Agency and Partnership Outline
Professor McGovern
Summer 2019
Areas covered in the Class:
1. The law of Agency  Is the agent’s action or inaction attributed to the principal?
2. The legal consequences of conducting business through different forms of unincorporated business
organizations what are the legal consequences of doing business in a particular form? Including a
a. Partnership
b. Limited partnership
c. Limited liability partnership (LLP)
d. Limited liability company (LLC)
Part I: The Firm and Its Agents
I.
The Agency Relationship: The Principal’s Liabilities and Rights in Contractual Dealings
A. The Agency Relationship
i. Definition of Agency
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 so to act.” Restatement (Second) of Agency §1(1).
2. “Agency is the fiduciary relationship that arises when one person (a “principal”)
manifests assent to another person (an “agent”) that the agent shall act on the
principal’s behalf and subject to the principal’s control, and the agent manifests assent
or otherwise consents so to act.” Restatement (Third) of Agency §1.01
ii. Three Requirements of Agency **All three must be present**
1. Mutual consent
2. That one person will act on behalf of another, and
3. Subject to the other’s control
a. It doesn’t matter if the parties know they are forming or if they intend to form
an agency relationship. If all three elements are present, then the relationship is
formed, even if unwittingly.
iii. Examples:
1. There is a shopping mall that allows restaurants to open up inside. Is there an agencyprincipal relationship between the mall and the restaurants inside? No because the
restaurants are not acting on behalf of the mall but acting for themselves.
2. A makes a loan to B and in exchange for the loan, B agrees to give a mortgage on a
parcel of land to A. The mortgage allows A to sell the land if B defaults on the loan. Is
there an agency-principal relationship? No because A is not acting on B’s behalf.
iv. Green v. H&R Block
1. Benefits to H&R Block:
a. Bank pays H&R Block a portion of finance charge paid by taxpayer
b. H&R Block subsidiary purchased about ½ the loans from the bank, becoming the
lender
c. Sears gives H&R Block 15% of the check cashing fee
2. Issue: Was there an agency relationship between H&R Block and its customers?
3. Characteristics of the agency relationship  Restatement (Second) Agency §12-§14
a. An agent has to the power to alter legal relations of the principal
i. Narrow view – agency exists when they only have the power to bind
principal to a contract or respondeat superior is present
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ii. Broad view – if they play an agent in bringing about the result then
agency exists
b. The agent’s duty to act primarily for the benefit of the principal (fiduciary duty)
c. The principal has the right to control the agent regarding matters entrusted to
him (principals don’t have the right to control the details of the agent’s work)
i. i.e. lawyer-client relationship – the client as the principal is not
controlling the details of the work, but instead are controlling the
outcome and objective of the work
4. The Trial Court viewed the above 3 characteristics as “essential elements” of an agency
relationship, but the MD CoA said they are just considerations the court should use for
guidance when determining an agency relationship
5. The goal was to establish that there was an agency relationship between H&R Block and
the taxpayer and thus H&R Block had a fiduciary duty to the taxpayer to put their
interests above everyone else’s, including H&R Blocks. H&R Block was receiving
kickbacks without the taxpayer’s consent, so they were putting their own interests first
by profiting from these transactions and thus, breaching their fiduciary duty.
6. Basile v. H&R Block
a. Unlike Green, the PA Supreme Court found that H&R Block was not a agent of
the taxpayers because the taxpayers alone who decided to take advantage of
the RAL option  they argued the power to bind the principal to a contract did
not exist (following the narrow view)
v. Problem 1.1
1. (A) The Translator is an agent of the Dealer because the Translator is acting on behalf of
the Dealer and the they are subject to the Dealer’s control, as the Dealer can provide
instructions as to how they want to the translation to proceed.
2. (B) Babel Translations is not an agent because they are not under the Dealer’s control
since they are just translating what the document says and they aren’t acting on behalf
of the Dealer, as there’s no 3rd party present  just providing a service.
B. Formation of Agency Relationships
i. Issue: Are any formalities required for a principal to create an agency relationship or to grant
authority to an agent?
ii. Creation of Authority in an Agent
1. “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. Restatement (Second) of Agency §26
a. Bottom line  There must be some manifestation of conduct, as well as
authority to act on their behalf
b. General rule is that there are no formalities UNLESS there is 1) a statute or 2)
authority is executed from instruments under seal (latter exception is archaic
and rarely applies)
i. Statute exception  most often found when agent is executing a deed
for real property; we look for a statute that says the principal’s
authorization must comply to a specific requirement
iii. Estate of Giannopoulos
1. In NY, power of attorneys had to comply with specific requirements per state statute,
but the principal’s authorization didn’t comply with the specific formalities thus the
court did not have legal authority to represent the client
a. Statute exception applied where specific formalities were required by law
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iv. Manifestation, Actual Authority, Formal Requirements Definitions
1. “Actual Authority … is created by a principal’s manifestation to an agent that, as
reasonably understood by the agent, expresses the principal’s assent that the agent
take action on the principal’s behalf (emphasis added).” Restatement (Third) of Agency
§3.01
2. “A person manifests assent or intention through written or spoken words or other
conduct.” Restatement (Third) of Agency §1.03
3. “If the law requires a writing or record signed by the principal to evidence an agent’s
authority to bind a principal to a contract or other transaction, the principal is no bound
in the absence of such a writing or record. A principal may be estopped to assert the
lack of such a writing or record when a third party has been induced to make a
detrimental change in position by the reasonable belief that an agent has authority to
bind the principal that is traceable to a manifestation made by the principal.
Restatement (Third) of Agency §3.02
C. Principal’s Liability in Contract for Acts of Agents
i. Kasselder v. Kapperman
1. Schladweiler was working as Kapperman’s agent in order to authorize repairs on the
road grader  so he had the power to bind Kapperman to the repairs
a. Authorization leads to power to bind
2. Issue: Is the agent’s action (or inaction) attributable to the principal, as if the principal
entered into the agreement alone?
a. A principal is bound by the agent’s acts regardless of the type of principal
present (i.e. disclosed, partially disclosed, or undisclosed)
3. The court found that Schladweiler only had authorization of up to $3K in repairs, per the
power Kapperman gave him, so he had no power to bind above that amount
a. Schladweiler exceeded his authority, so he was liable for amount beyond $3K
b. Agent’s Implied warranty of authority – when an agent approaches a 3rd party,
they’re treated as making a warranty and they’re authorized to do whatever
they do. If that turns out to not be true, then they have breached their implied
warranty of authority and are liable to the 3rd party for that breach.
ii. Capacity
1. Principal – We assume that the principal has capacity to give authorization. Thus, they
must have the capacity to give legal consent and capacity to do the act that they’re
authorizing the agent to do.
a. Capacity comes up as a defense by the principal
2. Agent – For an agent to have capacity, they only need the physical or mental capability
to do the thing they’ve been appointed to do. Thus, almost anyone can be an agent,
including minors and mentally disabled.
a. It’s hard for a principal to prove an agent doesn’t have capacity
3. Business Entities – they have to appoint human agents when they are principals
D. Principal’s Rights under Contracts entered into by Agents: Disclosed, Partially Disclosed, and
Undisclosed Principles
i. Types of Principals
1. Disclosed – where the 3rd party has notice both that the agent is acting for a principal
and they know the principal’s identity
2. Partially disclosed – where the 3rd party has notice that the agent is acting for a
principal, but they don’t know the principal’s identity
3. Undisclosed – where the 3rd party doesn’t have notice that the agent is acting for a
principal, so they think they’re only dealing with the agent
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ii. Issue: When an agent acting for an undisclosed principal enters into a contract on the principal’s
behalf, can the undisclosed principal enforce the contract against the 3rd party?
iii. Woodlawn Park v. Doster Construction
1. The defendants contracted to do construction work for an undisclosed principal, which
was a limited partnership, through the agent, Maurin-Ogden.
2. The court decided that an undisclosed principal has a right to sue and enforce the
contract per the Restatement (Second) of Agency §302 and a LA Law Review Article
iv. Agent for Undisclosed Principal
1. Restatement (Third) of Agency §603 “When an agent with authority makes a contract
with a third party on behalf of an undisclosed principal, the third party and the principal
can enforce the contract as if the principal himself had made the contract with him,
unless:
a. The principal is excluded by the contract (R3A §603(1))  there must be
something specific in the contract that excludes undisclosed principals
i. Anti-Assignment Clauses are not conclusive, but are evidence of an
intent to exclude an undisclosed principal
b. The principal is fraudulently concealed (R2A §304, R3A §6.11(4)):
i. Agent falsely represents that Agent is not acting for a Principal,
ii. 3rd party would not deal with Principal, and
iii. Agent or Principal has notice that 3rd party would not deal with Principal
(merely suspecting they wouldn’t deal with you is not enough)
rd
c. If the 3 party has a right of set-off against the Agent
2. Failure to Disclose as Fraudulent Concealment: Restatement (Third) of Agency §6.11(4),
comment d  3rd party can avoid the contract by establishing a basic assumption that
the 3rd party was mistaken and because of the mistake enforcing the contract would be
unconscionable, and the mistake was known by the agent or principal, and the mistake
has a material and adverse effect on the performances due to the 3rd party
3. Set Off: Restatement (Third) of Agency §6.06(2)  If an agent makes a contract on
behalf of an undisclosed principal, then the 3rd party is entitled to set-off against the
amount the 3rd party owes the principal any amount the agent owes the 3rd party,
provided that, the amount the agent owes the 3rd party arose before the 3rd party had
existence of the principal
v. Problem 1.4
1. An undisclosed principal was not excluded from the contract between the Agent and
Owner, and fraudulent concealment most likely cannot be proven, even though the
Agent did not disclose they were an agent
a. Mere failure to disclose can be fraudulent concealment, if there is a failure to
disclose material information
2. There was no fraudulent concealment, as the Owner never stated they wouldn’t have
dealt with Big Amusement, but instead only would have asked for a higher price
a. Courts will not protect 3rd parties from a bad bargain, only when they would
never have dealt with that principal
3. Skipped
4. The Owner would argue they think they are dealing with the Agent, not Big Amusement,
so set off applies for any amount Big Amusement incurred prior to them knowing about
Big Amusement’s existence
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II.
Actual Authority of Agents
A. Express Actual Authority
i. King v. Bankerd
1. Bankerd gave King a power of attorney authorizing King to “convey, grant, bargain,
and/or sell” Bankerd’s interest in him home
2. King conveyed Bankerd’s interest for no consideration to Bankerd’s wife, who sold the
property, which prompted him to bring this action against the attorney for breach of
trust and breach of fiduciary duty
3. Issue: Was King authorized to do what he did?
ii. Authority to Make a gift of Plaintiff’s Property
1. A power of attorney does not grant power to make a gift of the Plaintiff’s property
unless that power:
a. Is expressly conferred,
b. Arises as a necessary implication of powers that are clearly conferred, or
c. Is clearly intended by the parties, as evidenced by the surrounding facts and
circumstances
iii. Statutory Form Powers of Attorney – notes pg. 48-51
1. Effective January 1, 2014, Texas has adopted a statutory form for durable powers of
attorney that is substantially the same as that set forth in the Uniform Statutory Power
of Attorney Act, reproduced on pgs. 48-49.
a. Tex. Estates Code sex. 752.051
b. Adopts an “opt-in” approach that requires initials, rather than the former optout approach used in Texas
B. Implied Actual Authority
i. Most actual authority is implied, not express, thus it is more significant.
ii. State Farm Mutual v. Johnson
1. John and his friend purchased a car together and Johnson’s friend, at his request,
acquired insurance for the car. The friend declined the purchase
uninsured/underinsured motorist coverage.
2. Johnson was in an accident with an uninsured driver. State Farm rejected Johnson’s
claim for coverage.
3. Issue: Was he bound by his friend’s rejection of the motorist coverage?
iii. Problem 2.2
1. Church hires Bill to paint the church and after speaking with the church, Bill hires his
brother, Sam to help, like he’s done in the past.
2. Bill sends Same to the hardware store to purchase more paint.
3. Issue: does Sam have express or implied actual authority to purchase paint on behalf of
the church.
a. Sam had express authority from Bill. Bill had implied authority from the church
to hire Sam as his helper.
4. When a principal allows an agent to do something and doesn’t object, they are making a
manifestation for the future in that they can continue that action
III.
Power of Agents to Bind the Principal by Unauthorized Acts
A. Apparent Authority
i. Hamilton Hauling v. GAF
1. Hamilton Hauling contracted with Bajt, agent of GAF, to sell wood chips to GAF. Under
the contract, GAF was obligated to purchase wood chips at a minimum cost of $800K/yr
for 10 years.
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2. GAF fired Bajt and notified Hamilton Hauling that no future deliveries would be
accepted. Hamilton Hauling sues GAF for breach of contract, alleging GAF is bound by
the contract.
3. Issue: Was GAF bound by the contract made by Bajt?
ii. Apparent Authority Elements:
1. Requires a manifestation by the principal that somehow reaches the 3rd party (can be
via phone, email, TV, etc.), which causes the 3rd party to believe the agent is authorized,
and the 3rd party’s belief must be reasonable.  If the agent has apparent authority,
then they bind the principal to a contract.
a. When a principal acquiesces in an agent’s unauthorized conduct, a third party
can believe that the agent is authorized to do that conduct based on their prior
acts
b. When a principal places someone in a position, with a certain title, that principal
is making a manifestation to the world that this person has the customary level
of authority of someone in that position, industry, and geographical location
c. An agent cannot create their own authority by expressly statements that their
authorized  must be a manifestation by the principal, not agent
iii. Hypo 1 – A principal gives a power of attorney to the agent and authorizes them to sale the
land. The agent has the power of attorney with them.
1. Actual Authority? Yes, because the P of A specifically says they can sale the land. The
agent’s state of mind is relevant for actual authority.
2. Apparent Authority? The agent always has implied, apparent authority to state the
scope of their authority to a 3rd party, unless the principal says otherwise. Thus, the
showing of the P of A to a 3rd party is a manifestation of the principal and if that causes
the 3rd party to reasonably believe the agent has authority, then they have apparent
authority.
iv. Hypo 2 – A principal gives a power of attorney to the agent and authorizes them to sale the
land, but orally expresses to them not to sell the land for less than $200K. what happens if the
agent sells the land for $150K?
1. Actual Authority? No, because the agent’s state of mind is not consistent with the P of A
2. Apparent Authority? Yes, because if they show the P of A to the 3rd party, it says they
have authority to sell, but they are engaging in an unauthorized sale per the principal’s
oral instructions.
v. Fennell v. TLB Kent Co., note 4, pg. 64
1. Fennell brought a wrongful discharge action against his employer. Fennell’s attorney
agreed with the employer to settle for $10K.
2. The U.S. District Court approved the settlement and dismissed the action. Fennel claims
his attorney had no authority to settle, but the court concluded the attorney had
apparent authority to settle.
3. Issue: Did the attorney have apparent authority?
a. Hiring someone as your attorney is not making a manifestation that they have
apparent authority to authorize a settlement, especially since most assume the
attorney will discuss settlement options with their client.
i. Narrow Exceptions  If client is in the courtroom when the attorney
tells the court they are settling and the client says nothing, that is
considered acquiescing.
B. Estoppel
i. Doctrine of Estoppel
1. “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
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ii.
iii.
iv.
v.
vi.
to make a detrimental change in position because the transaction is believed to be on
the person’s account if:
a. The person intentionally or carelessly caused such belief, or
b. 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.”
Restatement (Third) of Agency §2.05
How Doctrine of Estoppel differs from Apparent Authority
1. Mere failure to act can give rise to Estoppel. Mere failure to act does not give rise to
apparent authority.
2. For a principal to be bound to Estoppel, the 3rd party has to have a detrimental change
in position. In apparent authority, you just need a manifestation by the principal, but
not detrimental change.
a. A change in position is expending money or labor, incurring a loss, or becoming
subject to legal liability
3. Estoppel is a one-way street and it’s used by 3rd parties to bind the principal. Apparent
authority is a two-way street and is used by the principal to bind the 3rd party.
4. An undisclosed principal cannot be bound by Estoppel or apparent authority because
the 3rd party is not aware of them.
Hypo 1 – Owner and Buyer live next door and Buyer wants Owner’s computer. As a joke, Owner
tells Buyer that his computer is at the Merchant’s store and has permission to sell it. Buyer goes
to the store and sells it. The Owner gave Merchant apparent authority to sell the computer, so if
Buyer purchases it, the sale is binding.
Hypo 2 – Same as above, but Owner was getting computer fixed and didn’t jokingly tell Buyer his
computer was at store the be sold. Instead, Buyer saw it there and Merchant said he had
apparent authority from Owner to sell it. Buyer went home to think about it and in the
meantime, Owner heard what Merchant said, but didn’t correct the Merchant or tell Buyer it
wasn’t for sale. There is no apparent authority from Owner for the Merchant to sell computer,
but the Buyer could try to use Estoppel to bind the Merchant to sell the computer.
Problem 3.2
1. Did Merchant have power to transfer Owner’s title to the computer if:
a. Owner left the computer with Merchant to be repaired?
i. Under Common Law, no, there’s no manifestation for apparent
authority from Owner to Merchant that they can sell the computer.
Also, there’s nothing from Estoppel that gives them the authority either.
ii. Under the UCC, the Merchant has the power to give Buyer good title
because he has possession and he deals in goods of that kind. The UCC
protects the Buyer, not Owner even if both parties are innocent
because they want to protect commercial transactions.
b. Thief stole the computer from Owner, and sold it to merchant?
i. Same results under the Common Law as above, where neither apparent
authority nor estoppel apply.
ii. Under the UCC, the Merchant doesn’t have any power to transfer title
because the thief, as the entruster, has no rights to sell the computer.
Thus, the Owner can be reimbursed or can get the computer back.
Common Law Rule re: Possession
1. Merely giving possession of something to someone else is not enough to give someone
apparent authority to sell it, nor for the doctrine of estoppel to apply and bind the sale.
To bind the sale and estop the real owner from asserting their title, there must be
possession with slight additional circumstances that turn the scale.
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vii. UCC re: Possession
1. Any entrusting or possession of goods to a merchant who deals in goods of that kind
gives him power to transfer all rights of the entruster to a buyer in ordinary course of
business.
viii. Metalworking Machinery v. Fabco
1. Metalworking bought a “wheelbarator,” but never picked it up, so 9 months later it was
sold to Yoder, who eventually sold it to Fabo. Metalworking asserted their ownership
because East Coast Steel Co. had no authority to sell it.
2. Aside from not picking it up, Metalworking did not through any affirmative act give
apparent authority to East Coast to sell the wheelbarator to someone else.
3. Under both the Common Law and UCC, Metalworking is the true owner.
a. Mere possession under Common Law without additional circumstances still
made Metalworking the owner
b. Metalworking acquired title, so East Coast had no interest to transfer PLUS they
did not deal in goods of this kind, so under UCC the true owner prevails
C. Inherent Agency Power
i. Elements of Inherent Agency Power (for a disclosed or partially disclosed principal)
1. “Plaintiff is subject to liability for unauthorized conduct of Agent if:
a. Agent is a general agent
b. For a disclosed or partially disclosed principal
c. The act was done on account of Plaintiff
d. The act usually accompanies or is incidental to the agent’s authorized conduct
e. The 3rd party reasonably believes the agent is authorized, and
f. The 3rd party has no notice of the Agent’s lack of authority
Restatement (Second) of Agency §161
ii. Definition of General Agent
1. “Continuity of service rather than the extent of discretion or responsibility is the hallmark of the general agent. The point at which one becomes a general agent cannot be
marked with exactitude. One who is an integral part of a business organization and does
not require fresh authorization for each transaction is a general agent.” R2A §3,
comment A.
iii. Nogales Service Center v. Atlantic Richfield
1. According to NSC, Tucker orally agreed that ARCO would:
a. Make a $100K loan to NSC to fund construction of a motel and restaurant, and
b. Give NSC a 1 cent/gallon discount on all diesel fuel and keep NSC competitive
with respect to other sellers of diesel fuel
2. Tucker had no apparent authority to bind ARCO even though he was the Manager of
Truck Stop Marketing and had power to grant other types of discounts, despite arguing
ARCO’s manifestation of apparent authority regarding his title within the industry
3. Tucker was found to be a general agent for ARCO, but there was no error in refusing the
jury instructions regarding inherent agency power
iv. Problem 3.3
1. Is FHLMC as an undisclosed principal liable for Fidelity’s misconduct?
a. Yes, under §194, Fidelity was a general agent, who’s acts were ‘usual or
necessary’ in the business of servicing loans. There unauthorized acts were not
too far removed from their authorized conduct.
v. Inherent Agency Power (for an undisclosed principal)
1. “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.” Restatement
(Second) of Agency §194
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vi. You don’t need inherent agency power when you have a disclosed or partially disclosed
principal. You need it when the principal is undisclosed because apparent agency and estoppel
cannot bind an undisclosed principal.
vii. The Restatement (Third) does not recognize inherent agency power as a separate theory under
which the principal can be subject to liability for the agent’s unauthorized conduct
1. Closest you get to inherent agency power is found in R3A §2.06
IV.
Principal’s Accountability for Notification to and Knowledge of the Agent
A. General Rules
i. Knowledge Defined
1. Conscious awareness – Restatement (Third) §1.04 comment d
ii. Notification Defined
1. A manifestation (written or spoken words or conduct) intended to covey information to
another person
a. Notification could lead to knowledge
iii. Notice Defined
1. The legal consequence of a person being charged with information because the person
acquired knowledge or received notification – Restatement (Third) §5.01(3) comment b
a. One can have notice without actual knowledge, i.e. You are out of town and are
served, which says you’re being taken to court. Even though you are out of town
and have no actual knowledge, the service left at your home gives you notice
Knowledge
iv. When a Principal is affected by Knowledge of an Agent
1. “A principal is affected by the knowledge of an agent concerning a matter as to which
[the agent] acts within his power to bind the principal OR upon which it is his duty to
give the principal information.” Restatement (Second) §272 – FOCUS ON THIS RULE
2. “For purposes of determining a principal’s legal relations with a 3rd party, notice of a
fact that an agent knows or has reason to know is imputed to the principal if knowledge
of the fact is material to the agent’s duties to the principal, unless … [one of two
exceptions applies.]” Restatement (Third) §5.03
v. Udolf v. Aetna
1. Udolf filed a claim with its insurers under employee dishonesty policies. The policies
both contained an exclusion for injury resulting from the dishonesty of any employee
“upon discovery by the Insured, or any partner or officer, of any fraudulent or dishonest
act of such [e]mployee.”
2. Issue: Whether the knowledge of the Agents that Bjork had committed a fraudulent or
dishonest act is attributed to their employer, Udolf.
a. Yes, knowledge by the Agents was attributed to the Principal because Shukis
and Auer had a duty to give Udolf information that he would want to know
about, like the misappropriation of funds by Bjork. Thus, it was like Udolf knew
so the loss of money is not covered under the insurance policy.
b. An agent is subject to a duty to give information to a principal when the agent
has notice of facts that the agent should know might affect how the principal
desires to act in the transaction. Note 2, pg. 89
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Notification
vi. Notification given to an Agent
1. “A notification given to an agent is effective as notice to the principal if the agent has
actual or apparent authority to receive the notification, unless … [an exception
applies.]” Restatement (Third) §5.02
vii. Dvoracek v. Gillies
1. Gillies was required to give 60-days written notice that he was renewing the lease,
which he gave to someone working in the office. Dvoracek claimed she never received
the written notice that Gillies intended to renew his lease, so she sent him an eviction
notice.
2. Issue: Did Gillies’ notification to Dvoracek’s agent of his intent to renew his lease
constitute notice to Dvoracek?
a. Notice to Dvoracek’s agent was like notice to Dvoracek herself, thus she had
notice that Gillies intended to renew his lease.
Prior or Casually Obtained Information
viii. Prior or Casually Obtained Knowledge
1. “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.” Restatement (Second) §276
2. “If an agent knows a fact or has reason to know it, notice of the fact is imputed to the
principal if the fact is material to the agent’s duties … unless … (b) the agent is subject to
a duty to another not to disclose the fact to the principal. This is so regardless of how
the agent came to know the fact or to have reason to know it.” Restatement (Third)
§5.03
a. Texas follows the Minority Rule, but has adopted an exception to the rule
i. “… where if the agent is the actor (sometimes designated sole actor),
representing his principal in the transaction to which his knowledge,
relates, the principal will not be permitted to avail himself of the
benefits of his agent’s services without being charged with his
knowledge.” Wellington Oil v. Maffi
ix. Problem 4.2
1. R.B. was allegedly assaulted and raped in her apartment by Thomas, Carol the
apartment manager’s ex-husband, who was living with Carol at that time.
2. Carol knew that prior to their marriage her ex-husband had been charged with rape.
Apartments owed no duty to R.B. to take reasonable precautions unless they knew of
this prior conviction.
3. Assuming Carol never told anyone at Apartments about the conviction, did Apartments
owe a duty to R.B.?
a. Even if Carol knew this info before she worked for Apartments, it was not
confidential information, thus her knowledge is attributable to Apartments
B. Adverse Agents
i. Principal’s legal relations with an Adverse Agent
1. “For purposes of determining a principal’s legal relations with a 3rd party, notice of a fact
that an agent knows or has reason to know is not imputed to the principal if the agent
acts adversely to the principal in a transaction or matter, intending to act solely for the
agent’s own purposes or those of another person. Nevertheless, notice is imputed
except:
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ii.
iii.
iv.
v.
V.
a. When necessary to protect the rights of a third party who dealt with the
principal in good faith; or
b. When the principal has ratified or knowingly retained a benefit from the agent’s
actions
rd
2. A 3 party who deals with a principal through an agent, knowing or having reason to
know that the agent acts, adversely to the principal, does not deal in good faith for this
purpose.” Restatement (Third) §5.04
Kirschner v. KPMG
1. A bankruptcy trustee seeks to recover from KPMG and other outside advisors to Refco
for aiding and abetting or failing to discover fraud by Refco’s management.
2. Issue: Is the alleged misconduct of corporate officers attributed to Refco?
Problem 4.4
1. The Lanes agree to buy Oustalet’s home and both are represented by the same Realty
agent and attorney. Oustalet was required to arrange a termite inspection, repair any
damage, and submit a certificate that there weren’t any infestations.
2. There was unrepaired termite damage, which Oustalet, the realtor and the attorney
knew of, but not Lane. After they closed on the house, the Lanes discovered the damage
and demanded Oustalet pay for the repairs.
3. Did the Lanes have knowledge of the damage because their agents had knowledge?
a. Where both parties were represented by the same agents, it should have gone
to the jury to determine whether that meant the Lanes had knowledge.
Summary of Attribution of an Agent’s Knowledge
1. General rule: Knowledge of an agent is attributed to the principal when (1) it concerns a
matter as to which the agent acts with power to bind the principal, or (2) the agent has
a duty to convey the information to the principal
2. Exception: Knowledge of an adverse agent is not attributed to the principal
a. An agent acts adversely only when the agent acts solely for the agent’s own
purposes or those of another person
3. Exception to the exception: Knowledge of an adverse agent is attributed to the principal
if the principal has ratified or knowingly retained a benefit from the agent’s action
Remaining issue  When is notification to an adverse agent attributed to the principal?
1. “(1) A notification given to an agent is effective as notice to the principal if the agent has
actual or apparent authority to receive the notification, unless the person who gives the
notification knows or has reason to know that the agent is acting adversely to the
principal as stated in §5.04.” Restatement (Third) §5.02
Ratification of Unauthorized Transactions
A. General Rules
i. Definition of Ratification
1. “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(1)
2. “A person ratifies an act by:
a. Manifesting assent that the act shall affect the person’s legal relations, or
b. Conduct that justifies a reasonable assumption that the person so consents.”
Restatement (Third) of Agency §4.01(2)
3. “A person may ratify an act if the actor acted or purported to act as an agent on the
person’s behalf.” Restatement (Third) of Agency §4.03
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ii.
iii.
iv.
v.
a. Ratification is an unauthorized action and the person acting or purporting to act
for that person has no authority to bind. If a person ratifies a prior act, then it is
like they authorized the act from the beginning and then they are bound.
Botticello v. Stefanovicz
1. Mary and Walter owned a farm as tenants in common and Walter agreed to a lease
agreement with Botticello, which granted him an option to purchase the farm for $85K.
2. When Botticello attempted to exercise his option to purchase, Mary and Walter refused,
so Botticello sued for specific performance and won on the theories that Walter acted
as Mary’s agent and Mary ratified the lease through her contract.
3. Issue: Was Walter the agent of Mary? Did Mary ratify the lease agreement?
a. Mary did not give Walter the authority to act as her agent. Marital status cannot
in and of itself prove the agency relationship.
b. Mary did not ratify the lease because Walter did not act on her behalf or
purport to act on her behalf. And even if he did, Mary did not do anything that
led to the reasonable assumption that she consented, nor was there a
manifestation of assent. Just because you receive proceeds does not make you a
party to the contract.
Ratification and Undisclosed Principals
1. The traditional common law rule under Restatement (Second) says that an undisclosed
principal cannot ratify a contract because the agent cannot purport to act on the
principal’s behalf, thus there’s nothing to ratify. R2A §87
2. The new Restatement (Third) though says an Undisclosed principal can ratify an act
done by their agent if the agent acted or purported to act on their behalf. R3A §4.03
3. Disclosed and Partially Disclosed principals can always ratify an unauthorized act by
their agent on their behalf.
Comments on Ratification
1. Note 1, pg. 117 – In order for an act to be ratifiable, a principal must have been able to
undertake the transaction both at the earlier time when the agent acted and at the later
time of the act of ratification.
2. Note 6, pg. 121 – A Principal’s ratification of an unauthorized act can create apparent
authority as to a subsequent act. This can occur if the principal ratifies without telling
the 3rd party that the agent had no authority to enter the first transaction.
Problem 5.1
1. Allen leases Paula’s farm to Terry for 5 years and purports to represent Paula. Paula
doesn’t inquire about the terms of the lease and accepts from Terry the security deposit
and first month’s rent.
a. Did Paula ratify the lease?
i. Yes, Allen purported to act on her behalf. After the fact, Paula engaged
in conduct that would lead to the assumption that she consented to the
lease.
b. Can Paula avoid the lease after she learns that the term is 5 years? Any
difference if the terms of similar farm leases customarily range between 3-5
years or 1-3 years?
i. Yes, she can avoid the lease even though she ratified it because she did
not have actual knowledge of material facts re: the leases terms.
1. If the typical lease terms are close to the terms of the contract,
then she should know this. However, if the typical lease is
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substantially less, then the longer lease terms would be material
and allow her to rescind her affirmance
vi. Rescinding Affirmance
1. A person is not bound by a ratification (i.e., can choose to rescind an affirmance) made
without knowledge of any material fact involved in the affirmed transaction. See note 4,
pg. 119; Restatement (Third) of Agency §4.06
a. Material facts – those that “substantially affect the existence or extent of the
obligations involved in the transaction, as distinguished from those which affect
the values or inducements in the transaction.” Restatement (Second) of Agency
§91
vii. Illustrations of Material Facts
1. A, who has no power to do so, enters into a contract to sell P’s goods and tells T that P
will buy the goods back within 1 year if T so desires. A does not tell P of the buyback
provision and P affirms. P can rescind the affirmance upon learning of the provision.
2. A, who has no power to do so, contracts with T to sell P’s shares in a corporation. P
affirms. After affirming, P learns of a recent development that makes the shares must
more valuable. P cannot rescind the affirmance.
a. The higher value of the shares is NOT material
B. Knowledge of Agents
i. Estate of Sawyer
1. Durrance invested estate funds for six months with Crowell and specifically said don’t
invest in VREIT. After the six months, he then re-invested funds on a 30-day rollover and
Crowell invested in VREIT.
2. Durrance’s secretary was instructed to find out from Crowell how to continue the
investment and how much notice was required to withdraw the funds. Crowell gave that
info and said he invested the money in VREIT, which went bankrupt.
3. Issue: Did Durrance have knowledge and thus ratify what Crowell did?
a. Crowell argues Durrance had knowledge through his secretary, but his secretary
did not have authority to inquire as to where the funds were invested. Thus,
Durrance did not have knowledge through his secretary.
b. Where Durrance had no actual knowledge, he cannot have ratified the
investment and as soon as he found out that the money was invested in VREIT,
he acted upon it by requesting his money back.
c. A principal can ratify a transaction based on the knowledge of an agent, but that
doesn’t apply here  for ratification of an unauthorized act to occur so as to
bind the principal, the principal must have actual knowledge of the material
facts being adopted at the time affirmance occurs. Absent such knowledge, an
affirmance may be avoided upon the principal’s learning the material facts.
ii. When does failure to act or silence amount to ratification?
1. “An affirmance of an unauthorized transaction ca be inferred from a failure to repudiate
it.” R2A §94
2. “Failure to object may constitute such a manifestation when the person has notice that
others are likely to draw such an inference from silence.” R3A §4.01, comment g
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VI.
Termination of Agency Relationship
Termination of the Agency Relationship
A. Voluntary Terminations
i. Voluntary Terminations Defined
1. Principal and Agent always retain power to terminate the agency relationship. R3A
§3.10(1); R2A §118
a. Nevertheless, the one terminating the relationship could be liable for breach of
contract
i. Example: P and A agree that A will serve as agent for 3 years, and P
terminates the agency relationship after 6 months.
ii. Example: P gives A a power of attorney that grants A exclusive authority
to sell P’s property during the next year, and the power says that it’s
irrevocable during the year. P orally revokes A’s authority after 3
months.
2. A voluntary termination of the agency occurs:
a. When either the Principal or Agent has notice that the other party manifests
dissent to continuance of the relationship (see R3A §3.10(1), R2A §119, and
note 1 from pg. 129), or
b. By implication because of subsequent events (see note 7, pg. 131)
i. Implied terminations occur when, because of intervening events, A
should realize that P would no longer consent to action by A if P knew of
the intervening event
1. Example: P authorizes A to buy a house. A subsequently learns
that the house has been largely destroyed by fire.
ii. Problem 6.1
1. Jason worked as an agent for Tutt and purchased cattle from Pace over a 4-year period.
Tutt discharged Jason and didn’t pay him severance pay. As payback, Jason told Pace to
send 100 sheep to Tutt, which Tutt said never to buy.
2. Tutt refused delivery and refused to pay arguing:
a. He had ordered Jason never to purchase sheep, and
b. He had discharged Jason prior to the purchase by Jason
3. What’s the court’s decision?
a. Jason has no actual authority but might have apparent authority to bind Tutt to
the purchase because of his position and purchases over the last 4 years.
b. Where Jason was terminated, he has no power to bind Tutt, but Pace is
unaware of Jason’s termination. Until Pace receives notification of Jason’s
termination, Jason still has apparent authority  Lingering authority
4. Lingering Authority – it is reasonable for 3rd parties to assume that an agent’s actual
authority is a continuing or ongoing condition, unless and until the 3rd party has notice
of circumstances that make it unreasonable so to assume.
iii. Comments on Voluntary Terminations
1. Note 3, pg. 130
a. Voluntary termination of an agent’s authority terminates (1) actual authority,
and (2) other agency powers, including inherent agency power, but does not
terminate the apparent authority of a general agent until the 3rd party has
notice of the termination (see Zukaitis v. Aetna)
2. Note 5, pg. 130
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a. Special agents (obtained for a singular transaction, not ongoing transactions)
generally do not have lingering apparent authority, i.e. their apparent authority
terminates when their actual authority terminates
3. Note 8, pg. 131
a. The Restatement (Third) of Agency generally tries to simplify the rules on
termination of an agent’s apparent authority, i.e. it does not distinguish
between general and special agents
i. “Apparent authority ends when it is no longer reasonable for the 3rd
party with whom the agent deals to believe that the agent continues to
act with actual authority.” R3A §3.11(2)
B. Terminations by Operation of Law
Death
i. Death of a Principal
1. “The death of an individual principal terminates the agent’s actual authority. The
termination is effective only when the agent has notice of the principal’s death. The
termination is also effective as against a third party with whom the agent deals when
the third party has notice of the principal’s death. Restatement (Third) of Agency
§3.07(2)
ii. Traditional Common Law Rule
1. Death of a principal terminates all of an agent’s powers at the moment of death,
regardless of whether the agent or the third party have notice of the principal’s death
a. Effect: An agent who acts for a principal who has died has no power to bind the
principal, and therefore breaches the agent’s implied warranty of authority. See
note 2, pg. 134.
b. Also, under CL, incapacity terminates both actual and apparent authority
iii. Problem 6.2
1. Father gives his son a power of attorney to change bank accounts to add the son’s name
as joint tenants. Unbeknownst to son and bank, father dies 30 minutes before the son
goes to the bank and changes everything.
2. Issue: Did son take the funds, or must the funds pass under father’s will?
a. At Common law, upon the moment of death both actual and apparent authority
are terminated, thus the funds would pass through the father’s will
b. Under the Restatement, actual authority terminates with the death of the
principal, but apparent authority exists until the third party has notice, so where
neither the son nor bank had notice, the son would take the funds.
Statutory Responses
iv. Durable Powers of Attorney
1. If a written power of attorney expressly provides that Agent’s authority to act will not
be affected by the Principal’s incapacity or disability, then the Agent’s authority
continues despite the Principal’s incapacity or disability. UDPA §2
a. Texas Estates Codes §§ 751.002, 751.051 (eff. Jan. 1, 2014)
v. Death (or Incapacity) of the Principal
1. If the Principal grants authority in a written power of attorney (durable or otherwise),
then the Principal’s death or incapacity does not terminate:
a. The authority of the agent who does not know of the Principal’s death or
incapacity and acts in good faith
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b. The apparent authority of the Agent as to the 3rd party who does not have
knowledge of the Principal’s death or incapacity and acts in good faith. UDPA §4
c. Texas Estates Code §751.054(a)(1) (eff. Jan. 1, 2014) (applies only to durable
powers of attorney)
2. Durable health care powers of Attorney
a. Texas: Health & Safety Code §§ 166.151 to 166.166
C. Irrevocable Agencies
i. Irrevocable Agency Powers
1. The only agency powers that are irrevocable by voluntary act are
a. Powers coupled with an interest in the subject matter of the power
i. An agent has a separate interest in the subject matter of the power that
arose independently of the agency power
b. Powers given for consideration or as a security
i. Power give to secure the performance of a duty or protect title or given
for consideration
Power given for consideration or as
security
Power coupled with an interest in the
subject matter of the power
Irrevocable Agency Powers
Terminated by Voluntary Act of
Principal?
NO
NO
Terminated by Principal’s Death?
YES (**R2A is contrary)
NO
ii. Irrevocable Powers
1. “The powers given as security cannot be terminated by either a voluntary act or the
Principal’s death.“ Restatement (Third) of Agency §3.12(1)
2. “A power given a security cannot be terminated by either a voluntary at of the principal
or the principal’s death. Instead, a power given as security … is terminated by an event
that
a. Discharges the obligations secured by the power, or
b. Makes its execution illegal or impossible, or
c. Constitutes an effective surrender of the power.”
Restatement (Third) of Agency §3.13(1)
iii. Traditional Common Law Rule
1. Only powers coupled with an interest survived the death of the principal.
iv. Problem 6.4
1. Kane needed money so Dore loaned him $1K and Kane said if he didn’t repay it that
Dore could have his fridge and sell it. Chase loaned Kane $500 and Kane said if he didn’t
repay it that Chase could sell a ring he gave Chase. Kane took his piano to Sarle and told
him to sell it for $750 and keep $250 for commission. Kane got mad at all of them and
sent a letter revoking their authority to sell what he had given him and then he died
suddenly.
2. Determine the rights, if any, of Dore, Chase, Sarle, and Ware (a) because of the letters
and (b) because of Kane’s death. Explain.
a. Sarle: An interest only in the proceeds, or the result of the exercise of the
power, is not sufficient to show an interest in the subject matter of the power in
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Sarle’s case. Sarle has power to bind Kane if he didn’t get the letter and if he is
in a jurisdiction that follows R3A.
b. Dore: There is only power given for consideration or as security with the fridge.
These powers are not terminated by Kane’s letter, but they are terminated by
his death, thus he cannot sell the fridge.
c. Chase: There is a power given for consideration or as a security with the ring
AND Chase has a separate interest in the ring because he already had
possession of it. The first power is not terminated by the letter but is terminated
by Kane’s death. Regarding Chase’s separate interest, the letter doesn’t
terminate his power and neither does Kane’s death so he can still sell the ring
regardless. Chase’s independent interest is not affected by anything, that’s why
it survives voluntary acts and death.
v. Lee v. O’Brien
1. Issue: Is this a power coupled in an interest in the subject matter?
a. No, because each sibling granted the power to sell their interest in the property,
so the sibling acting through powers of attorney only has interest in their own
power. Thus, agency power can be revoked through voluntary acts.
2. Rule: Agency authority terminates if the principal or the agent manifests to the other
dissent to its continuance.
vi. Problem 6.3
1. As part of a settlement to their divorce, John and Mary each received a one-half interest
in their property. John gave Mary irrevocable power of attorney to act for him when
selling the property. She tells John she’s getting remarried and selling the property to
herself and her new husband. John wrote letters to both revoking Mary’s authority,
which they received.
2. What result if, before the sale, John brings an action claiming he is not bound by the
contract of sale that Mary signed?
a. If powers were neither given for consideration or security or coupled with an
interest in the subject matter, then John’s letters revoked her authority. But if
the court finds Mary’s powers were given with consideration or as security in
the divorce proceeding, then his letters did not revoke authority and she can
still act.
3. What result if John died before Mary signed the contract and his executor brings the
action?
a. At common law, his death immediately terminates her authority to sell, but she
must have notice since there was a written power of attorney.
b. But if the court finds Mary’s powers were given with consideration or as security
in the divorce proceeding, then his death did revoke authority
VII.
Agent’s Liability in Contractual Dealings
A. Agent’s Duty to Fully Disclose Principal
In General
i. Summary of Agent’s Liability on a Contract Entered into for the Principal
1. Agent of a disclosed principal is not a party to the contract (and therefore NOT liable to
3rd party) unless 3rd party and agent agree that Agent will be a party. Restatement
(Third) Agency §6.01
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2. Agent of a partially disclosed (unidentified) partner is a party to the contract (and
therefore liable to 3rd party) unless 3rd party and Agent agree that Agent will not be
party. Restatement (Third) of Agency §6.02
3. Agent of an undisclosed Principal is a party to the contract and therefore liable to 3rd
party. Restatement (Third) of Agency §6.03(2)
ii. Three Final Points
1. Trade Names
a. Example: the principal is XYZ Corp. but does business under the trade name
“The Beachcomber Restaurant”
i. An agent of XYZ Corp. signs a contract as “VP of The Beachcomber
Restaurant”
2. Defenses of Agency who is a party to contract. Restatement (Third) of Agency §6.01
comment e, §6.03 comment e
3. Form of signature
Election of Remedies
iii. Election of Remedies Doctrine
1. “Under the doctrine, the liability of an agent of his undisclosed principal on a contract is
only in the alternative … After learning all the relevant facts, a creditor must elect
whether he will hold the agent or the principal liable for the debt. A creditor who elects
to hold the previously undisclosed principal liable thereby discharges the agent, even if
the creditor subsequently discovers that the principal is insolvent. Furthermore, the
entry of a judgment against the principal amounts to an election to forego collecting
from the agent.”
iv. Three Comments
1. Election of remedies is a doctrine that is broader that the principal-agent context
2. Generally, only a judgment against principal will discharge the agent
a. Exception: if agent detrimentally relies on creditor’s statement that creditor will
look only to principal, then agent is discharged
3. The doctrine also can protect the undisclosed principal: if the creditor learns of
principal’s existence, and obtains a judgment against the agent, the previously
undisclosed principal is discharged
a. Exception: if the creditor obtains a judgment against the agent BEFORE learning
of the principal’s existence, the creditor still can obtain judgment against the
principal (but only one satisfaction)
v. Texas Law on Election of Remedies
1. Texas courts follow the election of remedies doctrine in the undisclosed principal
context
B. Agent’s Implied Warranty of Authority
i. Restatement (Third) of Agency §6.10 – “A person who purports to make a contract,
representation, or conveyance to or with a third party on behalf of another person, lacking
power to bind that person, gives an implied warranty of authority to the 3rd party and is subject
to liability to the 3rd party for damages loss caused by breach of that warranty, including loss of
the benefit expected from performance by the principal, unless
1. The principal or purported principal ratifies the act …
2. The person who purports to make the contract … gives notice to the 3rd party that no
warranty is given, or
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3. The 3rd party knowns that the person who purports to make the contract … acts without
actual authority
ii. Two Final Points
1. Measure of damages for breach of implied warranty of authority
a. Actual damages plus expectancy damages. R3A §6.10, comment b
2. Statute of limitations issue in Farm Credit Bank. R2A §329, comment K
VIII.
Duties of Agent to the Principal
A. Introduction
i. There are two general categories of duties that an agent owes a principal:
1. Duty of performance and Duty of loyalty.
B. Duties of Performance
i. Agent’s 6 Duties of Performance per Restatement (Third)
1. Duty created by contract §8.07
2. Duty of care §8.08
3. Duty of obedience §8.09
a. Act within your actual authority and follow instructions
4. Duty of good conduct §8.10
a. Refrain from acting in a way that brings disrepute upon the principal or their
business, includes disparaging remarks and acquiring a reputation that’s
inconsistent with the principal’s business
5. Duty to provide information §8.11
a. Relevant in determining whether the agent’s knowledge is attributable to the
principal. This occurs in 2 ways:
i. If the agent acts with power to bind the principal
ii. When the agent has a duty to convey the information to the principal
6. General duties as to the principal’s property §8.12
a. Duty to keep and render accounts
i. Agent must keep actual records of money and things received on behalf
of the principal,
ii. Agent then must make the records available to the principal
ii. Problem 8.1
1. Paul wants to buy an antique vase and hires Alan to locate and purchase the vase.
a. Alan searches diligently for the vase and cannot locate one. Paul sues Alan for
breach of contract. What result?
i. There is no liability under Restatement (Second) of Agency §377,
comment B  “The promise to act as an agent is interpreted as being a
promise only to make reasonable efforts to accomplish the directed
results. The promisor is not liable unless he fails to make such efforts as
he reasonable can.”
ii. Agents are subject to any duties created by contract and if an agent
contracts to do something, they aren’t guaranteeing the results, but
guaranteeing the use of reasonable efforts.
b. Instead, Alan forgets about the project and misses and opportunity to buy such
vase. What causes of action does Paul have against Alan?
i. Alan is liable to Paul because he did not act with reasonable care.
ii. Agents are subject to reasonable care, which isn’t a contractual duty,
but a duty imposed by law when you act on behalf of someone else.
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iii. Agent’s Duty created by Contract
1. “An agent has a duty to act in accordance with the express and implied terms of any
contract between the agent and the principal.” Restatement (Third) of Agency §8.07
iv. Agent’s Duty of Care
1. “Subject to any agreement with the principal, an agent has a duty to the principal to act
with the care, competence, and diligence normally exercised by agents in similar
circumstances.”
2. “Special skills or knowledge possess by an agent are circumstances to be taken into
account in determining whether the agent acted with due care and diligence.”
3. “If an agent claims to possess special skills or knowledge, the agent has a duty to the
principal to act with the care, competence, and diligence normally exercised by agents
with such skills or knowledge.” Restatement (Third) of Agency §8.08
C. Duty of Loyalty
i. Agent’s Duty of Loyalty
1. “An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters
connected with the agency relationship.” Restatement (Third) of Agency §8.01
2. “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 this agency.” Restatement
(Second) of Agency §387
a. Thus, an agent cannot act for the benefit of a 3rd party or to benefit themselves,
unless the principal and agent agree to that
ii. Agent’s Duty of Loyalty in a Nutshell:
1. The agent’s duty of loyalty requires the agent:
a. To disclose to principal when Agent is representing or acting as an adverse
party. §8.03
b. When the Agent represents or acts as an adverse party, they must disclose all
material facts concerning transactions between the agent and principal, that the
agent should know would affect the principal’s judgment. §8.06
c. To account to principal for any profits the agent makes in connection with
transactions conducted for the principal, unless they consent §8.02
Conflicts of Interest
iii. Problem 8.3
1. ABC employed Agent at $125/week to acquire land for development of mobile home
parks. ABC told Agent to acquire Parkacre in Agent’s name and then convey it to ABC.
Parkacre was $30K, but unknown to ABC, Agent had an option to buy Parkacre for $15K.
Agent bought it for $15K and the conveyed it to ABC for $30K, making a $15K profit.
Agent argues that ABC’s only remedy is to rescind the transaction.
2. What would agent have to do to get ABC to consent to a transaction that otherwise
would violate Agent’s duty of loyalty?
a. A conflict of interest doesn’t guarantee there’s a breach of the duty of loyalty.
However, the agent has a duty to not act as an adverse party to the principal,
which is what he did here. Also, he has a duty to disclose all material facts,
which in this case would be that he has an option to purchase the land,
including the option price and what the agent would make off of the deal.
b. A breach of the duty of loyalty doesn’t mean that the principal will suffer actual
damages, instead we look at how the agent acts and whether the agent met
their obligations per §8.06.
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c. It’s irrelevant as to whether the principal suffered any actual damages, meaning
the principal could be better off than where they would have been.
i. “Where 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, it’s
value or its proceeds to the principal.” §8.02, comment e
iv. Aspects of the Agent’s Duty of Loyalty
1. “An agent has a duty not to deal with the principal as or on behalf of an adverse party in
a transaction connected with the agency relationship.” Restatement (Third) §8.01
2. “Conduct by an agent … does not constitute a breach of duty if the principal consents to
the conduct, provided that:
a. In obtaining the principal’s consent, the agent
i. Acts in good faith,
ii. Discloses all material facts that the agent knows, has reason to know. Or
should know would reasonably affect the principal’s judgment unless
the principal has manifested that such facts are already known by the
principal or that the principal does not wish to know them, and
b. Otherwise deals fairly with the principal” – Restatement (Third) §8.06(1)
3. An agent is prohibited from self-dealing – dealing with the principal as an adverse party.
Restatement (Third) §8.03
Accounting for Profits
v. Problem 8.2
1. B advised County to acquire voting machines from Machine Corp. Unknown to County, B
received payments from Machine Corp for recommendations.
2. County brings an action against B seeking to impose a constructive trust on the funds B
received and an accounting to determine the amounts that B has received.
a. B has a duty to disclose the payments received and must get County’s consents
to keep the profits. If County agrees they can keep the money, then B must keep
and render the accounts so County can view them. If County doesn’t agree that
B can keep the profits, then County is entitled to the profits B made and any
actual damages they suffered.
i. Actual damages suffered is irrelevant to recover profits.
vi. Aspects of the Agent’s Duty of Loyalty
1. “An agent has a duty not to acquire a material benefit from a 3rd party in connection
with transactions conducted or other actions taken on behalf of the principal or
otherwise through the agent’s use of the agent’s position.” Restatement (Third) §8.02
vii. Principal’s remedies for Agent’s Breach of Duty of Loyalty
1. The principal can recover any actual damages sustained. Restatement (Third) §8.02,
comment e
2. The principal can ask the court to impose a constructive trust on any money or property
the agent receives in violation of the agent’s fiduciary duty. §8.02, comment e
3. If the agent has used the principal’s property for the agent’s own purposes, the principal
can recover the value of the use of the property
a. Example: if the agent uses the principal’s truck for the agent’s own purposes,
the principal can recover the fair market value. See Restatement (Third) §8.05
and illustration 2.
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Competition with the Principal, Confidential Information and Related Issues
viii. Agent’s Duty regarding Competition
1. “An agent has a duty to refrain from competing with the principal during their
employment…” – Restatement (Third) §8.04
2. “Although an employee may not compete prior to termination, the employee may take
action during employment, not otherwise wrongful, to prepare for competition
following termination of the agency relationship.” §8.04, comment b and c
a. If the agent obtains the consent of the principal to compete, then there is no
breach of fiduciary duty
ix. Agent’s Duty regarding Use of the Principal’s Property
1. “The agent’s duty of loyalty prohibits an agent from using property of the principal for
either the agent’s own benefit, or for that of another. Restatement (Third) §8.05(1)
a. This duty continues even after the agency relationship has ended
x. Agent’s Duty regarding Confidential Information
1. “An agent has a duty … not to use or communicate confidential information of the
principal for the agent’s own purposes or those of a third party.” Restatement (Third)
§8.05(2)
2. “The duty of confidentiality extends to all such information concerning a principal even
when it is not otherwise connected with the subject matter of the agency relationship;
and does not end when the agency relationship terminates. §8.05, comment c
a. Confidential information can NEVER be used UNLESS it is in relation to skills and
more general knowledge that the agent learned
xi. Corporate Opportunity Doctrine
1. Prohibits fiduciary usurpation of a corporate opportunity because certain business
opportunities are seen as belonging to the firm  Is this an opportunity that should
have been presented to the principal?
2. What courts look at when determining whether the opportunity was corporate:
a. How did that opportunity come to them and was it while they were an agent in
their official capacity to the principal?
b. Did the agent use the principal’s resources in order to capitalize on an
opportunity?
xii. Problem 8.4
1. Puja employed Adam as an agent to buy selenium prospects as an undisclosed principal.
Adam and the owner of Rockacre negotiated a purchase for Puja and Adam believed the
property was being sold below value. Before the sale was completed, Adam resigned as
Puja’s agent and bought it for his own account.
2. Puja has now learned of Adam’s purchase of Rockacre. What are Puja’s rights and
remedies against Adam?
a. Adam breached his duty of loyalty to Puja. The Corporate Opportunity Doctrine
would apply because he found out about the property while working for her and
negotiating for her to own it.
b. Adam was also using improperly using Puja’s confidential resources and
information as she was paying for his expenses and learning about Rockacre
might have come from information from Puja herself.
c. Adam was also competing with Puja during his employment, which is a breach
of loyalty because he ended up purchasing the property for himself during his
negotiations for Puja.
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IX.
Respondeat Superior and Related Doctrines
A. Introduction
i. Respondeat Superior – Restatement (Second) §219(1)
1. A principal is vicariously liable for wrongful conduct of the principal’s agent if:
a. The agent is a servant, and
b. The servant commits the wrongful conduct whole acting within the scope of
employment
ii. Two types of liability for a principal
1. Vicarious liability
2. Direct liability
B. Principal’s Liability for Wrongful Acts of Servants
Acts of Servants within the Scope of Employment
i. Thompson v. United States
1. Kitteau was practicing his fast drawing while in the Police station and accidently shot
and killed Thompson. Thompson’s family brought a suit against the US Dept of the
Interior for vicarious liability.
2. Issue: Was Kitteau acting within the scope of his employment when he accidently shot
Thompson?
a. Even though an employee might violate an express policy prohibiting certain
conduct, an employer can still be liable. Here it was forbidden to draw weapons
inside the station house, but the government was still responsible for Kitteaux’s
actions because he was attempting to improve himself as a policeman.
b. “An act, although forbidden, or done in a forbidden matter, may be within the
scope of employment” Restatement (Second) §230
ii. Test for Determining whether a Servant’s Act is within the Scope of Employment
1. Conduct of a servant is within the scope of employment if, but only if:
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
d. If force is used by the servant against another, the use of force is not
unexpectable by the master
2. Conduct of a servant is not within the scope of employment if it is different in kind from
that authorized, far beyond the authorized time or space limits, or too little actuated by
a purpose to serve the master
Restatement (Second) §228
a. Generally, an employee is not vicariously liable for tortious conduct of an
employee that occurs while the employee is traveling to or from work
i. Exception: “Special Errand Rule” – where the employee traveling to work
performs a “special errand” on behalf of the employer pursuant to the
employer’s instructions, the employee will be regarded as acting within
the scope of employment
iii. Problem 9.1
1. Bartender is employed at Bar where he collects money, serves drinks, and removes
disruptive patrons. Customer accused Bartender of short-changing him and Bartender
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became enraged and attacked him, causing Customer to suffer a broken nose and
injured back.
2. Is club vicariously liable to Customer for Bartender’s conduct?
a. Issue: Was Bartender acting within the scope of employment? Yes, all 4
elements were met because the employer will be held liable for the willful act of
the servant even though he had no knowledge that the act would take place.
b. The employer doesn’t need to foresee the precise act or exact manner of injury
as long as the general type of conduct may have been reasonable expected.
i. An employer is usually responsible if the employee loses his temper and
willfully injures a patron because that’s foreseeable when an employee
is a bartender. (intentional conduct  doesn’t require negligence)
iv. When an employee is actuated by personal motives, the employer is relived from liability
because the employee is no longer serving the master. When an employee uses force that is
excessively violent and not expected by the employer, then they also are not acting within the
scope of employment.
C. The Independent Contractor Rule
Servants (Employees) v. Independent Contractors
i. Servants v. Independent Contractors
1. A Servant is an agent who serves
a. Whoever, there are agents who are NOT servants
2. An Independent contractor is a service provider who is not an agent
ii. Independent Contractor Defined
1. “An independent contractor is a person who contracts with another to do something for
him but who is not controlled by the other nor subject to the other’s right to control
with respect to his physical conduct in the performance of the undertaking. He may or
may not be an agent.” Restatement (Second) §2(3)
iii. Elements to determine whether one is an Employee or Independent Contractor
1. In determining whether one acting for another is a servant or an independent
contractor, the following matters of fact, among others, are considered:
a. The extent of control which, by agreement, the master may exercise over the
details of the work;
i. Most important element  they’re an employee if they are subject to
control as to the means used to achieve the results and they’re an IC if
they are subject to the control or direction of another as to their results
only
b. Whether or not the one employed is engaged in a distinct occupation or
business;
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;
i. Less supervision, less likely there’s control and they’re an IC
d. The skill required in the particular occupation;
i. More skill required, less likely there’s control and they’re an IC
e. Whether the employer of the workman supplies the instrumentalities, tools and
the place of work for the person doing the work;
i. If employer doesn’t provide tools, then no control and they’re an IC
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f.
The length of time for which the person is employed;
i. Shorter period, less likely there’s control and they’re an IC
g. The method of payment, whether by the time or by the job;
i. ICs are normally paid “per job” rather than “by time”
h. Whether or not the work is a part of the regular business of the employer;
i. Whether or not the parties believe they are creating the relationship of master
and servant; and
i. The intent of the parties is important in determining their status
j. Whether the principal is or is not in business
Restatement (Second) §220
iv. Kane Furniture Corporation
1. Kane Furniture sells furniture and carpeting and uses Perrone for carpet installation.
Perrone hires independent carte installers, including Kraus to compete jobs that he
cannot perform. After installing a job for Kane at Perrone’s instructions, Kraus went to a
bar and drank and on his way to Kane to drop off his passenger he hit a car and killed
the passenger.
2. Issue: Was Perrone Kane’s employee and was Kraus Peronne’s sub-employee?
a. Both were determined to be ICs because Kane was not in control of how results
were achieved, and Kane did not exercise any control over them
Non-Delegable Duties  Exception to the Independent Contractor Rule
v. Non-Delegable Duty
1. A person is vicariously liable for the conduct of an independent contractor when the
person has a non-delegable duty  The duty can be imposed by statute, virtue of the
relationship, etc.
a. i.e. Duty of a landlord to keep the premises in a safe condition and even if a 3rd
party takes care of maintaining the property, the landlord is still liable
2. A nondelegable duty is a duty imposed by law that a person cannot escape by
delegating performance to an independent contractor
3. Generally, a duty will be deemed nondelegable when “the responsibility is so important
to the community that [a person] should not be permitted to transfer it to another.”
vi. Kleeman v. Rheingold
1. A law firm used an independent process service agency to serve process for a medical
malpractice case a few days before the statute of limitations expired. The service agency
delivered the papers on time, but gave them to the Doctor’s secretary, not the Doctor
himself, thus the statute of limitations expired, and the plaintiff had no recourse.
2. Issue: is the law firm responsible for their agent’s negligence under vicarious liability?
a. The court found that serving process to someone is a nondelegable duty and the
law firm was vicariously liable for their agent’s mistake.
b. “An attorney may be held liable to the client for negligent service of process,
even though the task may have been “farmed out” to an IC., pg. 250
i. Plaintiff still must show that the 3rd party acted negligently and that she
would have prevailed in the action had negligence not occurred
Apparent Authority/Estoppel “Ostensible Agency”  Exception to the Independent Contractor Rule
vii. Elements of Ostensible Agency
1. The principal represents by conduct of otherwise, that a person is an employee
(servant),
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2. That representation causes a 3rd party to reasonably believe that the person is an
employee, and
3. The 3rd party justifiably relied on the appearance of agency
Restatement (Second) §267
viii. Baptist Memorial Hosp. System v. Sampson
1. Plaintiff was bit by a brown recluse spider and was admitted to the emergency room
twice at BMHS, both times she was misdiagnosed. She finally went to a new hospital
that diagnosed her correctly, so she sued BMHS and the two doctors for medical
malpractice.
2. Issue: Is BMHS vicariously liable for the negligence of Dr. Zakula?
a. A hospital is not normally vicariously liable for the negligence of an IC physician,
unless the elements of Ostensible Agency are established. In Texas, ostensible
agency is based on the notion of estoppel, a representation by the principal
causing justifiable reliance and resulting harm.
b. There were signs in the ER saying the Doctors were ICs and the plaintiff signed a
waiver and plaintiff failed to raise a fact issue on at least one element of
ostensible agency, thus BMHS wasn’t found to be vicariously liable
Part II: Unincorporated Business Organizations
X.
(General) Partnerships
A. Introduction
i. General Partnership Statutes
1. Uniform Partnership Act (UPA) – 1914
a. All states (except LA) adopted it
b. Texas adopted it around 1960
2. Revised Uniform Partnership Act (RUPA) – 1997
a. About 39-12 on adoptions (states + DC)
3. Texas Revised Partnership Act (TRPA)  Now TBOC
a. Technically “not” uniform: passed in 1996, Note ULC claims it
b. Relied on a working draft of RUPA, but it includes some MAJOR non-uniform
provisions
4. Caveat: Uniform Bar Exam uses current uniform statutes
ii. Swiezynski v. Civiello
1. Employee of a partnership owned grocery store was injured and took out a worker’s
comp insurance claim for her injuries. The employee then filed an action against each
partner individually for breach of a duty of care.
2. Issue: Is an individual partner an employer and entitled to immunity from employee
lawsuits?
a. Under the Worker’s Comp Law, an employer is defined as “a person,
partnership, association, corporation, or legal representative of a person,
partnership, association or corporation, who employs one or more person.”
i. Definition of Employee  employer’s right to the employee’s labor and
his right to control the employee’s performance and the employee’s
corresponding right to compensation
ii. Under worker’s comp law, the employee receives a right to receive
insurance benefits for work-related injuries and in return, an employer
receives immunity from employee suits for those insurance benefits
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iii.
iv.
v.
vi.
vii.
b. Decided under the UPA per default rights of partners. Thus, the employers are
entitled to immunity from employee lawsuits.
Entity v. Aggregate Debate
1. Entity Argument:
a. A Partnership is a separate legal person with its own rights and own obligations,
which is distinct from those of its owners (partners)
b. Dominant RUPA, TBOC approach
2. Aggregate Argument:
a. “Partnership” has no entity or identity apart from those of partners doing
business together  “An association of two or more persons to carry on as coowners a business for profit” UPA §6
b. Dominant UPA approach
Partners Default Rights under Partnership Law  UPA
1. Unless the partnership agreement provides otherwise, partners by law have “equal
rights in the management and conduct of the partnership business.” UPA §18(e).
2. Each partner has an equal right to control the work performances of an employee and
partners are personally liable for partnership obligation including an employee’s claim
for compensation. UPA §15.
Partners Default Rights  RUPA
1. “A partnership is an entity.” RUPA §201
2. Heightens lure of conceptualistic approach, but identical partner rights and obligations
of UPA
a. Partner’s right to control, RUPA §401(f)
b. Partner’s liable for partnership obligations, RUPA §306(a)
3. Caveat re: exhaustion of remedies
TBOC and Worker’s Compensation
1. 152.056 – A partnership is an entity distinct from its partners
2. But relevant aggregate aspects:
a. Equal rights in management and conduct of business – 152.203(a)
b. Jointly and severally liable for debts/obligations of partnership – 152.304
3. Alice Leasing Corp v. Castillo – Texas Appellate Case from 2001
a. TRPA/TBOC says partnership is an entity
b. TRPA supersedes earlier aggregate-based case
c. Partnership and other partners not covered by one partner’s worker’s comp
policy
Problem 10.1
1. Costa and Head are partners, who are working with HTCC on a construction contract.
When HTCC submitted their final bill, there was an outstanding balance of more than
$39K. HTCC filed suit for breach of contract.
2. May HTCC sue Land Company in its name?
a. Aggregate approach:
i. Partnership is not an entity separate from its partners, so there’s no
legal capacity to sue or be sued
b. No, HTCC must name and sue all partners
3. Are Costa and Head liable for their partnership’s obligations?
a. Yes,
4. May HTCC sue Cost and Head without first exhausting remedies against their company?
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viii. Common name statutes:
1. Can sue persons using a common name by suing them under their common name.
2. Service of process must serve at least one, but do not have to serve all of them
3. But judgment enforceable only as to joint partnership assets and separate assets of
partners served
ix. UPA §15 liability
1. Partner is liable for partnership obligations
a. Jointly and severally liable for wrongful conduct, breaches of trust
b. Joint liability for all other partners’ debts and obligations (i.e. contracts)
2. Joint obligation intricacies at common law
a. A single obligation of ALL partner’s jointly (only)
b. Can’t enforce vs. a partner’s PERSONAL assets until you exhaust all resources
c. Obligation merges into judgment
d. Judgment better be good vs. ALL partners
x. RUPA and TBOC
1. Partners jointly and severally liable for ALL partnership obligations RUPA §306(a)
2. Partnerships can sue and be sued in its own name RUPA §307(a), TBOC 152.305
3. Can sue partnerships or partners in same or separate actions RUPA §307(b), TBOC
4. To get judgment vs. a partner, must name and serve partner as a defendant
a. RUPA §306, comment 3
b. TBOC §152.306(a) – judgment v. partner who was served
xi. American Star Energy & Minerals Corp. v. Stowers
1. Suit in early 1990s vs. partnership. There was a judgment vs. partnership in 2007 and
partnership was found to be insolvent. In 2010 there’s a suit against the general
partners.
2. Issue: Has the statute of limitations run to sue the general partners?
a. You can sue partnerships and any or all partners in the same or separate action
– TBOC 152.305, RUPA §307(b)
b. American Star argues the general partners were not parties to the partnership
contracts and are separate entities because they weren’t in privity, committed
no wrongful act, and caused no legal injury.
xii. RUPA/TBOC: Judgments and Partners
1. A judgment against a partnership is not by itself a judgment against a partner. RUPA
§307(c), TBOC 152.306(a)
a. Cannot be satisfied from a partner’s personal assets UNLESS also have judgment
vs. that partner
2. TBOC §152.306(a) – judgment can be entered vs. a partner served with process in a suit
vs. a partnership. RUPA §307, comment 3 (must be named and served)
xiii. Enforcement vs. Partners
1. A judgment creditor of a partner may not levy execution against assets of a partner
UNLESS judgment based on same claim is obtained vs. partnership and writ of execution
on the judgment is returned unsatisfied (in whole or in part) RUPA 307(d)
2. A creditor may proceed against (one or more partners OR) the property of a partner to
satisfy a judgment against the partnership ONLY IF judgment obtained against the
partners and based on same claim, judgment obtained against the partnership, has not
been reversed or vacated, and remains unsatisfied after 90 days TBOC 152.306(b)
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B. Formation of Partnerships
Generally
i. Problem 10.2
1. Restaurant owned by Austin and Dalton becomes involved in business, but basis was
unclear. Dalton says they were going to incorporate, and both would be shareholders,
but they didn’t do that. Austin thought Dalton was buying the restaurant and running it
for a “trial period.” Dalton paid $18K in expenses while managing the business.
2. Were Dalton and Austin partners?
a. Yes, there was an intent to share profits and Dalton managed the business
without supervision or intervention of Austin. Also, Dalton paid bills with her
own money.
b. However, partners cannot sue on partnership matters until a settlement and
accounting occurs.
ii. Inadvertent Partnership
1. One can be a partner without realizing it
2. Ambiguous business relationships
3. Partnership: default multi-owner business
4. No statutory filing required to form
iii. In re Keytronics
1. Issue: Was Willson a partner with King regarding the Quick Pay system?
a. Yes, there was co-ownership of the business and Willson proved a partnership
with King even though there was no clear agreement re: relationship
i. There was an intent to share (profits)
ii. Willson contributed his time and expertise and they pooled their
resources (contribution)
iii. Business cards made and their business name was their initials
(intent/association)
iv. Joint decision making re: non-tech issues (control)
v. The court inferred the elements that they were lacking (i.e. loss-sharing)
iv. Partnership at Common Law
1. A partnership is “the association of 2 or more persons to carry on as co-owners a
business for profit.” UPA §6(1)
a. Accord RUPA §101(4) – definition of partnership
2. What does “co-owner” of a business mean?
a. Generally addresses whether the parties share the benefits, risks, and
management of the enterprises such that (1) they subjectively view themselves
as members of the business rather than as outsiders contracting with it and (2)
they are in a better position that others dealing with the firm to monitor and
obtain information about the business
i. Lendor or Lessor v. Co-Owner  no right to control/participate
v. Common Law Factors of a Partnership:
1. Intent to form a partnership
2. A community of interest in the venture
3. Contribution of money, property or, often labor
4. An agreement to share profits
5. An agreement to share losses  often deemed essential**
6. A mutual right of control or management of the enterprise
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vi. Rules for Determining the Existence of a Partnership
1. UPA §7(1) rejects common law rule that can be partners as to 3rd parties without being
partners to each other
2. Conduct that odes NOT by itself establish partnership
a. §7(2) – common ownership of property
i. Even if shared profits arising from use of property
b. Accord, TBOC 152.052(b)92)
c. §7(3) – sharing of gross returns
i. Even if a common interest in property generating
ii. Accord, TBOC 152.052(b)(3)
3. §7(4) Sharing Profits – prima facie evidence as partner
vii. Formation of a Partnership under RUPA §202
1. (a) … the association of two or more persons to carry on as co-owners a business for
profit
a. Forms a partnership
b. Whether or not the persons intend to form a partnership
c. Accord, TBOC 152.051(b) – association … creates partnership regardless of
intent, labels used by the parties
i. Look at contemporaneous conduct to determine intent
2. (c) In determining whether a partnership is formed, the following rules apply:
a. (c)(1)-(3) parallel 7(2)-(4)
viii. Rules for Determining if a Partnership is Created under TBOC 152.052
1. (a) Factors indicating that persons have created a partnership
a. Profit sharing (actual or right to)
i. There only has to be an intent to share  receipt or right to receive
b. Expression of intent to be partners
c. Participation in control (actual or right to)
d. Sharing, or agreeing to share
i. Losses
ii. Liabilities for claims by 3rd parities vs. business
1. Under 152.052(c) – an agreement to share losses is not
necessary to create a partnership
e. Contributing money or property to the business (or agreeing to)  NOT services
2. (b) One of the following circumstances, by itself, does not indicate that a person is a
partner in the business:
a. (1) the receipt or right to receive a share of profits as payment [in certain
circumstances]
b. (2) co-ownership of property, regardless of
i. (A) the nature of the common or joint ownership; OR
ii. (B) whether co-ownership is combined with sharing of profits from the
property
c. (3) the right to share or sharing gross returns or revenues, regardless of whether
i. The persons … have a common or joint interest in the property
[generating] the returns or revenues
d. (4) ownership of mineral property under a joint operating agreement **MOST
IMPORTANT FOR TEXAS**
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ix. Non-Partner Profit-Sharers – UPA §7(4), RUPA §202(c)(3), TBOC 152.052(c)
1. Payment of (or to)
a. A debt
b. Wages, etc. to an employee or independent contractor
c. Rent
d. Former partner (or someone claiming under one)
e. Interest, etc. on a loan even
i. If it varies with profits
ii. Varies in form
f. Consideration for the sale of [goodwill] a business or other property
x. Joint Venture
1. Limited purpose partnership  Apply partnership principles
a. TBOC 152.051(b)(2) – a partnership regardless of whether called a joint venture
2. Perhaps Limited scope of undertaking, so limited apparent and implied authority
Limited Liability Partnerships (LLPs)
xi. Problem 10.4, Question 1
1. Law firm wants to become a limited liability partnership.
a. What? How?
i. Follow the TBOC requirements to register as an LLP
xii. Limited Liability Partnership (LLP)
1. An election that a (general) partnership can make to limit, the liability of some partners
for some obligations of the partnership
a. State filing required
2. NOT a discrete (form of) entity
a. NOT a separate statute or TBOC chapter
xiii. TBOC LLPs – Registration as an LLP
1. File application with the Secretary of State – 152.802
2. Info in 152.802(a)(1)
a. Name of partnership (LLP MUST be in name, 152.803, 5.063)
b. Federal taxpayer ID number
c. Street address of principal office in Texas
d. Number of partners (as of 1/1/16)  $200/per partner filing fee
3. Brief statement of business done [(a)(2)]
4. Signed by a majority-in-interest of the partners (or persons authorized by same)
5. Franchise Tax – Texas Taxation Code
a. TTC 171.0002(a) – taxable entity includes partnerships and LLPS
b. TTC 171.0002(b)(2) excludes a general partnership where only natural persons
have direct ownership AND liability is NOT limited, including registration as LLP
xiv. Problem 10.4, Question 2
1. Law Firm, LLP is registered as an LLP. Partner Bob signs a contract on behalf of the law
firm.
a. Is Bob personally liable?
i. Not just a partner, but acted as an agent of partnership, so Bob has
same obligations as all agents.
1. A party to and bound by contracts entered into for LLP unless
disclosed
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xv.
xvi.
xvii.
xviii.
a. Acting (only) as agent and identity of principal (full
name, including LLP)
b. Caveat – can agree to also be bound
2. Implied warranty of authority
b. Is Partner Alma personally liable on contract?
i. No, full shield protection against liability
c. Registration of LLP expired before Bob entered into contract for LLP. Is Alma
personally liable now?
i. All partners liable as partners on contract. Cannot get reinstatement,
but only new registration. Partners liable for all obligations incurred
during the interim of lapse.
Liability on partners on Contract
1. Original Texas LLP Provision, Art. 6132b §15(1)
a. Only protected against partners’ liability for certain wrongful conduct
b. Did NOT protect vs. liability for contracts
2. TBOC 152.081, RUPA §306(c) – full shield
a. Tort AND contract
b. Protects Bob and Alma from liability as partners
Lapse or Termination of LLP
1. OLD TBOC 152.802(e) and (g) – registration as LLP only effective for 1 year and you had
to renew before expiration, or lapse
2. Beginning 1/1/16 – TBOC 152.802(e) – registration as LLP effective until it is withdrawn
or terminated
a. Have perpetual statute, Accord RUPA §1001(e)
b. (g) deleted because you no longer need to apply for yearly renewal
LLP Annual Reports – Effective 1/1/16
1. TBOC 152.806(a) – no later than 6/1 of each year, each LLP has to file with the Secretary
of State an Annual Report with
a. The name of the partnership
b. Number of partners as of date of filing (pay $200/per partner filing fee)
2. (b) No later than March 31st, Secretary of State to send notice to all LLPs to file annual
report by 6/1 and warn of termination of registration as LLP, unless they file the annual
report and pay filing fee by the date specified in (c)
3. (c) If you do not file and pay fee by May 31st, then AUTOMATIC termination of
registration as an LLP
4. (d) Affects only partnership statute as an LLP and is NOT event requiring winding up and
termination of partnership under TBOC chapter 11
Reinstatement of Registration as LLP
1. TBOC 152.806(e) – Application for reinstatement of LLP statute but occur no later than
the 3rd anniversary of effective date of termination. Application for reinstatement must
state:
a. Name of the partnership and effective date of termination
b. Statement that “circumstances giving rise to the termination will be corrected”
i. By filing annual report and paying filing fee for EACH year that the
annual report was not filed
2. (f) File a tax clearance letter from Comptroller saying the partnership has met all
franchise tax obligations
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3. (g) all Annual Reports must be filed and filing fees paid
4. (h) Approved reinstatement under (e) relates back to effective date of termination AND
partnership status as LLP continues in effect AS IF TERMINATION HAD NEVER
OCCURRED
a. Caveat – “reinstatement” after 3 years DOES NOT relate back, and partners are
liable of obligations arising after termination and before reinstatement
xix. Problem 10.4, Question 3
1. Bob, a partner in Law Firm, LLP commits malpractice. Liability of Bob for malpractice?
a. Not liable as a partner, but liable as a tortfeasor for wrongful conduct
2. Liability for Alma?
a. No liability as a partner under TBOC, RUPA, BUT may be personally liable if:
i. Participated in the malpractice OR
ii. Negligent in connection with malpractice
xx. Texas Original LLP
1. Art 6132b §15(1) – Wrongful conduct shield only, but partners liability without fault
where
a. Negligent person working under partners’ “supervision or direction”
b. Partners directly involved in “specific activity”
c. Partners notice or knowledge and failed to stop or cure
2. NY 26(c) – No shield for wrongful conduct of
a. Person under partner’s direct supervision and control
b. While rendering professional services on behalf of LLP
3. Texas 152.801
a. Expanded to “full shield”
i. Torts and contracts
b. Tort cut-out and liability without fault
i. Remained through Aug. 31, 2011
ii. Gone for obligations incurred after the date
4. RUPA 306(c)
a. No liability by reason of being or acting as a partner’s full shield and NO cutouts,
but still liable for own misconduct, etc.
C. Partners as Agents
Apparent Authority
i. Problem 10.5
1. The 3 partners of Randy’s Grocery Store said they wouldn’t sell alcohol, but partner Gus
decided to order Shiner Beer one day to increase sales. Randy was on the loading dock
when the beer arrived and refused to accept the delivery.
2. Is the partnership liable to Spoetzel Brewing Co. for the contract?
a. No, it’s not the usual practice of Randy’s to purchase beer, but the Brewery had
to know that the partner did not have authority to purchase it.
ii. Partner as an Agent
1. Partners are agents of the partnership for the purpose of its business – UPC §9(1); TBOC
152.301; RUPA §301(1)
a. Agreement to be partners is a manifestation of consent
2. An act of every partner which is not apparently for the carrying on of the business of the
partnership in the usual way does not bind the partnership UNLESS authorized by the
other partners and the 3rd party knew that – UPA §9(1)(2); RUPA §301(2)
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3. Actual Authority (express or implied)
4. Power to bind by an unauthorized act  3rd party’s interpretation
a. Apparent authority
b. Estoppel to deny authority
c. Inherent agency power (??)
iii. Binding Effect of Partner’s Actions
1. Unless a partner does not have authority to act for the partnership and the 3rd party
knows the partner lacks authority, an act of the partner binds the partnership if the act
is apparently for carrying on it the ordinary course (1) of the partnership business, or (2)
business of the kind carried on by the partnership. TBOC 152.302(a); RUPA §301(1)
2. An act of a partner that is not for carrying on in the ordinary course of business
described in (a) binds the partnership only if authorized by the other partners.
152.302(b)
3. A conveyance of real property by a partner on behalf of the partnership not otherwise
binding on the partnership binds the partnership if the property has been conveyed by
the grantee or a person claiming through the grantee to a holder for value without
knowledge that the partner exceeded that partner’s authority in making the
conveyance. 152.302(c)
Negligence and Other Wrongful Conduct of Partners
iv. Problem 10.9
1. Law firm is a general partnership and the partners include Ali and Bruno.
2. Question 1 – Liability of Law Firm if
a. Ali driving to take a deposition in a pending case
i. The law firm is liable to the pedestrian
b. Ali negligently runs down pedestrian
i. The law firm is liable under Respondeat superior for the wrongful acts of
servants done in the scope of employment.
ii. As a partner, Ali is an agent of the Law firm, but all agents are not
servants
iii. Not clear that partners are servants of the partnership
1. Especially under the aggregate view
2. Right to participate in management and conduct of partnership
business
c. Question 2 – Instead, Ali injures Bruno (another partner)
i. The law firm is still liable, even to a partner
d. Question 3 – A prospective client of the Law Firm goes mountain climbing with
Ali in Nepal. While climbing, Ali doesn’t secure the rope and prospective client is
injured. Is the law firm liable?
i. Even though firms ordinarily practice client solicitation, going all the
way to Nepal is probably too far outside the OCB
ii. However, there could be liability per TBOC 152.303(a)(2) if traveling to
Nepal was done with the authority of all the partners and approved by
all partners even if the act was outside the OCB
e. Question 4 – Ali deposits a settlement check into the client’s trust account.
Bruno withdraws the money without authority and absconds with it.
i. Theft is OCB and no approved by the partners or partnership, but under
152.303(b) and UPA §14 the law firm is liable for the stolen funds.
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v.
vi.
vii.
viii.
ix.
Money was in the OCB and received because of the business carried on
by the partnership.
f. Question 5 – Ali is drafting a will for a Widow, who asks for a recommendation
for a suitable investment. Ali tells her to give Bruno the money and Bruno
absconds with the funds. Is the law firm liable?
i. The law firm is not in the business of investing client funds. Ali has no
actual or apparent authority to tell the Widow to give Bruno the money
but have to look at what the Widow reasonably believed.
1. Do you base her reasonable belief on the nature of the Law
Firm’s business or look at the entire factual context? Look at
entire factual context.
Liability of Partnership for Conduct of a Partner
1. A partnership is liable for loss or injury to a person, including a partner, for a penalty
caused by or incurred as a result of a wrongful act or omission or conduct of a partner
acting (1) in the ordinary course of business of the partnership OR (2) with actual
authority of the partnership. TBOC 152.303(a); UPA §13; RUPA §305
2. A partnership is liable for the loss of money or property of a person who is not a partner
that is (1) received in the course of the partnership’s business and (2) misapplied by a
partner while in the custody of the partnership. TBOC 152.303(b)
Measure for “Ordinary Course of Business”
1. TBOC 152.303(a) and its UPA/RUPA counterparts, use “ordinary course of business of
the partnership”
a. Act is outside the way that the partnership has been doing business
b. But is it within the ordinary course of business of the kind carried on by the
partnership?
2. OCB is standard you should follow
Doctors Hospital at Renaissance v. Andrade
1. Doctors Hospital owns and operates Women’s Hospital. Dr. Lozano, who’s a limited
partner of the hospital, committed malpractice during delivery at the Hospital.
2. What liability does Doctors Hospital have?
a. Hospital is a (limited) partnership and Lozano is a (limited) partner. Caveat –
parties stipulated that 152.303 applied. Thus, liability applies to limited
partnership and limited partners, but NOT to the extent inconsistent with
“nature and role” of a Ltd partner under Chapter 153.
i. General partners are agents and have rights to management and control
ii. Ltd partners are possibly liable as a general partner if they participate in
the control
Hospitals and Doctors
1. Only persons (doctors) can be licensed to practice medicine
2. Hospitals are licensed to provide health care services but CANNOT practice medicine.
a. They provide a platform and support services for doctors.
3. Hospitals generally are NOT liable for malpractice by doctors when using hospital’s
facilities.
Doctors and Partnerships
1. TBOC 152.055 permits doctors to form partnerships to provide professional services
2. The practice of medicine is outside the ordinary course of business for a hospital,
because they operate health care facilities NOT provide medical services
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3. Unless a hospital exercised such control over doctors as to be illegally engaged int eh
corporate practice of business
D. Partners as Managers
Generally
i. Problem 10.10
1. Matt, Paul and Emily are partners in MEP grocers. Matt and Paul both go out and
contract with different bread companies without discussing it with each other.
2. Question 1 – Is the partnership subject to liability?
a. MEP is liable if the act is within the partnership business or the kind of the
business carried on by the partnership and 3rd party didn’t know they lacked
authority – UPA §9(1); RUPA §401(f); TBOC 152.302(a)
b. Are Matt or Paul liable to MEP grocers (or to Emily?)
i. Binding fiduciary duty or duty to act within authority? They have equal
rights in management and conduct, so yes.
3. Question 2 – Emily agrees with Paul and Matt contracts the other way anyway regarding
the bread company. Is MEP liable to 3rd party?
a. Matt had no actual authority, but possibly apparent authority.
b. Did Matt breach a duty? Yes, he knowingly acted without authority – breach of
duty of obedience.
ii. Nabisco v. Stroud
1. Nabisco supplier to a grocery store. One partner told Nabisco “I won’t be liable” and
Nabisco sold the bread anyway.
2. Is the partner liable as a partner?
a. 2 partners – 1 is not a majority and authority not taken away. They should have
dissolved the partnership.
iii. Rules Determining Rights and Duties of Partners
1. All partners have equal rights in the management and conduct of the partnership
business – UPA 18(e)
2. VOTING: Any difference arising as to ordinary matters connected with the partnership
business may be decided by a majority of the partners – UPA §18(h); RUPA §401(j)
a. If the matter is outside the OCB, then 100% of partners must agree
b. In Texas, decisions are made by “Majority-in-interest” – TBOC 152.209(a)
i. Majority-in-Interest means by share of profits – TBOC 151.001(4)
ii. Profits are equal UNLESS agreed to otherwise – TBOC 152.202(c)
Transactions Out of the Usual and Regular Course of Business
iv. Resolving Differences among Partners
1. Differences arising in a matter in ordinary course of partnership business may be
resolved by a majority-in-interest of partners – TBOC 152.209(a); RUPA S401(j)
2. An act outside the ordinary course of business of the partnership may only be
undertaken with the consent of ALL partners – TBOC 152.209(b); RUPA §401(j)
v. Acts requiring Consent of all Partners
1. Unless authorized by the other partners or unless they have abandoned the business,
one or more but less than all the partners have no authority to:
a. Assign the partnership property in trust for creditors or on the assignee’s
promise to pay the debts of the partnership,
b. Dispose of the good-will of the business
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c. Do any other act, which would make it impossible to carry on the ordinary
business of a partnership,
d. Confess a judgment,
e. Submit a partnership claim or liability to arbitration or reference
UPA §9(3)
vi. Vinson v. Marton
1. Multiple partner partnership that buys, sells and exchanges real estate. Their sole asset
is a 283-acre parcel of land. two of the partners signed a K to sell the parcel to Vinson. A
majority of the partners approved the sale and the dissenters tried to block it.
2. Vinson sues for specific performance. Will it be granted?
a. Sale of Real Estate is generally, outside the OCB, especially when it’s a sole asset
of partnership, but if the partnership business is in buying and selling land, the
it’s in the OCB
i. Only majority agreement required under 18(h); majority-in-interest
under TBOC
b. Agreement in Vinson provided that all business of partnership to be carried on
by majority vote. Caveat  cases often hold general voting clauses do not apply
to extraordinary matters requiring a unanimous vote.
c. Given the nature of partnership business, an agreement would have controlled
in any event.
i. Partnership’s owing land incidentally  cases often limit general voting
provisions to ordinary matters
E. Withdrawal, Winding Up and Termination of a Partnership
Withdrawal
i. Problem 1 – Events of withdrawal and their effect
1. Javier, Edward, and Lakesha form a partnership which is “at will.” After a disagreement,
Javier types up and signs a letter withdrawing from the partnership, which he then
hands to Edward and Lakesha.
a. What is Javier’s status with respect to eh partnership after he delivers his letter
to Edward and Lakesha?
i. Upon receipt of the letter, Javier ceases to be a partner per TBOC
§152.501
b. Does the partnership enter a period of winding up as a result of Javier’s actions?
i. No, the partnership continues per §152.502
c. How, would your answers to (a) and (b) change if the partnership agreement
says the partnership will last for 3 year and Javier delivers his letter to Edward
and Lakesha after only one year?
i. He has the ability to withdraw, but his withdraw is wrongful because he
does not meet the 3-year duration of the partnership
d. Assume Javier dies before notifying Edward and Lakesha of his resignation.
What is his status of the partnership upon his death?
ii. Events of Withdrawal of a Partner – TBOC §152.501
1. (a) A partner ceases to be a partner on the occurrence of an event of withdrawal
2. (b) An even of withdrawal of a partner occurs on:
a. (1) receipt by the partnership of notice of the partner’s express will to withdraw
as a partner on:
i. (A) the date on which the notice is received; or
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iii.
iv.
v.
vi.
vii.
viii.
ii. (b) a later date specified by the notice
b. (7) If a partner is an individual:
i. (A) the partner’s death
Effects of Event of Withdrawal on a Partnership – TBOC §152.502
1. A partnership continues after an event of withdrawal
2. The event of withdrawal affects the relationships among the withdrawn partner, the
partnership, and the continuing partners as provided by Sections 152.503-152.506 and
Subchapter H
Wrongful Withdrawal – Liability – TBOC §152.503
1. (a) At any time before the occurrence of an event requiring a winding up of partnership
business, a partner may withdraw from the partnership and cease to be a partner as
provided by §152.501
2. (b) A partner’s withdrawal is wrongful only if:
a. (1) the withdrawal breaches an express provision of the partnership agreement;
b. (2) in the case of a partnership that has a period of duration, is for a particular
undertaking, or is required under its partnership agreement to wind up the
partnership on occurrence of a specified event, before the expiration of the
period of duration, the completion of the undertaking, or the occurrence of the
event, as appropriate:
i. A) the partner withdraws by express will …
Event of Withdrawal  REDBREW
1. Request by a partner that a partnership at will be wound up if the other partners
decline the request and continue the partnership
2. Event specified in the partnership agreement as an event of withdrawal
3. Death or termination of a partner
4. Bankruptcy of a partner
5. Redemption of a partnership interest following its transfer
6. Expulsion of a partner by a court or by the other parties, or
7. Written notice of a partner’s desire to withdraw
Problem 2 – Redemption of Partnership Agreement
1. Return to parts (A) and (B) of Question 1.
a. What is Javier entitled to receive from the partnership?
i. The partnership is obligated to redeem Javier’s interest based on the
FMV of the interest on the date of withdrawal
2. Return to part (c) of Question 1.
a. What is Javier entitled to receive from the partnership?
i.
Redemption if Partnership Not Wound Up – TBOC §152.601
1. The partnership interest of withdrawn partner automatically is redeemed by the
partnership as of the date of withdrawal in accordance with this subchapter if:
a. (1) the event of withdrawal occurs under §152.501(b)(1)-(9) and an event
requiring a winding up of partnership business does not occur before the 61st
day after the date of the withdrawal
Redemption Price – TBOC §152.602
1. (a) Except as provided by Subsection (b), the redemption price of a withdrawn partner’s
partnership interest is the FMV of the interest on the date of withdrawal…
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2. (b) The redemption price of the partnership interest of a partner who wrongfully
withdraws before the expiration of the partnership’s period of duration, the completion
of a particular undertaking, or the occurrence of a specified event requiring a winding
up of partnership business is the lesser of:
a. (1) the fair value of the withdrawn partner’s partnership interest on the date of
withdrawal; or
b. The amount that the withdrawn partner would have received if an event
requiring a winding up of partnership business had occurred at the time of the
partner’s withdrawal
i. AKA liquidation value  generally refers to the amount of business
assets that can quickly be sold (usually less than FMV); partner is subject
to a penalty for wrongful withdrawal
3. (c) Interest is payable on the amount owed under this section, see also TBOC 152.605
ix. Problem 3
1. In Question 1, Javier withdrew from the partnership and assume the partnership
redeemed his interest by paying FMV for it. 6 months later, Javier enters the same office
supply company where he routinely ordered things and purchases a case of paper. He
tells the office supply company to charge it to the partnership’s account.
a. Is the partnership bound to this purchase? Is Javier subject to liability to the
partnership?
i. Yes, the partnership is bound because the purchase occurred less than a
year from when Javier withdrew; he had implied authority and apparent
authority to bind the partnership because buying paper is something
Javier normally would do for the partnership. Yes, Javier is liable for any
damage that he created to the partnership, which would be the cost of
the paper per TBOC §152.504.
x. Withdrawn Partner’s Power to Bind Partnership – TBOC §152.504
1. (a) The action of a withdrawn partner occurring not later than the first anniversary of
the date of the person’s withdrawal binds the partnership if the transaction would bind
the partnership before the person’s withdrawal and the other party to the transaction:
a. (1) Does not have notice of the person’s withdrawal as a partner;
b. (2) Had done business with the partnership within one year preceding the date
of withdrawal; and
c. (3) Reasonably believed that the withdrawn partner was a partner at the time of
the transaction
2. (b) A withdrawn partner is liable to the partnership for loss caused to the partnership
arising from an obligation incurred by the withdrawn partner after the withdrawal date
and for which the partnership is liable under Subsection (a)
Winding Up and Termination of a Partnership
xi. The process of Winding Up and Termination of a Partnership
1. When certain events occur, a partnership is required to begin “winding up.” Winding up
is the period during which the partnership prepares for the termination of the
partnership. Once the winding up is complete, the partnership terminates. SEE TBOC
§152.701.
a. During the period of winding up, the partnership finishes work in progress and
settles accounts with third parties. The partners also settle accounts among
themselves.
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2. Once a partnership has entered the period of winding up, the partnership’s business
continues, but only for the limited purpose of winding up partnership affairs. The
partnership cannot begin engaging in new business activities. The person winding up the
partnership can properly take only actions that are appropriate for winding up, such as:
a. (1) prosecuting or defending legal actions on behalf of the partnership;
b. (2) selling off assets of the partnership to reduce them to cash;
c. (3) paying partnership creditors; SEE TBOC §512.703, 11.052, 11.053(a), 11.055
3. Once the winding up is complete, the partnership terminates. The partnership does not
have to file anything with the State of Texas in order to terminate (because nothing was
filed to created it). The partnership need not notify third parties of its termination,
unless notification is required by the partnership agreement or any agreements the
partnership has with 3rd parties. See TBOC §11.103
xii. Problem 1
1. Javier, Edward and Lakesha form an at will partnership. After a contentious meeting,
Javier types a letter resigning and gives it to Edward and Lakesha. After Javier delivers
his letter, an event occurs that requires winding up of the partnership.
a. In general, who is authorized to wind up the partnership?
i. The partners who haven’t withdrawn, the legal rep of the last surviving
partnership, or a person appointed by the court can carry out the
winding up per TBOC §152.702.
b. In this problem can Javier wind up the partnership?
i. No because he has already withdrawn, but Edward and Lakesha can.
xiii. Persons Eligible to Wind Up Partnership Business – TBOC §152.702
1. (a) After the occurrence of an event requiring a winding up of a partnership business,
the partnership business may be wound up by:
a. (1) the partners who have not withdrawn
b. (2) the legal representative of the last surviving partner, or
c. (3) a person appointed by the court to carry out the winding up under
Subsection (b)
2. (b) On application of a partner, a partner’s legal representative or transferee, or a
withdrawn partner whose interest is not redeemed under Section 152.608
xiv. Problem 2
1. On behalf of the partnership is Question 1, Lakesha places an order for several dozen
boxes so the firm’s client files can be transported and stored. Edward also enters into a
5-year lease of a new photocopier and the lease has significant penalties for early
termination.
a. Is the partnership bound to pay for the boxes and to the lease of the
photocopier?
i. Lakesha’s purchase of the boxes is appropriate for winding up, so the
firm is obligated to pay for them. Edward’s 5-year lease is not
appropriate for winding up, but he had implied actual authority or
apparent authority to lease a copier, so it would bind the partnership as
long as the other party didn’t know that an event requiring winding up
had occurred.
b. Are Lakesha and Edward subject to liability?
i. Lakesha is not subject to liability, but Edward is under TBOC §152.705
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xv. Binding Effect of Partner’s Action after event requiring Winding Up – TBOC §152.704
1. After the occurrence of an event requiring winding up of the partnership business, a
partnership is bound by a partner’s act that:
a. (1) Is appropriate for winding up; or
b. (2) would bind the partnership under Sections 152.301 and 152.302 before the
occurrence of the event requiring winding up, if the other party to the
transaction does not have notice that an event requiring winding up has
occurred
xvi. Partner’s Liability to the Partners after event requiring Winding Up – TBOC §152.705
1. (b) A partner who incurs, with notice that an event requiring a winding up of the
partnership business has occurred, a partnership liability under Section 152.704(2) by an
act that is not appropriate for winding up is liable to the partnership for a loss caused to
the partnership arising from that liability.
xvii. Problem 3 – Events Requiring Winding Up
1. When Javier writes his resignation letter, he demands the partnership be wound up. He
then gives Edward and Lakesha that letter and the 3 of them meet the following week.
At the meeting, Javier votes in favor of the partnership being wound up and the other
two voted to continue the partnership.
a. Does the partnership enter a period of winding up as a result of Javier’s letter?
i. No, because there was no majority-in-interest in the decision to begin
winding up and the majority-in-interest want to continue the
partnership per TBOC §11.057(a) and (d)
b. What is Javier’s status with respect to the partnership after the vote at the
partnership meeting?
i. He is no longer a partner because he has requested to withdraw. The
partnership will continue with Edward and Lakesha who can redeem
Javier’s interests.
xviii. Provisions for Domestic General Partnership – TBOC §11.057
1. (a) Unless otherwise provided by the partnership agreement, a voluntary decision to
wind up a domestic general partnership, other than a partnership [for a specific
duration] described in Subsection (b) requires the express will of a majority-in-interest
of the partners who have not assigned their interests…
2. (b) Unless otherwise provided by the partnership agreement, a voluntary decision to
wind up a domestic general partnership that has a period of duration or is for ap
articular undertaking, or in which the partnership agreement provides for the wind up
of the partnership on occurrence of a specified event, requires the express will of ALL of
the partners
3. (c) An event requiring the winding up of a domestic general under Section 11.051(4)
includes the following:
a. (3) the sale of all or substantially all of the property of the general partnership
outside the ordinary course of business, unless otherwise provided by the
partnership agreement
4. (d) Unless otherwise provided by the partnership agreement, if a domestic general
partnership does not have a period of duration, is not for a particular undertaking, and
is not required under its partnership agreement to wind up the partnership on
occurrence of a specified event, an event requiring winding up of the partnership under
Subsection 11.051(a) occurs on the 60th day after the date on which the partnership
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receives notice of a request for winding up the partnership from a partner, other than a
partner who has agreed not to withdraw, or a later date as specified by the request,
unless a majority-in-interest of the partners deny the request for winding up or agree to
continue the partnership.
xix. Problem 4
1. When Edward, Lakesha, and Javier enter a partnership, they agree it will last for 3 years.
a. When will the partnership enter a period of winding up?
i. It will enter a period of winding up when the 3-year period is up per
TBOC §11.051(1)
b. Would the period of winding up change if the partners meet in the middle of
year 2 and Edward and Lakesha vote to wind up the partnership, but Javier
votes against it?
i. No because all 3 partners must agree to the voluntary winding up and
Javier hasn’t per TBOC §11.057(b)
xx. Event Requiring Winding Up of Domestic Entity – TBOC §11.051
1. Winding up of a domestic entity is required on:
a. (1) the expiration of any period of duration specified in the domestic entity’s
governing documents
xxi. Problem 5
1. Two years after Edward, Javier, and Lakesha form their partnership, they unanimously
vote to sell the building where their offices are located and all the partnership’s
furniture, fixtures, and equipment. The sale later takes place and assume that the
partnership agreement has no provision addressing the effect of this sale.
a. What effect does this sale have on the partnership?
i. The sale binds the partnership per TBOC §11.057(c)(3)
b. Does the answer depend on whether the partnership is “at will” or instead for a
specific term?
i. No, it doesn’t matter what kind of partnership it is as this applies to ALL
partnerships
Distributions on Liquidation
xxii. To understand UPA and RUPA it’s useful to consider two common financial statements that
businesses prepare
1. The Balance Sheet
a. It presents a business’s financial position at a single point in time.
b. The fundamental accounting equation
i. The balance sheet is an express of the fundamental account equation:
Assets = Liabilities + Equity
c. Traditionally, a business’ balance sheet was presented in two side-by-side
columns, with assets on the left side and liabilities and equities on the right said
i. Because assets always must equal the sum of liabilities and equity, the
two columns always balance
d. In a partnership, the equity portion of the balance sheet commonly is referred
to as the partners’ “capital accounts.” Each partner has a capital account, and
the sum of these capital accounts is the total equity of the partnership. See
RUPA §401(a)
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2. The Income Statement (AKA Profit and Loss Statement)
a. The income statement reflects how the business did over a period of time, i.e.
whether the business made a profit or incurred a loss
b. The two basic items on the Income Statement are “revenue” (income) and
“expenses”
c. The income statement’s equation
i. Revenue – Expenses = Net Income
1. If revenue exceeds expenses, then net income will be positive,
and you’ve earned a profit.
2. If expenses exceed revenues, then net income is negative, and
you’re incurred a loss
3. Linking the Income Statement and Balance Sheet
a. If a partnership ears a profit or incurs a loss, the profit or loss will affect the
partners’ capital accounts
i. A profit increases the partners’ capital accounts and conversely a loss
decreases the partners’ capital accounts. The amount of the increase or
decrease depends on the share of the profit or loss to which each
partner is entitled. Each partner’s share is determined either by
agreement of the partners or by the default rules of the UPA or RUPA.
xxiii. Parker v. Northern Mixing Co
1. Ike, Douglas, and CJ create Northern Mixing Co to provide asphalt to CJ’s business. The
parties disagreed on aspects of the arrangement and after a few months they ended the
arrangement. The court concluded that they formed a partnership, but that CJ was a
creditor and not a partner. Douglas and CJ brought this action for an accounting.
2. The parties contributed:
a. Douglas - $7.5K (value of services)
b. Ike - $134.477K (services, equipment and expenditures)
c. CJ - $89K (loan to partnership)
3. Total assets = $230K; Liabilities = $89K; Capital Accounts - $134.484.5K
a. Authority for Capital Accounts found in RUPA §401(a) and TBOC §152.202
4. They incurred a loss of $48K
a. Under UPA §18(a) if the partners do not agree otherwise, they share losses in
the same proportion than they share profits. See also RUPA §401(b) and TBOC
152.202(c)
5. Under UPA §40 creditors other than partners get paid first. Amounts owed to partners
other than for capital and profits are paid next. Amounts owed to partners in respect of
capital are paid next (i.e. they’re entitled to get back their capital contributions). Any
remaining amounts – profits – are then distributed to the partners.
a. Thus, CJ, the creditor, gets paid first. Followed by Ike. Both Douglas and Ike have
born an equal share of the losses ($24K each).
xxiv. Note on Service Partnerships, pg. 378
1. Unless the partners agree to the contrary, when one partner contributes cash [or
presumably property] and the other contributes only services, the service partner does
not have to contribute at the point of liquidation to allow the other partner to recover
his capital
2. This is inconsistent with UPA §40(d) which says that “partners shall contribute, as
provided in section 18(a) the amount necessary to satisfy the liabilities.”
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a. Liabilities include amounts owing to partners in respect of capital
XI.
Limited Partnerships
A. Introduction
i. Definition of a Limited Partnership
1. “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.” RULPA §101(7)
2. “In any case not provided for in this Act, the provisions of the [UPA or RUPA] govern.”
RULPA §1105
3. Per McGovern, a Limited Partnership is NOT the same as a Limited Liability Partnership.
The latter is the same as a General Partnership, thus everyone is just a partner. In a
Limited Partnership you have General Partners and Limited Partners.
ii. Roles of General and Limited Partners in a Limited Partnership
1. General Partners – have the rights and powers of a partner in a general partnership, and
also have the liabilities of a partner in a general partnership. RULPA §403
2. Limited Partners – are passive investors who have only whatever voting rights are
granted by the limited partnership agreement. RULPA §302
a. Limited Partners generally do NOT have personal liability for partnership
obligations. RULPA §303(a)
B. Formation of Limited Partnerships
Generally
i. Creating a Limited Partnership
1. File a document with the appropriate state office.
a. Most common name: “certificate of limited partnership.” RULPA §201(a)
b. Texas name: “certificate of formation.” TBOC §1.002(6), 3.0019a), 3.011(a)
c. Must be signed by ALL general partners. RULPA §204, TBOC §3.004(b)(1),
153.553(a)(1)
2. Information required in the certificate is very basic. SEE RULPA §201(a), TBOC §3.005,
§3.011(c)
3. Limited partnership is formed at the time the certificate is filed (or on a later date
specified in the certificate). RULPA §201(b), TBOC §2.001(c), 4.051, 4.052
a. Note: RULPA provides limited partnership is formed upon filing if “there has
been substantial compliance with the requirements of §201.” RULPA §201(b)
ii. Limited Partnership Agreement
1. RULPA and Texas do not require a written agreement, but limited partnerships normally
have a written limited partnership agreement.
2. The limited partnership agreement is not filed with the state
3. The typical limited partnership agreement is very detailed, and spells out the rights and
obligations of the partners, such as:
a. Each partner’s share of profits and losses
b. How much capital each partner is required to contribute to the partnership
c. Voting rights of partners
iii. Limited Partnership Name
1. 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)
2. 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)
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a. A limited partner who knowingly permits his name to be sued contrary to this
rule is personally liable to creditors who extend credit to the limited partnership
without actual knowledge that the partner is not a general partner. RULPA
§303(d)
b. In Texas the TRLPA contained this prohibition; the TBOC does not.
3. Reservation v. Registration of limited partnership name
a. Reservation of a name  short term protection. 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)
Defective Formation of Limited Partnerships
iv. Problem 11.1
1. Alan and Betty extended credit to Widgets, Ltd who is now insolvent, and Alan and Betty
want to hold Investor personally liable. Investor invested money and signed a Certificate
and Agreement of Limited Partnership, but Investor took no action to have a certificate
of Limited Partnership filed and did not withdraw from equity participation in Widgets
Ltd. Investor received distributions, some that occurred after Investor learned that no
limited partnership had been formed.
a. Is Investor liable to either Alan or Betty?
i. Yes, because Investor is not entitled to protection under ULPA §11 
although Investor had the erroneous belief that he was entering into a
limited partnership when he contributed, he did not promptly renounce
his interest/future profits after discovering that a general partnership
and not limited partnership had been formed.
ii. Yes, because Investor is not entitled to protection under RULPA §304 
Investor made a contribution in good faith (objective standard) that he
was becoming a limited partner, but upon discovering the mistake,
Investor did not either 1) file an appropriate certificate to amend the
partnership with the help of the general partners or 2) withdraw from
future equity participation.
1. If Investor had taken one of the 2 corrective steps above, per
§304(b) he would still be liable if Alan and Betty believed in
good faith, he was a general partner at the time of the
transaction BUT Alan and Betty didn’t know of Investors
involvement, so he would have complete protection if he had
taken corrective action even though it was after the transaction.
iii. Yes, because Investor is not entitled to protection under TBOC
§153.106, 153.107, 153.108  Investor made contribution in good
faith, but did not promptly either 1) file an appropriate certificate to
amend the partnership, 2) withdraw from future profits, or 3) file a
written statement with the secretary of the state.
v. Person Erroneously Believing Himself a Limited Partner – RULPA §304
1. (a) A person who contributes to a business is not liable as a general partner if the
person:
a. Erroneously believes in good faith they are becoming a limited partner, and
b. They take correction action:
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i. (1) cause a certificate of limited partnership to be filed, OR
ii. (2) withdraw from future equity participation
2. (b) Even if 304(a) is met, the contributor remains liable to those who transacted
business with the enterprise before the corrective action was taken if those 3rd parties
actually believed in good faith that the contributor was a general partner.
Limited Liability Limited Partnerships (LLLPs)
vi. Limited Liability Limited Partnerships
1. Texas permits a limited partnership to register as a limited liability partnership. TBOC
§152.805, 153.351
2. TBOC §153.351 – To become a limited liability partnership, a limited partnership must:
a. Have authority to register as an LLP, either int is partnership agreement or with
the consent of partners required to amend its partnership agreement;
b. Comply with Subchapter J, Chapter 152, i.e. file the application to become an
LLP; AND
c. Comply with Chapter 5, i.e. have the correct form of name
i. TBOC §5.055 – Name must BOTH (1) contain the word “limited,” the
phrase “limited partnership” or an abbreviation of these, AND 2)
contain the phrase “limited liability partnership” or an abbreviation of
that phrase.
ii. Having the phrase “limited liability limited partnership” or an
abbreviation of it in the name is sufficient
3. Difference between an LLP and LLLP  An LLP is a general partnership that is registered
as an LLP. An LLLP is a limited partnership that is then registered as an LLLP thus the
general partners benefit because their personal liability is cut off like the limited
partners.
C. Management Structure of Limited Partnerships
Generally
i. Rights of General Partners in a Limited Partnership
1. “A general partner in a limited partnership has all of the rights and liabilities of a partner
in a general partnership. But the general partner needs the unanimous consent of the
limited partners to take certain action.” ULPA §9(1)
2. Same as ULPA §9(1), but without a list of items for which the general partner needs the
consent of limited partners. RULPA §403
ii. Limited Partners in a Limited Partnership
1. Limited partners are passive investors, i.e. in their capacity as limited partners, they
have no right to participate in management.
2. Limited partners may have the right to approve (i.e. vote on) certain actions taken by
the general partner
iii. RULPA Rules on Limited Partner Voting
1. Partnership agreement general can permit LPs to vote on any matter and may provide
voting on per capita or some other basis. RULPA §302
2. Matters that general partner must submit to vote of limited partners:
a. Admission of a general partner (only if partnership agreement does not address
it) RULPA §401
b. Admission of additional LP (only if partnership agreement does not address it)
RULPA §301(b)(1)
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c. Continuation of business after withdrawal of a GP (only if partnership
agreement does not address it) RULPA §801(4)
Effect of Limited Partner Participating in Control
iv. Gast v. Petsinger
1. Gast argues that the LPs are personally liable for general partner obligations, specifically
for his claim for back pay and expenses because they were participating in control of the
business like a general partner.
a. “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.” ULPA §7
b. Limited Partners need decision making authority that CANNOT be checked by
the General Partner in order to be held personally liable
v. Problem 11.2
1. Are Arisha, Bashi, and Chen personally liable on the contract:
a. Under agency law principles?
i. No, they are no personally liable because an agent of a disclosed
principal is not a party to the contract and the disclosed principal is ABC
Management, per the signed contract.
b. Under RULPA §303? Under ULPA (Re-RULPA) §303.
i. Arisha, Bashi, and Chen are participating in control of the business but
because they are serving as operators and directors of ABC
Management, per RULPA §303(b)(1) they are not personally liable.
ii. They are not liable per RE-REULPA §303 because it doesn’t matter if
they are participating in control, as a LP is not personally liable.
vi. Liability to Third Parties – RULPA §303
1. (a) 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 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, he is
liable only to persons who transact business with the limited partnership reasonable
believing, based upon the limited partner’s conduct, that the limited partner is a general
partner.
2. (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.
vii. Texas Law
1. Texas had adopted RULPA §303
a. TBOC §153.102 (counterpart to RULPA 303(a))
b. TBOC §153.103 (counterpart to RULPA 303(b))
viii. No Liability as Limited partner for Limited Partnership Obligations – RE-RULPA §303
1. “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.”
Page 47 of 57
ix. Other instances of Limited Partner Liability
1. A limited partner who knowingly permits his name to be used in the name of the limited
partnership generally is personally liable to creditors who extend credit to the limited
partnership without actual knowledge that the partner is not a general partner. RULPA
§303(d)
a. Texas – the TRLPA contained this rule; the TBOC does not
2. Defective formation of a limited partnership – person who erroneously believed that
they were becoming a limited partner in a limited partnership. ULPA §11, RULPA §304,
TBOC §153.106-153.109
3. Limited partner commits a tort while acting in the course of the limited partnership’s
business
XII.
Limited Liability Companies
A. Introduction to Limited Liability Companies
i. Evolution of the LLC
1. The LLC emerged because of the quest of business participants for a form of business
organization that offered:
a. Limited Liability, and
b. Favorable federal tax treatment
2. An LLC offers the flexibility of a partnership with limited liability
3. In 1988, the IRS ruled that LLCs would be classified as partnerships for federal tax
purposes only. Since then, each state has enacted their own LLC legislation and Texas
enacted their own in 1991.
ii. Federal taxation of Business Organizations classified as Corporations
1. Default Rule – double taxation (subchapter C)
a. Earnings are taxed at the corporate level
b. Earnings are taxed again when distributed to shareholders
2. Possible solution:
a. Elect to be subject to subchapter S of the Internal Revenue Code
i. Eliminates corporate level of tax
ii. Income and deductions pass through to shareholders
1. There are restrictions as to which Corporations can make this
election which is why not every Corporation does this
iii. Federal taxation of Business Organizations classified as Partnerships
1. Business organizations classified as partnerships for federal tax purposes are NOT
separate taxable entities
a. They are subject to subchapter K of the Code
b. Subchapter K provides flow-through tax treatment (similar to subchapter S) –
the partnership itself is not subject to taxation
iv. Current Federal Rules on Tax Classifications of Business Organizations
1. Under current IRS regulations (commonly known as ‘check-the-box regulations’):
a. Domestic unincorporated business organizations with two or more members
can elect to be treated as either a:
i. Partnership (subchapter K) (default rule), or
ii. Corporation (subchapter C or S)
b. Thus, a general partnership (or LLP), is limited partnership or LLC with two or
more members is treated for federal tax purpose as a partnership unless it
elects to be treated as a corporation
Page 48 of 57
2. Under current IRS regulations (commonly known as ‘check-the-box regulations’):
a. Domestic unincorporated business organizations with only ONE member can
elect to be either:
i. Disregarded for federal tax purposes (default rule), or
ii. Treated as a corporation (subchapter C or S)
b. Thus, a single-member LLC is disregarded for federal tax purposes unless it
elects to be treated as a corporation.
v. Series LLCs
1. Type of LLC formed under state law that has multiple compartments, each of which is
referred to a series. You still only file one certificate with the secretary of the state but
designate the LLC as a series.
2. You can insulate assets from the claims of creditors, where creditors might be able to
only go after one series of an LLC, not all of them
a. i.e. You own 50 rental properties and you create a Series LLC where each
property is within its own series. Thus, you insulate claims of one property from
claims of the other properties from creditors.
B. Formation of Limited Liability Companies
i. Terminology and General Concepts
1. The owners of the LLC are referred to as members.
a. All states permit single-member LLC, See TBOC §101.101(a)
2. LLC might be managed by its members (member-managed LLC) or by one or more
managers (manager-managed LLC), See TBOC §1.002(51)
3. Members and managers are not, by virtue of being members or manager, liable for the
debts and obligations of the LLC. TBOC §101.114
ii. Creating a Limited Liability Company
1. File a document with the appropriate state office
a. Most common name: “articles of organization” ULLCA §202(a)
b. Texas: “certificate of formation” TBOC §1.002(6), 3.001(a), 3.010
2. Information required in the certificate is very basic, See TBOC §3.005, 3.0101
3. LLC is formed at the time the certificate is filed (or on a later date specified in the
certificate), See TBOC §3.001(c), 4.051, 4.052
iii. Operating Agreement of LLC
1. Delaware and Texas do not require a written agreement, but LLCs normally have a
written operating agreement.
Page 49 of 57
2. Terminology:
a. Most common: “operating agreement”
b. Delaware: “Limited liability company agreement”
c. Texas” company agreement” TBOC §101.001(1)
3. Operating agreement is NOT filed with the state
4. The typical operating agreement is very detailed and spells out the rights and
obligations of members and managers, such as:
a. Each member’s share of profits and losses
b. Rules regarding voting by members and managers
c. Procedure for calling meetings of members and managers
iv. Limited Liability Company Name
1. Typically, state statutes require the LLC name to contain the words “limited liability
company” or an abbreviation of those words
a. TBOC §5.056 – “must contain the phrase ‘limited liability company’ or ‘limited
company’ or an abbreviation of one of those phrases.”
C. Management Structure of Limited Liability Companies
i. Possible Governance Structures of LLCs
1. LLC might be managed by its members (member-managed LLC) or by one or more
managers (manager-managed LLC), See TBOC §1.002(51)
2. Typical default rule: LLC is member-managed
3. Texas: does not have a default rule – certificate of formation must state how LLC is
managed. See TBOC §3.0101; see also §101.251 and 101.252
ii. Default TX LLC Voting
Ordinary
Matters outside Fundamental
Amendment of
Matters
the ordinary
business
the certificate of
course of
transactions or
formation
business (extra
actions that
ordinary
would make it
matters)
impossible to
carry on the LLCs
ordinary business
MemberMajority of
Absolute
Absolute
Unanimous
Managed LLC
members
majority of
majority of
approval by
present at the
members. TBOC members. TBOC
members. TBOC
meeting at
§101.356(b)
§101.356(c)
§101.356(d)
which a quorum
is present TBOC
§101.355 and
101.356(a)
Ordinary
Matters
Matters outside
the ordinary
course of
business (extra
ordinary
matters)
Fundamental
business
transactions or
actions that
would make it
impossible to
carry on the
LLCs ordinary
business
Amendment of
the certificate of
formation
Page 50 of 57
ManagerManaged LLC
XIII.
Majority of
members
present at a
meeting at
which a quorum
is present TBOC
§101.355 and
101.356(a)
Absolute
majority of
managers. TBOC
§101.356(b)
Approval by
managers (see
TBOC §101.355
and 101.356(a)(b)) AND
absolute
majority of
members. TBOC
§101.356(c)
Approval by
managers (see
TBOC §101.355
and 101.356(a)(b)) AND
unanimous
approval by
members. TBOC
§101.356(d)
Ownership Interests in Partnership, Limited Partnerships and LLC
A. Ownership of the Firm versus Ownership of Firm Assets
i. Nature of Partnership Property – TBOC §152.101
1. Partnership property is NOT property of the partners. A partner or a partner’s spouse
does not have an interest in partnership property
ii. Classification as Partnership Property – TBOC §152.102
1. (a) Property is partnership property if acquired in the name of:
a. (1) the partnership, or
b. (2) one or more partners, regardless of whether the name of the partnership is
indicated, if the instrument transferring title to the property indicates:
i. (A) the person’s capacity as a partner; or
ii. (B) the existence of a partnership
2. (b) property is presumed to be partnership property if acquired with partnership
property, regardless of whether the property is acquired as provided by Subsection (a0
3. (c) property acquired in the name of one or more partners is presumed to be the
partner’s property, regardless of whether the property is used for partnership purposes,
if the instrument transferring title to the property does not indicate the person’s
capacity as a partner or the existence of a partnership, and if the property is not
acquired with partnership property
4. (d) for purposes of this section, property is acquired in the name of the partnership by a
transfer to:
a. (1) the partnership in its name; or
b. (2) one or more partners in the partner’s capacity as partners in the partnership,
if the name of the partnership is indicated in the instrument transferring title to
the property
iii. Rights and Duties of a Partner – TBOC §152.203(b)
1. (b) a partner may use or possess partnership property only on behalf of the partnership
a. See UPA §25(2)(a)
iv. Nature of Partner’s Partnership Interest – TBOC §154.001(a)-(b)
1. (a) a partner’s partnership interest is personal property for all purposes
2. (b) a partner’s partnership interest may be community property under applicable law
a. See TBOC §1.002(68)
v. Power to effect Transfer or Grant of Security Interest – TBOC §152.405
1. A partnership is not required to give effect to a transfer prohibited by a partnership
agreement, See TBOC §152.401
Page 51 of 57
B. Rights of Transferees and Creditors
Assignments
i. Admission as Partner – TBOC §152.201
1. A person may become a partner only with the consent of all partners
ii. Transfer of Partnership Interest – TBOC §152.401
1. A partner may transfer all or part of the partner’s partnership interest
iii. General effect of Transfer – TBOC §152.402
1. A transfer of all or part of a partner’s partnership interest:
a. (1) is not an event of withdrawal;
b. (2) does not by itself cause a winding up of the partnership business; and
c. (3) against the other partners or the partnership, does not entitle the
transferee, during the continuance of the partnership, to participate in the
management or conduct of the partnership business
iv. Effect of Transfer on Transferor – TBOC §152.403
1. After transfer, the transferor continues to have the rights and duties of a partners other
than the interest transferred
v. Rights and Duties of Transferee – TBOC §152.404
1. a) A transferee of a partner’s partnership interest is entitled to receive, to the extend
transferred, distributions to which the transferor otherwise would be entitled
2. b) if an event requires a winding up of partnership business under Subchapter 1, a
transferee is entitled to receive, to the extent transferred, the net amount otherwise
distributable to the transferor
3. c) until a transferee becomes a partner, the transferee does not have liability as a
partner solely as a result of the transfer
4. d) for a proper purpose the transferee may require reasonable information or an
account of a partnership transaction and make reasonable inspection the partnership
books. In a winding up of partnership business, a transferee may require an accounting
only from the date of the latest account agreed to by all of the partners.
5. e) until receipt of notice of a transfer, a partnership is not required to give effect to ta
transferee’s rights under this section and Sections 152.401-152.403
vi. Dissolution by Decree of Court – UPA §32(2), RUPA §801(6)
1. On the application of the purchaser of partner’s interest under sections 28 or 29
a. After termination of the specified term or particular undertaking, or
b. At any time if the partnership was a partnership at will when the interest was
assigned or when the charging order was issued
2. BOTTOM LINE – the Assignee/Transferee can seek judicial dissolution of the partnership
3. Under TBOC §11.314 ONLY an owner of the partnership or limited liability company can
seek judicial dissolution of the partnership, so NOT the assignee/transferee
Charging Orders
General Partnerships
vii. Nature of a Partner’s Right in Specific Partnership Property – UPA §25(2)(c)
1. (2) The incidents of this tenancy are such that:
a. (c) A partner’s right in specific partnership property is not subject to attachment
or execution, except on a claim against the partnership. When partnership
property is attached for a partnership debt the partners, or any of them, or the
Page 52 of 57
representatives of a deceased partner, cannot claim any right under the
homestead or exemption lass
b. See RUPA §203 and §501, TBOC §152.002 §152.308
2. BOTTOM LINE – A creditor of an individual partner cannot go after partnership property
viii. Partner’s Interest Subject to Charging Order – UPA §28
1. (1) The court is authorized to issue a charging order in favor of the creditor in the form
of the distributions that would go to the partner, but that doesn’t give the creditor the
right to go after any of the partnership’s assets, See also RUPA §504(a) and TBOC
§152.308(a)
a. Charging order – a lien on the partner’s distributions/interests and allows the
creditor to collect a debt  a remedy for a creditor going after an individual
partner, NOT the partnership
2. (2) The holder of a charging order can seek foreclosure on the partnership interest that
is subject to the charging order. If the creditor is the highest bidder at the foreclosure
sale, then they become a transferee of the partnership interest through an involuntary
transfer, which gives the creditor all future distributions that come out of the
partnership, See also RUPA §504(b)
a. TBOC §152.308(c) – In Texas, you CANNOT seek foreclosure, so a creditor’s
ONLY remedy is the charging order
ix. Texas Provision on Charging Orders for General Partnerships:
1. Charging Orders:
a. 152.308(a) – charging order is available
b. 152.308(b) – rights of holder of the charging order (to receive distributions)
c. 152.308(c) – charger order is a lien
d. 152.308(d) – a charging order is the exclusive remedy of a judgment creditor of
a partner with respect to the debtor’s partnership interest
e. 152.308(f) – a partner’s creditor has no right to obtain possession of or exercise
remedies with respect to the partnership’s property
2. Right to seek dissolution – only a partner can seek judicial dissolution (an assignee
cannot do so). TBOC §11.314
Limited Partnerships
x. RULPA – Assignments
1. Section §101(10) – “partnership interest” means a partner’s share of the profits and
losses and right to receive distributions
2. Section §702 – a partnership interest in a limited partnership is assignable, unless the
partnership agreement provides otherwise
a. An assignment does not entitle the assignee to exercise any rights of a partner
b. Rather, the assignee is entitled “to receive, to the extent assigned, only the
distribution to which the assignor would be entitled.”
3. Section §704(a) – an assignee becomes a limited partner only if: (i) the partnership
agreement allows the assignor to give the assignee that statute and the assignor does
so, or (ii) all other partners consented
xi. Assignee’s Right to seek Judicial Dissolution
1. UPA §32(2)/RUPA §801(6) – a partnership is dissolved, and its business must be wound
up, if the transferee of a partnership interest makes application to a court and the court
determines that it is equitable to wind up the partnership business:
Page 53 of 57
a. After the expiration of the partnerships term or the completion of its
undertaking, if the partnership was for a definite term or particular undertaking,
or
b. at any time, if the partnership is an “at will” partnership
2. RULPA §1105 – “In any case not provided for in this [Act] the provisions of the Uniform
Partnership Act govern.”
3. RULPA §802 – a court can decree dissolution of the partnership only “[o]n application by
or for a partner.” **creditor to a limited partnership cannot seek judicial dissolution**
xii. Baybank v. Catamount Construction
1. Can Baybank seek a charging order?
a. Yes, under UPA §28 a creditor can seek a charging order against a limited
partnership
2. Can they appoint a receiver to receive funds due the Connors?
a. RULPA §703 doesn’t say anything about appointing a receiver, so look at the
UPA and under UPA §32 they can appoint a receiver.
3. Can they get dissolution of the limited partnership if judgment was not satisfied in 14
days?
a. No, only a partner can seek judicial dissolution of a limited partnership per
RULPA §802, not a creditor
xiii. Texas Rules for Limited Partnership
1. Assignments: TBOC §153.251 and 153.253 are essentially the same as RULPA §702
2. Charging Orders:
a. 153.256(a) – charger order is available
b. 153.356(b) – rights of holder of the charger order (to receive distributions)
c. 153.256(c) – charging order is a lien and the holder of the charging order cannot
seek judicial foreclosure on that interest
d. 153.256(d) – a charging order is the exclusive remedy of a judgment creditor of
a partner with respect to the debtor’s partnership interest
e. 153.256(f) – a partner’s creditor has no right to obtain possession of or exercise
remedies with respect to the limited partnership’s property
3. Right to seek Dissolution – only a partner can seek judicial dissolution (an assignee
cannot do so), TBOC §11.314
Limited Liability Companies
xiv. Texas Rules for LLCs
1. Assignments: TBOC §101.108 and §101.109 (similar to rules for assignments of limited
partnership interest)
2. Charging Orders:
a. 101.112(a) – charger order is available
b. 101.112(b) – rights of holder of the charger order (to receive distributions)
c. 101.112(c) – charging order is a lien and the holder of the charging order cannot
seek judicial foreclosure on that interest
d. 101.112(d) – a charging order is the exclusive remedy of a judgment creditor of
an LLC member with respect to the debtor’s partnership interest
e. 101.112(f) – a member’s creditor has no right to obtain possession of or
exercise remedies with respect to the LLC’s property
3. Right to Seek Dissolution – only an LLC member can seek judicial dissolution (an
assignee cannot do so), TBOC §11.314
Page 54 of 57
XIV.
Fiduciary Duties in Partnerships, Limited Partnerships and LLCs
A. Business Judgment Rule
i. Problem 14.1
1. Limited Partnership agreement provides:
a. Management of the business and affairs of the limited partnership is the
responsibility of the general partner, and
b. The limited partners have no right to take part in the control of the business
2. Should the court interfere in the general partner’s decision as to the distribution of
profits?
a. No, because of the business judgment rule – it’s a policy that courts have
adopted where they will not step in and question the good faith decisions of
managers, as long as their decisions are meant to benefit the business.
However, if the general partner is acting in bad faith, then the courts will step in
to determine whether they are breaching their fiduciary duty.
B. Duty of Loyalty
i. Hypothetical
1. A doctor is a partner in a partnership of doctors. The doctor negligently performs an
operation. The injured patient sues, and successfully establishes that the partnership is
liable for the doctor’s negligence under UPA §13.
2. Has the doctor who performed the operation breached a fiduciary duty to the
partnership and the other partners?
a. Courts would find that something more than mere negligence is required to
breach the duty of care
ii. RUPA Approach
1. Section 404
a. States a partner’s fiduciary duties in an exclusive manner
b. Duty of loyalty is limited to the three things listed
i. Partners can consent to a specific act that otherwise would violate the
duty of loyalty, see RUPA §103(b)(3)(ii)
c. Duty of care
d. Duty of good faith and fair dealing
e. Partner does not necessarily violate the duty of loyalty merely because the
partner’s conduct furthers his own interest
iii. Texas Approach
1. TBOC §152.204
a. Does not state a partner’s duties in an exclusive manner. Where is the word
“fiduciary”? see TBOC §152.204(d)
b. A partner must discharge her duties and exercise any rights and powers in the
conduct or winding up of the partnership business: (1) in good faith, and (2) in a
manner the partner reasonably believes to be in the best interest of the
partnership.
c. Same as RUPA §404€
2. TBOC §152.205 (Duty of Loyalty)
a. A partner’s duty of loyalty includes three specific items. (Unlike RUPA, does not
say partner’s duty of loyalty is limited to these three items.) The three specific
items:
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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
3. TBOC §152.206 (Duty of Care)
a. A partner’s duty of care is to act in the conduct and winding up of the
partnership business with the care of an ordinary prudent person would
exercise in similar circumstances
b. An error in judgment is not by itself a breach of the duty of care
c. Partner is presumed to satisfy the duty of care if the partner acts on a n
informed basis and in compliance with TBOC §152.204(b).
4. TBOC §152.210 – a partner is liable to a partnership and the other partners for:
a. A breach of the partnership agreement, or
b. A violation of a duty to the partnership or other partners under this chapter that
causes harm to the partnership or the other partners
iv. Limited Partnerships
1. RULPA §403/TBOC 153.153 – A general partner in a limited partnership owes fiduciary
duties to the partnership and other partners because a general partner:
a. Has the rights and powers of a partner in a general partnership, and
b. Is subject to the restrictions and liabilities of a partner in a general partnership
2. Limited partners generally do not owe fiduciary duties because they are passive
investors.
a. A limited partner who participates in the business in some capacity might
becomes subject to fiduciary duties
C. Fiduciary Duties and Contracts
Contracting Away Fiduciary Duties
i. Main Issue
1. To what extent can parties who have fiduciary duties modify or eliminate those duties
by contract?
2. Traditionally, courts have been hostile to contractual modifications of fiduciary duties.
3. Modern approach – contractual modification of fiduciary duties is addressed by statute.
ii. TBOC Provisions on Waivers of Duty
1. TBOC §152.002(a) [RUPA §103(a)]: makes clear that the TBOC rules regarding the
relationship among partners are default rules that the partners generally can modify in
their partnership agreement
2. The rules that cannot be modified are listed in TBOC §152.002(b)
Default Fiduciary Duties
iii. Main Issue
1. To what extent do participants in a business owe fiduciary duties when they have not
contractually agreed to be subject to them?
2. The issue is largely confined to limited liability companies:
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a. Partnerships – courts have long regarded partners as fiduciaries, and modern
partnership statutes now recognize the fiduciary duties of partners
b. Limited Partnerships – state limited partnership statutes typically provide that
the general partner is subject to the same obligations as a partner in a general
partnership
c. LLCs – are creatures of statute, and state statutes typically do not address
whether members or managers of an LLC have fiduciary duties
iv. Default Fiduciary Duties in LLCs
1. Texas has no apparent judicial opinions addressing this issue
2. Member-managed LLCs – there is a good argument that members of a membermanaged LLC owe fiduciary duties to the LLC and other members, just as partners do,
but the extent to which courts will accept this argument is unclear
Final Exam:
-
-
180 points total and each section is weighted based on time allotted
o 90 Minutes  MC about 30 questions at 3 min/question
o 90 minutes  combo of essay and short answer questions
IRAC essay (citations to statutes and cases is not required)
Complete the online practice MC questions
How to Prepare:
-
Review what we’ve done (cases, problems, etc.)
Tab statutes  know corresponding UPA, RUPA, and TBOC if applicable
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