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●
The Firm and Its Agents and Servants (Assignment 1A)
o Definition of Agency - Rest2d§1
● Agency: 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
▪
●
Basically, a fiduciary relationship that results from:
● Manifestation of consent from one person (principal)
● That another person (agent) act on behalf of principal and
● Is subject to the principal’s control
● With consent by agent to do so.
Elements of Agency
▪
Mutual consent
●
●
Can be implied
▪
That one person will act on behalf of another and
▪
That person (agent) will act subject to the other's (principal) control
▪
(All of these elements must be present)
Attributes of "agency"
▪
Agent has the power to alter legal relations b/w principal and 3rd parties
(§12)
● Ex, power to bind principal to a contract, vicarious liability on
principal for torts that the agent commits
▪
Agent is a fiduciary w/ respect to matters w/in the scope of his conduct
(§13)
● Someone who acts primarily for the benefit of another
▪
Principal has the right to control the agent w/ respect to matters entrusted
to him (§14)
● Refers to right to control the result or ultimate outcome of the
work, rather than to control over the minute details
● Agent must be subject to result or ultimate objective and
does not refer to actual physical control
● Ex, atty-client: Client controls the outcome but does
not control what cases atty should read to get there
● This differentiates agent/principal from master/servant
relationship
● A principal is not vicariously liable for agents but is
for servants
●
Fiduciary Duties of Agents and Servants (1B)
o Fiduciary principle - §13, comment a
● The agreement to act on behalf of the principal causes the agent to be a
fiduciary, that is, a person having a duty, created by his undertaking, to act
primarily for the benefit of another in matters connected with his undertaking
▪
Made up of a couple of things
●
Primary fiduciary duty is the duty of loyalty
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●
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§ 387 - requires that the agent act solely for the benefit of
the principle in matters connected w/ the agency
§ 389 - requires agent to not act as an adverse party w/out
the principal's consent
● Generally, agents cannot buy from or sell to the
principal w/out consent of the principal
● HRB violated this by taking the loan from the
bank
§ 390 - if they do act as an adverse party, must disclose all
relevant facts of the relationship
● HRB did not disclose all facts concerning the adverse
relationship
§ 388 - Agents have a duty to account for profits
● Agent cannot profit from transactions conducted for
the principal without the principal's consent
The Firm and Its Agents
o Partnership (1C) (UPA and RUPA)
● An association
▪
●
Of two or more persons
▪
●
"Person" could mean individual or a corporation or a partnership (UPA §2,
RUPA § 101(10)
To carry on as co-owners
▪
●
Voluntary or consensual agreement
Shared control
A business
▪
●
Must be an activity that rises to the level of being a business
●
●
Ability to control the business is the hallmark of ownership
Mere co-ownership of land would not be a business (unless they
are dealers) (UPA §2, RUPA §101(1)
For profit
▪
Must have intent to earn profits (so still qualifies even if it is a failing
business)
▪
Characteristics of Employment Relationship
●
●
Employer's right to employees labor and to control employees performance
● UPA §18(e) says that all partners have an equal right in the management
and conduct of the partnership business
● Default rule that could be modified in the partnership agreement
● RUPA §401(f)
Employees right to compensation from employer
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●
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UPA §15(b) contractual obligation of partnership so partners have liability
for the debts/obligations of the partnership
RUPA §306(a)
Theories of Partnership
▪
Entity Theory of Partnership
Partnership is a separate and distinct legal person with its own rights
and obligations that is separate from the individual partners
● So if two people make up the partnership, then you would have
essentially three "persons"
● RUPA says partnership is an entity §201(a)
● Comments say that this is not determinative and the focus is
more on whether the characteristics of the employment
relationship are present
● They are in the RUPA
● §401(f) each partner has an equal right in the
management and conduct of the partnership
business
● §306(a) in general partners are personally liable
for partnership obligations
Aggregate Theory of Partnership
● Partnership is an aggregate of its partners such that there is no
separate and distinct partnership
● Rather, the term partnership is merely a way of describing the
relationship b/w the partners
● Kind of like referring to a group of people as a family
● Under UPA, partnerships are part aggregate and part entity
●
●
▪
Conceptual approach
●
▪
Functional approach
●
o
Is it in an entity or an aggregate and then reach conclusion on that
basis
Analyze issues on merits and ask what makes the most sense in this
context, given the issues involved and relationships of the parties.
Limited Partnerships (1D)
●
Definitions
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▪
RULPA - §101(7) - a limited partnership is a partnership [an association of
two or more persons to carry on as co-owners a business for profit] that
has a least 1 general partner and at least 1 limited partner
▪
General Partner - §403
●
▪
Limited partners
●
Basically just investors - persons who contribute capital and share
profits, but who cannot manage the business and are liable only for
the amount of their contribution
● §302 - says only have whatever voting rights that are given
to them in the limited partnership agreement
● §303 - Do not have personal liability for partnership
obligations - only exposed to liability for what they invested
●
Rights of a Limited Partner
● Share in partnership profits and losses and receive
distributions
● Transact business with the partnership
● Assign her interest
● Withdraw from the partnership
● Bring a derivative action
● Inspect and copy partnership records and obtain from a
general partner information concerning the state and
financial condition of the partnership
● Vote on limited issues
●
What about interests between these that may conflict?
● Primary duty is to the partnership if there is a conflict
● So must show a specific divergence of interests b/w the
individual partner and the limited partnership would justify
the breach of fiduciary duty
▪
Interest of partnership = collective interests of the partners
●
o
partners who control the business and are personally liable for the
partnership’s debts
● Have the right to participate in the management of business
● Also has personal liability
Takes priority of the individual interests of the partners
Limited Liability Companies - LLCs (1E)
● Background
▪
Looking for limited liability and favorable tax treatment
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▪
A combination of corporation and general partnership organizations
permitting flexibility like a partnership and limited liability lead to the
creation of the Limited Liability Corporations
● Allowed for full participation and get flow-through tax treatment
and limited liability
● Not much uniformity among states with LLC legislation b/c all
states have their own
▪
For tax purposes, currently IRS has "check the box regulations"
●
o
If you have an unincorporated domestics business organization
with 2 or more members, it can elect to be treated as a corporation
for tax purposes or as a partnership
Limited Liability Partnerships (LLPs) and Limited Liability Limited Partnerships
(LLLPs) (1F)
● Limited Liability Partnership
●
▪
Protects partners from vicarious liability for both contract and tort liability
▪
Still a general partnership, but by filing application and registering as an
LLP, it essentially buys the additional feature of limited liability
See 1F handout
▪
Question 1
●
What steps must be taken for a partnership to become a Limited
Liability Partnership?
● To become a register LLP, Law Firm must file an application
with the secretary of state (TBOC §152.802)
● Must pay application fee as well ($200 per partner)
● §152.803 says they must include the words "limited liability
partnership" or the abbreviation LLP in its name (per
§5.063)
● §152.804(a) requires liability insurance up to at least $100k
or if not, they must have a separate fund of at least $100k
for satisfaction of any judgments
● Failing to comply w/ financial responsibility clauses
will prevent partnership from gaining the limited
liability that protects the partners from being
personally liable
● Registration only last one year so must be renewed annually
(§152.802(g))
● See 161 S.W.3d 137
● On date 1, Firm registered as an LLP
● Time passes and Firm fails to renew
registration
● On date 2, the Firm enters a lease and fails to
make payments
● Lessor brings action against partners who
were personally liable since they failed to
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renew LLP status and so were not protected
from personal liability
▪
Question 2
●
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Question 3
●
●
●
In an LLP, if Partner B entered into a contract with a photocopier
company, is Partner A subject to personal liability on that contract?
● §152.801(a) says that partners in an LLP do not have
personal liability for obligations incurred while the
partnership is an LLP
● See also §152.304 general rule for partner liability
● Says that the partner would be liable jointly and
severally
● However, § 152.801(a) trumps this general rule
If an LLP and Partner B commits malpractice. Is Partner A subject
to personal liability to the victim of malpractice?
● §152.801(a) says no - protects partners from vicarious
liability for both contract and tort obligations
● Note that the obligation must have incurred while the
partnership was an LLP
● But see exceptions noted in §152.801(b)
Is Partner B subject to personal liability to the client who suffered
the malpractice?
● While he has protection b/c of the LLP, since his acts caused
the harm, he is still responsible
● So no vicarious liability b/c of status in the LLP
● But still subject to direct liability b/c of his own
actions (§152.801(e)(2))
● This pretty much applies all the time (no real
shield against this)
The Shields of LLPs
▪
Full shield ("second generation")
●
●
●
▪
Partial shield statute ("first generation")
●
▪
Protects from both tort and contract obligations of the partnership
● This is what Texas has
Majority of states offer the full
RUPA has a full shield provision §306(c)
Protects partners from vicarious liability from tort-type obligations
● Texas started as this at first, but then switched over to full
shields
Must keep in mind that direct liability always exists for one's own
misconduct regardless of what kind of shield
● But some states have an exception to this if the tort was
committed by someone under the direct supervision or control of
the partner
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▪
Question 4
●
▪
Law Firm is an LLP where Partner A supervises C, an associate. If
C commits malpractice, is Partner A by virtue of his status subject
to personal liability to the client?
● By virtue of his status as a partner and the §152.801(b)(1)
exception for partners who directly supervise the other
partner when the malpractice occurred (so A would be
vicariously personally liable)
● Client would only have to show that A was a partner
● So Client could recover from C b/c of direct liability and also
recover under vicarious liability from both the partnership as
well as the assets of Partner A (b/c of 152.801(b))
● Note that Partner A could also be held directly liable for
negligent supervision or negligent hiring, for example
Question 5
●
●
So by virtue of status of partner, this partner is subject to
vicarious liability for torts committed by someone under
his/her control
GL is a Texas limited partnership w/ two partners: G, the general
partner and L the limited partner. Can GL become a registered
LLP?
● Yes per § 152.805 which says they can and then look to
§153.351 for the requirements in order to do so
● Must register and must have authority to do so,
either by authority from the partnership agreement
or by consent of the partners
● Must also comply w/ all of the stipulations in Chapter
152
● Name requirement explained in §5.055, which says
must include Ltd and LLP in the name
● So if who benefits from switching from a limited partnership
to a Limited Liability Partnership?
● General partner would benefit b/c he would no longer
be personally liable for partnership obligations as an
LLP (whereas he would be in a regular limited
partnership)
● Note that situations exists in a regular partnership
where limited partners may be personally liable so
becoming an LLP would benefit the limited partners
as well
LLP vs LLLP
▪
LLP is a general partnership that has registered and attained limited
liability
▪
When a limited partnership does the same thing, it is referred to as an
LLLP, a limited liability limited partnership
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▪
Real issue then is what is he underlying structure of the organization is
(general or limited)
▪
Liability shield is the same in each case
●
●
Protection from vicarious liability for partnership obligations they
would otherwise be liable for
Also no difference in terms of procedures and requirements for
registering
Introduction over, now looking more in depth at each type of relationship
●
Contractual Dealings by Agents
o
Firms Liability in Contract for Acts of its Agents (2A)
● Recall definition of agency from Rest2d
▪
●
The agency relationship arises when there is mutual consent that one
person will act on behalf of another and subject to the others control
Consequences of forming the agency relationship
▪
In general, if an agent exceeds his authority, the principal is not bound
●
▪
Exception: if you can separate the authorized from the
unauthorized conduct, the principal will be bound by the authorized
acts
● When an agent deals w/ a 3rd party, the agent gives an
implied warranty that they are authorized to do what they
are doing
Notes, p83
●
●
●
Unauthorized acts may bind agents in certain circumstances
If an agent has authority from the principal then has power to bind
the principal to a contract
● That applies whether the principal is disclosed, partially
disclosed, or undisclosed
Assume here though that both the P and A have capacity
● Required capacity of a principal
● To be bound, principal must have capacity to consent
to the agency relationship and the capacity to enter
into the underlying transaction
● This would most likely come up as a defense
asserted by the principal
● Required capacity of an agent
● Needs only the physical or mental capability to do
the thing he/she has been appointed to do
● Would be much harder for principal to argue
that agent didn't have capacity
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●
o
Keep in mind that business entities can be principals and the
humans that represent them are their agents
Principal's Rights Under Contracts Entered Into by Its Agents: Disclosed, Partially
Disclosed, and Undisclosed Principals (2B)
● Degrees of principal disclosure
▪
Disclosed Principal
●
▪
Partially disclosed principal
●
▪
3rd party knows there is a principal but does not know identity
Undisclosed principal
●
▪
3rd party has notice of the existence and identity of the principal
(that there is one and who it is)
3rd party has no notice, even of the existence of the principal
● Think they are just dealing with the agent and has no
knowledge of the principal
So how do the degrees of disclosure effect the way in which the principal
enforces a contract?
● Not really an issue if the principal is disclosed or partially disclosed
● Principal can enforce contract against the 3rd party
●
Undisclosed principal enforcement
▪
Problem 2.2, p88 - can an undisclosed principal enforce a contract against
a 3rd party?
● Under common law, the answer is yes
● Rest2d §302 - a person who contracts w/ the agent of an
undisclosed principal, when the agent intended to contract
on behalf of that principal within his power to bind the
principal, is generally liable to the principal
● Under civil law, the answer is no
● French doctrine prete-nom said that an agent for an
undisclosed principal can sue the 3rd party, not the
principal
● Prete-nom is where the contracting party
makes no representation about acting for
someone else
●
Chapter 3 - Focus of Firms
o Formation of Agency Relationship
● Missed this class
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Formation of Partnership Relationship
● UPA §6, RUPA §202(a)
●
●
▪
Association
▪
Of two or more persons
▪
To carry on as co-owners
▪
A business
▪
For profit
Role of profit sharing is a necessary element
▪
Cant be a partnership w/out profit sharing (the intent to share profits)
▪
Keep in mind that this is not conclusive because other relationships
involve this as well
● Employer/employee relationship has a profit sharing element but
that does not necessarily indicate a partnership
UPA §7(4), RUPA §202(c)(3) - persons who share profits are presumed to be
partners, unless they are being received in a non-partnership capacity (wages,
rent, etc.).
▪
UPA § 7 says that profit sharing is prima facie evidence
▪
RUPA § 202(c) says that it creates the presumption that profit sharing
creates a partnership
▪
●
▪
Must look to (1) the written agreement or (2) the conduct…to
determine if it was a partnership
● (Need all 4 elements of intent; business; profit;
co-ownership of profits, property and control).
● Conduct = question of fact. Still neither party by their conduct
intended to form a partnership relationship. They still had a
business. It was for profit. And, by conduct, there was still no
co-ownership of anything.
Court also examines any agreement to share losses
● This would be persuasive if it were present
● TBOC §152.052(a)(4)(A) says that an agreement to share losses is
a factor in determining whether a partnership is created
● But §152.052(c) says that sharing losses is not dispositive
● TBOC §152.052 - Rules for Determining if Partnership is
Created
UPA §18(a), RUPA §401
●
● Partners share losses in the same proportion that they share losses
This inquiry is very fact specific
●
Factors Indicating a Partnership
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o
Formation of Limited Liability Partnership - 3E
● Recall that partnerships can be formed very informally
▪
●
By a handshake sometimes and even by accident
LLPs however require registration and filing fees
▪
But keep in mind that it is still the same entity (general partnership) but
has essentially purchased the limited liability
▪
●
Still subject to the UPA or RUPA
Important things to remember:
▪
Procedure for becoming an LLP
●
●
●
▪
In Texas, the registration must be renewed annually
●
▪
Filing an application w/ the secretary of state
Must also comply with the name requirement (TBOC §5.063)
Must comply with financial responsibility requirements (TBOC
§152.804(a))
If fail to renew, you lose the LLP shield and parties become
personally liable
Both a general partnership and a limited partnership can register to
become an LLP
● In a GP, he general partner will benefit primarily
● When GP registers, it becomes an LLP
● Limited partners will benefit as well because may be liable in
certain circumstances
● When a LP registers, it becomes an LLLP
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Liability for Contracts Entered Into Before Formation of a Limited Liability Firm
● Essentially looking at who incurs liability when something goes wrong in the
formation and there is a separate contract
●
Liability of Limited Partners - 3F
▪
Consider the results under three statutes
●
ULPA §11
● ULPA §11 Status of Person Erroneously Believing
Himself a Limited Partner: A person who has contributed
to the capital of a business conducted by a person or
partnership erroneously believing that he has become a
limited partner in a limited partnership, is not, by reason of
his exercise of the rights of a limited partner, a general
partner or bound by the obligations of such person or
partnership if he promptly renounces his interest in the
business profits upon ascertaining he is not a limited
partner
● Focuses on promptness of fixing the mistake
●
RULPA § 304 -Person Erroneously Believing Himself an
Limited Partner:
● A person is not liable as a GP if they erroneously but in good
faith believe they are becoming a limited partner if:
● Cause a certificate of LP to be filed OR
● Withdraw from future equity participation
● Except as provided in §b, a person who makes a
contribution to a business enterprise and erroneously but
in good faith believes that he has become a limited partner
in the enterprise is not a GP and is not bound by its
obligations by reason of making the contribution, or
receiving distributions from the enterprise, or exercising any
right of an limited partner if, upon finding out about the
mistake he
● (1) causes an appropriate certificate of limited
partnership (or amendment) to be executed and
filed, OR
● (2) withdraws from future equity participation in the
enterprise by filing a certificate of withdrawal with
the Sec of State.
● A person who makes a contribution described in §a is liable
as a GP to any 3rd party who transacts business with the
enterprise
● (i) before the person withdraws and an appropriate
certificate is filed to show withdrawal, or
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(ii) before an appropriate certificate is filed to show
that he is not a GP,
● but in either case only if the 3rd party actually
believed in good faith that the person was a GP at
the time of the transaction.
Note that time is essential and the good faith error must
exist at the time the transaction was made
Focuses in creditor reliance
●
●
●
●
●
TBOC §§ 153.106 - 153.109
● Starts the same but also has the promptness requirement
("if, w/in a reasonable time after ascertaining the mistake,
the person" takes corrective action)
● Corrective action includes
● Certificate of formation of a limited partnership to be
signed and filed
● Written statement to the secretary of state
● Temporary measure that buys her 180 days
(153.107) to try to persuade the GP to file a
certificate of formation of LLP
● W/draw from participation in future profits and
declaring so with the secretary of state
● 153.109 - liability of erroneous contributor
● Liable as a GP if
● The contributor has knowledge or notice that
no certificate has been filed or was filed
incorrectly
● And 3rd party reasonably believed, based on
contributors own conduct, that the contributor
was a GP at the time of the transaction and
extended credit based on that reliance
● Makes it much more difficult to recover from people
like Carpenter
Liability of Members of a Limited Liability Company
● Rest2d §326: Unless otherwise agreed, a person who, in dealing with
another, purports to act as agent for a principal whom both know to be
nonexistent or wholly incompetent, becomes a party to such a contract.
● See comment (a)
● To avoid being a case in the text book:
● Always check to see that the name you choose is available - if yes,
reserve it so it doesn’t get kicked back
● Don’t do any business until you get word that your business has
become an LLC
● If you cant wait to transact business, make it very clear who is a
party to the contract and if any substitutions will take place
● Defenses
● Corporation by Estoppel
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3rd party is estopped from denying the LLC's existence b/c
the 3rd party dealt as if the LLC existed at the time of the
contract
● Elements of Corporation by Estoppel:
● Misleading conduct by the person to be
estopped
● Causing third party reason to believe it
● Third part changes positions to their
detriment
De Facto Corporation
● Elements
● A valid law authorizing formation of the corp (LLC)
● An attempt in good faith to form the entity AND
● Actual use of corporation powers
● Model Rules say that de facto corporations cannot exist
● Argument is that there are uniform procedures to
codify creation of an LLC and you must follow those
in order to become an LLC
●
●
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Actual Authority of Agents, and its Consequences
o Intro
● Authority (Rest2d §7) - the power of the agent to affect the legal relations of the
principal by acts done in accordance with the principal's manifestations of consent
to him
▪
Actual
●
▪
Actual vs Apparent authority
●
●
o
Can be express or implied
Actual authority circumstantially proven which the principal actually
intended the agent to possess and includes such powers as are
practically necessary to carry out the duties actually delegated
Apparent authority is the authority the agent is held out by the
principal as possessing
Express Actual Authority - 4A
▪
Power of attorney: a written document by which one party, as principal, appoints
another as agent and confers upon the latter the authority to perform certain
specified acts or kinds of acts on behalf of the principal
● Well settled rule that power of attorney is to be strictly construed and held
to grant only those powers which are clearly delineated
● Note that party intentions can override this
● To have a reasonable belief, an agent must have express, specific
language conferring that authority is given for the agent to make a gift
● Cant give a gift under power of attorney unless
● Expressly conferred
● Arises as a necessary implication from the conferred powers
or
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Is clearly intended by the parties, as evidenced by the
surrounding facts and circumstances
Cases illustrate that even when you have express actual authority, there will still
be issues of interpretation
Note 2, p207
Note 4, p207
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●
●
▪
Rest2d §47 - Unforeseen circumstances arise and agent cant communicate
with the principal, then agent can do whatever is reasonably believed
necessary to protect the principals interest
o
Implied Actual Authority - 4B
● All forms of authority that are nit express are necessarily implied
▪
●
Definition
▪
●
Authority implied from the words or conduct between the principal and the
agent.
● Implied authority to act may arise from:
● principal’s words—incidental to express authority,
● principal’s conduct,
● custom or usage,
● emergency situation
May be more significant than express authority
▪
●
Can be implied in fact or implied in law
Virtually impossible to spell out everything an agent is hired to do
Mill Street Church v. Hogan, p210
▪
Implied actual authority
●
●
▪
Actual authority circumstantially proven
In past circumstances and course of dealing it was reasonable for
him to believe he could hire Sam
Factors to determine whether a person hired under implied authority of an
agent, could be an employee
● Whether the agent reasonably believes because of present or past
conduct of the principal that the principal wishes him to act in a
certain way or to have certain authority.
● The nature of the task or job
● Implied authority may be necessary in order to implement the
express authority.
● The existence of prior similar practices
● Specific conduct by the principal in the past permitting the agent to
exercise similar powers
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▪
Creation of authority - Rest2d §26
●
▪
When incidental authority is inferred - Rest2d §35
●
o
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 principals account
Unless otherwise agreed, authority to conduct a transaction
includes authority to do acts which are incidental to it, usually
accompany it, or are reasonably necessary to accomplish it
Agent's Duties of Care - 4C
▪
Rest2d §377(b)
●
Under ordinary circumstances, the promise to act as an agent is
interpreted as being a promise only to make reasonable efforts to
accomplish the directed results
● If so interpreted, the promisor is not liable unless he fails to make
such efforts as he reasonably can
▪
Standard of care - Rest2d §379
Unless otherwise agreed, there is a basic standard of care and if
agent has any special skill, he is expected to use those skills in a
careful manner as well
Agent's Duty of Loyalty
● In general - 4D
●
o
▪
Rest2d §387
●
▪
●
Unless otherwise agreed, an agent is subject to a duty to his
principal to act solely for the benefit of the principal in all matters
connected with his agency
Duty of loyalty has many applications/aspects
Conflicts of Interest - 4E
● Per §389, A must disclose to P when A acts as an adverse party
● Acting as an Adverse Party Without Principal's Consent - Rest2d
§389
● An agent is subject to a duty not to deal w/ his principal as
an adverse party in a transaction connected w/ his agency
w/out the principal's knowledge
● Per §390, when acting as an adverse party, A must disclose all relevant
facts to P
● Acting as Adverse Party With Principal's Consent - Rest2d §390
● an agent who, to the knowledge of the principal, acts on the
agent’s own account in a transaction in which the agent is
employed has a duty to deal fairly with the principal and to
disclose to him all facts with the agent knows or should
know would reasonably affect the principal’s judgment,
unless the principal has manifested to the agent that the
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●
●
principal knows such facts or that the principal does not
care to know them.
If there is a breach, the principal is entitled to any damages
and any benefits that the agent got out of the transaction
● See Desfosses v. Notis, 333 A.2d 83 (Me. 1975)
Duty to Account for Profits - 4F
● Duty to Account for Profits Arising out of Employment - Rest2d §388
● Unless otherwise agreed, an agent who makes a profit in
connection w/ transactions conducted by him on behalf of the
principal is under a duty to give such profits to the principal
● So w/out consent of principal, agents are not allowed
to profit from such transactions
● Don’t forget the "unless otherwise agreed" part where an
agreement or custom may permit some retention of profits
▪
See Rest2d §§ 401, 403, 404, 407 for liabilities related to breach of these
duties
●
Other Aspects of the Agent's Duty of Loyalty - 4G
▪
Acting for Adverse Party Without Principal's Consent - Rest2d §§391, 392
●
▪
An agent must disclose when representing an adverse party
Acting for Adverse Party With Principal's Consent - Rest2d § 392
●
A must disclose all relevant facts re the adverse representation
▪
Agent must not compete with the principal whilst acting as agent - § 393
▪
All of these rules disappear, unless otherwise agreed, upon termination of
the agency - §396
▪
Agent must not use the principal's confidential information to benefit
anyone other than the principal - § 395
● This rule survives the agency relationship and so agent is still
precluded from using confidential information even after the
relationship is terminated
●
Power of Agents to Bind the Firm by Unauthorized Acts
o Basically issues that arise when an agent has no authority to act but does so anyway
o Introduction - 5A
● Four Doctrines
●
▪
Apparent authority
▪
Estoppel
▪
Estoppel to deny authority
▪
Inherent agency power
Ostensible authority
▪
●
Some courts jumble them all up as one, but for our purposes, we must
consider the doctrine of apparent authority as separate from the doctrine
of estoppel
General inquiry
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▪
Did the 3rd party believe the principal had consented to the agent binding
the principal?
o
▪
Was that belief reasonable under the circumstances?
▪
To what extent was the principal responsible for that belief?
Apparent Authority - 5B
● Rest2d §8, §27
▪
An agent's power to bind the principal by an unauthorized action is based
in the principal's manifestations - written or spoken words or other
conduct - to third persons
▪
But the 3rd person must act reasonably in interpreting the principal's
conduct
●
Elements of apparent authority
▪
Manifestation by principal
●
●
●
▪
Appointment to a position may be enough to satisfy this
● See note 2 on p242
Merely a statement by the agent of authority is not enough, the
manifestation must come from the principal not the agent
An add in the newspaper may be enough to convey authority by
the principal
That somehow reaches a 3rd party
●
Does not have to be a direct contact b/w principal to agent
▪
And causes the 3rd party actually to believe the agent is authorized
▪
3rd party's belief must be reasonable
●
▪
It may be necessary for the 3rd party to inquire as to whether or
not that belief is reasonable
Apparent authority all depends on what the third party believes
●
●
The P “holds out” that the agent has the authority – P’s
manifestation of consent,
● “Holds out” can occur in 3 ways
● By direct P to 3rd party communications (not in this
case)
● Appointment to a position with customary duties
● Prior acts (practice or course of dealing) as between
the parties.
3rd party reasonably believed/relied that the P consents to A’s
authorization, AND
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●
●
Cannot have apparent authority with an undisclosed principal
●
Actual authority vs. Apparent authority
▪
Actual
●
●
●
▪
●
Agent shows POA to purchaser of land
●
●
▪
Agent has implied actual authority to represent scope of authority
Will also have apparent authority to act for principal when showing
the buyer the POA to make purchase
What if principal says don’t sell it for less than $15k?
●
If agent sells it for less, the principal will still be bound because of
the power of attorney document
Reliance by 3rd party
▪
●
3rd party's state of mind is crux here - Rest2d §27
Example
▪
●
Express
Implied
● Will always have implied actual authority to represent the
scope of that authority, unless stated otherwise
Agent's state of mind is the crux - Rest2d §26
Apparent
●
Rest2d does not require the 3rd party to show any kind of change in
position (loss, entering into a contract, etc)
● Simply need to show a reasonable reliance
● Some courts require a show of a change of position however
● For example, the Hamilton Hauling court appeared to
require a change based on the jury instructions
Two way street
▪
Where 3rd party seeks to bind principal to a contract can go both ways
▪
Principal could also use apparent authority as an argument to bind the 3rd
party
o
The 3rd party must actually believe the agent is authorized.
Estoppel - 5C
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●
Rest2d §8B
● A person who is not otherwise liable as a party to a transaction purported
to be done on his account, is nevertheless subject to liability to persons
who have changed their positions because of their belief that the
transaction was entered into by him or for him, if
● Situations where estoppel can apply
● He intentionally or carelessly caused such belief or
● Knowing of such belief and that others
●
Some situations exist where the principal is not bound by apparent authority, but
will be bound by estoppel
▪
▪
●
An undisclosed principal cannot be bound by estoppel
Other situations exists where they could overlap
Estoppel v. Apparent Authority
▪
Mere failure to act can give rise to estoppel, but normally does not give
rise to apparent authority
● This is b/c mere failure to act is not a manifestation by principal
▪
To assert estoppel, the 3rd party must have changed their position based
on their belief that the agent was authorized
● Merely entering into a contract is not a change of position, instead
must suffer a loss or incur a liability
▪
Apparent authority is a two-way street, but estoppel is a one way street
●
●
Only 3rd party's can assert estoppel against the principal and not
vice versa
UCC has changed the Common Law
▪
Any entrusting of 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
● Promotes integrity of business transactions
o
Inherent Agency Power - 5D
● Are there circumstances where the principal has not made a manifestation and is
not at fault but is nevertheless bound by unauthorized acts by the agent?
●
Inherent agency power (in the contract context)
▪
Indicates the power of an agent which is derived not from authority,
apparent authority, or estoppel but solely from the agency relation and
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exists for the protection of persons harmed by or dealing with a servant or
other agent
● All the principal has done is retained the agent
▪
●
Agent generally has to be a servant and must have committed the harm
while acting in the scope of his employment
Respondeat superior is a form of inherent agency power in the tort context
▪
Principal is liable for agent if agent is classified as a servant and the agent
must commit the tort while acting in the scope of employment
● We make the principal liable merely b/c of the agency relationship
●
Elements - Rest2d §161
▪
A general agent
●
One who is authorized to make a series of transactions involving a
continuity of services
● This is similar to servant in respondeat superior b/c both
bear some sort of close relationship with the principal
● Only looking at continuity of services, not extent of
discretion or level of responsibility
▪
For a disclosed or partially disclosed principal
▪
Subjects the principal to liability for acts done on the principal's account
▪
If such acts are incidental to or usually accompany the agent's authorized
conduct
● Must be within the scope of employment
● Not too far removed from authorized conduct
●
▪
The 3rd party must reasonably believe that the agent is authorized
▪
And 3rd party has no notice that the agent is not so authorized
McGovern says there is a problem with inherent agency power idea
▪
P appoints A as the GM of a business and tells A to only buy supplies from
certain suppliers. A buys from other sellers in accordance with customary
practice. These sellers know nothing of A's authority except A's statement
to them that he is P's GM.
● Apparent authority would apply to this case
● In almost any situation were you meet Inherent agency, you will
also meet apparent authority by position
●
Inherent agency exists and is most significant in an undisclosed principal
situation and exists for this reason
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▪
Undisclosed principals cannot be bound by Apparent authority, Estoppel,
or §161
● They can be bound per Rest2d §194
● A general agent for an undisclosed principal subjects his
principal to liability for acts done on his account if usual or
necessary in such transactions, although not permitted by
the principal
▪
So basically pay attention to this one especially when you have an
undisclosed principal since neither apparent authority nor estoppel will
apply
●
Consider why inherent agency power is significant and why it matters
▪
Only real way to bind an undisclosed principal by the unauthorized
conduct of an agent
●
Firms Accountability for Notification to and Knowledge of the Agent
o Important Terms
● Knowledge
▪
Conscious awareness
●
●
Notification
▪
Refers to an act that is intended to convey information to another person
●
▪
Rest2d §9 - knowledge of a fact is limited to actual conscious
awareness
Rest2d §9(3) - a formal act intended in it self
May or may not lead to the legal consequence of knowledge (conscious
awareness)
●
Notice
▪
Describes the legal consequences of a person being charged with
information b/c of acquire knowledge or receiving notification
● Persons have notice when they know it, have reason to know it,
should know it, or have been notified of it
● Rest2d §9 -
▪
Notice can lead to the legal consequence of knowledge, but not always
●
▪
o
Consider a subpoena left on a door of a person on vacation
● The notice (subpoena) serves as notification but does not
have knowledge
Will also be charged with notice if they have reason to know
Knowledge - 6A
▪
Rest2d §272 - Knowledge of an A is attributed to P regarding matters as to which
●
A acts with power to bind, or
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So even if A acts in an unauthorized way, if A has the power to
bind, the principal will be bound by A's knowledge
A has a duty to give the P information
● When an agent has a duty to convey info: when the agent has
notice of facts which the agent should know might effect how the
principal desires to act (Rest2d §381)
●
●
▪
Does not matter whether the agent did or did not actually tell the principal
●
So why is it attributed back to the P?
● Agent has a duty to tell and typically will normally follow through
● When cannot expect an agent to follow through with that
duty, then the knowledge will not be attributable to the
principal
▪
Holding
●
●
Prior or Casually Obtained Knowledge - 6B
● Rest2d §276
● If the knowledge was either acquired before the agency
relationship existed or while the agent was not acting for the
purposes of the principal and the agent has forgotten the
knowledge, the principal would not be held liable b/c the agent had
no duty to the principal to remember it
● Likewise, knowledge is not imputed to principal if the agent
acquired it while acting in a position of confidentiality
● Consider where the duty lies: if priest is told in
confidence, duty owed to the confessor, not principal
● Generally comes up with information conveyed to an
attorney or physician/patient
● Exception:
● Knowledge would be imputed if it can reasonably be
presumed to be present in the agent's mind while acting for
the principal or if it was acquired so recently as to raise the
presumption that he still retained it in his mind
●
●
The knowledge of an employee may be imputed to an employer
under an employee dishonesty insurance policy if the employee
holds a position of management or control in the exercise of which
a duty to report known dishonesty of a fellow employee can be
found to exist either explicitly or by fair inference from a course of
conduct
So, as long as the agent is still consciously aware of the fact, it
does not matter when or under what circumstance that knowledge
was acquired
● Only relevance of time is whether the agent still
remembers and if they do, then it may be attributed
to the principal
Notification - 6C
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●
●
Rest2d §268
● Notification to an agent results in notice to the principal if the
agent has actual authority or apparent authority to receive that
notification
Time from Which Notification or Knowledge Affects Principal - 6D
● Timing is the issue
● Rest2d §278
● The agent must have had both a reasonable time to
communicate the information to the principal and the
principal must have had a reasonable opportunity to act on
it
● In case of organizations, there must be sufficient time for
information to filter through the organization and into the
hands of the agents acting on behalf of the principal
▪
For an agents knowledge to be attributable, must have reasonable amount
of time for agent to convey and reasonable time for principal to act and
disseminate this knowledge
▪
At what time does notification effect a principal
●
●
Notification can be intended to
● Determine the parties rights from a specific point in time, or
● Notification has effect immediately (Rest2d § 270)
● Require action on the part of the person notified (fix
electrical problem)
● Person notified must have reasonable opportunity to
notify the decision maker and decision maker must
have a reasonable time to act
Adverse Agents - 6E
● General rule is that whatever knowledge an agent acquires within the
scope of his authority is imputed to his principal
● Exception
● Rest2d §282 principal is not effect by knowledge of an agent
if that agent is acting secretly adversely to the principal and
entirely for his own or another's purpose
● Cannot expect an agent to follow through on a duty to
convey when acting adversely
● An agent is not acting adversely merely b/c he is acting adversely
or has a conflict of interest
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●
▪
Rest2d §282 illustrations
●
▪
Agent must have totally abandoned the principal's interests
and be acting entirely for his own or another's purpose. It
cannot be invoked merely b/c he has a conflict of interest or
b/c he is not acting primarily for his principal
Sole actor doctrine
● The principal is affected by the knowledge of an agent who
acts adversely to the principal if:
● If, before the principal has changed position, the
principal knowingly retains a benefit through the act
of the agent which otherwise the principal would not
have received
● Retains something of value through agents
services but seeks to retain the item and also
disclaim the agent's knowledge of the
transaction
● Illustration 10 (handout)
● If the agent enters into negotiations w/in the scope
of he agent's powers and the person with whom he
reasonably believes the agent to be authorized to
conduct the transaction
● Illustration 7
● If sole actor doctrine applies, knowledge is attributed to the
principal
Notification is effective against the principal when the agent has actual or
apparent authority to receive it
▪
So even if that agent is acting adversely, notification will still be
effective unless the 3rd party has notice that the agent is acting
adversely
▪
Knowledge of adverse agent is not attributed back, but notification is
attributed back to the principal
● See page 414, note 3
●
Knowledge of and Notification to Partners - 6F
▪
Remember our three terms
Knowledge
Notice
Notification
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▪
RUPA §102
●
●
●
●
Knowledge 102(a)
● A person knows a fact if they have actual knowledge
(cognitive awareness)
● Similar to Rest2d and conscious awareness
● Differs from UPA which also noted that reason to
know or should know also counted
Notification - 102(c)
● An act intended to convey information
Notice - 102(b)
● Legal consequence of acquiring knowledge or receiving
notification
● Knows of it, has received notification of it, or has
reason to know it exists
●
102(f) knowledge of a partner relating to the partnership is
effective immediately as knowledge of the partnership
● Any notification to a partner operates in the same way as
notification
● All partners are considered agents of the partnership
● By virtue of being a partner, partners have actual or
apparent authority to receive notifications relating to
the partnerships business
● Adverse agents' knowledge is not attributed to the
partnership
● Notification to a partner who is committing fraud will
not be attributed
●
What result if we have a limited partnership?
● Remember, a limited partnership has a general partner and
limited partner
● Whose knowledge would be attributed and whose
notification would be attributed
● GP manages business and has personal liability
● LP are just passive investors so generally their
knowledge and notification will not be attributed b/c
they are precluded from making business decisions
● But note, if they have some other role besides
limited partner (ex, an employee in the
business and take part in the day to day
management) then go back to the general
rules of agency law
Ratification of Unauthorized Transactions
o Doctrine of ratification
● Arises out of the risk of unintended dealings inherent in the use of agents.
● Even where an agent dealing with a 3rd party has acted outside the scope of the
agent's power to bind the principal, the principal may nevertheless be bound if
the principal ratifies the agent's act
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o
Affirmance - 7A
▪
Ratification
●
●
▪
Ratification requires acceptance of the results of the act with an intent to
ratify and with full knowledge of all the material circumstances
Rest2d §82 elements
● Affirmance by a person
● Of a prior act professedly done on his or her account
● This is an important point- consider undisclosed principals
Affirmance
●
P manifests an election to be bound or
● Somehow communicating a choice to be bound
● Note that it doesn’t actually have to be communicated to
the 3rd party, it just has to be a expressed manifestation
such as a diary entry
● P engages in conduct justifiable only if they are electing to
be bound
● Knowing acceptance of benefits
●
Can an undisclosed principal ratify an unauthorized act?
● NO b/c the actor has to profess to act on the other person's behalf and if
the 3rd party doesn’t have notice of their existence cant profess to be
acting on their behalf- Rest2d §85
● Only disclosed or partially disclosed principal can ratify
●
Three notes
● In order to ratify, a principal must have been able to undertake the
transaction both at the point the agent entered it and at the time the
principal affirms
● Suppose A, without power to bind, enters transaction that would be
illegal for the principal to enter - in that case the principal cannot
affirm
▪
When can a principal rescind affirmance?
●
●
Rest2d §91 - ratifier can rescind if they affirm while ignorant of any
material fact
● Principal has to have knowledge of a material fact before
they can affirm
Material facts are those which substantially effect the existence or
extent of the obligations involved in the transaction
● Ex, A enters into a contract to sell P's goods to 3rd party
and at that time A has no power to bind. As part of the deal
A tells 3rd party that P will buy back the stuff if 3rd is
unsatisfied. A tells P but fails to tell about the obligation to
buy the goods back
● This effects the existence or extent of the obligations
and would be a material fact
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●
o
In contrast, facts that effect the value or inducements are not
material
● Ex, suppose P owns lots of corporate stock and A contracts
to sell it at a certain price, but without the power to bind. A
tells P and P affirms. If later P learns that stock is waay
more valuable than originally thought. P cannot rescind b/c
the price of the stock is one that effects the value and so is
not material
●
A principal may have a duty to inquire about the facts of the transaction
and if they don’t, they may assume the risks of affirming
● Ex, principal should inquire as to term of lease before
collecting the rent
●
When a P ratifies an unauthorized transaction, that may create apparent
authority for future transactions
● Ex. a principal may be bound to the second contract on the basis of
the apparent authority created by the manifestation to the third
party that the agent had authority to deal
● This may also create actual authority
Knowledge of Agents - 7B
▪
General Rule
●
The knowledge of an agent acting within the scope of her authority is
chargeable to the principal, regardless of whether that knowledge is
actually communicated
● Court says that the secretary's scope of authority did not extend to
how the funds were invested and so therefore her knowledge is not
attributed to lawyer and so that means that his failure to disaffirm
does not equal ratification
▪
It is possible for a principal to ratify a transaction based on knowledge
that is attributed from an agent
● In these cases, must look at whether the failure to act on this
would be ratification
▪
Rest2d §94
●
▪
Failure to repudiate a transaction can constitute an affirmance of the
transaction
● Silence can constitute an affirmance if normally we would expect
one to speak up if they object
Principal will not be charged with knowledge of facts relating to the agent's own
unauthorized acts
o
Approach to Ratification
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●
●
o
Chapter 6 - Management and Conduct of Firm Business - Governance Structures
Introduction - 8A
● Governance structures
● Default rules come from the statutes
▪
To what extent can the members change the rules
●
o
General rule is that they can change nearly all rules, but some are
mandatory
Partnerships
● Partners as Agents
▪
Study Guide for 8B (handout)
●
Question 1
A. UPA §9 every partner is an agent of the partnership
● If a partner has actual authority to do what they are doing
then they bind the partnership
● So A, acting for the partnership, has created an obligation
for the partnership
● What assets have been put at risk for this?
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The partnerships as well as all partner's own
personal assets
B. A binds the partnership unless the associate has knowledge that A
is acting without authority
● Does he appear to be carrying on in the business
● §9(1) apparent authority of the partners
C. Offer extended by an employee
● § 9(1) does not apply here because she is not a partner so
instead we would look to the general rules of agency law
● Here it appears that the partnership would be bound
by apparent authority by position
● Manifestation would be the hiring her as the
director of recruiting
● Could also try actual authority assuming she was told
to extend the job offer
Question 2 - how does UPA § 9(2) apply to the doctrines of estoppel or
inherent agency power as they apply to partnerships?
● Look to §4 which says that estoppel and inherent agency apply and
could bind the partnership -> but this does not mesh with what
§9(2) says
● Acts outside the ordinary course of business will bind the
partnership if the partner acts with actual authority
● Even if you have an act for which you would not have apparent
authority, the partnership would still be bound if the partner acted
with actual authority
● See also RUPA §301
● Comment something which says exactly this
Question 3 - Can we rely on A's status as a partner as an indication that A
has power to bind the partnership on an issue of referral to arbitration?
● No , per § 9(3) says that a partner by virtue of being a partner
does not have apparent authority to do any of the things listed in
9(3)
● Puts the business world on notice that a partner needs
either actual authority or unanimous consent from the rest
of the partners to do any of the listed stuff
● The partnership agreement could satisfy this or some
other written agreement
● RUPA §301 does not list this stuff
● Comment 4 says that what is within and what is
outside a partner's apparent authority should be left
to the courts
Question 4 - is UPA § 9(4) necessary? Why or why not?
● Not really necessary because they already same pretty much the
same thing in §9(1)
Question 5
● UPA §9 simply says the business of the partnership of which he is a
member
● RUPA §301 says that not only is evidence of how the particular
partnership works relevant but so is evidence of how other
business do too
●
●
●
●
●
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▪
Apparent Authority - 8B
●
▪
Burns v. Gonzalez, p287
● Facts
● Partnership of Bosquez and Gonzalez sold broadcast time to
Burns on a commission basis but were unable to fulfill their
duty and so Bosquez executed a promissory note to Burns
● Issue
● Burns is seeking to hold the other partner, G, personally
liable so question is whether Bosquez created a partnership
obligation when he executed the promissory note?
● Burns is trying to show that Bosquez appeared to be carrying on
the usual business of the partnership and that Burns had no
knowledge of Bosquez' lack of authority to bind the partnership
● Burns had the burden of proof since he is the one seeking to
bind the party
● Burns failed to do this so G cannot be held personally
liable
Partnership by Estoppel (Purported Partners) - 8C
▪
What happens when someone purports to be a partner?
●
UPA §7 - Rules for determining the existence of a partnership (RUPA
§308(e))
● In determining whether a partnership exists these rules shall apply
● Except as provided by § 16, persons who are not partners
as to each other are not partners as to 3rd parties
● So only one set of rules for determining if the
partnership exists whether it is alleged by someone
within or outside the partnership
●
UPA §16 says a person is liable if
● There is a representation that the person is a partner in an actual
or purported partnership
● Made by or with the consent of the purported partner
● Is failure to act consent?
● Comment says no, b/c there is no duty to rescue in the
absence of a pre-existing duty and merely knowing you
have been held as a partner is not enough to amount to a
duty
● If 3rd party, on the faith of the representation, gives credit to the
actual or apparent partnership
● Fairly low standard to meet (providing goods on credit,
without immediate payment)
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●
An executory agreement to provide credit will meet
this standard also
●
RUPA §308(a)
● Does not use the "give credit" language
● Applies if a person enters into a transaction
●
Public representation and reliance
● Even if a pubic representation then the 3rd party has to show
reliance on the statement
● RUPA §308(a) clarifies and says that if the representation is made
in a public manner then the purported partner is liable to the
person who relies on the purported partnership
● Purported partner does not have to have knowledge of the
public representation
●
Liability of a person whose status as a partner is misrepresented (UPA §
16(1), RUPA 308(a))
● IF
● A person represents itself, or consents to another
representing it, as a partner in an enterprise and
● A 3rd party relies on that representation and enters into a
transaction with the supposed partnership
● THEN
● The person is liable to the 3rd party on the transaction
● Reliance element
● 3rd party must believe the representation and that must be
what causes the 3rd party to act
● So then who is liable?
● Does an actual partnership exist?
● If no, look to UPA §16(1)(b)
● Jointly liable to the 3rd party
● If yes, was a partnership obligation created?
● If no look to §16(1)(b) (partnership assets
are not at risk)
● If yes §16(1)(a) (all assets (partnership and
personal) will be at risk)
●
Liability of others who make or consent to the misrepresentation (UPA
16(2), RUPA 308(b))
Three rules:
o IF
● A partnership exists and
● All the parties make or consent to the misrepresentation of
a person’s status as a partner
o THEN
● The partnership is liable on the transaction and
●
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●
o
IF
o
●
●
THEN
●
●
o
IF
o
●
▪
The partners are each liable under the ordinary rules (UPA
15, RUPA 306)
A partnership exists and
Not all partners make or consent to the misrepresentation
The partnership is not liable and
Those partners who made or consented to the
misrepresentation are jointly (UPA) or jointly and severally
(RUPA) liable on the transaction
● No partnership exists
THEN
● Those who made or consented to the misrepresentation are
jointly (UPA) or jointly and severally (RUPA) liable on the
transaction
What does Texas do?
● TBOC §152.054
● False representation of partnership or partner
● A false representation indicating a person is a
partner does not create a partnership
● A representation that one is a partner in an existing
partnership does not make that person a partner
● TBOC §152.307
● Texas has abandoned partnership by estoppel and omitted
§308
Quick recap
●
●
Must look to the partnership acts (UPA or RUPA) or the agency laws
Try to keep the laws of agency straight
● A has power to bind P if A has
● Actual authority
● Manifestation by the P that causes A to believe that
he has the authority to act
● Express
● Ex, power of attorney
● Implied
● Ex, acts which are incidental to or
reasonably necessary to accomplish
the authorized transaction
● Apparent authority
● Manifestation by principal that causes the 3rd part
reasonably to believe the A is authorized to act
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●
Partners as Managers - 8D
▪
Generally
●
Problem 6.6
● Question 1
● Partners by virtue of being partners possess implied actual
authority
● Manifestation is the agreement to be partners
● So next question is what is in the scope of that authority?
● Matters within the ordinary course of partnership
business
● So, partners have implied actual authority to bind the
partnership to matters within the ordinary course of the
partnership business (reasonably necessary to conduct the
partnership business)
● This extends to all partners
● Next question is to determine whether the actions fall within
the ordinary course of business
● Are they liable to the partnership or the co-partners?
● No b/c they had authority to do it
● Question 2
● In a vote, per UPA §18(h) they would need a majority vote,
which in this case would be 2 of 3
● How many votes does each partner get?
● 18(h) says just one
● 18(e) says all partners have equal rights
● Doesn’t matter what the capital contribution is or
what the profit share is
● Keep in mind that these are the default rules and could be
changed based on agreement b/w the partners
● Ex, could allocate voting power based on how much
capital each party puts in
● RUPA §401(f), (j) say the exact same things
● TBOC §152.209(a) is different
● Texas says difference may be decided by a majority
in interest
● Partners who hold more than 50% of the
profits
● Default rule is equal share to the profits
● TBOC 152.202(c)
● So if you E and P vote, there would be a
majority in interest because they would have
66% of the shares combined
● Part a - if E and P vote in favor of ordering from W, and M
tells them that he does not want to be bound, is MEP
grocers or M liable on the contract?
● E and P had express actual authority to place the
order and M cannot unilaterally take away that
authority by sending the letter
● So everyone is still bound, including the
partnership
● The letter could take away any apparent authority
and W has an obligation to check into the matter
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M is still personally liable by virtue of his status as a
partner
● This is similar to the Nabisco case on p312
● Part b - what action if any could M have taken to avoid
liability on purchases from W?
● M could dissolve the partnership
● Note that this is different from termination
and is merely a step on the road to
termination
● Dissolution is a period of winding up of the business
● No further authority to continue business as
usual and are limited to winding things up
● Analogous to a separation before a divorce
Question 3
● After losing the vote, M again contracts to buy bread from
A, but A does not know of the vote against this.
● Is the partnership and E and P subject to liability?
● Back to 9(1) - partner is bound if carrying on
business in usual way and 3rd party didn’t
know so the partnership is still bound through
apparent authority.
● Do the individuals face personal liability?
● If partnership assets are insufficient, the
creditor can hold the partners liable under
section 15
● Is M subject to liability from either the partnership or E and
P for buying a crappy product?
● Since this is unauthorized, he will be liable for the
breach of fiduciary duty he owes to the partnership
Question 4
● What if they each are aware that the others want to buy
from someone else and then they both end up contracting
with the other company anyway
● Is the partnership subject to liability?
● No implied actual authority though b/c they
knew that the other person did not agree
● A disagreement takes away this
authority and are obligated to put it to
the partners for a vote
● Appears that they both have apparent
authority though b/c the 3rd parties do not
know of the disagreement
● In this case, the partnership would be
liable
● As among the partners is M liable to E or the
partnership for contracting without consulting?
● M acted w/out actual authority and caused
injury through the unauthorized act so he
would be liable
●
●
●
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▪
o
Transactions out of the Usual and Regular Course of Business - 8E
●
Voting rules
● Two types of matters presented to a partnership
● Ordinary matters
● Need a majority vote
● Actions in contraventions of an agreement among the
partners (ie, amendment to partnership agreement)
● Need a unanimous vote (18(h))
● Doesn’t mean you need a unanimous vote to
change "any" agreement
● RUPA §401(j)
● An amendment to a partnership agreement
● Suppose M wants to increase the size of the grocer to make it a
mega-mart. Does he have authority to sign $1mil construction
loans?
● Not in ordinary course of business matters so would need
consent from co-partners, but what kind of vote would he
need?
● Not an ordinary matter, but is not really in
contravention of an agreement
● This is an extraordinary matter and requires an unanimous
vote
● Look to RUPA §401(j) comments says so
●
Vinson v. Marton & Assoc, p320
● Review this case (wasn’t paying attention)
● Not something that would make it impossible to carry on the
business of the partnership and even if it was, you changed the
default rules
● Bound to V for specific performance and damages
Governance structure of Corporations - 8H
▪
Shareholders are not agents and have no management rights
●
Differs from partnerships where each partner is an agent and has management
rights
▪
Board of directors possess management authority
▪
Officers run the business on a day to day basis
▪
Shareholders can only vote on the board of directors and extraordinary matters
●
Otherwise they are only passive investors
▪
Very formal structure
▪
Many states allow a corporation to permit them to operate more like a partnership
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Limited Partnerships
● Rights of General Partners - 8G
▪
Relevant provisions: ULPA §9(1) and RULPA §403
General partners in LP’s have the same rights and same obligations as
partners in regular partnerships.
● GP the liabilities of a partner (ie personally liable for partnership
obligations)
● Limited partners in LP’s have no rights, by virtue of being limited partners,
to participate in management or conduct of the partnership business.
Voting Rights of limited partners - 8H
●
●
▪
Generally
●
●
●
●
●
RULPA § 302
● Basic provision on voting rights of limited partner
● Voting rights are determined by partnership agreement and
those rights can be based on a per person basis or capital
contribution (capital contribution is the typical way)
RULPA § 401
● Limited partners are entitled to vote on the admission of a general
partner but only if it is not addressed in the partnership agreement
RULPA § 301(b)(1)
● Can vote on admission of a new limited partner but only if the
partnership agreement does not address the matter
RULPA § 801(4)
● Can vote on whether the business continues after a general partner
withdraws but again, only if it is not addressed in the partnership
agreement
Limits on Contractual Expansion of Limited Partner Rights - 8I
▪
Remember, generally limited partners cannot be personally liable
●
ULPA §7
● A limited partner shall not become liable unless ... he takes part in the
control of the business
● He chose these two limited partners b/c they were less than
passive investors
"Takes part in the control of the business"
● Looking for decision making authority that may not be checked or nullified
by the general partner
●
▪
If yes, they have a level control
▪
Ex, acting as a foreman with power to purchase parts but
not to extend credit unless approved by GP
▪
Ex, acting as sales manager without power to hire or fire
and with power to order cars only with approval of GP
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●
▪
Frigidaire Sales Corp v. Union Properties Inc, p342
●
●
●
●
●
●
▪
If LP's are exerting a level of control whereby they can be considered
more like a GP, such as in the examples above, then they can be held
personally liable
Issue is whether individuals who are LPs become liable as general partners
when they also serve as active officers of a corporation which is the
managing general partner of the limited partnership?
So are the LPs who make up the board of directors for the corporation
such that they can be held personally liable?
● They argue no, they were just officers for the corporation and they
were acting as agents and had fully disclosed the principal (the
corporation)
Court says limited partners should be liable only when a creditor has
mistakenly assumed the limited partners are general partners
● But in this case there was no possibility that Frigidaire thought they
were general partners
● The argument for them though is that if they can show that
it is an appropriate case for piercing the corporate veil then
they could
● Would have to show things like under-capitalization,
not following corporate formalities, etc
Delaney - TX SupCt went opposite way and held the partners liable
What is the rationale of ULPA §7?
● This court says it is creditor reliance and if creditor relied on them
as GPs then they are liable
● TX SupCt said if they are in control, then they are liable
The prior two cases examined this stuff under ULPA §7, but current
version is RULPA §303
RULPA §303 - Liability to third parties
●
●
303(a)
● A limited partner is liable for partnership obligations if
● He participates in the control of the business
● AND the creditor reasonably believed the limited partner
was a general partner, based on the limited partner's
conduct
303(b)
● Must look here to see if there is something that does not amount to
participating in control
● A limited partner does not participate in the control solely by doing
one of the things listed in (b)
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●
▪
ULPA 2001 is the next level of evolution
●
▪
ULPA 2001 §303
● Eliminates the control deal
● A limited partner is not liable for obligations of the limited
partnership , even if the limited partner participates in the
management and control of the limited partnership
Texas follows the RULPA
●
▪
A limited partner is not to be treated as participating in
control merely because he is an officer of a corporate
general partner
TBOC §153.102 and §153.103
General rule is that limited partners have limited liability, but can sometimes be
personally liable
▪
So when can a limited partner become personally liable?
●
●
●
●
▪
Can get protection from the first two if you register the partnership as an LLP
●
▪
●
If limited partner participates in the control of the business
If limited partners name is used as part of the name of the limited
partnership (RULPA § 303(d))
When the limited partnership is defectively formed (see Briargate Condo
case)
A limited partner can be directly liable if they cause injury, such as a tort
Primary beneficiary will be the general partner, but it will also benefit
limited partners b/c they will not be liable for participating in control and
having name in title
Note that it is important to be able to distinguish between an LP and an LLP
Limited Liability Companies - 8J
▪
General Background
●
●
●
Certificate of formation
● Aka articles of formation in some states
● Has limited information (name, registered office, agent, etc)
Operating agreement (aka "company agreement" in TBOC)
● Participants in an LLC will typically enter into a separate agreement
● State LLC acts typically set forth default rules
LLCs can have either a partnership-like governance structure or a
corporate-like structure
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●
●
●
▪
Problem 6.7, p348
●
●
●
▪
If an LLC has a partnership structure it is referred to as a
"member-managed LLC"
● Partners are agents
If it has a corporate like governance structure, it is referred to as a
"manager-managed LLC"
● Centralized management with managers
Default rules is typically "member-managed"
● Texas does not have a default rule and so the structure
must be noted in the application
LLC is a member-managed LLC, ice cream shop. The members are L, M,
and P. L entered into a contract w/ N to sell the building and lot.
Did L have authority to transfer the property?
● Looking at ULLA §301(a)(1) it appears yes
● Each member is an agent of the LLC …
● Then go through same analysis as we did with partners
● What kind of authority did she have?
● Implied actual authority to conduct transactions in the
ordinary course of business
● In this case, selling real estate was not an ordinary course
transaction so was not authorized
● What would be required for her to have authority?
● Would need approval of the members ULLCA §404(a)(1)
● Either a majority (404a) or unanimous approval
(404(c)12)
● May fall under 404(c)(12) where consent of
all members is required for sale of company
property
● Not necessarily though b/c of
something about corporations
If no, did she nevertheless bind the LLC to the transaction?
● Is Lucy apparently carrying on the ordinary course of the business?
● No so this prevents her from having both actual and
apparent authority (301(a)(1))
● Look to 301(c)
● Says instrument is conclusive in favor of a person who gives
value w/out knowledge of the lack of authority of the person
signing and delivering the instrument
● So Lucy has power to transfer the real property
Results differ based on whether member-managed or manager-managed
●
301(b) says that if it is manager managed, the members are not agents
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▪
Want to put whether manager-managed or member-managed information in the
articles of organization so that the public is on notice
▪
Analyze the ice cream problem under TBOC
Basically the same analysis
But in the voting part, it requires a quorum
● Notice also each member gets only one vote
● Basic default voting rule is that we need a majority of members
present
● 101.356(b) it says for extraordinary transactions we need an
absolute majority
● This is a stricter rule for actions out of the ordinary course
of business
● Fundamental business transaction is defined to include all or
substantially all assets
● Summary of TBOC voting rules
● Default rules describe both manager-managed or member
managed without differentiating
● Member-managed
● For ordinary matter
● Need a majority of those present at a meeting at
which a quorum is present
● For extraordinary matters (those outside the ordinary
course)
● Need an absolute majority of members (356(b))
● For a fundamental business transaction or an act that would
make it impossible for the ordinary course of business
● Need an absolute majority of members (356(b))
● If it is an amendment of certificate of formation
● Need unanimous approval of members (356(b))
● Manager-managed
● Ordinary course matters
● Need a majority of the managers present at a
meeting at which a quorum is presented
● Managers can approve them themselves
without putting it to the members
● Extraordinary matters
● Absolute majority of managers
● Fundamental transactions or those that would make if
impossible for OCB
● Need approval of managers and approval by
members under the above rule
● If it is an amendment of certificate of formation
● Need unanimous approval managers and of members
(356(b))
Chapter 7 - Managerial Discretion and Fiduciary Duties
o When can someone be held liable for breach of fiduciary duty
●
●
●
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Duty of Care - 9A
● Rest2d §379(1) - General duty of care of a paid agent
▪
●
●
Unless otherwise agreed, a paid agent is subject to a duty to the principal
to act with standard care and with the skill which is standard in the
locality for the kind of work which the agent is employed to perform, and
in addition, to exercise any special skill that the agent has
Note 3, p354 - Texas SupCt
▪
Adopts same rule as stated above
▪
In some jurisdictions they are held to a more subjective standard
Note 4, p354
▪
Attorney could be held liable if they fail to advise client of unsettled legal
issues relevant to a settlement
o
Business Judgment Rule - 9B
▪
RULPA §403(a)
●
●
▪
Basically says general partner has implied actual authority to make
business decisions
If they are only arguing that the decision was bad, then that is not enough
to hold the general partner liable
Business judgment rule
●
●
Courts are reluctant to second-guess the decisions of businesses
Rationale
● Don’t want directors to be hampered in decision making by the fear
of liability should something go wrong
●
Courts will not second-guess the decisions of managers, such as a general
partner, unless the general partner
● Is motivated by self-interest
● Is grossly negligent in informing itself
● Note 3, p360 - mere negligence is insufficient
● Note 5, p361 - partners owes a duty that is not grossly
negligent or willful misconduct
● An error in judgment or failure to use ordinary care
is not gross negligence
● Is not acting in good faith
● To be acting in good faith, the persons primary purpose
must be proper
● See Kamin case, p356, courts will not interfere
unless directors acted with bad faith or for a
dishonest purpose
● Is engaging in conduct that amounts to a gift or waste of the
partnership assets
● Basically asserting that no reasonable person could conclude
that the business is getting fair value for what it is paying
● Ex, may come up in charitable contribution of assets
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Duty of Loyalty - 9C
▪
UPA §21
●
●
▪
Every partner must account to the partnership for any benefit or profit
derived by him without consent of the other partners from any transaction
connected with the formation, operation, or liquidation of the partnership
or derived from any use by him of its property
● So basically all agents owe a fiduciary duty to each other
Default rule is that need unanimous consent
● Note that UPA §21 says nothing about duty of care, but most
courts supplement this and get it in
Fundamental duty of any partner is the affirmative duty to make a full disclosure
to his partner, not only that he is dealing on his own account but also of all the
facts which are material to the transaction
●
Tour of the RUPA
▪
RUPA §404
●
●
●
●
●
●
(a) The only fiduciary duties a partner owes are the duty of loyalty
and duty of care
● Exclusive - these are the only two fiduciary duties
(b) Duty of loyalty
● Is limited:
● To account to the partnership any property, profit, or
benefit derived from the conduct of the business or
use of the partnership property
● This is different from UPA which also
mentioned the formation of the partnership
● To refrain from dealing as an adverse party
● To refrain from competing with the partnership
● Doesn’t saying anything about consent
● But look to §103
● The stuff in (b) cannot be changed by
agreement of the partners
(c) Duty of care
● Is limited to:
● Refraining from engaging in grossly negligent or
reckless conduct, intentional misconduct or a
knowing violation of the law
● Mere negligence is not sufficient
(d) Obligation of good faith and fair dealing
(e) Does not violate the duty merely b/c it furthers the partners
own interest
TBOC
▪
152.204 - General Standards of Partner's Conduct
●
●
Duty of loyalty and a duty of care
● But this is not an exclusive list
Note also that there is no mention of the word "fiduciary"
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▪
152.205 - Partner's Duty of Loyalty
●
▪
152.206 - Partner's Duty of Care
●
▪
Basically same as above but again is not exclusive
Presumed to satisfy the duty of care if they act in an informed
basis and in compliance with 152.204
● Kind of sounds like the business judgment rule in the
corporate context
● Partner is not liable for mere negligence
Note that 152.002 identifies things that cannot be altered by the
partnership agreement
o
Fiduciary Duties in the context of Limited Partnerships
● Sonet v. Plum Creek Timber Co, LP, p378
▪
See also the handout (and read this case)
▪
What is the GPs defense as to why they have not breached the duty of
loyalty?
● They say that the limited partnership agreement takes priority over
the fiduciary duties that the GP would otherwise have
● Basically says that the limited partnership agreement modified
and/or contracted around the GPs duty of loyalty
▪
What protection do the limited partners have if the GP can set the terms
of the agreement?
● They can vote on matters for which the limited partner approval is
required and this is one of them
● Specifically, 2/3 of the partners would have to agree to this
▪
What about matters for which limited partner approval is not required
(does not need to be submitted to the partners)?
● Where the GP has a conflict of interest and approval is not
required, the transaction must be fair and reasonable
▪
Categories of transactions
●
●
▪
Two competing views, note 2, p388
●
●
▪
Matters for which limited partner approval is required
Matters for which limited partner approval is not required
● So this basically imposes the duty of fiduciary duty
Traditionalists say that the duty is imposed by virtue of ones status
and those duties are mandatory and cannot be modified by
contract
Other camp says the fiduciary duties are default rules and parties
are free to contract around them
Holding
●
This court agrees with GP that the duty was contracted around and
dismisses the case
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●
▪
Delaware Limited Partnership Act says that parties can expand or
restrict the fiduciaries duties that would otherwise apply and court
says that is exactly what they have done here by restricting them
● Only protection the Lps have is the ability to vote on it
What is the effect of the courts holding w/ respect to the dispute (does the
decision insulate the transaction from attack by the plaintiff)?
● No, b/c LPs are only precluded from challenging the breach of duty
of loyalty
● Argument then is that GP did not make adequate disclosure and
failed to represent material facts
● They did this later and got an injunction
● So once precluded from breach of fiduciary duty, the main
argument they will make is lack of adequate disclosure, which is
necessary to informed consent
▪
So what happens if the GP voluntarily put an issue to the vote of the LP,
even if not required to? What's the effect of the vote by the LP?
● This was not mentioned in the limited partnership agreement so
not sure
● Suppose LPs approve it but then one of the LPs wants to challenge
it b/c it is not fair and reasonable
● Possible effects of limited partner approval of a transaction
where such approval is not required
● No effect - standard of fairness with the burden of
proof on the fiduciary
● Some effect - standard of fairness but the burden of
proof shifts to the challengers
● Even more effect - standard business judgment rule
(code for "challengers lose")
● Insulates the transaction from attack
▪
(8) Suppose it had been a general partnership and subject to the RUPA would their contractual provision be permissible under 103(b)?
● RUPA §103(b) - the things that cannot be modified
● 103(b)(3) says you cannot eliminate the duty of loyalty but
● the parties can identify certain types of activities that
wont violate or
● the partners can ratify a specific act or transaction
that would otherwise violate the duty of loyalty, as
long as there is full disclosure of all material acts
● So under this, the ratification/vote would allow the modification in
Sonet
●
Chapter 10 - Liability for Wrongful Acts of Servants
o Introduction - 10A
● Respondeat Superior
▪
Rest2d §219(1) - When Master is Liable for Torts of his Servants
●
A master is subject to liability for the torts of his servants
committed while acting in the scope of their employment
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▪
Break it down
●
●
o
A master is vicariously liable for torts committed by A if
● Agent has to be somebody who is classified as a servant
● Servant has to commit the tort while acting in the scope of
employment
This is a form of strict liability where the principal is liable simply
by virtue of the principal/agent relationship
● (principal could also be directly liable for other stuff such as
negligent hiring, negligent supervision, etc)
Master's Liability for Acts of Servants - 10B
● Liability for acts of a servant within the scope of employment
▪
When is a servant acting in the scope of employment?
●
Rest2d §228
● Conduct is w/in the scope of employment if
● It is of the kind the servant is employed to perform
● It occurs substantially within the authorized time and space
limits
● It is actuated at least in part by a desire to serve the master
● Courts will often stretch to get this one
● And if force is used by the servant, it is not unexpectable by
the master
● The court need not have foreseen the precise act or
exact manner of injury as long as the general type of
conduct may have been reasonably expected
● Rest2d §229
● Elaborates on the §228 basic test
▪
Note 3, p457
●
▪
Detour vs frolic
● Labels used as shorthand to explain conduct that is within
(detour) and conduct that is outside (frolic) the scope of
employment
Hypo: If McG ran over a pedestrian on his way to work, would STCL be
liable?
● General Rule: An employee commuting to and from work is outside
the scope of employment and therefore the employer is not
vicariously liable
● Exception: special errand rule
● If the employee, while commuting, performs a
special errand which would otherwise require a
separate trip, they are acting within the scope of
employment
● Ex, picking up employers mail at the post
office on the way to work
● It is possible also to ratify unrequested
behavior
● See note 3, p463
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▪
Sage Club v. Hunt, p464
●
●
●
▪
Note 2, p466
●
▪
What's different in Noah v/ Ziehl to make it outside the scope of
employment?
● Bouncer had a vendetta against patron and as patron was
leaving for the night royally beat him up
● Bouncer used a weapon, which does not appear to
be within the scope of a bouncer's employment
● So this level of force may not have been
expected by the employer
● Appears not to have been actuated, even in
part, by a purpose to serve the master
Note 4, p469
●
●
Pitcher who threw fastball at fan who was harassing him - court
said pitcher was actuated by desire to get back to practicing
without heckling fans and so met all elements of §228
Note 3, p467
●
▪
Sage Club employed Thyfault as a bartender, who then beat up
Hunt who accused Thyfault of stealing his money. Hunt then sued
Sage Club
● P= Sage Club, A= Thyfault, T= Hunt
Go through the elements of Rest2d § 228
● Hired to serve drinks, collect money, and handle rowdy
patrons so it was conduct of the type he was hired for
● Did it while on duty behind bar so it is within time and space
● Again, court reaches and says it was met even though it
appears Thyfault was actuated for personal reasons and not
for the business
● Expected to use force to remove belligerent patrons so it
was expected
The court need not have foreseen the precise act or exact manner
of injury as long as the general type of conduct may have been
reasonably expected
Once a servant has departed from the scope of employment there
is an issue as to when they re-enter
● Same issues here as when we address §228 in the first
place
Liability for Servant's Abuse of Position - 10C
▪
Situation where a P is vicariously liable even though the servant is acting
outside the scope the employment
▪
Rest2d §219(2)
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●
▪
Burlington Industries v. Ellerth, p472
●
●
●
o
Master is not subject to liability for torts of his servants acting
outside the scope of employment, unless:
● (d) the servant purported to act or speak on behalf of the
principal and there was reliance upon apparent authority or
he was aided in accomplishing the tort by the existence of
the agency relation
Issue: can an employer be vicariously liable for discrimination
under Title VII?
● Two types of cases
● Quid pro quo case: where supervisor has made
threats of adverse employment action if the
employee does not go along and the threats are not
carried out
● Hostile work environment case: no adverse
employment action taken
Can the action by Slowick be considered as conduct within the
scope of employment
● Quid pro quo: argument could be made that denial of a job
benefit is conduct of the kind that is in scope of why they
were employed (to make personnel decisions)
Was Slowick aided in accomplishing his conduct by the existence of
the agency relationship
● In a quid pro quo case this is always true
● Position facilitates conduct of denying tangible job
benefits
● This means the employer will always be
vicariously liable
● In a hostile work environment case, employers are given an
affirmative defense (see p481)
● Employer must show
● That the employer exercised reasonable care
to prevent and correct promptly any sexually
harassing behavior and
● That the plaintiff employee unreasonably
failed to take advantage of any preventive or
corrective opportunities provided by the
employer or to avoid harm otherwise
● Employer is vicariously liable in both types of cases, but in
the hostile work environment employers have an affirmative
defense they can use to cut off this liability
Liability of Partnerships and Partners - 10D
● Respondeat superior
▪
A principal is vicariously liable for torts committed by an agent if
●
The agent is classified as a servant
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●
▪
●
●
The tort is committed while the agent is acting within the scope of
employment
Principal can be vicariously liable for torts committed outside the scope of
employment
Partnerships
▪
When is partnership vicariously liable for the wrongful act of a partner?
▪
If yes, how are the partners liable?
UPA §13, RUPA §305(a)
▪
Partnership is vicariously liable for wrongful acts committed by partners
while acting:
● In the ordinary course of partnership business OR
● With the authority of the other partners
●
●
Handout
Law Firm is a partnership that has several partners, including individuals A and B.
▪
(1) A leaves office to take a depo and hits Ped
●
●
▪
(2) Same facts but the person A hits is other partner, B
●
●
▪
UPA: Partnership is vicariously liable for wrongful acts committed
by partners because it was in the ordinary course of partnership
● Since A is out taking a deposition, the firm is vicariously
liable to Ped
Same result under RUPA 305
UPA says liable to anyone who is not a partner in the partnership
● So partnership would be liable (partnership obligation would
be created)
RUPA says liable to any person
● Partnership would not be liable
(3) Prospective client and A go mountain climbing, after the other partners
agree to have the partnership pay for the trip, and A negligently fails to
secure a rope, causing injury to Prospect. Is the partnership liable for
negligence of A?
● Since other partners agreed to let A go with Prospect, it fits under
the second half of UPA 13 which says that a partnership is
vicariously liable if partner is acting with the authority of the other
partners.
▪
(4) Law Firm negotiates a settlement for Plaintiff in a medical malpractice
case and a check is sent. A deposits the check in the firms trust account.
B makes an unauthorized withdrawal and absconds. Is Law Firm liable for
the settlement proceeds?
● Under UPA §13
● A was acting in the ordinary course
● But was B acting in the ordinary course?
● Kind of b/c handling client funds is in the ordinary
course for a law firm
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●
●
●
●
▪
UPA §14(b)
● Partnership received the money in its ordinary course and it
was misapplied while it was in the custody of the
partnership
● So under this analysis, the partnership would be
liable
Note for exam, would want to argue both of these
RUPA §305
● Same result b/c similar language in §305(b) as in UPA §14
(5) See handout for the question
●
●
●
●
▪
But consider that B was serving his own interests
and was not acting to benefit the partnership in any
way
Investment activity is not in the ordinary course of business or
authorized conduct
● Again this doesn’t seem to apply under UPA 13
Under UPA 14, looks like it might work, but the property was not
exactly received in the ordinary course of business since it was
investment stuff
● But looking at UPA 14(a) could argue that B was acting with
apparent authority when he told the client to turn the funds
over to him.
● Remember apparent authority is viewed through the
3rd parties perspective
● A made the manifestation by making the statement
that either he or one his partners would call her back
regarding the investment
● Other manifestations by the partnership?
● Perhaps by virtue of his employment as a
partner he has apparent authority
● Then go back to whether investing
activity is w/in the ordinary course of
business
See also Cook v. Brundidge 533 S.W.2d 751 (1976)
RUPA §305(a)
● Applies to both actual and apparent authority so would get
the same result
(6) See handout for the question:
●
UPA §15: If there is a partnership obligation how are the partners
liable (what is the form of their liability)?
● (A) Partners are jointly and severally liable for everything
chargeable to the partnership under UPA §13 or §14
● So basically they are collectively liable as well as
individually liable for the whole thing
● This suggests that plaintiff can go after anyone, and
does not have to exhaust the partnership assets first
● He also need not join all the partners in the
same action
● (B) joint liability b/c this is a contract issue and would not
fall under §15(a)
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Instead it falls under 15(b) because it would be "all
other debts and obligations"
● If this is the case, the plaintiff has access to the
partnership assets and those have to be exhausted
first
RUPA §306, §307(d)
● (C) in both cases, they will be both jointly and severally
liable under 306(a) b/c will be liable for all obligations of the
partnership
● 307(d) says that the partnership assets must be
exhausted before can go after the assets of the
individual partners
● (D) for an LLP, plaintiff would have access to the partnership
assets, but not on the assets of the partners simply based
on their status
● This does not preclude a partner from being directly
liable however
● So when A hit B, the LLP status does not
protect him b/c he is directly liable
● So would have access to the partnership assets and
the partner who is directly liable, but not the other
partners
One other thing to remember
● Full shields, like §306, protect from tort and contract
liabilities of the partnership
● Partial shields generally only protect from tort liabilities of
the partnership
● Partners are not protected from contract obligations
●
●
●
●
Liability for Wrongful Acts of Independent Contractors
o Intro
● Remember respondeat superior:
▪
Principal is vicariously liable for torts committed by an agent it:
The agent is a servant AND
The agent commits the tort while acting w/in the scope of
employment
In this chapter we will focus on the first element
●
●
●
▪
If the agent is not a servant, then they are classified as an independent
contractor
●
Servants vs. independent contractors
▪
Agents can overlap with independent contractors and when they do they
are "non-servant agents"
▪
When the agents do not overlap, they are simply servants
●
▪
Servants are a sub-category of agents
Independent contractors that do not overlap with agents are "non-agent
service providers"
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▪
o
Non-Liability for Acts of Independent Contractors - 11A
▪
o
See also Rest2d §2 and §220
Fact intensive which much attention paid to the factors set out in Rest2d §220
Exceptions to the Independent Contractor Rule - 11B
● A person is vicariously liable for the acts of an independent contractor if that
person has non-delegable duties
▪
●
some other source, including specific relationships such as
landlord/tenant, contracts, statutes or regulations)
How do we know when a duty is non-delegable?
▪
●
This is not a duty that arises from agency law, but rather arises from
P547, no clear criteria for determining this but will be determined
non-delegable when the responsibility is so important to the community
that the employer should not be permitted to transfer it to another
Non-delegable
▪
Means the person who has that duty will be liable for breach even if that
breach is committed by an independent contractor
▪
●
Quick recap
▪
Basic doctrine is respondeat superior - Rest2d §219
●
▪
Exception
●
●
●
P is vicariously liable for torts committed by an agent it
● Agent is classified as an servant
● Agent is acting w/in scope of employment
P can also be vicariously liable for conduct of a servant when the
conduct is outside the scope
● Discrimination of title VII (Burlington case)
When is a p vicariously liable for torts committed by an
independent contractor
● Non-delegable duties
● Cannot escape liability for breach if p has a
non-delegable duty
Apparent Authority/Estoppel - 11C
▪
Baptist Memorial Hospital v. Sampson, handout
●
Facts
●
Sampson was bit by a brown recluse spider and went to the
hospital twice and both doctors misdiagnosed her problem
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Issue: is the hospital vicariously liable for the alleged
negligence of the second doctor?
● Md was an independent contractor, not a servant
Because an IC has sole control over the means and methods of the
work, the entity that hires the IC is not vicariously liable
● BUT an entity may act in a way that makes it liable
● Liability may be imposed under the doctrine of "ostensible
agency"
● Idea is that the hospitals conduct should equitably
prevent it from denying the existence of an agency
Focus
● Whole focus of respondeat superior is on the Principal/Agent
relationship
● The focus of ostensible agency is the reliance of the 3rd
party caused by the principal
Elements of Ostensible Agency - Rest2d §267:
● Principal represents by its conduct or otherwise that a
person is P's agent or servant,
● P's representation causes 3rd party reasonably to believe
the person is P's agent or servant, AND
● 3rd party justifiably relied on the appearance of agency
Court determined that the first element was dispositive
● In support of its motion for summary judgment, the hospital
showed that there were signs in the ER that said the mds
were independent contractors and that all patients signed a
consent form that indicated that the mds were independent
contractors
Holding
● Court said Sampson could not show a specific
representation by the hospital that could be construed as a
representation that the mds were employees and so granted
summary judgment
● McGov disagrees and says there were some factual issues
that could have been resolved
● By virtue of allowing mds free reign of the ER gives
the appearance of an agency relationship
● Most people would tend to think these mds
are hospital employees, just by the fact of
their being there
● So if this is an adequate representation, the question
then is whether the hospital took appropriate
measures to counteract that representation
● Also notes that even if she could have overcome the
first element, she would still have to show that the
third element worked also
● May be hard to show that 3rd party justifiably
relied
● General rule: If a patient is admitted w/out
objection, they are treated as having relied on
the appearance of agency
What if it hospitals have a non-delegable duty to provide
non-negligent care, so that they cannot delegate to an IC to
escape the duty
●
●
●
●
●
●
●
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●
●
▪
Ostensible agency can apply in other settings as well
●
●
●
●
Against: pl already has adequate recourse against both the
hospital as well as the mds (malpractice)
For: hospital is in a better position to deal with the risk
Undertakers funeral limo was dirving by an independent contractor
● Appeared that the drivers were employees of the undertaker
Holiday Inn owned by independent franchisee. Renters were
robbed and tried to sue corporate HI
Car bought from gas station and brakes turned out to be defective.
Station was owned by an independent franchisee but he sues
corporate Texaco
● Relies on national Texaco advertising and court said the ad
was enough of a representation that would allow 3rd parties
to reasonably believe that all mechanics were Texaco
employees
Chapter 13 - Ownership of the Firm
o Ownership of the Firm vs Ownership of Firm Assets - 12A
● Property rights of a partner
▪
UPA §24 - Extent of a Property Rights of a Partner
●
●
●
●
Rights in specific partnership property
● Under UPA, who owns specific partnership property?
● UPA §25
● Partners are co-owners of specific partnership
property as tenants in partnership
● Aggregate theory
● Keep in mind that the UPA follows the
aggregate theory whereby the partnership is
not an entity and cannot own anything
● Partnership is not a separate
thing, it is just a way to classify
the relationship
● Partner can only use property for limited purposes
and cannot assign it, per UPA §25
Interest in the partnership
● Right to share of the profits and a right to a share after
termination - UPA §26
Right to participate in management
● UPA 18(a) each partner has an equal right to participate in
the management of the partnership
Putnam v. Shoaf, p622
▪
Basic facts
●
Frog Jump Gin company owned by Putnam and Charltons. Shoaf
purchases Putnam's one/half interest for the gin company. Two
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●
●
●
▪
documents were signed, a dissolution agreement b/w Charltons
and Putnam and a quitclaim deed from Putnam to Shoafs
After the dissolution of the original partnership, the Charltons
consented to the Shoafs becoming partners after they acquired
Putnam's interest in the partnership
After Shoafs become partners, they discover that the old
bookkeeper was embezzling money. Partnership recovers the
money, but Putnam comes back into the picture and says that she
is entitled to one-half of that recovery
Putnam argues that she never conveyed her interest in this money
to the Shoafs
UPA says that the current partners own the partnership which would mean
that Putnam no longer has any interest
● While she was a partner, the only right she had to the partnership
property was the right to use it for partnership purposes and this
was not a transferable interest
● All she had to convey was her interest in the partnership and had
no specific interest to separately convey or retain
● The only right she has is to use the partnership property for
partnership purposes and this is not assignable
▪
The only thing she could convey was her interest defined in UPA §26 - her
share of the profits and surplus
●
RUPA §
▪
RUPA §203, 501 - Partnership owns specific partnership property
●
▪
RUPA §401(g)
●
▪
Partners can only use that property for partnership purposes
RUPA §502
●
o
This is b/c the RUPA emphasizes the entity theory where the
partnership is separate from the actual partner
Says the only transferable interest of a partner is the profits, losses
and distributions
Rights of Assignees and Creditors
● Assignments - 12B
▪
Assignment of Partner's Interest - UPA §27, RUPA §503
●
●
●
Assignment does not trigger a dissolution of a partnership
Assignment of a partnership interest does not entitle the assignee
to interfere in the management or administration of the partnership
business
Problem 13.7, p646
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▪
●
A, P, B are partners in a dairy farm called APB Farms. C is a creditor of P
so to settle her debt, P assigns C her half of the partnership interest
● Did the assignment dissolve APB Farms?
● No, UPA §27 - assignment does not in and of itself dissolve
a partnership
● Is C now a partner in APB Farms?
● No, UPA §27 - assignment of a partnership interest does not
entitle the assignee to interfere in the management or
administration of the partnership business
● Assignment does not make C a partner
● Did the assignment entitled C to take possession of P's half of the
cattle owned?
● Under UPA §25(a), the only rights P has are the rights to
use the partnership property and she cannot convey any
actual shares of the cattle
● P only conveys to C her share of profits and surplus
● After the assignment, APB reinvests all profits. Can C sue to force
them to make distributions?
● UPA §27 - C only gets the rights to distributions that are in
fact made - cannot force them to be made
● May she bring a direct or derivative suit for breach of
fiduciary duty?
● Partners do not owe a duty of good faith or fiduciary
duties to assignees (Bauer case)
● Concern is that assignees could become
pesky if in fact partners owed fiduciary duties
● What rights does C have as assignee?
● Only the right to receive any distributions to which the
assigning partner would be entitled to
● So is she stuck? What if they say they will not make any
distributions?
● She can petition a dissolution if it is a partnership at will UPA §32(2)(b), RUPA §801(6)
● Request a judicial dissolution of the partnership
● This is like a trump card b/c court will basically imply that it
is in the best interest of all parties
● TBOC §11.314 says that assignees cannot seek a judicial
dissolution
Recap of 12A
▪
Property rights of a partner (UPA §24)
●
●
●
●
Rights in specific partnership property - UPA §25, RUPA §401(g)
● Basically the only right though is to use that partnership
property for partnership purposes
Interest in the partnership - UPA §26, RUPA §502
● Rights to profits and surplus
Right to participate in management - UPA §18(e), RUPA §401
● Equal right to participate
Charging Orders
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▪
General Partnerships - 12C
●
●
●
Still considering the rights of a creditor
Problem 13.1, p621
● Facts
● APB Farms again. C is a creditor of P and C has a
judgment against P in that amount. Note also that
the debt is unrelated to the partnership business. To
enforce the judgment, P sends the sheriff out to
execute on C's share of the farm stuff.
● Can C do this?
● No, UPA §25(2)(c) - says a creditor to an individual
partner may not execute on partnership assets
● Protects the partnership and says do not have
a right to assets of a partnership
● Same result under RUPA
● 203 - assets of the partnership belong to the
partnership
● 501 - a partner is not a co-owner of
partnership propery and has no interest in
partnership property which can be
transferred, either voluntarily or involuntarily
Problem 13.8, p652
● Facts
● Same as above with the APB dairy farm
● (a) May C ask the court for a charging order?
● Yes, authority UPA §28, RUPA §504
● On due application to a court, the court may
charge the interest of the debtor partner with
payment of the unsatisfied amount
● Does the charging order entitle C to half of P's share
of partnership property?
● No, it is just a method to help the creditor
collect on the judgment and it does not allow
the creditor actually take partnership assets
● So it is more like a lien
● UPA §28 / RUPA §504
● Also allows the court to appoint a receiver to collect
the distributions of the partnership
● Broad authority to issue such other orders as the
circumstances of the case requires
● (b) If, pursuant to the charging order, C receives an amount
sufficient to close pay the judgment, is she entitled to future
distributions?
● The charging order is only good to satisfy the
amount of the judgment, nothing else
● Since it is a lien and/or garnishment, once the
creditor has been paid, they have no further right to
future distributions
● (c) Assume APB Farms has made no distributions and told C
that they will be reinvesting all profits. Should the court
grant C's motion to foreclose and what is the effect of such
foreclosure?
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UPA §28(2) gives authority for foreclosure
● UPA is not exactly clear, but suggests that it is
available to a creditor who has a charging
order
● RUPA §504(b) court may order a foreclosure subject
to the charging order at any time
● What is the effect of such foreclosure?
● Foreclosure would mean there was a court
supervised sale of the partnership interest
● P's interests in the partnership would be sold
off to the highest bidder
● The people who would bid on it include P, C,
and A and B
● If anyone else buys the prop, C
benefits b/c she will get paid the
amount she is owed
● Anything left over would go to P
● If C buys the foreclosure, she would be
in the same position as if she were an
assignee of the partnership interest
● So then as assignee she would
have the right to seek judicial
dissolution
(d) Suppose APB begins to pay partners including P a
monthly salary, but P refuses to pay C half of it. Can C ask
the court for a charging order directing APD Farms to pay
half of P's salary to C?
Texas dropped the charging order provision in the TBOC
with respect for general partnerships
● TBOC 154.002 is the equivalent of UPA §25(2)(c)
● A creditor cannot execute on partnership
assets, but in Texas there is no authority to
obtain a charging order
● Charging order is not an available remedy for
a general partnership in Texas
●
●
●
●
●
Summary so far
Rights of a creditor of a partner in a general partnership
● Seek a charging order?
UPA/RUPA - yes ; TX - no
●
●
If get a c/o seek appointment of receiver?
UPA/RUPA - yes ; TX - n/a
If get c/o seek foreclosure on partnership interest?
UPA/RUPA - yes ; TX - n/a
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●
▪
If foreclose (or get voluntary assign) seek dissolution?
UPA 32(2)(b)/RUPA 801(6) - yes ; Tx - no, 11.314
Limited Partnerships - 12D
●
●
What are the rights of a creditor in a limited partnership?
RULPA
● 101(10) - Definition of Partnership Interest
● defines partnership interest as a partner's share of
the profits and losses of a limited partnership and
the right to receive distributions of partnership
assets
● 702 -Assignment of Partnership Interest
● Partnership interest is assignable unless the
partnership agreement says otherwise
● also says the assignee has the right to receive
distributions that the assignor would have been
entitled to receive
● Basically the same as UPA 27 and RUPA 503
● 704(a) - Right of Assignee to Become a Limited Partner
● Assignee of a partnership interest in a limited
partnership does not have the right to become a
limited partner unless
● Partnership agreement says the assignor has
the right to make the assignee a partner
● Consent is granted from all other partners
●
Problem 13.9, p667
● Facts
● APB Farms again but assume it is a limited
partnership, where A, P, and B are limited partners.
P has voluntarily assigned half of her interest in the
farm to C. After the assignment, APB Farms tells C
that they will continue to reinvest all profits and will
make no distributions.
● May C sue in a court for a decree dissolving or liquidating
APB Farms?
● RULPA §802 says that the only people who can apply
for a judicial dissolution are the people in the
partnership
● Note that this is different than the general
partnership rules in UPA and RUPA
● RULPA §1105, which says that anything not
provided for in this act, go back to UPA or
RUPA
● But this does not apply here, b/c 802
does specifically say that only partners
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●
Rights of a creditor of a partner in a limited partnership
● Seek a charging order?
RULPA §703 - YES
●
If get a c/o seek appointment of receiver?
RULPA - NO (see 1105, which directs you to UPA,
which
says YES)
●
If get c/o seek foreclosure on partnership interest?
RULPA - NO (see 1105, which directs you to UPA,
which
says YES)
●
●
If foreclose (or get voluntary assign) seek dissolution?
RULPA §802 - NO
TBOC §153.256
● Rights of a creditor of a partner in a Texas limited
partnership
● Seek a charging order?
Tx - Yes
If get a c/o seek appointment of receiver?
Tx - no (?)
● If get c/o seek foreclosure on partnership interest?
Tx - no
● If foreclose (or get voluntary assign) seek
dissolution?
Tx - no, §11.314
No access to partnership assets
Charging order is the exclusive remedy by which a creditor
may satisfy a judgment
Legislation trying to give protection to people doing
business in limited partnership form
●
●
●
●
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▪
Limited Liability Companies - 12E
●
●
TBOC §101.112
● Identical to TBOC §153.256 except that this provision
applies to LLCs
Rights of a creditor of a partner in a Texas LLC
● Seek a charging order?
Tx - Yes
●
●
●
o
If get a c/o seek appointment of receiver?
no (?)
If get c/o seek foreclosure on partnership interest?
- no
If foreclose (or get voluntary assign) seek dissolution?
Tx - no, §11.314
Tx Tx
Distributions on Liquidation
● Continuing discussion of ownership of the firm
● Now looking at a business org at the end of its life and the distributions it makes
upon liquidation
●
Parker v. Northern Mixing Co, p629 and handout - 12F
▪
Facts
●
●
▪
Doug Guthrie, Ike, and CJ Guthrie agreed to operate an asphalt
plant
Venture did not last very long and they agreed to end the business,
but could not agree on the proper allocation of the assets and
liabilities
First must figure out what kind of relationship they had and then apply the
applicable rules
● Court determined that it was a de facto partnership
● The partners of the NMC are Ike and Douglas
● CJ is just a creditor
● The agreement to end the business was a dissolution
● Dissolution is a change in the relationship of the parties
▪
What did each party contribute to the venture?
●
●
●
Ike: $134,477.62
Doug: $7,500.00 (value of services)
CJ: $88,956.40 (amount of loan he made to the venture)
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●
▪
Total: $230,934.02
Balance sheet
●
Assets:
$230,934.02
Liabilities: $88,956.40
Partners capital accounts:
Ike: $134,477.62
Doug: $7,500.00
▪
Balance sheet explanation
●
●
▪
Was Doug entitled to a salary entitled to a salary?
●
●
●
▪
UPA §18(f) Default rule for salary is that no partner is entitled to
remuneration for acting in the partnership business
● So no, b/c there was no agreement to the contrary
The compensation will come from the profits
A partner contributing only personal services is ordinarily not
entitled to any share of partnership capital pursuant to dissolution.
Personal services may qualify where an express or implied
agreement exists
Result of operation
●
●
●
●
▪
Left hand side shows how much is invested
Right hand side shows who has a claim
● The partners have a claim based on the amounts in their
capital accounts
The loss was $48,101.01, per court on page 633
● Default rule is that profits and losses are to be shared
equally
● So divide by 2 and come up $24,050.50 per partner
This loss will effect the capital accounts and reduce each by their
share of the loss
● So Ike ends up w/ $134,477.62 - 24,050.50 = $110,427.12
● Doug ends up with $7500 - 24,050.50 = (-16,550.50)
We would also have to reduce the asset amount by the loss
● 230,934.02 - 48,101.01 = $182,833.01
We would leave the liability alone on the balance sheet
Looking at UPA §40, who gets paid and when?
●
So of the $182,833.01 available assets
● CJ the creditor gets paid first per §40(b)(I), leaving
$93,876.61
● Ike is entitled to $110,427.12 and since there is not
enough, Douglas will have to contribute that amount to the
partnership
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$110K is then a liability that the partnership owes to
Ike
● Doug is going to have to contribute $16,550.50 to
the partnership in order to get to that amount
● He will just have to find the money
Result is that each partner has a loss equal to $24,050.50
●
●
▪
●
Argument for Doug would be that his services should be accounted for in
the same manner as a cash contribution
● That value of contributions are equal whether services or cash
● Becker said that a service partner should not have to contribute
toward the loss to allow the capital contributor to recover
● Kind of an equity deal: Ike puts in money and he gets it
back, but Doug put in blood sweat and tears and got
nothing back
● Note that this is inconsistent w/ UPA §40(d) and RUPA §401
Brief Hypo:
▪
Suppose there are two partners, A and B, who form the AB partnership
but register it as an LLP. Assume they each put in $100 of capital
● Assets = $200, Liablities = 0, Capital accounts = A-$100 and
B-$100
● Then they take out a loan from the bank
● Assets = $250, Liabilities = $50, capital accounts= A-$100 and
B-$100
● Then they have a loss of $250 so the assets are reduced to zero
● The partners will split the loss so the capital accounts will be
$100-$125 = ($25)
● What happens if the bank wants to collect their $50 back?
● Cant get anything b/c it is a limited liability partnership
▪
W/ respect to outside creditors, keep in mind the effect of limited liability
●
●
●
So even though they have negative capital accounts, they will not
have personal liability or have to pay the bank
Note that this a full shield jurisdiction and protects against contract
or tort
● Partial shields protect against tort liabilities, but not contract
liabilities
Chapter 14 - Dissociation of Non-owner Agents
o Termination of the agency relationship
● Can terminate in one of two ways
o
▪
Voluntary action of the principal or the agent or
▪
By operation of law
Voluntary Terminations - 13A
● Because it arises by mutual consent, it can also terminate on a voluntary act
● Terms
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●
▪
If the P terminates, it is called revocation
▪
If the agent terminates it is referred to renunciation
Rest2d §118
▪
The principal and the agent always retain the power to terminate the
relationship
▪
BUT CONSIDER
Although they both have power to terminate, consider other
consequences, such as breach of warranty, depending on the
agreement
When does it happen?
●
●
▪
Termination of agency occurs when one party has notice that the other
manifests dissent to its continuance
● Ex, a phone call
▪
Manifestation could also be by conduct
Conduct inconsistent with the authority previously given
Ex, P authorizes A to sell land, but then P builds a giant house on
the land (this would be a manifestation of dissent)
Implied termination
●
●
●
▪
Agents authority to act can also be terminated by intervening events that
should cause the agent to realize they are no longer authorized
● Ex, P authorizes A to buy a house but subsequently the house has
burned down
▪
●
See also note 7, p682
Zukaitis v. Aetna Casualty, p678
▪
Facts
●
●
▪
General agent vs special agent
●
▪
Md had Aetna insurance through agent. Notified his insurance
agent of a lawsuit, but Aetna had terminated that agent. The
agent sent the notification to the wrong insurance provider, who
didn’t realize it and began representation. Later they realize it and
withdraw. MD then asks Aetna to represent him since they were
the provider. They refused so he had to get his own attorney.
Aetna claimed that Md did not provide prompt notification to them
and also that the notification he gave was not to their agent, b/c
they had voluntarily terminated the relationship with that agent
Authorized to conduct a series of actions involving continuity of
services
Even though the agent did not have actual authority though, they had
apparent authority
● Lingering apparent authority
● Rest2d §127 - if a principal manifest that the agent is a
general agent, then the agent has apparent authority that is
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not terminated by voluntary termination of actual authority
unless the third party has notice
● In other words, apparent authority continues until
the 3rd person has been given notification of the
termination
▪
How could Aetna have cut off the apparent authority?
●
●
●
Notes
▪
3, p680
●
▪
A voluntary termination terminates all powers of an agent to affect
the principal's legal relations, inlcuding inherent agency power
EXCEPT
● It does not terminate is apparent agency of a general agent
5, p681
●
o
Could have written an letter to all policy holders who purchased
Aetna insurance from that particular agent
● This notice would not be effective unless could show they
actually got it though
May also be able to do so by way of notification by publication to
the general public
● Not effective though for everyone
● 3rd person has extended or received credit to or
from the principal through the general agent
● The principal should have known that the agent had
already begun to deal with the 3rd person
● These people have dealt with agent already and notification
by publication is insufficient
Lingering apparent authority of special agents rarely happens
● exists only in limited circumstances as listed
Terminations by Operation of Law - 13B
● Death
▪
Problem 143, p683
●
●
Father gives Son power of attorney to change bank accounts. Son
goes to bank and adds himself as joint tenant to Father's bank
account. Unknown to bank or Son, Father died a half hour before
Son got to the bank.
● Is power of attorney actual or apparent authority?
● Actual in the form of power of attorney
● Apparent authority applies also
● For apparent we need a manifestation by the
principal to the 3rd party and POA satisfies
this
Under traditional rule, sons actions would be ineffective and the
funds would pass under the will
● Rest2d §120, Comment c
● At common law, death terminates all power of the
agent to bind the principal both authority and
Downloaded From OutlineDepot.com
●
●
▪
Rationale in Shock
●
●
▪
They said whole point was to protect 3rd parties and they should
continue to be protected until they have notice of the death
Also said the risk of death should fall on the estate of the principal,
not the 3rd party
Rest3rd §3.07(2) (see note 5, p23)
●
●
▪
apparent authority without notice to either the agent
or the 3rd party
● Agent has no power to bind when he dies and so has
breached the implied warranty of authority
Modern Trend - Shock
● Apparent authority continues until the 3rd party has notice
of the death
● The power of attorney creates apparent authority
presentation of the POA is a manifestation of the agent to
the 3rd party made by the principal
Problem though is that Son's apparent authority is dependent on
his actual authority and when Dad died, he lost his actual authority
● Maybe Son's actual authority continued until he knew of the
death
Effect
Death of principal does not terminate actual authority until agent
has notice of the death
Death of principal does not terminate apparent auhtority until the
3rd party has notice of the death