

apparently carrying on in the usual way the business or affairs of the LLC binds the LLC" unless:

+, manager does not ha)e actual authority

+$, and the person does not &now and does not ha)e reason to &now that the manager lac&s the authority

b! %anagers owe fiduciary duties to the LLC and to its:

members in the same way that partners do to partnerships


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+, The fiduciary duties owed are:

duty of care and duty of loyalty

c! These may only be modified:

by operating agreement" but they cannot be eliminated

. Lia$ility of Me!$ers Managers and Officers (OL IB.+.)

! Me!$ers

a! egardless of whether an LLC is member9managed or manager9managed:

members of the LLC are not personally liable for debts" obligations or liability of the LLC solely by being a memberb! 0 member is sub#ect to liability upon:

piercing of the LLC )eil

+, This might occur in the case of:

fraud or the LLC not acting independently as a business

c! (ailure to hold meetings of members or managers" or failure to obser)e formalities pertaining to meetings" is not a

factor in establishing liability unless required by the operating agreement!

d! 6ituations where this occurs most often include:

comingling funds or undercapitaliBation" combined with fraud or in#ustice

e! %embers may agree:

to be obligated personally for debts+, Liability also occurs where there has been a wrongful distribution +lea)es LLC insol)ent,:

members may be liable for the amount they recei)ed

$! Managers and Officers

a! Ho manager or officer of an LLC is personally liable for the obligations of the LLC solely by reason of being a manager

or officer of the LLC unless it accrues due to their own negligence or tort!

b! %anagers must apply the same duty of care as:

+, duty of care that an ordinary prudent person in li&e position would exercise

+$, in a manner that person reasonably belie)es would be in best interest of the LLC

c! 2f an LLC is member9managed" the members will" of course" ta&e on the potential liability for any wrongful acts or

breach of duty of managers when acting in that role! Fowe)er" if the LLC is manager9managed" the members willessentially ha)e the same limited liability as limited partners in a limited partnership!

+. "ontri$tions (OL IB.G.)

! The same as limited partnership

G. /issociation (OL IB.*.)

! The articles of organiBation or operating agreement may pro)ide that a member may withdraw" resign" or retire from an

LLC at the time or happening of an e)ent specified in the operating agreement" or that a member does not ha)e such a

right!

$! 0part from any restriction on the right to withdraw:

a member may withdraw by pro)iding notice to the LLC of intent to withdraw

/! 0withdrawn member is not entitled to:

payment for interest until company is dissol)ed and wound up

! When a member withdraws:

he is no longer a holder of economic interest or any other fiduciary duties

! 2f the withdrawal is in )iolation of the operating agreement:

then the LLC can offset any amount owed to the withdrawn member for any damages incurred due to his breach of

operating agreement

*. /issoltion

! 0n LLC must be dissol)ed and its affairs wound up upon the occurrence of the earliest of:

a! the time specified in the articles of organiBation" or happening of e)ents specified in the articles of organiBation or

written operating agreement


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b! by a )ote of the members

c! by entry of decree of #udicial dissolution

$! =udicial dissolution can ta&e place:

a! if not practicable to carry on the business and for protection of rights or interests of members

b! business has been abandoned

c! internal dissent and management deadloc&ed

d! fraud" mismanagement or abuse of authority


Question 3

0pplicants might be as&ed a question that requires them to consider general partnership liability similar to the following:

@@"@@@" with =ohn recei)ing a >E@"@@@ commission! =ane signed the contract on behalf of Candyco! =ohn &nows that

=ane is a partner in Candyco" but does not &now that Candycos partnership agreement prohibits any partner from entering into

a contract that will require a payment of >$@"@@@ or more without the appro)al of the other partners!

2f =ohn finds an acceptable buyer for the sto)e coo&ers" will Candyco be successful in asserting a defense if =ohn brings an

action to enforce his contract with Candyco" based on the pro)ision in the partnership agreement requiring the appro)al of all

partners for contracts in excess of >$@"@@@?

2ssues that applicants must consider are the authority of a partner to bind a partnership" and the effect that express limitations

of that authority ha)e upon transactions with third parties!

A partnership is liable for the wrongdoings of a partner if the wrongdoing is committed in the course of business. So if -oe

strayed into anothers property because he thought it belonged to lac#acre, then the partnership is liable. f -oe went tosabotage to help his own company, then partnership is still liable. f it can be shown that trespass had no connection to

/rapeco, then perhaps the partnership will not be liable but that is unli#ely here. Partners are ointly and severally liable and so

if the partnership is liable, both Peter and 0i#e are liable as general partners of /rapeco for -oes wrongdoing. 1ven if they are

both liable, they have the right to see# indemnification from the partnership. n addition, partnership can re2uire contribution

from -oe since it was his wrongful act that caused the liability. f neither /rapeco nor -oe have any money, then Peter and

0i#e would have to pay.

A partner is both an agent and principal of a partnership and can bind the partnership unless there is an e3press limitation.

-ane did not have actual authority to bind 4andyco since there is prohibition on contracts in e3cess of ()*,***. ut the

partnership may be bound by the apparent authority of the partner if it is reasonable for the third party to assume that the

partner had such authority based on the nature of partnership business and the third party had no actual #nowledge of the

limitation. Since the sale of coo#ers was in ordinary course of business and -ohn had #nowledge that -ane was a partner in4andyco but had no #nowledge that she did not have authority to enter into a contract with him over ()*,*** without approval

of the other partners, the assumption that -ane had authority to bind the partnership was reasonable. 'owever, if sale of

coo#ers was outside the course of business or was a sale of substantially all assets, then approval of all partners would be

necessary, and not be reasonable to assume that -ane had authority. Since no such facts are given, it is reasonable to

conclude that -ane had apparent authority and the contract would be enforceable. 1ven if 4andyco sells the coo#ers, -ohn

may still be entitled to compensation on a 2uantum!merit analysis. Also, although 4andyco will be bound, they would have

claim against -ane for violating the e3press limitation in the partnership agreement.

Documents

California Bar Exam Lecture Notes - Agency