Agency & Partnership Outline, Ricks, Fall 2010
I. Agency
A. Formation of Agency Relationships
1. Generally
 Agent: a person who represents another in contractual negotiations or transactions akin thereto.
 Principal: the party who consents to the other party acting on his behalf & under his control.
 Agency: a fiduciary relation which results from the manifestation of consent by one person to another
 that the other shall act on his behalf and subject to his control, and consent by the other so to act” R2A §
o agency is not a contract theory (although the relationship can be evidenced bya contract)
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Elements of Agency: (required)
*R2A 1
(1) Some manifestation (consent) by the principal that the agent act (a) on his behalf and (b)
subject to his control;
 Control- over the result or ultimate objectives (the ends); doesn’t include control at
every moment- may be attenuated and ineffective
 Inapposite to the amount of control for a master-servant relation - which is
control over the ends and the means
o (2) Consent by the agent to act for the principal
 Consent- rests on intent as manifest by agreement or action (objective standard - words
or actions)
 the parties must consent to the interpersonal relationship, not necessarily the label
 the parties may try to disclaim the agency relationship via contract, the court should
look at the parties conduct and not solely to the parties respective label
Characteristics/ Attributes of Agency: (factors- not dispositive) These are NOT elements,
once the agency exists all of these will occur.
o Agent’s power to alter the legal relations of the principal
o Agent’s duty to act primarily for the benefit of the principal
o Principal’s right to control the agent
Burden:
o The existence of an agency relationship is a factual matter
o Party asserting the agency claim has the burden of proof
Policy Behind Agency Test:
o Qui Facit per alium, facit per se. (He who acts through another, he himself acts) -- metaphysical
unity of agent & principal
o Instrumentality & extension beyond yourself helps you be free & do more
o Economic Welfare
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Selling Goods & Agency:
o Usually, a dealer who receives good from another & simply re-sells them is not an agent for the original
seller
 Exceptions, where dealer can be agent:
 (1) where the dealer has a duty to act primarily for the benefit of the original seller
 (2) where the dealer passes on the warranty & performs the warranty duties of the original seller
o Green v. H&R Block: Class action (b/c actual das were minimal) suit is brought against H&R for breach of a fiduciary duty to
disclose kickbacks. AC found sufficient facts were alleged to prove an agency relationship, giving rise to a duty to disclose. Here,
the taxpayers manifest consent by authorizing H&R to file, put money in their account with bank through RAL, loan application.
H&R consents by: agreeing to file return, promising to appear if audited, promising to secure a rapid refund, advertising says
“trust” H&R. Correct result, wrong analysis
 Ricks analysis:
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Principals consent- taxpayers manifest consent by authorizing H&R to file, put money in
their account with bank through RAL, loan application.
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Agent consent -H&R consents by: agreeing to file return, promising to appear if audited,
promising to secure a rapid refund, advertising says “trust” H&R.
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Principal’s control - at any time before delivery the taxpayer could have canceled the
service/refund
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o Basile v. H&R Block: Same facts as Green, but opposite result- crt H there was no agency relationship. Crt uses circular reasoning;
the absence of an element that would normally establish agency doesn’t necessarily mean that there is no agency. Wrong result, right
elements.
 Ricks thinks there is evidence of agency for the purposes of the tax returns. An agency relationship creates fiduciary duties
and a duty to disclose. Ricks thinks H&R isn’t liable b/c relationship didn’t go that far (no duty to disclose; no breach b/c it
was trivial).
o Elson v. Koehr: Crt H that a dealer who sold manufacturer’s products was not an agent b/c not the dealer wasn’t acting primarily for
the benefit of the manufacturer- simply purchased the products from manufacturer to resell. R2A 14J: A person who receives good
from another for resale is not an agent of that seller to a subsequent buyer unless they parties agree that the original seller
has a duty to act primarily for the benefit of the original seller.
o Bunting v. Koehr: a boat dealer purchased Mercury Marine (MM) boats from the manufacturer, but the dealer sold them
with the manufacturer warranty. Court holds that a dealer who sells a product subject to the manufacturer’s warranty is
not the manufacturer’s agent -- the warranty is like a piece of the boat -- and the dealer is not under control of the
manufacturer. Crt reasoned that the extended warranty was just a condition of purchase, and thus, the dealer had no
power to alter the legal relationship of the manufacturer
 Ricks thinks: The attachment of this warranty made the dealer MM’s agent. The dealer: (1) consented to act on the
manufacturer’s behalf by performing the warranty services FOR the manufacturer; (2) the dealer was subject to
MM’s control because the dealer abided by the warranty terms set by the manufacturer, the dealer met all the
requirements the manufacturer required; and (3) the manufacturer consented to this by allowing the dealers to
perform the warranty work and relieve the manufacturer of the obligation. A person who re-sells good subject
to a warranty by a manufacturer, is an agent of the manufacturer.
o Kasselder v. Kapperman: Kasselender owned a grader that he wanted to sell, but the buyer “S” would not buy it unless it
was in running condition. K agreed to pay for repairs to the grader, but only if the repairs were less than $3000 -- S said
he could get it fixed for less than $3000 so K sent the grader to S. Subsequently, the costs of repair were $6000 and S
authorized the higher repair costs. The ct found there was an agency relationship made bw S (agent) and K (principal) but only
to the extent of the $3000. Anything over $3000 S had to pay, because he was only authorized to repair the machine for $3000.
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2. Power of Attorney- written document that purports to convey an agency relationship and bestows upon the attorney the ability
to perform specified acts for the principal
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General Rules @ Power of Attorney:
POA are strictly construed to grant only the power enumerated and interpreted strictly, BUT the
parties intent rules. The law is very formal in order to prevent fraud b/c the agent is given the
authority to bind the principal w/out reference to whether he should or should not have taken the
action.
o The intention of the parties rules -- determined by looking at the language used in the
instrument (ejusdeum generis - when there is a listing of powers the words are not to be
construed in their broadest sense) and in light of the surrounding circumstances
o Broad all embracing terms are to be discounted and disregarded in POA
o Courts give terms their technical rather than their popular meaning
o Ambiguities in the instrument are construed against the drafter
o Expresio unius exclsio alterius: expression of one is the exclusion of the other
o Interpret the contract together as a whole
o An agent holding a broad power of attorney lacks the power to make a gift of the
principals property, unless that power: (1) is expressly conferred; (2) arises as a
necessary implication from the conferred powers or (3) is clearly contended by the
parties, as evidenced by the surrounding facts and circumstances
o Handwritten provisions prevail over typed
Requirements of a POA: (from the Uniform Rules applicable in Giannopoulos)
(1) Furnish an affidavit of the attorney-in-fact
(2) State the circumstances under which it was procured
(3) Post office address of the grantor
(4) Amount of his interest and relationship to decedent
(5) Financial arrangement and exact terms of compensation of the attorney-in-fact or of any other
person concerned with the matter
(6) Copy any agreement concerning compensation
(7) Name of any attorney representing the attorney-in-fact
o
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Related Issues:
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1) See Duty of Loyalty - Bock v Nash for more one PoA
2) See King v. Backnard @ Duty to the principal
Estate of Giannopoulos: Widow resident of Albania signs a POA granting NY firm the right to represent her re: her interest in an
estate in NY. Here, the Uniform Rules and Real Property laws were violated, and aspects of the doc gave the crt an impression of
fraud. Thus, the crt held there was no POA. The address only contained the state and country; fee agreement wasn’t specified in
the agreement; translator’s statement is simply notarized, not sworn under oath; her signature was in a different language than the
doc; not notarized in Albania- doesn’t state the notary read and explained the doc.
King v Baknerd: H and W split - H lives in home for a while then moves out west - signs a POA that states lawyer
had authority to “convey, grant, bargain/sale” the home - W moves in and later wants to sell property - attorney gifts
it to W - H returns and sues- attorney did not have the power to gift the property to W - ejusdeum generis gives the word
“grant” a meaning like sale, not gift -- power must be clearly delineated
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B. The Firm’s Contractual Liability
1. Agency v. Authority
 Agency doesn’t necessarily equal authority. It’s possible to have agency w/out the agent possessing any authority to
act on behalf of the principal.
 Authority: is the agent’s power to bind the principal “by acts done in accordance with the principal’s
manifestation of consent to the agent” R2A § 7. Principal is bound by the authorized acts of this Agent in
entering into contracts on the principals behalf.
 When evaluating whether the agent had the authority to bind the principle - have to look at the exact
time/place/situation to see if liability extends
2. Actual Authority- authority the principal actually gives to the agent
Elements of Actual Authority
1) Manifestation of intent by the principal to the agent that the agent is authorized
2) Such that the agent actually believes
(subjective standard)
3) Reasonably, that the agent is authorized
(RPP objective standard)
 Intent isn’t required. Authorization may be expressly conveyed orally, in writing, or may be implied through the
actions of the principal.
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Modes of Communicating the Principals Manifestation
o Directly: from principal to agent
o Indirectly: through intermediaries (secretary)
o Inaction: silence when there is a duty to speak; “when silence, reasonably interpreted, indicates consent”
Actual Authority can be:
o Express: authority expressly indicated by the principals words or conduct
o Implied: authority to do acts that are incidental to or accompany express authorized acts; may be based on
custom or past dealings
Escaping the Contract Entirely (third party): only if,
o (1) contract provides that it is inoperative if the agent is representing someone
o (2) a special type of fraud:
 (1) agent fraudulently represented that the agent was not acting for the principal
 (2) the third party would not have entered into the contract knowing the principal was a party
 (3) the agent or undisclosed principal knew or should have known that the third party would not have
signed a K with the principal.
Related Issues:
1) POA are a way of giving an agent actual authority
2) Ministerial Acts: agent can usually delegate the performance of incidental mechanical & ministerial acts, but may
not delegate acts that involve discretion or the agent’s special skill. Delegator is sub-agent.
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Kasselder v. Kapperman: Grater repair. Crt found owner was only liable for $3K b/c that was the amount that he expressly
authorized for repairs to the potential purchaser. No apparent authority b/c the owner never spoke with the repair person- fails
element 1.
King v. Bankerd: Client provided his attorney w/ a broad POA after he left his W and disappeared for yrs. POA said atty could
grant, convey, or sell property. Atty transferred client’s interest in the house to W. Client later sued atty. Crt H that POA did
create an agency relationship per se. But, agent lacks the authority to gift the principal’s property unless the power is: expressly
conferred, arises as a necessary implication from the conferred power, or is clearly intended by the parties as evidenced by the
surrounding facts/ circumstances. Based on the rules of construction, POA are always strictly construed against the drafter. Crt is
going to give effect to the word that extends the least amount of power- in this case sell. Here, atty was clearly acting against
client’s interest.
o Another issue mentioned in case: conflict of interest. Atty shouldn’t be acting as atty in fact on behalf of his clients.
Generally given to family members.
o De Bueno- upheld transfer for no consideration. POA contained very broad language; principal requested agent to
complete transfer for estate planning.
o Von Wedel- Very broad provision, but ex. were all business types. Crt didn’t approve transfer of prop to W to protect
principal while at war.
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Implied Actual Authority
Actual authority, circumstantially proven, which the principal actually intended the agent to possess & includes such
powers as are practically necessary to carry out the duties actually delegated (extra authority implied from the
circumstances, for acts that are practically necessary for the agent to perform the acts he was authorized to perform).
o Mill Street Church v. Hogan: Church painter had implied authority to hire his brother, as he had done in the past.
Painter discussed hiring a helper w/ an elder- who suggested another person but said he was hard to get ahold of.
o Factors Used in Determining Implied Actual Authority: (focus on the agents understanding of
his authority)
 If agent reasonably believes the principal has granted authority
 Nature of the task/job
 **most important: Conduct of the principal in the past- allowing agent to engage in like actions
o Carr v. Runyan: when mother sent her daughter to the mediation in her place & the judge’s order specifically provided
that the party who attended the mediation had to have the power to bind. This gave the daughter not only the power to
settle, but also to do anything else associate with settling (i.e. sign the roll)
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3. Apparent Authority- authority the principal holds out that the agent possess to a third party
Elements of Apparent Authority
1) Manifestation of intent by the principal that the agent is authorized
 “holding out” intentional or by negligence: 1) direct: oral/written or actions; 2) position:
generally recognized duties; 3) prior acts: reputation for authority in past transaction
2) Such that the 3P actually believes
(point of view of 3P)
3) Reasonably, that the agent is authorized
(RPP standard; reliance not an issue)
 May be proven w/o presence of the actual agent.
 Principal must be the source of the information to the third party
o Policy: 1) bw the two innocent parties (the prinipal & 3P) the burden should be placed on the
principal for putting an agent in the position to cause the harm; 2) Any loss should be imposed so
as not to disrupt normal commercial operations
Look for lingering apparent authority after the agent has been dismissed
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Modes of Manifestation by the Principal:
o Through intermediaries: by secretary or assistant displaying the 3rd party that the agent has power
o Direct: apparent authority created by express statement of the principal. Either through:
 authorization statement of the agent
 documents given by the principal to the agent,
 from 3rd persons who have heard the agents authorization through permitted channels of media.
o Reputation: A person who permits another to do an act in such a way as to establish in a community a
reputation for having authority to act, creates apparent authority w/ respect to those who learn of the reputation.
o Prior Acts: Apparent authority may be created by acquiescence of the principal in prior acts of an agent.
o By position (persons recognized role within an organization): look at local custom, past practice between
parties, and standard business roles -- if usually the agent’s position would give him a certain power, then there
is a manifestation
 Examples:
 CEO - apparent authority for transactions within the ordinary course of business
 General Manager - apparent authority for transactions within the ordinary course of business
 Vice President - no apparent authority, title lack a generalized meaning
 Corporate Secretary - apparent authority to certify copies of corporate documents
 Branch Manager - no per se apparent authority, probably apparent authority to communicate decisions
on significant matters made by the principal
 Lawyer - does not have apparent authority to settle w/o clients permission
Third Parties Reasonable Belief:
o A belief is not enough, the belef must be reasonable
o Third party has a duty of inquiry: when the principal’s acts create an appearance of apparent authority, but it is
ambiguous -- the third party has a duty to inquire to make the belief reasonable
o Can use the alleged agents conduct to support the third parties reasonable belief
Undisclosed/Partially Disclosed Principal:
o An agent for an undisclosed principal can never have apparent authority
o An agent for a partially disclosed principal can sometimes have apparent authority - if there is sufficient
manifestation
Sociedad v. McManus: Co. growing and producing onions dealt w/ 2 alleged agents of purchasing co. Claim K formed during
telephone convo w/ someone claiming to be from the purchasing co. Shipping onions in sacks not bearing name of purchasing co;
never received cks from purchasing co. But sued for remainder of claim still owed. Crt claimed there was no evidence of either
actual or apparent agency. Ricks thinks 2 items of evidence might be persuasive: 1) 1 alleged agent’s statement that he was an
authorized agent; 2) Telephone convo where person said he was calling from McManus. Both statements are evidence of a
manifestation of the intent of the principal that the agent was authorized- apparent authority.
Carr v. Runyan: Sold property by K. Person in possession didn’t pay taxes; prop sold at auction. Owner sues. Crt ordered
mediation. Daughter appears on mom’s behalf and approves settlement. Mom subsequently claims she didn’t ratify and
settlement is void. Crt H no actual authority b/c no evidence of mom’s manifestation of intent to her daughter. But crt H there
was apparent authority. Crt order stated that if didn’t attend mediation, parties must send someone authorized; and Mom allowed
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daughter to attend mediation in her place. These facts combine to implicitly show a manifestation of intent. Mediation and other
party actually believed daughter was authorized, and this belief was reasonable given the circumstances.
Hamilton Hauling v. GAF: Agent of GAF entered into a 10 yr K for $800K of raw materials, exceeding his authority to
authorize $25K purchase orders. Crt H no apparent authority b/c it was the agent who represented to the 3P that he had authority,
not the principal. Both the agent and the 3P acting as if the agent didn’t have authority. Also, no apparent authority was created
based on the agent’s position b/c he wasn’t generally authorized to execute this type of K (which the 3d party knew)
 Fails first element (bc Hamilton knew Bajts power to contract was limited & he was not authorized) Fails third element
(Hamilton not reasonable in thinking Bajt could K this time w/ no approval)
Fennell v. TLB Kent Co: Attys settled despite client’s disapproval. Crt H attys didn’t have apparent authority, and thus the
settlement was invalidated. No manifestation by the client to 3P that atty had authority to settle.
o This is problematic b/c attys generally assume that other attys have authority to settle for their clients. Attys can’t contact
other parties directly.
o Artha Management- 2nd Cir limitation. Presumption that atty has authority to act on behalf of client re: settlement. In
order to negate this authority, client must expressly state that the atty lacks authority to settle.
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4. Estoppel (protection for the 3P)
Elementsof
ofAgency
Agencyby
byEstoppel/
Estoppel/Equitable
EquitableEstoppel:
Estoppel:
Elements
1) a person makes a statement to another; and, [X is my agent or X has authority]
2) the other relies1)on
that statement;
as by signing
a person
makes a statement [such
to another;
and, [XaisK]my agent or X has authority]
3) reasonably; 2) the other relies
[person
of ordinary
prudence, conversant
on that
statement;
[such as w/
by business
signing ausages
K] and the nature
3) reasonably;
[person of ordinary prudence, conversant w/ business usages
and the nature
of the particular business, is
justified in presuming that agent has authority]
o If 12 yr old goes to Lexus to buy car for Bill Gates, reliance is unreasonable.
4) to the other’s detriment
 Relief the person who made the statement is stopped from denying it in court
When the principal has, by his voluntary act, placed an agent in such a situation that a
person of ordinary prudence is justified in presuming that the agent has the authority
to perform a particular act in behalf of the principal, the principal is estopped from
the agent’s authority to perform the act.
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R2A Estoppel:
 A person who is 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 position because of their belief that the transaction was
entered into by him, if:
o A) he intentionally or carelessly caused such belief (like communicating it to 3d party); or
o B) Knowing of such belief and that others might change their position because of it, he did not take
reasonable steps to notify them of the facts.
Different kinds of Statements
 Statement does not have to be made directly to a the 3P, can be transmitted through other media
 Leaving goods after purchase with a merchant who sells those goods is a statement (Metalworking)
o Possession alone is not enough to be a “statement” for estoppel purposes, there must be something more
 Silence: : Knowledge by the principal that a 3P will rely on agent’s authority, coupled w/ his silence, justifies
an inference of assent -- silence is only an affirmative act when there is a duty to speak
Reasonableness:
 it is not reasonable for a party to assume a seller has title because he has possession
Doric Co v. Rosen Associates: Management co took over hotel property: had a news conference and released information to the
press re: acquisition, designated mngr. Mngr had authority to hire/fire employees, pay invoices, office door said he was mngr. Ad
co completed services for hotel; mngr promised would be reimbursed. Ad co didn’t receive full pymnts after owner went into
bankr. Sued mngmnt co- claiming agency by estoppel. 1) Ad co mngr heard/read mgmnt co’s press release statements. 2) Ad co
relied on that statement in believing it would be fully paid by mngmnt co. 3) Ad co was reasonable in this reliance. 4) Ad co
completed the work and wasn’t fully paid.
Prob: even if ad co knew who the real owner was, wouldn’t have done anything differently. So is this really reliance?
Metalworking v. Fabco: Purchaser bought a metalworking machine from seller. Seller later re-sold the machine. The second
purchaser sold the machine to another co, who spent considerable $ servicing the machine. Original purchaser sued second
purchaser. Second purchaser argued equitable estoppel. Possible statement: leaving the machinery with the seller of goods of that
kind for 9 months. Did rely on statement to their detriment- receiving a judgment against them. But argument fails b/c second
purchaser wasn’t reasonable in their reliance (not reasonable for buyer to believe that seller has title just because seller has
possssion). However, leaving the machine with the seller isn’t a statement. Although possession & control usually aren’t
sufficient, slight additional circumstances may create a statement: ie if the seller is a merchant who regularly deals w/
merchandize of that type.
Goldstein v. Hanna: Condo owner entered into lease agreement which contained option to purchaser. Leasee attempted to
exercise option w/ simultaneous sell to another buyer. Ultimate purchaser declined to perform. Leasee was prepared to complete
the deal, but the realtor stated the option would remain open until the end of the option period (contrary to the lease terms- said if
exercise prior, it expires). Realtor called owner to confirm. Owner didn’t say anything and allowed leasee to rely on realtor’s
assertions. Although there is no statement, crt still applies equitable estoppel. R2A 94, com a: Knowledge by the principal that a
3P will rely on agent’s authority, coupled w/ his silence, justifies an inference of assent. However, Ricks thinks agency doesn’t
really work here b/c not enough evidence of intent or a statement- realtor could’ve said ok even if owner said don’t go forward.
But thinks leasee should still win b/c owner admitted leasee had a right to purchase the prop when he tried to buy out leasee’s
interest.
Hodeson v. Koos Bros.: Salesman purported to sell customer furniture and took cash. Co claims salesman was an imposter. Crt
finds co liable for customer’s loss based on negligence- lack of reasonable surveillance. Can’t create agency b/c there’s no
manifestation of intent by the co. (actual/ apparent authority) or a statement by the co. on which the customer relied (estoppel).
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There’s no inherent authority (no agency relationship) and no ratification. The only way to extend this negligence argument into
estoppel is to analogize it to the duty to speak in Goldstein. Ricks thinks it’s a stretch.
Hypos: Thief stole stereo and sold it to merchant. Merchant then sells it to buyer. Owner can’t be estopped to deny the
merchant’s agency b/c the owner didn’t make a statement.
If principal tells 3P that she gives agent authority to negotiate a K, and she puts out an offer on a house- there’s apparent
authority. But no agency by estoppel if there’s no harm. ie- if principal doesn’t actually buy the house. Would apply if: put down
a deposit, gave up another opportunity, sold her own house.
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5. Inherent Authority- situations where agent explicitly acts outside the authority given to him by the principal
Elements of Inherent Authority:
In general: A FAIRNESS DOCTRINE -- when the agents position creates an opportunity for harm to a third party. The principals
liability is not based on representation/manifestation made to agent or third person or on estoppel, but exists because of the nature of
the nature of the agency between the principal & the agent for the protection of third persons harmed by the agent
**for there to be inherent authority there needs to be a general agent & either an undisclosed/disclosed principal.
o
o
o
o
o
o
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General agent- agent authorized to conduct a series of transactions involving a continuity of service. R2A §
3(1)
 Factors: (R2A § 3. com a)
Remember 4 exam
 Number of acts agent performs to get to result
 Number of people agent deals with
 Length of time agent needs to accomplish the result
 An independent K-er isn’t a servant but may still be an agent. R2A 2(3)
Special agent- agent authorized to conduct a single transaction or a series of transactions not involving
continuity of service. R2A § 3(2)
If the principal is UNDISCLOSED: then principal liability exists if:
1) the agent is a general agent
2) doing acts usual or necessary to authorized transactions (even though forbidden)
*need not be authorized transactions
If the principal is DISCLOSED or PARTIALLY DISCLOSED, then principal liable if:
1) the agent is a general agent;
2) doing acts which usually accompany or are incidental to the performance of his
authorized transactions (even though forbidden); and,
3) the other party reasonably believes that the agent is authorized
Policy based Limitations: (inherent agency does not apply if)
 When the third party knows that the agent is acting without authority (not innocent, shouldn’t be
protected)
 When the agent is not acting in the principals interest (conduct not a part of the enterprise)
Principle: cannot allow the principal to deprive a benefit unjustly received
Policy For Inherent Authority:
o
o
o
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Unjust enrichment: the principal is the least cost avoider of minor deviations of his agent
Respondiat Superior: it is not unjust to insist that the principal should be liable for many of the
frauds/wrongs by one he has employed
Economic Benefit: Between the innocent customer and the principal, it is more equitable to make the
principal liable - in the best position to insure these incidents do not occur
Dupuis v. FHLMC: Homeowner signed PN in favor of mortgage co. Mortgage co sold note to FHLMC, but entered into a K w/
FHLMC to service the loan. Mortgage co is now bankrupt. Homeowner stopped making payments, and FHLMC attempted to
recover full amount of the loan- including amounts never dispersed and retained in escrow. Mortgage co breached K w/
homeowner by failing to disburse entire amt of loan, not paying ins./ taxes, didn’t pay interest on escrow funds, didn’t credit acct
for amt of ins ck or amt paid to fix roof. FHLMC claims not liable b/c these actions were unauthorized under their agreement w/
the mortgage co. Mortgage co is a general agent of FHLMC. Mortgage co performs multiple acts in servicing the loan: paying
taxes, ins, taking pymnts, monthly statements, demand ltrs, etc; deals w/ mult parties- taxing authority, ins co, potential lien
holders; length of time to service a mortgage is substantial- in this case 30 yrs. Mortgage co’s actions were of the type usual or
necessary in a servicing relationship. FMLMC is thus liable to homeowner for Mortgage co’s breach of K. Underlying principle:
unfair to take the benefit of the K w/out the burden of the breaches. However, FHLMC escapes liability b/c of the Merrill
Doctrine: agent of a governmental entity can’t bind it beyond the entity’s statutory authority.
Kidd v. Edison: Edison hired mngr to arrange tone-test recitals. Singer sued claiming mngr agreed to pay her retainer, even if no
recitals performed. Edison claimed mngr was only authorized to arrange pymnt for recitals. Crt H Edison liable to pay singer.
The singer knew she was working for Edison- principal was disclosed. Mngr was a general agent, and he was doing acts usually
incidental to setting up recitals: finding artist is likely to require a retainer, must set up well in advance. Singer is reasonable in
her belief that mngr is authorized: he was authorized to enter Ks and was the one setting everything up. (Almost same evidence
as #1- fact that he is a general agent makes belief reasonable.)
Zanac v. Frazier: Restaurant owner told ast mngr to price out the job of fixing the sign. Ast mngr talks to repair co, informs them
he has to get approval, then calls back and gives the go ahead. Owner claims he didn’t authorize ast mngr to hire repair co. There
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is no evidence of actual/apparent authority or agency by estoppel b/c no manifestation of intent by the owner. Owner was
disclosed to repair co. Ast mngr is a general agent of the restaurant: he is authorized to hire/fire employees, take supply
deliveries, and do things that had to be done at the restaurant. Authorizing this repair is the type of activity that would usually
accompany ast mngr’s authorized duties. Repair co is reasonable in belief that agent is authorized- economic justification. Due to
the simplicity of the transaction, repair co was reasonable in not double checking agent’s authority. But if this was a high dollar
development, would except the builder to ensure authority- something in writing.
Exam Qs:
o An undisclosed principal is NOT bound by apparent authority.
o Economic justification for an informality like in the Zanac case. (3P may reasonably believe an agent is authorized
when the relative size of the project makes the cost of investigating the agent’s authority unreasonable.)
11
6. Ratification- affirmance by a person of a prior act which did not bind him but which was done or professedly done on his
account (R2A 82)
Elements of Ratification: (only applies in the absence of any of the above)
1) an (unauthorized) act purportedly done on behalf of another (principal)
o At the time of the act the principal must have: (a) existed; (b) had the capacity to originally
authorize.
o The effect of ratification is that the act becomes authorized at the time it actually occurred,
unless
 The principal lacked contractual capacity at the time the agent acted OR
 The retroactive effect would interfere with a third parties rights than intervened
Under above circumstances the effective date is the date of ratification
2) knowledge by the other (principal) of the material facts of that act, and
o Material facts- substantially affect the existence or extent of the obligations involved in the
transaction that knowledge of them is essential to an intelligent election to become a party
o Knowledge- requires actual knowledge, not just reason to know R2A 91, com c
3) the voluntary affirmance or acceptance by the other of that act
o Affirmance- intentional act (electing to be bound or through conduct R2A 83) viewed
objectively indicates a choice to treat the act as authorized
 Affirmance need not reach the third party to be effective (can be simply told to the agent)
o Type of affirmance by conduct: accepting/ retaining benefits. R2A 98- In order for acceptance
of benefits to constitute affirmance, the principal must have no claim to the accepted benefits
other than through the transaction in Q; if act non purpoted to be done on behalf of principal no affirmance
o Inaction: in a situation where “under such circumstances that, according to ordinary experience
of men, one would naturally be expected to speak if he did not consent” -- duty to speak!
 Policy:
o Economic Efficiency: Ratification arises from the risk of unintended dealings from the use of
agents in the market. Even where the agent, in dealing with a 3rd party, acts outside his
authority, the principal may still be bound if he ratifies the agents acts
Partial Ratification -- not allowed


A principal is not allowed to ratify the unauthorized acts of an agent to the extent that they are
beneficial, and disavow them to the extent they are damaging. If a principal ratifies part of a
transaction, he is deemed to ratify the whole of it. R2A §96
o Does not apply to distinct transaction or separate acts R2A§96 com. B
Act Purportedly done on behalf of Another
o Have to have some affirmative representation by the actor
o Marital status alone cannot fulfill this element
o Owning the land jointly, without some sort of knowledge by the other party that the land is owned jointly,
is not enough in itself
o Note: a not yet formed business cannot “ratify” (called something else) an act by a promoter because the
contract date is pre-dated to the actual signing, and at that time the business was not in existence.
Related Issues:
1) Non-existing firm: an entity cannot ratify something that happened before it existed, the entity has to adopt the K
and a Novation needs to occur (novation: a new agreement between the principal & a third party)
2) A principal can affirm by either electing affirmatively - adoption to be bound- or by conduct - acquiescence
3) Principal can ratify the forgery of its signature
4) Where an agent, authorized to collect a debt owed to the principal, accepts in lieu of cash a valid check payable to the
agent, the debtor is discharged upon the payment of the check, although the agent absconds from the proceeds.
5) An entity does not know something unless a person in the organization with sufficient authority knows about it
12
6) In order for the corporate principal to ratify, there is no need for the unauthorized act to create any measurable benefit
to the parent entity
7) Marriage, in itself, is not proof of agency.




Botticello v. Stefanovicz: H & W held farm as tenants in common. H executed lease w/ an option to purchase. Attys & leasee
didn’t know about W’s interest until 3P sought an E. Ds later refused to honor leasee’s option, and he sued and was granted a
judgment by TC. AC set aside judgment against W, but upheld judgment against H. 1) H wasn’t W’s agent. Martial status or joint
ownership alone isn’t enough to establish agency. *Could argue apparent authority: apparent that Mary must know about the
agreement; intent to ratify by accepting payments. 2) No ratification. H didn’t purport to act on W’s behalf. No evidence of W’s
knowledge- didn’t know about terms of the agreement; draw up by H’s & leasee’s atty w/out her review. (although could be
argued as above). W didn’t affirm/ accept the agreement by accepting the rent payments. Rent may be used for family purchases;
could just be one spouse providing for the other.
Rakestraw v. Rodrigues: H uses W’s SP as collateral for a loan for his business over W’s objection- forged W’s signature. W
signs proceeds ck not realizing what it was. Later learned about forgeries, sought counsel, but decided not to take action. W
thought he had an interest in the business b/c her SP was used as collateral on the loan. Co fails and defaults on loan. W is sued,
pays the remainder, then cross-claims against H/notary. Crt H W ratified the forgeries. Act of signing the PN was an act
purportedly done on behalf of another. W later acquired actual knowledge of the forgeries. She accepted the forgeries by taking
benefits (corp payed prior security interest and taxes), and by not taking action.
3 A’s Towing v. P&A Well Serv: P&A had a K w/ Chevron to plug a well. Due to equip probs & weather, the job was delayed.
P&A’s president called Chevron and was told by an unidentified person that the K was canceled. P&A didn’t return to the well
relying on this statement that the K was canceled. Chevron later sent a letter to P&A saying K was canceled. Towing co. sued
P&A for sums due under towing Ks. P&A filed a 3P demand against Chevron to recover the towing costs. TC said P&A was
entitled to amt it would have made if it had been able to complete performance. Chevron argues on appeal that the unidentified
individual didn’t have authority to cancel and thus K cancellation can’t be imputed to Chevron. Crt H that Chevron ratified the
phone call. 1) Person on the phone said the K was canceled- act purportedly done on behalf of another. 2) Chevron was aware of
the phone call- supervisor testified that he knew about it and there was a general awareness in the office. 3) Chevron voluntarily
affirmed the act by not taking action when they knew about the phone call. *Voluntary element is iffy- hard to say Chevron
intended to ratify. But Chevron’s argument that they didn’t know who answered is unbelievable. Crt knows someone is trying to
cover himself and is trying to reach the just result.
o R2A 94, com a- Silence or a failure to act indicates affirmance under such circumstances that, according to the ordinary
experience and habits of men, one would naturally be expected to speak or act if he did not consent.
Navrides v. Zurich Ins.: Atty signed settlement release and forged client’s name on the settlement check. Client was
unsuccessful in collecting from atty. She sued the insurance co who paid the settlement and the bank that cashed the check. By
suing the other party, w/out making an attempt to set aside the unauthorized dismissal of her PI action, the client ratified the
settlement. If a principal ratifies part of a transaction, he is deemed to ratify the whole of it. R2A 96 Thus, atty was authorized by
the client’s ratification to receive the settlement. Receipt of payment by someone authorized to receive it is payment; the maker is
then released. Thus, ins co and bank are not liable.
o R2A 96. com b- General rule against partial ratification doesn’t apply to situations involving distinct transactions or
separate acts. In this case, client’s ratification of the settlement didn’t equal ratification of the atty’s forgeries. Thus, client
can still sue the atty for unauthorized confiscation of her funds.
13
7. The Non-Existent Firm -- Promoter’s Liability in Contract
Promoters Liability in Contract
There is a presumption (see how to rebut below) that a promoter who assumes to act on behalf of a
not-yet formed corporation is personally liable for the contract if the corporation never forms and
does not expressly adopt the contract
*To defend the promoter from liability -- look to arguments below





Exception:
o Promoters can execute option contracts on behalf of the corporation only if the option giver dies & the option taker
(the corporation) exercises the option -- the estate must honor it.
To rebut presumption:
o The 3P knows of the non-existance of the firm AND
o Agrees to look solely to the firm
 BOP: on the promoter to prove
For promoters liability to end:
o Contract must be made on behalf of the corporation;
 Look to the intent of the other party
 Express: stated in contract that they are contracting with the corporation and do not
hold the promoter liable
 Implied: circumstantial evidence
o Signature line -- Did promoter sign on behalf of himself or the corporation?
o Who were payments made to promoter or corporation?
o Did other party know /informed that promoter was/is trying to become
incorporated?
o Corporation is ultimately formed, AND
o The Corporation expressly/impliedly adopts the contract -- there is a novation (new agreement between the
corporation & the third party)
Ricks Analysis:
o Arguments for why the promoter should not be liable:
 It isn’t necessary to have two parties to a K -- the ct assumes that this is necessary when holding
promoters liable until corp forms
 The contract does not have to form at the time signed -- can form at a later time when the corp.
comes into existence and ratifies
 Mistake in transcription argument: If the written document does not reflect the actual agreement of
the parties (and the plaintiff can prove this), the plaintiff can have the document reformed to
reflect the actual agreement. If the correct name of the party to the contract is not included
(meaning here that the parties intended the corporation to be the party), the promoter can sue to
have the correct name inserted and the promoter's name omitted.
Alternative Arguments:
o (1) De Facto Incorporation -- Elements
 (1) a valid law existed under which such a corporation (or partnership) could be lawfully
organized
 (2) an attempt had been made to organize thereunder
 (3) the defective corporation was an actual user of the corporation ((i.e. they acted like a
corporation)
 (4) All elements done in good faith
o policy: created to keep individuals from personal liability when they had
attempted to abide by the statute and corporate business took place before
formailities complete
o (2) Corporation by Estoppel
(contraversial because they completely contradict the purpose of the
statute)
 Purpose: comes about when parties are estopped from denying an entities existence because they
have acted like one exists
 Elements:
 (1) There is a statement or conduct showing a belief that a partnership exists by the
purported members
14


 (2) There is reliance on this statement by a third party
 (3) Reasonably
 (4) The third party receives a detriment as a result of the reliance
(3) Mistake in Transcription
 Where a mistake relates, not the factual presmise of the agreement, but to the way in which the
agreement is expressed in writing
Goodman v. Darden: Goodman (promoter) has a K w/ Darden, Doman & Stafford (DDS) to renovate an apartment building.
During negotiations, Goodman decides to incorporate. K is signed in the name of his proposed corp. 5 progress payments are
made to Goodman in the name of the corp. Work wasn’t completed on time and was allegedly poor quality. DDS served
Goodman w/ demand for arbitration. Good claimed he wasn’t a party to the K, and thus wasn’t required to arbitrate. Crt H
Goodman was a party to the K. Promoters of a corporation are at least initially liable on any Ks they execute in furtherance of the
corp entity prior to formation, b/c: a corp not yet in existence can’t authorize actions on behalf of itself. Formation of the
corporation following execution and adoption of the K by the corp are prerequisites to any release of liability. Burden is on the
promoter to show by a preponderance that both parties intended for the corporation to be solely liable.
15
C.
The Firm’s Liability in Tort:
RESPONDIAT SUPERIOR -- an employer/master is vicariously liable for the torts of his servant; joint & several
liability (if the servant is not liable, neither is the master)
For employer to be liable under the doctrine of respondeat superior:
1) The actor must be a servant; AND
2) Either:
a) acting in the scope of employment (elements below either RS §228 or 219(a)) OR
b) abusing his position
-Unless an exception applies, there is no employer liability for independent contractors
-Respondeat superior liability applies to both negligent torts and intentional torts
Policies behind Respondeat Superior Doctrine:
1)
2)
3)
4)
hire well trained staff
control workplace (safer, more responsible employees) -- risk avoidance
deep pockets
burden follows benefit- force the internalization of their externalities (ex. pollution- if manufacturing costs are
pushed off on everyone else it becomes a net drag on utility) Employer receives the benefit so they should assume the
risk -- make the corporation recognize their externalities and pay for them -- so truly socially profitable (businesses whose
profits are greater then all of their costs) survive
5)
6)
7)
8)
1. Servant
Spreads the risk
employer and employee are “one unit”
the employer has most of the evidence of facts surrounding the injury
misleading appearance (circular argument- not misleading unless believe employer is liable)
*Rationales support mult factors. Combo of factors and rationale give judges free reign.
v. Independent Contractor

Independent Contractor-(R2A 2(3)) person who contracts w/ another to do something for him but who isn’t controlled
by the other nor subject to the other’s right to control w/ respect to his physical conduct in performing the undertaking.
He may/may not be an agent.
 Servant- one who is employed to perform service for another in his affairs and who, w/ respect to his physical conduct
in the performance of the service, is subject to the other’s control or right to control (Arsand)
 R2A 220(2)- FACTORS FOR DETERMINING SERVANT V. INDEPENDENT CONTRACTOR
(a) Control: Extent of control which, by the agreement, the master may exercise over the details of the work. (most
important factor- Kane; Pamperin);
(b) Distinct Occupation: Whether or not the one employed is engaged in a distinct occupation or business;
(c) Supervision: The kind of occupation, with reference to whether, in the locality, the work is usually done under
the direction of the employer or by a specialist without supervision;
(d) Skill: The skill required in the particular occupation;
(e) Provider: Whether the employee or the workman supplies instrumentalities, tools, and the place of work for the
person doing the work;
(f) Length of Employment: The length of time a person is employed;
(g) Payment: The method of payment, whether by time or by the job;
(h) Regular Business: Whether the work is a part of the regular business of the employer;
(i) Parties Belief: The intent of the parties to create a master-servant relationship; and
(j) Whether the principal is or is not in business.
(a) ***COSSBBPPL
16


Kane Furniture v. Miranda: Kane provides carpet installation through Perrone’s business. Perrone hired contractor’s to complete
installation jobs, including Kraus. After finishing an installation job, Kraus went and got some drinks then caused an accident,
killing the passenger of the other vehicle. Crt H Kraus was an independent contractor and Kane was not liable based on the R2A
factors. (see case pg. 531; rvw application of factors to facts)
Pamperin v. Trinity Mem. Hosp.: Negligence in practice of medicine. Radiologist, who works for a different entity than the
hospital, mis-read an X-Ray test. Crt H that the radiologist, as well as Lakeview, entity for which radiologist work, were
independent contractors. (Factors: radiologists exercise independent professional judgment, hosp doesn’t control specific
techniques used by Lakeview, separate offices, Lakeview establishes fees, Lakeview has its own malp ins and isn’t prohibited from
serving other hospitals.) Thus, there was no liability for the hospital. *Ricks argues that finding radiologist liable is supported by
policy: hosp could tell Lakeview to hire him, hosp has the deeper pocket, hosp gets the benefit of his srvcs, etc. Shows that this is a
subjective area.
o Ricks argument against: thinks that doctors are servants since the hospital has control over the
doctors(advisory boards, get license taken away)
17
2. Scope of Employment

-- Negligence & Intentional Torts
Definition of Scope of Employment: the range of reasonably foreseeable activities that a servant engages in while
carrying on the employer’s business (Black’s Law Dictionary)
 R2A 228- Whether a Servant’s Acts are WITHIN THE SCOPE OF EMPLOYMENT
(1) Conduct of a servant is w/in the scope of employment if:
(a) it’s of the kind he is employed to perform;
(b) it occurs substantially w/in the authorized time and space limits;
(c) it’s actuated, at least in part, by a purpose to serve the master; and
*not solely for own purpose/ motive; most important for intentional torts
(d) if force is used by the servant against another (intentional torts), the use of force is not
unexpected by the master
 R2A 229- Expanding the Test
(1)To be w/in the scope of employment, conduct must be of the same general nature as that
authorized or incidental to the conduct authorized.
(2) IF THE SERVANT’S CONDUCT IS NOT AUTHORIZED, IT COULD STILL BE
WITHIN THE SCOPE OF EMPLOYMENT, IF:
a.
b.
c.
d.
e.
f.
g.
The act is commonly done by the servant;
The time, place and purpose of the act;
The previous relations between master and servant;
The extent to which the master’s business is apportioned btwn servants;
Whether the act is outside the business of the master, or if within, it has not
been entrusted to the servant;
The degree of departure from the normal method of accomplishing the
authorized result; and,
Whether the act is seriously criminal.
 R2A 219(a): A master is NOT subject to liability for the torts of his servants acting OUTSIDE THE
SCOPE OF THEIR EMPLOYMENT, UNLESS:
(a)
the master intended the conduct or the consequences or
Direct liability- employer acts with tortious intent; Indirect- agent’s high rank
in the company makes him or her the employee’s alter ego.
(b)
the master was negligent or reckless (liability outside vicarious liability) or
(c)
the conduct violated a non-delegable duty of the master or
(d)
the servant purported to act or to speak on behalf of the principal and there was reliance
upon apparent authority, or he was aided in accomplishing the tort by the existence of the
agency relation.
 NEGLIGENCE -- Apply §228 & §229
o Another Test to apply when the Servant is Driving
 Henderson v. AT&T: A master is not responsible for negligent operation of a servant’s automobile,
even though engaged at the time in furthering the master’s business, UNLESS:
1) master expressly or impliedly consents to the use of the automobile;
2) had the right to control the servant in its operation; OR
3) the use of the automobile was of such vital importance in furthering the master’s business that his
control might be reasonably inferred.
o Exceptions:
o Coming and Going Rule: Absent special circumstances, the employer will not be liable for the negligent
conduct of its servants while coming/going from work.
o Special Errand Rule: (Exception to Going/Coming): Where the servant performs a special errand on
behalf of the master that would otherwise require a separate trip by another servant, the servant is acting
within his scope of employment.
o Frolic v. Detour:
18

o Frolic: a significant deviation from the servants scope of employment, liability does not attach
o Detour: a slight/foreseeable deviation, liability does attach
o Re-entering employment:
 Employee does not re-enter employment merely by deciding to return to serving the
master interest
POLICY ARGUMENTS FOR RESPONDIAT SUPERIOR FOR NEGLIGENCE:
 Employers duty to hire & maintain safe employees
 Employer had control over the employee
 Employer put the servant in the situation, by giving him the job & responsibility
Ratification of Torts/ Crimes:
 Master can ratify a tort committed by a non-servant or a servant acting outside the scope of employment
a. Negligence Cases
 Thompson v. US: Trainee on duty at the tribal police headquarters killed an officer when mimicking fast draw.
Crt H trainee was acting w/in the scope of his employment, and thus the govern was liable. Trainee was on govern
property on duty- authorized time/space limits. He is being trained in quick draw- kind he is employed to perform.
Crt draws the inference that he is practicing to perfect his skills- which is a purpose to serve the govern’s business.
This type of action is foreseeable given the nature of the job and that he is being trained in this procedure. If the
govern is receiving the benefit of training these employees who are otherwise not qualified, it must bear the
burden. *Ricks, however, thinks crt uses a false analogy re: fire arm range, and that the evidence leads to a diff
conclusion. Trainee admitted he wasn’t practicing, that he was just playing around. Crt skips over this evidence
b/c it would hurt their argument- want to find govern liable based on fault, but respondeat superior is a no fault
doctrine. If you were the govern, could present evidence of rules/regulations, good hiring record, distance btwn
this office and the one who allowed the prior behavior.
 Henderson v. AT&T: Henderson’s car lost a wheel. Zuckerman, AT&T employee driving his own car on his way
to participate in an AT&T sponsored graduate study program, hit Henderson who was standing behind the stopped
car. Crt H AT&T was not liable under respondeat superior. Could at least argue that fits under elements above. Crt
cites the R2A test, but doesn’t apply it. Instead, the crt follows the rule:
o Alternative Test for Respondiat Superior when servant is driving
 A master is not responsible for negligent operation of a servant’s automobile, even though engaged
at the time in furthering the master’s business, UNLESS:
3) master expressly or impliedly consents to the use of the automobile;
4) had the right to control the servant in its operation; OR
3) the use of the automobile was of such vital importance in furthering the master’s business that his
control might be reasonably inferred.
o Analysis: 1) employee could’ve secured other transportation, but do have an argument toward consent b/c
reimbursed; 2) didn’t tell employee direct route, pre-established mileage- could’ve gone off track to visit,
etc.; 3) N/A. (ex of what would be: pizza delivery, DHL where use company’s truck)
o Policy argument: AT&T should bear the burden of the benefit they gain from sending employees to
graduate programs.
19
b. INTENTIONAL TORTS -- PUNITIVE DAMAGES COULD BE AVAILABLE
**Usually Employers are not liable for servant’s intentional torts, however, the
employer may be liable if meets test below.
 R2A 228- Whether a Servant’s Acts are Within the Scope of Employment
(1) Conduct of a servant is w/in the scope of employment if:
(a) it’s of the kind he is employed to perform;
(b) it occurs substantially w/in the authorized time and space limits;
(c) it’s actuated, at least in part, by a purpose to serve the master; and
*not solely for own purpose/ motive; most important for intentional torts
(d) if force is used by the servant against another (intentional torts), the use of force is not
unexpectable by the master
 Purpose Test: **whether the tortfeasor was acting, at least partially, to serve the master
o Bouncer Situation:
 Removal with expectable amount of injury (i.e. throwing down stairs)  within
scope of employment
 Removal with un-expectable amount of injury (i.e pulling a knife)  outside
scope of employment
o Police Officer “quick draw:”
 Wanted to improve quick draw skills for master
 Forseeability Test: **whether the conduct was foreseeable from the nature of the employment
o Baseball player injuring heckling fan:
 Foreseeable and interfering with player’s ability to do his job

Policy Behind Respondiat Superior for Intentional Torts:
o
o
o
o

PUNITIVE DAMAGES MAY BE AVAILABLE:
o



Duty to hire maintain/responsible employee
Control of Employee
Efficiency: Internalization of costs -- the business should pay all of its internal/external
costs
Spreading Costs
RS § 217(c) punitive DAS can be imposed on a principal on account of a servants
wrongful act if:
 The principal authorized the doing and the manner of the act, or
 The agent was unfit and the principal was reckless in employing him, or
 The agent was employed in a managerial capacity and was acting within the
scope of employment, or
 The principal or a managerial agent of the principal ratified or approved the act
Sage Club v. Hunt: Bouncer-bartender at a bar, broke a customer’s nose after customer accused him of keeping too much
change. Crt H bar was liable. (R2A test) 1) He was doing the kind of thing he’s employed to perform- taking $ from patrons
and controlling rowdy customers; 2) Incident occurred w/in time and space limits- on the job; 3) He was serving the master’s
purpose by taking the $ and controlling disorder at the bar. But could argue he overreacted and was serving his own purpose/
motive; 4) It’s not unexpectable. He had to remove customers from the bar on a regular basis and it is reasonable to forsee that
every once in a while a “bounce” would get a little out of hand.
o Efficiency Argument: if the bar does not pay for these “costs” then they will be pushed onto the public to assume.
Noah v. Ziehl: Bar bouncer beat the daylights out of a client of the bar as a personal vendetta and stabbed him (revenge from
earlier fight and patting his girlfriend’s butt). Ct held the bar was not liable because the severity of the beating was not
expected by the bar owner (different from Sage: not foreseeable that bouncer would have a knife and go crazy on a customer)
Policy argument: deciding this the other way would put almost no limit on the amount of violence that could be expected by
employers.
o Intellectual discrepancy: Crts focus on general violence in bouncing when want to say not unexpected, but focus on the
actual act when want to deny liability.
Manning v. Grimsley: Baltimore Orioles pitcher was warming up and a group of fans were hassling him. He threw ball
toward them; it went through the netting and hit P. Crt H team was liable. Heckling was interfering with his ability to perform
20





his duties (not just personal motive); and it’s foreseeable that this could happen b/c players get heckled all the time. *Want to
say it’s not foreseeable that professional would throw balls at fans, but also want the teams to be liable so they better police
the players.
Fiocco v. Carver: Location in time and space requirement isn’t met when a trucker goes off of his route for personal reasons
and has an accident- even if he makes up his mind prior to the incident that he is headed back to his route
Prob: Ranch foreman’s 16 yr old son wasn’t employed by the ranch owner but often helped out. He often shot squirrels digging
near the corral. He pointed his gun at 3P during an argument and accidentally shot him. Crt H ranch owner wasn’t liable b/c
there was no purpose to serve the master.
Prob: Collector caused das when re-possessing TV. Employer kept the TV, and was thus held liable under ratification.
Dempsey v. Chambers: Someone who wasn’t the seller’s servant unloaded coal to purchaser w/out seller’s knowledge. While
delivering the coal, he broke a pane of glass in the building. Afterward, with knowledge of the delivery and the accident, seller
sent an invoice for the coal to purchaser. Sending the bill ratified 3P’s delivery, and also adopted the tort.
Ratification and Punitive DAS:
o RS § 217(c) punitive DAS can be imposed on a principal on account of a servants wrongful act if:

The principal authorized the doing and the manner of the act, or

The agent was unfit and the principal was reckless in employing him, or

The agent was employed in a managerial capacity and was acting within the scope of employment, or
21
3. Abuse of
PositionAbuse of Position
Elements:
 (1) Aided in accomplishing the tort by the existence of the agency relation.
 (2) A principal who puts an agent in a position which enables the agent, often while apparently acting within its
authority, to commit a fraud or other tort on a 3P is subject to liability for the tort. (Ex: that’s why pizza
delivery/ drive-in restaurants tell you how much your order is up front so that the person delivering the food
can’t overcharge you.)
o The principal need not benefit, nor need the agent have been actuated by a purpose to serve the
principal.
o Must have a relationship btwn the injured 3P and the principal.
o Policy: so employers won’t give authority to employees who may abuse it- don’t let employees run
wide; employers have a duty to hire and maintain responsible employees.
Related Issues
1) Sexual Harassment: Three issues related to sexual harassment:
 1(a): General Rule: Master is responsible for torts of his servants committed within the scope of employment.
Sexual harrssment does not fall within this rule because it does not benefit the employer & is not motivated by a
purpose to serve the master. It’s personal in nature.
o Exception: sexual harassment could fall within the general rule if there was a company policy to
discriminate.
 Examples: 1) Employer has a policy of discouraging women from seeking advancement and sexual






harassment is a means of furthering that policy. (Sims); Female trying to get into an NHL team. 2) Hooter’s/
strip clubs- harassment of girls by male employees might further the master’s purpose by setting the
environment of the club/restaurant. 3) Dr uses it as a treatment mechanism- hold clinic liable.
1(b): Aided by the Agency Relationship: requires more than but, for causation; requires the existence of something
more than the employment relation itself. Requires a tangible employment action -- the part asserting sexual
harassment must show a significant change in employment status, such as hiring, firing, failing to promote,
reassignment w/ significantly different responsibilities, or a decision causing significant change in benefits, OR a
hostile enviroment that is persistent & something else.
1(c): Apparent Authority: It does not apply. Employer’s actual authority to hire & fire is what influences the
subordinate.
1(d): Employers Affirmative Defense: When NO tangible employment action was taken by the harasser, a
defending employer may raise an affirmative defense to liability for damages, subject to proof by the preponderance
of the evidence. The defense has two elements: ((the defense is not available when the supervisor’s harassment
culminates in a tangible employment action))
o (1) the employer exercised reasonable care to prevent & correct promptly any sexually harassing behavior;
AND
o (2) the plaintiff employee -- victim -- unreasonably failed to take advantage of any preventative/corrective
opportunities provided by the employer to avoid harm otherwise.
Entente Mineral v. Parker: Entente negotiated to buy a royalty interest from Young. Young got his atty to review the K. Atty
offered Young more money for the interest, and Young sold it to him- leaving Entente with nothing. Entente sued the atty & his
firm for tortious interference. Crt H firm wasn’t liable. 1) Atty wasn’t acting w/in the scope of his employment: wasn’t the kind of
service he was employed to perform- he was authorized to provide legal advice on the K, not purchase property interest; did occur
w/in time/space limits; but not for master’s purpose- done for his own gain (although could argue client relations); and it wasn’t
foreseeable that atty would go behind the buyer’s back when he was employed to review the terms of the agreement (could argue
that atty w/ this type of capital might take advantage of his position). 2) No abuse of position b/c no agency relationship btwn the 3P
and the principal. Entente had no prior dealings w/ the firm.
Billups: Employee overcharged for bread on a regular basis. Baker was held liable under abuse of position doctrine. Agency
relationship btwn baker and employee- apparent authority from right to sell. Employee was aided by the agency relationshipallowed him to perform fraud. Relationship btwn the customer and the baker- assumed paying baker.
Napp: Ins. co agent told decedent’s W that co would only pay half. When delivered ck for full amt, convinced her it was incorrectly
printed and had her sign it back over to him. He then kept half for himself. Crt H ins co liable under abuse of position doctrine.
Customer had a relationship w/ the ins co- purchased policy from them. Agent had apparent authority to act on the co’s behalf. The
trust created by his position allowed him to commit the tort. It’s irrelevant that the company didn’t receive any of the money he
kept.
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SEXUAL ASSUALT CASES  Burlington Indus. v. Ellerth: (US SC) Salesperson is subject to sexual harassment by a midlevel mngr: ie he suggested that her job performance depended on compliance w/ his sexual requests. Salesperson chose not to
report the incidents to her immediate supervisor. On one occasion, she did tell him that his conduct was inappropriate. Crt H
employer wasn’t vicariously liable for supervisor’s actions.
o Mngr wasn’t acting w/in the scope of his employment. Generally, as in this case, sexual harassment does not serve the
master’s purpose.
 Exs where sexual harassment could be to serve master’s purpose: 1) Employer has a policy of discouraging women
from seeking advancement and sexual harassment is a means of furthering that policy. (Sims); Female trying to get into
an NHL team. 2) Hooter’s/ strip clubs- harassment of girls by male employees might further the master’s purpose by
setting the environment of the club/restaurant. 3) Dr uses it as a treatment mechanism- hold clinic liable.
o Employer wasn’t held liable under 219(2) exceptions. Here, the employee seeks to hold the employer liable for the mngr’s
actions based on the mngr’s misuse of delegated authority. Thus, aided in the agency relation is the current rule to analyze.
(No apparent authority/ not high enough to be alter ego of comp; sexual harassment isn’t a non-delegable duty). Crt H that a
supervisor who commits a tangible employment action inflicts vicarious liability on the employer through the aided in the
existence of the agency relation doctrine.
 Tangible employment action- means by which the supervisor brings the official power of the employer to bear on
subordinates; requires a company act- ie decision documented in official comp records and subject to review by higher
level supervisors (firing/not granting promotion) -- no affirmative defense
 The standard applies to hostile work environment (sexual harassment) claims, but the employer has an affirmative
defense:
 Employer wasn’t negligent- exercised reasonable care to prevent and correct promptly any sexually harassing
behavior. AND
 Employee was negligent- employee unreasonably failed to take advantage of any preventive or corrective
opportunities provided by the employer
 This defense states that if both employer and employee do what they’re supposed, employer is liable- which is absurd.
The standard itself has lead to extensive litigation, and review of sexual harassment policies. Crt have been working out
the rule over time. Generally, if everyone does what they’re supposed to, employer isn’t liable. Just distinguish the two
standards by holding that sexual harassment that is severe and pervasive give rise to a claim for hostile work
environment.
Stropes v. Heritage House: 14 yr old w/ cerebral palsy is in the custody of the county at a local children’s center. Employee of
center who was authorized to change clothes & bedding/ bath residents sexually assaulted Stropes while completing this daily duty.
Crt finds employer liable by holding that the employee was acting w/in the scope of his employment. But Ricks thinks 1 st and 3rd
elements fail under the test- it wasn’t the kind of act the employee was employed to perform and it didn’t serve the master’s
purpose. Crt could’ve reached the same result by using the abuse of position doctrine. Principal placed the agent in a position which
enabled him to commit the assault.
Prob: Bank hired comp to move vaults. One of the bank’s employees left money in vault b/c didn’t receive instructions to place in
an alt location. One of the mover’s employees found the money and kept it. Moving co isn’t subject to vicarious liability for
employee’s action under the aided in the existence of the agency relation doctrine. The moving company only enabled him to move
the lockers, it was the negligence of the bank that caused the money to be in the locker.
Mary M: Police officer rapes woman after detaining her and driving her to her house in the police car. Threatened to take her to jail
if she didn’t comply. Crt H LA police department was vicariously liable for the officer’s conduct based on abuse of position
doctrine. Officer was enabled to commit the rape by his position of power; reasonably foreseeable risk that given the nature of the
job that at least one officer will abuse his position.
Lisa M: Ultrasound technician sexually assaulted patient. Crt H hospital wasn’t vicariously liable for the technician’s conduct. Crt
uses scope of employment (motive) analysis -- and the fact that the ultrasound tech’s duties did not involve touching her in that
way. Ricks thinks this is analogous to the Mary M case and hospital should be variously liable under abuse of position doctrine. In
actual case, told patient that w/out assaultive conduct he wouldn’t be able to tell the sex of the child.
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4. Employer’s
Liability for Independent Contractors
Usually Employers are not liable for torts of Independent Contractors -- three exceptions:
o
o
(a) negligence by the employer in selecting, training, or instructing the IC
(b) employed for work that is especially or abnormally dangerous
 Two Separate Rules: (argue both on test)
 (1) RS § 520: Abnormally dangerous: an activity is abnormally dangerous if there is
an inability to eliminate the risk by using reasonable care.
 (2) Huddleston: “Inherently Dangerous Activity:”
o (a) special and peculiar danger
 look to the community where it happens -- something not ordinary
in the community
o (b) different from the ordinary risks common to the community
o (c) employer knows or should have known of the risk of danger
o (d) π’s injury was not a result of collateral negligence by the IC

o

Exception to Inherently Dangerous:

(Brandt): work is not inherently dangerous unless it started with danger and
required preventative care to make it safe.
o Collaterall Risk: a non-negligent employer is not liable for an IC’s own
negligence where:
 The IC’s negligence consists solely in the manner in which he
does the work; AND
 The IC’s conduct creates a risk of harm which is not inherent in or
normal to the work, AND
 Employer has no reason to contemplate the IC’s negligence when
the contract was made
 Note: depending on which side you are taking is how you want to characterize the activity -all about the picture you build
 The basis of the inherently dangerous exception is rooted in non-delegable duty -- the
employer has a non-delegable duty as to risks inherent in the work that requires special
precautions.
(c) Employer under a specific non-delegable duty
 non-delegable duty: a duty will be deemed non-delegable when the responsibility is so
important to the community that the employer should not be permitted to transfer it to
another.
 RS § 424: when a duty is imposed by law on the basis of concerns for public policy, the party
bearing the duty cannot escape it by delegating it to an independent contractor.
 Example: must seek self help peaceably by statute, if get 3d party to seek self help
they have to act peaceably as well (M-Bank El Paso)
Affirmative Defense for Employer:
o Collateral Negligence Doctrine: a non-negligent employer is not liable for an independent contractors
negligence when:
(Brandt v. Missouri Pacific)
 (a) the IC negligent consists solely in the improper manner in which he does the work AND
 (b) the IC contractor’s conduct creates a risk of harm which is not inherent in or normal in the work
AND
 (c) the employer had no reason to contemplate the contractor’s negligence when the conduct was
made
o Indemnification from IC:
(Supreme Court of Colorado)
 (i) was the person (the π) seeking indemnification legally obligated to the third party;
 (ii) was the person (the ∆) from whom indemnification was sought also liable to the third party;
AND
 (iii) as between the two, was it more equitable for the ∆ to discharge the obligation to the third
person?
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Kleeman v. Rheingold: Client hired atty 5 days before SOL lapse on med mal case. Atty gave summons to process server 2 days
prior to SOL deadline. Process server delivered it to the secretary instead of the Dr. Client sued atty for multiple counts of
negligence related to the failed service. NY’s highest court agreed w/ the TC’s determination that the process server was an
independent contractor, but found the atty vicariously liable for the process server’s negligence based on the doctrine of nondelegable duty. Duty will be deemed non-delegable when the responsibility is so important to the community that the employer
should not be permitted to transfer it to another. Crt’s determination rests on policy considerations. Crt may take into account Rules
of Pro Res, public perception, etc.
o Crt’s arguments:
 Serving process on Ds is an integral part of an atty’s task.
 Attys are licensed to practice law, which requires specialized knowledge. Although process servers are licensed, the
licensing is for the benefit of Ds. Their licensing doesn’t relieve atty’s of their duty to serve process on Ds.
 Public perception: average client thinks the atty will do everything. Even if the client knows the atty will use a process
server, the avg client doesn’t realize the process server is an independent contractor, meaning the atty might not be liable
for the process server’s negligence.
 Code of Professional Responsibility: forbids lawyer from neglecting legal matters entrusted to him, must secure and
protect available legal rights; must represent clients zealously; lawyer can’t seek, by K or other means, to limit
prospectively the lawyer’s individual liability to a client for malpractice.
o Rebuttals:
 Non-delegable duty being imposed will result in increased cost for clients- risk adverse attys might do it themselves,
clients will then pay atty’s fees; malpractice cost increase is also passed on to clients.
 Counter: client might be willing to pay to get the job done right.
 Clients aren’t aware in any area that matters are handled by independent contractors. (Ex. Drs use independent
contractors w/out disclosing to patients.) And yet the law collapses liability btwn atty & process server but not dr & IC.
 Counter: dr’s IC have deep pockets, unlike process servers.
 Saving a client money is zealous representation. Can’t prospectively limit liability unless you have it, and atty weren’t
liable for process server’s negligence until this decision (so final code argument is circular).
 Attys delegate other actions: ie title searches.
 Counter: in cases where a firm forwards a case to another firm but retains a portion of the fee, remain liable for
negligence in proportion to amt of fee.
Good Humor: Good Humor began hiring ice cream truck drivers as independent contractors. Co. retained no control over their
practices; they resold the merchandize as private venders. Driver causes accident. Parents of injured child sue Good Humor, but crt
holds Good Humor isn’t liable. Exception to GR regarding non-liability for negligence of IC: when work to be done is inherently
dangerous an employer can’t escape liability by engaging an IC to do the work. 2 Tests for what creates an inherently dangerous
activity:
o Abnormally dangerous: inability to eliminate the risk by the exercise of reasonable care. R2T 520
 In this case, drivers could do things to help eliminate the risk: ie help kids cross the street; not solicit at night on a busy
street. But can’t see every kid and every car; can’t completely eliminate the risk. Test is goofy b/c makes driving an
inherently dangerous activity.
o Court’s Test: (CO SC)
(1) special or peculiar danger to others inherent in the nature of the activity
(2) not different in kind from ordinary risk
(3) employer knew or should have known that the special danger was inherent in the nature of activity/ particular
circumstances under which activity was performed
(4) even if an activity is inherently dangerous, employer isn’t liable for injuries caused by the collateral negligence of its IC
in performing the activity
 In this case, injury was caused by the collateral negligence of the drivers. Ex of activities where liability was found
under this test: trenching in the street.
 Other inherently dangerous activities: performing lions; blasting in the city.
Brandt v. Missouri Pac RR: Servant was hit by the unsecured leg of a piece of equipment he was using at work. He argued that the
work was inherently dangerous. Crt H that the negligence of the servant caused the injury. A master has a non-delegable duty
imposed by law where performance of the K necessarily involves inherently dangerous activity. Work is not inherently dangerous
unless it starts w/ danger and requires preventive care to make safety. Servant’s negligence was the sole cause of his injury. The
event occurred under conditions that were not inherently dangerous.
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5. The
Masters Liability for the Apparent Authority of Agents (Fall back if VL doesn’t work)
 General Rule: The hospital is not liable for the acts of the doctor, he is an independent contractor.
 Theories of Liability hold hospitals liable for negligence of physicans:
o 4 theories of vicarious liability have been recognized by different jurisdictions to impose liability on a hospital
for the negligence of ER physicians:
1) Agency by Estoppel- R2A 267
 One who represents that another is his servant or other agent
 And thereby causes a 3P justifiably to rely upon the care or skill of such apparent agent
 Is subject to liability to the 3P for harm (harm is the detriment) caused by the lack of care or skill of the
one appearing to be a servant or other agent as if he were such
2) Apparent Agency- R2T 429 (AC in Sampson- but extend to nondelegable duty)
 One who employs an IC to perform services for another
 Which are accepted in the reasonable belief that the services are being rendered by the employer or by
his servants
 Is subject to liability for physical harm caused by the negligence of the IC
 To the same extent as thought the employer were supplying them himself or by his servants
Paradigm case for this rule: General contractor remains liable for entire construction job even
though they hire subs to complete the work. Automobile repair services where dealership uses IC to
complete repairs.

Elements used in Sampson to show Apparent Authority:
o (1) the patient must look to the hospital, rather than the individual doctor, for treatment; AND
o (2) the hospital must “hold out” the physician as his employee.
 Evidence to show holding out; court will likely reject:
 Π has the reasonable belief that the dr. was an ee
 Doctor works at the location full time
 Dr uses hospitals equiptment
 Dr bosses around hospital staff
 Hospital uses possessory language when advertising @ dr
 Dr wears hospital logo
3) Nondelegable Duty (AK, FL, NY, NC) Result oriented; hosp always liable.
 Rationale: Hospital’s location and reputation is what draws the patients. Patient asked for the hospital’s
care, not a specific dr. Once patient is int he ER, doesn’t have a choice. Btwn the hospital and the patient,
the hospital is in a better position to handle the liability- patients don’t police the drs, hosp does. Hosp
has expertise in medical care and makes more $ off the drs. Hosp shouldn’t be allowed to externalize the
cost of doing business.
4) Ostensible Agency (TX SC in Sampson) *P must show:
 P had a reasonable belief that the dr was the agent/employee of the hosp
 Belief was generated by hosp affirmatively holding out the dr as its agent/ employee or knowingly
(should include negligently based on apparent authority doctrine) permitting the dr to hold herself as
hosp’s agent/ employee
 P justifiably relied on the representation of authority
 Rationale: Patients all think drs are employed by the hospital. Reliance is reasonable: tv shows
represent them as employees; look like employees- coats w/ hosp name, nametags; equipment is
provided by hosp; drs act as supervisors over other employees; patients never make a deal directly
w/ drs- always through the hosp; have parking spots; hosp assigns patients to drs; ER drs don’t have
offices in the hosp. Hosp is holding drs out as employees b/c hosp is the one responsible for these
appearances.
 TX SC in Sampson: Poorly reasoned. Didn’t make these arguments. Found hosp didn’t hold drs out
as employees- signs and consent forms both represented drs as IC.
 Current rule in TX: Hosp must do something more than they normally do to make patients think
dr’s are employees. PP rationale: hosp are paid by state $; don’t want to take $ out of public
funding so push it off on the drs. Result is that courts have found things not mentioned in this case
(like hosp names on scrubs) to be additional actions that warrant liability. (24 other jurisdictions
allow reasonable belief to control.)
o
Policy Arguemnts to hold the hospital liable:

The hospital is better able to police the doctors

Between the innocent third party & the hospital, it is more equitable to hold the hospital accountable

The patient goes to the hospital for the hospitals reputation, not the physicians
26



The doctor appears to be an agent of the hospital (scrubs with logo, coat w/ logo, uses hospital equiptment)
If doctors are IC, then it allows the hospitals to externalize
Sampson v. Baptist Mem. Hosp.: Patient is bitten by a brown recluse. 2 drs at Baptist Mem treated patient for insect bite and sent
her home. She went to another hosp 14 hrs ltr and was admitted into ICU in septic shock. Baptist Mem had signs up in ER saying
that drs were IC; also on consent form. Patient doesn’t recall the signs or consent form. Patient didn’t ask for a specific dr. AC H
that dr wasn’t an agent, servant, or employee of the hospital, but hosp was vicariously liable for dr’s negligence. TX SC reversed
and H hospital wasn’t vicariously liable for physician’s negligence.
27
D. The
Agent’s Duties and Liabilities
*Generally the agent owes the following duties to the principal:
1) Duty of Obedience
2) Duty of Loyalty
3) Duty of Care
4) Duty not to attempt the impossible
5) Not to bring disrepute on your employer/principal
1. Who
can Sue & Be Sued On Contracts Made by Agent
. a) WHO CAN SUE AND BE SUED -- Depends on Disclosure of Principal
 Law:
o Levels of Disclosure:
 undisclosed: third person has no notice that the agent is acting for the principal (RS §4(3))
 partially disclosed: third person knows they are dealing with an agent, but does not know the ID of the
principal. RS § 4(2)
 disclosed: the third person has notice that the agent is (1) acting for the principal and (2) knows the
principals identity. RS § 4(1)
o Who can sue when there is undisclosed principal:
 (a) Third party can sue the principal, once disclosed
 Ways for third party to eliminate being liable to undisclosed principal:
 Clause in the contract -- “no undisclosed principal”
 Third party needs to ASK -- are you working for an undisclosed principal? If deny
- fraud
 (b) Principal can sue the third party
o Reasoning: efficiency - keeps either party from having to sue the agent, to get to the other
party
o Anti-Assignment Clauses:
 Anti assignment clauses does not prevent the undisclosed principal from brining suit
against the third party -- however, may show as evidence that parties intended to
exclude the principal RS§ 303
 3P RIGHTS ONCE UNDISCLOSED PRINCIPAL IS DISCLOSED
o Generally, existence of an undisclosed principal is not grounds for a 3P to avoid the contract
EXCEPTIONS:
 Fraud: when agent of undisclosed principal makes:
 Affirmative misrepresentations denying working for the undisclosed principal
o If there is no affirmative act it does not rise to the level of fraud
 The 3P would not have contracted w/ the agent if they knew he worked for the principal
 The principal knew/reasonably should have known that the 3P would not have contracted with
him
 Result: contract is voidable; 3P may elect to rescind or follow through
 Mistake: make the contract void -- but simply not knowing that the agent works for the principal is not
enough
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2.
Agents Liability for Contracts:
Agent’s Liability in Contract Depends on the Amount of Disclosure:
o
When principal is fully disclosed: if the agent expressly discloses (1) that he is an agent (2) identity of the
principal then the agent is not personally liable on the contract.
 Circumstantial disclosure: the agent can escape personal liability by showing that there were sufficient
circumstances to show that the third party knew the two requirements, although not expressly said
 EX: third party came to the corporate office, met the president, property was in the principal’s
name, third party billed the principal.
o
When principal is partially disclosed: the agent is personally liable on the contract
 However, if the agent contracted within his authority from the principal, the 3P is likely still bound to
the principal and vice versa
o
When the principal is undisclosed: the agent is personally liable on the contract
 However, if the agent contracted within his authority from the principal, the 3P is likely still bound to
the principal and vice versa
The duty to disclose the agency relationship and the principal’s identity is on the agent, and can be proven by
the facts and circumstances.
 Liability of Attorneys for Expert Witnesses:
 Clark v. Maddux: where an agent making a contract (1) discloses his agency and (2) names the
principal, the agent is not liable for expert witness fees UNLESS the agent agrees to become
personally liable
o Looks to the reasonable expectations of the parties
 Copp v. Breskin: An attorney must give a litigation specialist or expert an express disclaimer of
responsibility if the attorney expects not to be liable for the litigation services, but this is in a context
where there is an express custom where the attorney is liable for expert fee’s in that region.
 Split between Clark and Copp argue both for exam

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
Woodlawn Park v. Doster Constr.- Developers contracted w/ engineering co. Developers accepted the engineers’ proposal
before the partnership was formally created. Partnership filed suit against the engineers, claiming that the construction co w/
which they contracted was acting as an agent for the individual partners and the partnership then contemplated and ultimately
formed. Crt H partnership could file suit. Undisclosed principal, upon revealing his identity, may sue and be sued.
Kelly Asphalt v. Barber Asphalt- Kelly and Barber were competitors. Kelly thought Barber would refuse to do business with
him, so he got Booth to act as his agent. Barber contracted with Booth, who didn’t disclose that he was acting as Kelly’s agent.
Booth paid Barber for the merchandize with money furnished by Kelly. Product turned out to be defective. Barber
subsequently refused to remedy the defect, claiming that he wouldn’t have completed the contract if he knew Kelly was the
principal. Existence of an undisclosed principal doesn’t supply grounds for avoidance of a contract unless fraud is present. If
an agent denies his agency when questioned and falsely asserts that his principal has no interest in the transaction, the contract
becomes voidable at the election of the defrauded party, but an agent doesn’t have an affirmative duty to reveal his agency
status. Crt H no fraud b/c Booth never falsely represented his agency status and was not silent in the duty to speak. Barber
didn’t ask if he was contracted on behalf of anyone. Crt also H no mistake (which would mean K never formed) b/c Barber
thought he was contracting with Booth, and he did. *The public policy behind contracting parties wanting to avoid creditors
who have done suspicious things isn’t addressed. This is a terrible case factually. Barber found out he was dealing w/ Kelly
and still made the delivery. Then he wants to keep the money but get out of paying damages. Likely a history of prior bad
dealings driving animosity btwn the parties.
“Disney case” (hypo in book)- Disney sent out agent to purchase land in Orlando to build Disneyland w/out disclosing Disney
was principal. Crt H no fraud/ misrepresentation b/c no one ever asked the agent if he was acting on behalf of a principal.
*Ricks thinks it’s odd that inside trading was made illegal (if have inside information about what affects the value of the stock,
can’t trade in that stock) but it’s not applied to all markets. This situation is analogous- Disney has inside information about
the use of the land that effects the market value of the land.
Clark v. Maddux- Atty contracted w/ dr. to act as expert witness in case. Atty told dr that client was ultimately responsible for
paying the dr, and that client was a poor woman. Atty sent ltr to dr protesting amount of bill- proving atty thought about bill
and amount. Crt H atty wasn’t liable for paying dr’s bill. Where an agent in making a K discloses his agency and the name of
his principal, the agent is not liable on the K unless he agrees to become personally liable.
29


o TX Rule is Clark. But not much evidence is required to make agent liable. Ex case from 14 th CA: crt reporter testified
that thought client would be liable and knew transcript was being prepared for the client, but crt still held atty liable.
Copp v. Breskin- Firm hired expert witness. Firm disclosed it was on contracting on behalf of client. But local custom is that
firm pays. Expert wouldn’t have accepted K if knew firm wasn’t liable. Firm sent ltr saying all bills would be paid in 30 days.
Later told expert that client would only pay 30%. Crt H firm was liable. An atty owes an expert or other litigation service
provider an express disclaimer of responsibility if the atty intends to not be bound by a K for litigation services.
o Rationale: Atty chooses expert.
o Potential result: firms just K out of liability. But not necessarily a modern trend.
o Split of authority btwn Clark & Copp- argue both sides on the exam.
Waste, Water, & Land v. Lanham- Member of 2-person LLC (acting as agent for LLC) contracted w/ engineer group re:
construction project. Agent told engineers to send K to other member. Engineers sent member a form K, which was never
executed and returned; just received verbal authorization from agent. Engineers completed work and never received payment.
Sued members individually and LLC. An agent who negotiates a K w/ a 3P can be sued for any breach of K unless agent
discloses both the fact that he or she is acting on behalf of a principal and the identity of the principal. If only one of these facts
is disclosed, principal is partially disclosed and agent is still liable. Whether a principal is partially or completely disclosed is a
question of fact. Rationale for agent having duty to disclose: agent knows everything; incentive to avoid liability. Cheapest for
agent to have duty to disclose v. 3P having duty to investigate. Crt H that business card w/ initials P.I.I. was insufficient to
disclose the identity of the principal LLC. Could’ve been a sole proprietorship or something besides business.
o What atty should do if drafting K on behalf of engineering co: become certain who is bound prior to sending the K.
Ensure client knows he is K-ing w/ co. Investigate entity, and obtain documentary evidence of authority of agent to act
on behalf of co. Make sure the responsible party signs the K.
o Here, Ricks thinks engineering co didn’t know so they put Landham thinking if he wasn’t the responsible party then the
other party would correct the K. But co started working before K even came back. Weren’t really careful.
30
b. Agent’s Duties & Liabilities -- Implied Warranty of Authority
 Law:
o Implied Warranty of Authority:
 Defined: A person who assumes to act as agent for another impliedly warrants that he has authority to
do so; and if therefore he in fact lacks authority he renders himself personally liable on the warranty
to one who deals with him in good faith in reliance thereon (Farm Credit Bank v. FCB Ltd)
 Exception: if the principal is liable to the third party under apparent authority, then the agent is
released from liability. (Benner v. Farm Bureau Mutual)
o Application of Implied Warranty of Authority:
 True agents who act outside their authority
 Purported agents with no actual authority
 Applies whether the principal is disclosed/undisclosed/partially disclosed
o Does not apply if:
 Agent denies having any authority to act OR indicates that he doubts his own authority, OR
 The third party knows for some other reason that the purported agent lacks authority.
o Death of the principal & Implied Warranty of Authority:
 Death of the principal automatically and without notice terminate by operation of law the agents
power to bind the principal, so the agent has not bound the principal RS § 329
 Death of the principal may cause the agent to breach the implied warranty of authority
 Solution: the agent may disclaim the implied warranty of authority in the contact between the third
party & the agent
 Policy: Agent is the least cost avoider, he can check with the principal on a daily basis to ensure that
he is still alive & that the agent is able to enter into an agreement on his behalf
o Possible claims against Agent:
 3P v. Agent
 warranty of authority is a claim brought against Agent for exceeding his authority and is
enforceable by the third party if the Principal is found not liable for the transaction of his Agent
or does not become a party to the transaction (as if bound by the Agent’s K under apparent
authority)
 Principal v. Agent:
 If an Agent acts outside his authority he has breached the duty of obedience and principal may
bring an indemnity claim
 If an Agent violates his fiduciary duty of loyalty he is subject to liability to delvier it, its value,
or its proceeds to the principal (R2A § 403).
o Affirmative Defenses
 the principal later ratified the act of the agent
 agent acts manage to bind the principal by apparent authority, inherent agency power or estoppel -then no breach of implied warranty of authority

Farm Credit Bank v. FCB Ltd.- Bank agreed to loan FCB money to buy prop for development. Omega acted as FCB’s agent
throughout negotiations w/ a 3P for a sublease. Omega’s pres contacted the Bank w/out authority from FCB and requested a
modification of the escrow fund in order to make the lease more attractive to the 3P. The Bank agreed to the modification, but
later learned that FCB hadn’t authorized the transaction. FCB refused to ratify the agreement. Bank filed suit against FCB,
Omega, and pres. Implied warranty of authority: a person who assumes to act as agent for another impliedly warrants that he
has authority to do so; and if he lacks authority he renders himself personally liable on the warranty to one who deals w/ him in
good faith and in reliance on his authority.
o When principal dies, authority terminates. So if an agent executes a K on behalf of a principal just a few minutes after
the principal’s death w/out knowledge of death, agent is personally liable. Even though agent hasn’t done anything
wrong, this result is justified b/c btwn agent and 3P, better to hold agent liable. Agent starts out being liable. Agent
works directly w/ principal- principal may have provisions which cover liability in these situations.
o When the agent binds the principal, implied warranty of authority doesn’t apply. Rights of the 3P aren’t affected by the
fact that the agent committed a wrong against the principal by acting outside his authority. R2A 329; Brenner
*Argument that not all the harm is covered by doctrine of apparent authority- recover damages but not the cost of filing
the action. (?)
o Warranty can be disclaimed through flimsy evidence: ex. “purports to be”
31
c.
Election of Remedies/Agents Liability in Contract
Rule for Consistency/Inconsistency of Claims:
General Rule: If there is election to pursue one of two inconsistent theories, mere entry of judgment
bars suit on the second theory. However, if there is an election between two consistent theories, only
satisfaction of a judgment bars proceedings under the second theory.
 To be inconsistent claims, the theory of recovery of one claim must allege what the other denies
(ex: claims of intentional misrepresentation v. K).
 If claims are consistent only satisfaction of a judgment against the Agent would bar recovery as
against the Principal on the same claim.
Election of Liability For Contract
o
Undisclosed Principal: (plaintiff must elect which defendant to go after)
 Majority: A person who has dealt with an Agent of an undisclosed Principal may elect to
hold either the Agent OR Principal liable, he cannot hold both (Put together w/next rule).
An undisclosed principal is discharged from liability on a K if the 3P, knowing the
principal’s identity, obtains a judgment for breach against the agent.
o Minority: the 3P can hold both the agent & principal liable
 An undisclosed Principal is discharged from liability upon a K if the 3 rd party, knowing the
identity of the Principal, obtains a judgment for breach of K against the Agent who made
the K.
o Rationales:
 Principal & agent are acting as one- only hold 1 or the other liable
 Protect D from having to bring 2 suits (but modern practices allow for impleading
and consolidation)
 Merger- 2 COA against diff parties based on the same facts can’t coexist when 1
has been reduced to judgment (but doesn’t explain why undisclosed principal ltr
discovered shouldn’t be liable for das against agent)
 1 K- no windfall: P only has one K-ed for remedy- suing the agent) and would
receive an unjust windfall if he was allowed to pursue the undisclosed principal
after learning principal had a deep pocket, P K-ed for the credit of the agent, not
the credit of the principal (but can argue no windfall b/c aggregate recovery is ltd
by amt of judgment)
 If the agent agrees to be separately liable, the remedy depends on the state:
o Alternative Liability w/ election - sue 1 party, if don’t recover judgment, then sue the
other
o Joint & Several Liability - below
 Note: if the principal is elected to be liable, the principal may seek indemnification from the
agent
o
o
Partially Disclosed Principal:
 joint & several liability between agent & principal
 Recovery of judgment against the agent of a disclosed or partially disclosed principal for
breach of K to which the agent is a party doesn’t discharge the principal
Disclosed Principal: Agent is not liable
 UNLESS: (1) the agent agreed to be liable or (2) the agent & principal are joint parties
to the K (agent signs separately & on behalf of principal)
o If the agent is separately liable, the other party has 2 separate COA although based upon
the same claim and only satisfaction of the judgment against the agent terminates the
liability of the principal. R2A 184, com c
32
o Issues of Liability:
 Joint and Several Liability: may sue either or both, but may only obtain full satisfaction of the judgment
o Rationales:
 Under election of remedies if a second suit is brought it’s usually b/c the 1st judgment wasn’t
satisfied. Denying recovery on the second action simply b/c of the election is unjust.
 Ps are put in a bind; forced to choose before they have all the information
o In practice:
 Joint and several is better because there’s no windfall because still can only recover up to a
certain amount total; also, election looking at pleadings which have little info about asset
 Joint Liability: single obligation; must be pursued all together (must bring claim against every party, but each may
still be liable for entire amount)
 Several Liability: each must be pursued separately


Orrock v. Crouse Realtors- Buyers in a residential sales contract obtained a default judgment against the sellers’ agent for
misrepresentation and breach of K. The judgment wasn’t satisfied, and buyers later filed an action against the sellers
(principal) for the same COA for which it obtained the judgment against agent. If the election of remedies rule applies (P
elects to pursue 1 of 2 inconsistent theories), mere entry of judgment bars suit on the 2nd theory. If there is an election between
2 consistent theories, only satisfaction of a judgment bars proceedings under the second theory.
o Crt H theories were consistent b/c it was the same COA against agent & principal. Ricks thinks the TC messed up in
awarding default judgment in the first place: 1) 2 COA plead against both the agent & principal are inconsistent w/ each
other: misrepresentation and breach of K. If allege tort- misrepresentation prevented the K from forming in the 1st place,
there are no grounds for BOK; 2) the principal was disclosed so the agent shouldn’t have been liable at all unless he
made himself a separate party to the K.
Crown Controls v. Smiley- Smiley used to own the trade name Industrial Associates, but he transferred ownership of that
name to North American Drill Supply, of which he and his ex-W are sole owners. Smiley, claiming he was an agent of
Industrial Associates, contracted with Slomer, pres of Crown Controls for purchase of products for Guam customer. The
customer experienced problems with the product and returned them to Crown’s supplier. Crown sued Smiley and Drill Supply,
and eventually obtained a judgment against Drill Supply, but was unable to collect. Crown then tried to collect from Smiley
personally. Crt H the liability of an agent and his previously undisclosed principal was joint and several. (adopted J&S 4 this
jurisdiction- Mo. Ap.)
33
2. Agent’s
Liability
 Agents Liability for Torts:
 The fact that the employer can be held liable for the torts, does not release the agent from
liability for the tort
o Reasoning: (1) lets the injured π get to the employee’s insurance too; (2) moral hazard - if automatically
release employee for liability, will promote employees to be more reckless
 An employer may seek indemnity from the negligent employee
 Agents & Employers are jointly and severally liable for the torts of the employee: both parties are liable for the
one judgment
o More about jointly & severally liability:
 The act: The parties must act together in commiting the wrong, or their acts, if independent, must unite
in a single injury
 Damages: the π can sue one or both tortfeasors, if damages are awarded, both parties are liable for the
one damages awarded -- no double recovery for π.
 Indemnity: The party who pays the judgment may seek indemnity from the other party that did not pay
for half ((master CAN sue the servant for indemnity))
 in practice few employers will sue employee for indemnification:




Adverse effect on employee moral
Inability of most employees to pay such indemnity
Opposition of unions
Release of Agent’s Liability:
--there is a split, argue both
 Common Law:
o the release of or a covenant not to sue between the injured and the agent also released
the principal
 it is likely though that the release of the principal would like not release the agent, according to the
regular rules (Ricks email)
o “Arguments for Common Law:
 Master & Servant are the same person -- release one, release the other
 There was no tort committed by the master -- unfair to hold him liable on a totally separate action
 Respondiat superior is derivative -- when the servant’s liability dismissed, there is nothing to hold
the master accountable for
 Tort feasor: means only the person guilty!
 Keep the person in the suit that commited the tort in the suit until the END
 Employer’s liability under respondeat superior is analogous to principal-surety law. Sureties are
liable secondarily. If the primary debtor is release, the guarantor is also released.
 United Contribution Among Tortfeasors:
o The release of one or more persons liable in tort does not release the principal from
liability unless the contract specifically states that the principal is also released
o “joint tort feasor” two or more person liable in tort for the same injury to the same person or property -no fault requirement
o Arguments for UCAT approach:
 Encourage settlement
 Make π whole
 Respondiat superior policies -- deep pockets, encourage good hiring,
 Respondiat superior makes the employer a tort feasor
 Employee can be indemnified
 Collusion -- allows the servant to admit guilt, get his insurance to pay, and then the master is
screwed bc the whole case is stacked against him
 Joint & Several Liability -- each liable for the whole amount jointly & severally
 POLICY BEHIND TORT LIABILITY:
 The Fault Concept: All persons should be held responsible for the consequences of their wrongful acts,
including inadvertent negligence.
 Expansion of Liability: Exceptions and modifications to this rule are normally result of Statute and subject to
strong criticism. Like the Yates case. These changes normally modify all of the settlement incentives in an
34
action & makes them pro-. Eg. Employee only settled for his policy limits and gets out. But, if the employee
gets out, he has an incentive to confess to negligence & screw the employer.
 Keeping with CL standards:

Punitive Damages: (must be the act of a vice principal AND meet the §909 requirements)
o (1) RST § 909: Punitive damages can properly be awarded against a master or other principal because of an act
by an agent if, and only if:
 (a) A principal (VP) authorized the doing and the manner of the act, OR
 (b) The agent was unfit and the principal (VP) was reckless in employing him, OR
 (c) The agent was employed in a managerial capacity (VP) and was acting in the scope of
employment, OR
 Question of fact -- look to:
 Type of authority of the servant
 Amount of discretion in what is done & how its done (decisions that effect corporate
policy) ** most important
 Whether the employee is “important”
 (d) The employer or manager (VP) of the employer ratified the act
o (2) When is someone a principal for RS§ 909? Vice principals: (a person who acts for the corporation- thus,
punitive damages may be awarded)
 Corporate officer - one who represents the corporation in a corporate capacity -- title/duties of the
employee are not dispositive
 Those who have authority to employ, direct, and discharge servants
 Those engaged in the performance of non-delegable duties of the master -- ie employing/selecting
employees
 Manage the whole or a department of the business
o Note: if the master is held liable for the personal actions of the servant, may seek indemnification from
the servant
o Policy behind punitive DAS:
 purpose of pun das is to protect society by punishing the offender rather than compensating the injured party. Thus, in
the corporate context, pun das against a corp should only be warranted when it involves an act of the corp rather than
an act of its ordinary servants or agents.



Wheeler v. Frito-Lay- Frito Lay driver, MI resident, hit another MI resident. Injured sues in state court. Frito Lay and driver file a
notice of removal to fed crt. Frito lay claims that b/c they are liable under respondeat superior, driver is no longer liable. Thus, case
may be removed under diversity jurisdiction grounds. The fact that a judgment may be entered against a master does not absolve the
servant of liability for his acts; rather, the doctrine of respondeat superior operates to establish a joint and several liability between
both the master and the servant.
Fireman’s Fund v. Turner- Turner was the manager of Oregon Sign. While acting in the course of business, he rear-ended another
car. Injured party brought suit and recovered a judgment against both Turner and Oregon Sign. Turner has personal insurance,
which paid 1/11th of the judgment, the remainder being paid by Oregon’s insurer (Fireman’s Fund). Master’s insurer then sought
indemnity from servant’s insurer. R2A 401, com d- A master held vicariously liable to a 3P injured by the negligence of a servant,
w/out negligence on the part of the master, may seek indemnification against the servant. (based on the concept that tort liability is
grounded in fault)
Yates v. New South Pizza- Pizza delivery guy collided w/ another car. Injured executed a covenant not to sue the delivery guy or his
insurer in exchange for payment of the full amount of coverage under the delivery guy’s policy. Injured then sued the pizza place
under doctrine of respondeat superior. Master argued that under state statute, release of one or more persons liable in tort for the
same injury is discharge of any of the other tortfeasors. Crt H that statute applied.
o Crt reasoned that the pizza place was a tortfeasor by applying the definition of joint tortfeasors from ’39 legislation- included
persons jointly and severally liable, like in respondeat superior. But current legislation was passed in ’67 and expressly
omitted this definition b/c it was confusing. Tortfeasor is commonly understood to mean a person who is guilty of committing
a tort.
o Ricks thinks the crt should have used the following arguments:
1) Employer’s liability under respondeat superior is analogous to principal-surety law. Sureties are liable secondarily. If
the primary debtor is release, the guarantor is also released.
2) Allowing settlement by just one party might lead to perverse negotiation techniques; should force them to all come to
the bargaining table at once.
3) Possibility of collusion btwn servant and master- after servant has paid out the full value of his insurance and gotten
fired, he has no potential for further harm and might be paid off by the servant to help reduce servant’s liability.
4) Allowing the servant to settle out removes the person who is at fault from the lawsuit. TX crts view fault as the reason
behind the liability.
5) Master-servant are viewed as one person under the law of respondeat superior- negates this rationale.
35

Hammerly Oaks v. Edwards- Apt complex resident was assaulted by former carpet cleaner. Someone previously stole cleaning
equipment from vacant apt across from resident. Carpet cleaner reported the theft to leasing agent and stated that he believed
resident stole the equipment and that he “would like to go over and beat it out of him.” He also told apt mngr that he couldn’t clean
w/out his equipment, and was then fired. Carpet cleaner and bro attacked resident. Security guard entered during attack and told
resident he should return the equipment. When resident denied offense, security guard told attackers to leave and started cleaning up
blood. Resident had to get back to his apt by himself and call 911. Jury found negligence and gross negligence. TC awarded
compensatory but not exemplary das.
o Pun das may be awarded against a master/ other principal b/c of an act by an agent if:
(a) the principal (VP) authorized the doing and the manner of the act, or
(b) the agent was unfit and the principal (VP) was reckless in employing him, or
(c) the agent was employed in a managerial capacity (VP) and was acting in the scope of employment, or
(d) employer or a mngr of employer (VP) ratified or approved the act RST 909
o Vice principal (represents corp in corp capacity) include 4 classes of corp agents:
(a) corporate officers;
(b) those who have authority to employ, direct, and discharge servants of the master;
Apt mngr in this
case
(c) those engaged in the performance of nondelegable or absolute duties of the master; and
(d) those to whom a master has confided the management of the whole or a department or division of his business
 Factors used to determine managerial capacity: type of authority employer has given employee, amt of
discretion employee has in what is done and how it’s accomplished; whether employee is “important”- doesn’t
necessarily require top mngr, officers, directors. Kolstad
o Apt mngr clearly was a VP of apt complex; security guard wasn’t. I re: leasing agent, though, b/c she is the one that heard
carpet cleaner say he wanted to beat up resident and didn’t report it. Crt H there was no evidence that the leasing agent was
VP: she didn’t have the authority to hire or fire employees or engage general Kers; didn’t have the authority to sign leases or
cks; just b/c she was the only one in the office when carpet cleaner reported this info doesn’t necessarily mean she is in
charge.
o Rationale: purpose of pun das is to protect society by punishing the offender rather than compensating the injured party.
Thus, in the corporate context, pun das against a corp should only be warranted when it involves an act of the corp rather than
an act of its ordinary servants or agents.
36
3. Agent’s
Duty of Obedience
 Obligation of “High Fidelity”
 Agent owes a duty of high fidelity, and that the agent may not proceed without or beyond his authority,
particularly where the agent has been forbidden to act and if the agent proceeds and his actions cause
loss to the principal, the agent is fully accountable to the principal for damages.
 Restatement § 385 Rule:
 Agents owe their principals a duty of obedience:
o (1) unless otherwise agreed, an agent is subject to a duty to obey all reasonable directions in
regard to the manner of performing a service that the agent has contract to perform
o (2) Unless the agent is privileged to protects the agent’s own or other’s interests, an agent is
subject to a duty not to act contrary to the directions of the principal.
Related Issues:
1) To limit the apparent authority problem arising in these cases, the company could disclose the limitations of the
contract directly to the customer in the agreement or in a letter of some kind.
2) The duty of obedience is limited to the “reasonable directions.” It is a duty based on a reasonable care and skill, as
detailed below in Duty of Care.
3) Other duties of agents:
a) Duty not to attempt the impossible
b) Duty of loyalty
c) Duty not to bring Disrepute(disgrace) on your principal
o

Crawford v. DiMicco- Employee of gen ins agency told customer that ins co (binder of coverage) would provide all risk ins on
boat. Ins agent knew of co policy requiring a condition survey, but didn’t advise customer of any conditions. Boat was damaged in
storm and sank; insurer sought das. Insurer denied coverage b/c ins policy was made w/out authorization. TC awarded judgment
against agency and insurer. AC H agency was liable to indemnify the insurer b/c agency- through its employee- acted outside its
authority. An agent acts for and on behalf of his principal and subject to his control. The agent owes a duty of obedience to his
principal, a duty not to act beyond the scope of his authority. If an agent acts w/out authority to the disadvantage of its principal,
the agent is liable to the principal for das unless: principal waives the breach of instruction or ratifies or adopts the agent’s acts as
its own.
o Ricks thinks insured should be forced to elect btwn suing gen ins agency (agent) or insurer (principal). Inconsistent theories:
insurer is liable b/c didn’t provide coverage, but might excuse insurer if find agent acted outside authority. Can’t have both.
37
4. Duty
of Care

General Duty:
 Standard of care for an agent is the standard of care & skill in the locality for the type of work
contracted to perform, and, in addition, to exercise any special skill that the agent has. Proven by
experts in the field in the locality. i.e. “ordinary care”
 R2A § 377
 One who makes a contract with another to perform services as an Agent is subject to a duty to act
according to his promise
 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
agent/promisor is not liable unless he fails to make such efforts as he reasonably can.
 Duty for an Attorney:
 The party claiming negligence by an attorney must plead and prove :
o The attorney-client relationship
o Breach of a duty arising from the relation
o Injury proximately caused by the Breach

An attorney is not liable for reaching a conclusion as to a controversial point of law which by
subsequent authoritative decision is proved to be erroneous
 An attorney has a duty to act in good faith & in accordance with an honest belief. The standard is
that of objective good faith - whether a reasonably prudent attorney (well informed) attorney could
reasonably entertain one or the other interpretation in the course of representing her client.
 Diff btwn obedience and duty of care: In obedience case, agent was commanded not to do something. In this case,
agent was commanded to do something. In the obedience case, duty is laid out. Here, specifics are to be determined
in the future. Like when a dr or an atty promises a specific result- duty of obedience- but normally just held to the
standard of a reasonably prudent professional.
 Examples:
 1) principal appoints agent to sell goods in market where highest prices could be obtained; agent is liable when
sells in bad market
 2) agent liable when couldn’t sell wheat for profit
 3) agent liable for lost sale when failed to meet person who would have purchased
 4) Agent (bank cashier) became known as a gambler in community; liable for breaching duty of care b/c brought
disrepute on principal (bank).


Maricopa Partnerships v. Petyak- Principal gave agent down payment to buy Jaguar. Couldn’t get car from Europe. Sought sell
from Dallas dealership- agent called and negotiated price and modifications. Agent wrote a personal ck for purchase price.
Principal paid back money. But dealer never delivered. Principal sued agent, and jury found against agent for full price. On appeal,
agent argues the TC instruction on agency theory was an inconsistent statement of the law. In order to find the agent liable, the
jury must first consider whether the agent breached its duty to act w/ reasonable care and skill. An agent who Ks w/ a principal is
subject to a duty to act according to his promise. This promise is ordinarily just to make reasonable efforts to accomplish directed
results. R2A 377
o Sometimes agent may make a specific promise. Sometimes crt may imply a promise. Analysis: btwn principal and agent, who
should bear the loss?
Myers v. Maxey- Widow and daughters sued atty for malpractice claiming atty failed to have a will made by deceased. Widow had
been appointed guardian of deceased’s estate prior to death, but crt declared he still had the ability to make decisions re his prop.
Atty interpreted this to mean he didn’t have to comply w/ statutory requirements that will be executed before judge b/c he had a
guardian. Crt H atty wasn’t liable b/c well informed attorneys could reasonable differ on the interpretation of this statutory
requirement. An atty who acts in GF (objective) is not answerable for a mere error of judgment/mistake re: a disputed area of the
law on which well-informed attys may have diff interpretations.
38
5. Duty of Loyalty
 Duties of the Agent -- R2A 387- An agent has a duty to his principal to act solely, exclusively for the benefit of the
principal, not for the agent or 3P, in all matters connected with his agency, including: **general duties of an agent
(1) Avoiding conflicts (non-compete) of interest between his interests and those of the Principal -- no competing
with the interest of the principal
(2) Disclose:
a) information to the Principal that the Principal may reasonably want to know, unless prior agreement
to the contrary;
b) interests that the agent has in the transaction
c) if the agent is working with/for the opposing party -- any conflicting interests (Rogers)
(3) Agent Acts solely for the principal: No secret profits (must be turned over to Principal); no working for
opposing party without consent
(4) Deal fairly with Principal, meaning not as an adverse party, unless prior agreement to the contrary.
**Exceptions**
**waiver: the duty of loyalty may be waived by consent of the principal.
**dual agent: agent may act on behalf of a third party whose interest is in conflict with those of the principal
as long as both parties to the transaction consent.
 Damages for Breach of Duty of Loyalty:
o R2A 389, cmt c- COA: Principal doesn’t need to prove harm in order to recover for breach of principal-agency
relationship.
o Restitution/Duty of Accounting: “disgorgment of profits earned by the agent”- if an agent receives anything of
value as a result of the violation of his duty of loyalty to the principal, he is subject to liability to deliver it, its value,
or its proceeds to the principal. ((R2A § 403))
 the agent holds any proceeds that the agent earns on the transaction in constructive trust for the principal
(gains interest)
 if the agents value is a fee charged  the principal can recover the payment of the fee (ie attorneys fees)
o Additional Damages: the court may award additional damages over the amount the agent earned on the transaction
as it sees fit
o Recission: The principal is also allowed to rescind any contracts the agent made on the principals behalf, while
breaching the duty of loyalty if the principal was not bound.
 Policy:
o The rule exists to take away the incentive of agents to act for their benefit on the principals transaction
o Metaphysical unity between agent & principal
o Promote Efficiency in transactions
o Lower Transactions Costs
o Lower Monitoring Costs -- -- principals costs of guarding against misconduct of the agent
 Power of Attorney & the Duty of Loyalty:
o POA are construed very strictly
o Creation of a power of attorney imposes a fiduciary duty of loyalty on the attorney in fact to act for the principal
 Attorney has a duty to act for the best interest of principal
 unless the duty of loyalty is waived to allow the attorney to engage in self interested transactions
 Waiver (attorney has duty to prove waiver by principal)
 Bright Line Rule: where a power of attorney does not expressly authorize in writing (oral
authorizations are not sufficient) the attorney in fact to make gifts to himself/herself, extrinsic
evidence of the principals intent to allow such gifts will not be admissible.
o Threshold showing that there is an express waiver in the POA to get in extrinsic evidence
 Deleware/CL Rule: look at the document to see if there is ambiguity in the issue if the principal
waived the duty of loyalty, if no ambiguity, no extrinsic evidence.
 Dual Representation:
o Attorney-client relationship creates a duty to disclose all information by the attorney. When the attorney is hired
by the insurance company to represent the doctor (opposing interests), the duty to disclose remains.
o In these situations, if the client wants to do one thing & the insurance company wants to do another, might want to
tell doctor to get independent counsel
 Counterargument: Client has contracted their rights away to the insurer, by accepting the insurance
companies counsel .
39



Green v. H&R Block- (see facts above, 1st case) Assuming the existence of an agency relationship, H&R owed a duty of loyalty to
its customer (Green), to not voluntarily place itself in a position where its interests or 3P interest were in conflict w/ Green’s
interests. One of the primary obligations of an agent is to disclose any info the principal may reasonably want to know, especially
when there’s a conflicting interest. Failure to disclose the info is a breach of the agency relationship. If there’s a breach and the
agent profits from the breach, the principal may bring a COA to recover those profits. Here, H&R had several interests in the loan
transaction, which created a conflict btwn it and its customers. H&R has a duty to disclose those interests affecting its ability to act
solely for customers’ benefit. H&R breached its duty of loyalty when it w/held info Green would reasonably want to know and
then made a secret profit.
Schock v. Nash- Decedent gave neighbor POA. Neighbor transferred property to herself to keep the beneficiary of the will,
Thomas Jefferson University, from getting it. Creation of a POA imposes a fiduciary duty of loyalty on the attorney in fact. An
atty-in-fact, under the duty of loyalty, has an obligation to act in the best interest of the principal unless the principal voluntarily
consents to the atty-in-fact engaging in an interested transaction after full disclosure. POA is strictly construed & broad allembracing expressions are discounted. TC may carefully evaluate admissible extrinsic evidence to determine if the principal
intended to make a gift/ consent to a strictly enumerated act of dealing after full disclosure. Crt H decedent did not intend neighbor
to receive the property. As the neighbor was unjustly enriched by the appropriate of decedent’s prop, crt ordered restitution.
Rogers v. Robson, Masters, etc.- Law firm represented a dr. in a med mal case. Dr. specifically stated that he didn’t want to settle.
Law firm also represented the ins. co. who wanted to settle quickly. Ins co and dr. had adverse interests. Although the law firm is
employed by insurer, insured is their client. Firm has a duty to disclose to insured their intent to settle contrary to his instructions.
If insured doesn’t consent to insurer’s decision to settle, ABA suggests that law firm should inform insurer that there’s a conflict.
If parties can’t agree, law firm should w/draw or allow insured to waive coverage and seek alternate counsel. *Bot line: agent has
a duty to disclose any conflict to principal.
o Note re: remedy: If dr sues law firm for malpractice based on negligence, recovery is based on harm- increased ins premium,
loss of reputation, etc. But in an action for breach of the duty of loyalty, remedy is restitution. So dr only collects fees
expended.
40
E. AUTHORITY AND REPRESENTATIONS OF THE AGENT
 Rule:
 The powers of the Agent are, prima facie, coextensive with the business entrusted to his care, and will not be narrowed
by limitations not communicated with the person with whom he deals.
 Restatement § 388: An Agent is subject to a duty to the Principal not to act in the Principal’s affairs except in
accordance with the Principal’s manifestations of consent. Under Restatement § 401, Agent’s are liable to their
Principals for damages resulting from breaches of duties owed to the Principal.
 Statements by the Agent: The principal may not be bound by false representations made by the agent made without
the principals consent, and outside the agent’s authority.

Cange v. Stotler & Co.- Nine unauthorized transfers were made to customer’s acct. Agent for trading co. acknowledged the mistakes
and told customer they would be corrected on several occasions. Agent later told the customer that the amts had been refunded, and
claimed customer was just reading the statements incorrectly. Customer eventually got the agent to sign an agreement admitting the
unauthorized transfers and providing for reimbursement. Agent failed to comply w/ the agreement, and customer sued > 2 yrs after
unauthorized trades were made. Original customer agreement contained a limitations clause: any claims against broker must be brought
w/in 1 yr. Agent’s last action, signing agreement, was one yr prior to suit. If co. is liable for agent’s statement, then SOL is tolled based
on estoppel.
o Ways to make principal liable for agent’s statement:
 Inherent authority- (rvw, see elements above) Since the principal co. is disclosed, it is liable if the agent is a general agent,
conducting acts that usual accompany/ are incidental to authorized transactions, and the other party reasonably believes the
agent is authorized. The agent is a general agent b/c he is authorized to conduct a series of transactions, buying stock, which
involves a continuity of service, has been happening for at least several years now. Agent, as a broker, was authorized in
saying that there was a mistake in accounting and offering to reverse it. Customer was reasonable in relying on agent’s
representations. *Like FHLMC case, doesn’t matter if principal actually instructed agent to makes the statements.
 Scope of employment: a principal may be held liable for the tortious conduct of an agent if the conduct was w/in the scope of
employment. An agent is acting w/in the scope of employment if he is doing what is necessarily incidental to the work that
has been assigned to him or which is customarily w/in the business in which the employee is engaged. Ex: Dyer v. Johnsonsellers of a house were held liable for misrepresentations by the selling agent.
Related Issues
* Estoppel tolls the statute of limitations period
41
F. The
Principals Knowledge
 Types of Knowledge:
 Actual
 Constructive: knowledge the principal has reason to know -- i.e. notice to authorized agent; imputed from agent’s
authority
 Generally: Notice to, or knowledge of, an Agent while acting within the scope of his authority and in reference to a matter
over which his authority extends, is notice to, or knowledge of, the Principal. Cts. limit it to employees with managerial
responsibility or control.
 R2A § 272: The principal is affected by the knowledge of the agent when:
 1) knowledge concerns a matter within the Agent’s power to bind the principal (the agent has actual authority) OR
 2) when the agent has a duty to give the principal the information
 R2A § 381: an agent has a duty if the agent has notice of facts which relates to matters entrusted to the agent,
and the agent knows those facts might effect the principal -- the duty is inferred from the agents position
 added by me  3) knowledge of the agent while acting in the scope of employment (in the normal execution of the
Agent’s duties) is chargeable to the principal
 EXCEPTIONS:
o (1) Casual knowledge or knowledge attained before the agent became employed with the principal is not imputed on
the principal
 Justification:
 Cost efficient
 Difficulty in the court determining the actual subjective knowledge of the agent at the time
 Uniformity of Agent & Principal: principal has no way of knowing what the agent knew before he was
“one with the principal,” principal only knows what the agent has learned since being agent since agent has
a duty to report
 there is a counterargument that the principal should be imputed if it can: “reasonably said to be present in the
agents mind when acting for the principal or if it was acquire recently before becoming employed with the
principal”
 rationale: people are employed because of their expertise (knowledge)
o (2)R2A § 273: A Principal will not be affected by an Agent’s knowledge concerning a matter outside the scope of the
Agent’s actual authority, but within the Agent’s apparent authority, UNLESS a 3rd party has relied on the Agent’s
apparent authority. (Estoppel). (Secretary having knowledge of legal term does not vest it in lawyer, since legal
work is outside the scope of her authority)
o (3) Knowledge will not be imputed on the principal if the agent is acting acting adversely AND entirely for the
agent’s own purpose or a third parties. RSA § 282
 The agent must have totally abandoned his principal’s interests (ie embezzler)
 CANNOT be invoked for merely conflict of interest or when not acting primarily for principal.
o
EXCEPTION TO THE ADVERSE EXCEPTION:
[[sole actor doctrine -- based on estoppel]]
 R2A § 282(2)(b): The principal is affected by the knowledge of an agent who acts adversely to the
principal if:
 `1) the agent enters into negotiations within the scope of his powers and the person with whom he
deals reasonably believes him to be authorized to conduct such transactions; OR
 2) Before he has changed his position, the principal knowingly retains a benefit through the act of
the agent which otherwise he would not have received.
 Notification v. Knowledge of the Agent
o Notification to an agent is notification to the principal if the agent was actually or apparently authorized to receive
the notification. [[different from notice; a formal act intended in itself to determine the rights of the parties
regardless of the degree of knowledge of the recipient -- notice if effective only if the agent had power to
receive it at the time the notification was received]] (Ex: the front desk lady of the ∆ leaser’s other business
receiving a notice of lease extension)
 If agent is: (1) authorized to receive the notification or (2) apparently authorized (look to past acts of agent) the
principal will “constructively” receive the notice
o Knowledge that is only within an agent’s apparent authority will not be attributable to the principal UNLESS a third
party relied on the appearance of authority.
42
 i.e. an agent could have actual knowledge of something, but since the way the agent received the knowledge is
not within the agents authority from the principal, the principal is not imputed with the knowledge.
 Knowledge & Ratification:
o Doctrine of ratification: A principal may affirm a prior action by an agent, which did not bind the principle but was
purportedly done on his account, with the ratification relating back to the time of the actual act.
 Ratification of unauthorized acts: for this to occur, the principal must have knowledge of all of the material facts
o





Udolf v. Aetna Cas. & Sur.- Small business operates retail clothing store. There’s only one director/ owner. Mngr handled everything
in owner’s absence. An employee stole $6K, but the mngr allowed her to repay the $ & remain employed w/out telling the owner. The
employee later stole another $48K. Mngr then filed her. Insurer denied coverage under policy exclusion which excluded coverage of
employee after insured or any partner or officer has knowledge or information that employee has committed any fraudulent or dishonest
act. Thus, the crt must determine whether the mngr’s (agent’s) knowledge was imputed to the owner (principal). Knowledge of an agent
acquired in the ordinary discharge of his duties for the corporation is generally imputed to the principal. Crt H mngr’s knowledge was
imputed to the owner. Mngr was in charge of operations in owner’s absence, and one of his duties was to report matters such as
misappropriations to the owner.
Lanchile Air v. Conn. Gen. Life- Lanchile contracted with ins co to obtain group health ins. Lanchile and ins co contracted through
agents Rodriguez and Molina. Unknown to the principles, agents where partners in an ins agency collecting service fees in the
transactions. Lanchile sues ins co to recover fees. I: whether the knowledge of agent is imputed to Lanchile. Knowledge and
misconduct of an agent will not be imputed to a principal if an agent is secretly acting adversely to the principal and entirely for his
own or another’s purposes. R2A 282 [Reasoning: law doesn’t presume wrongdoer will perform his usual duty of disclosing all material
facts re: his action if such disclosure will reveal his fraud.] Crt remanded for a jury determination of whether the agent was acting
adversely to Lanchile’s interests. Close call here b/c agent was for the principal by obtaining cheaper coverage, but also acting in own
behalf.
Dvoracek v. Gillies- Dispute btwn L & T. Lease gave 1 yr term to T w/ option to renew for 2 yr period provided written renewal was
given at least 60 days prior to lease expiration. Notice requirements were discussed in the lease, but didn’t state an exclusive method of
delivery. T normally hand delivered rent cks, and L sometimes hand delivered notices. W/in 60 days before lease expiration, T
delivered a notice to renew to L- left @ front desk. Secretary testified that she saw him go in the building and deliver the notice. L &
employees denied receiving notice, and sued T for wrongful detainer. Crt H jury could’ve concluded that employees were agents for the
purpose of receiving the renewal notice. Notification given to an agent is notice to the principal if it is given to an agent authorized, or
apparently authorized, to receive it. Hand delivery to the employee at the front desk is enough to work around SJ. Rent cks were
delivered there in the past. That’s where mail was normally delivered.
o Agent’s authority to receive a document constitutes constructive knowledge of the principal. Here, agent’s knowledge of the
contents of the notice is irrelevant. The authority given to the agent to receive the letter imputes constructive knowledge to the
principal.
Davenport v. Correct Manuf’s- Employee injured when employer’s cherry picker collapsed. Manufacturer’s agent had notice that this
cherry picker was defective- attended seminar about defective rod and assembly; fixed this very cherry picker at earlier late. This agent
then became an officer/director of D, service co. Prior agent of manufacturer, now officer of service co completed a repair unrelated to
rod and assembly on cherry picker; didn’t warn employer about defect or need to monitor. Employer sued service co after accident for
failure to warn. Service co claims they didn’t know of the defect and had no duty to discover it; claim can’t be responsible for officer’s
knowledge b/c he acquired that knowledge prior to his involvement w/ the service co.
o Majority rule: Knowledge of an employee/ officer can only be imputed to an employer if he gained the knowledge after he was
employed.
*TX RULE
 Ricks thinks it’s silly to say that the knowledge obtained by the agent before the agency began cannot be imputed to the
principal.
 RBZ v. Warwick- Prop manger’s ex-H assaulted & raped resident. Prop manager knew that he was convicted of rape prior to
their marriage. Apartments are not held to know what prop manager knows about prior conviction.
o Dissent rule: Knowledge would be imputed only if it can reasonably be said to be present in the agent’s mind while he was acting
for the principal or if it was acquired so recently as to raise the presumption that he still retained it in his mind.
 Rationale: people are employed because of their knowledge/ expertise.
Estate of Sawyer v. Crowell- Crowell founded & operated as pres. an investment trust designed for investments in RE. Crowell was
contacted by Administrator of Estate about investing estate funds in high-grade commercial paper (short term debt by large corp).
Crowell asked him about investing in trust, but Admin refused. Crowell purchased commercial paper from Ford. Crowell & Admin met
again on maturity date, and Admin told Crowell he wanted to invest in commercial paper for 30 day period so could get it in by the end
of the yr. Admin didn’t specify an investment location. Crowell purchased commercial paper from the investment trust. When
administrator had secretary inquire about how to w/draw, Crowell sent ltr saying 3 days notice & disclosed it was in investment trust.
Sec told admin needed 3 day notice & put ltr in file w/out mentioning where $ was invested. Investment trust went bankrupt.
Administrator sued to recover funds in BOK claim. Crowell claims he’s not liable b/c he told administrator where the funds were
invested. Crt H knowledge of secretary is not imputed to the administrator. The knowledge of an agent is not imputed the principal if
knowledge is acquired outside the scope of the agent’s authority. Obtaining knowledge regarding the location of the funds wasn’t w/in
the scope of the secretary’s authority. Admin simply told her to inquire about how to w/draw.
o Ratification: imputed knowledge also works for ratification. Doesn’t matter if the principal is a corporation or an individual.
Imputed knowledge works just as well as actual knowledge for the purpose of finding that the principal’s subsequent actions
ratified the acts of the agent. (Ex: Chevron- corp ratified acts of agent. Corp can’t have actual knowledge as a matter of law b/c it’s
an entity.)
o Crowell claimed that Admin’s silence after receiving the notice was a ratification. Ratification doesn’t apply in this case b/c the
principal didn’t have knowledge to begin w/.
43
otice
G. Termination of Agency
1. Revocable Agencies
VOLUNTARY REVOCATION
Principal:
-may at anytime revoke his or her consent to action on or her behalf by the agent. RS § 118.
-However, Revocation of the Agent’s authority does not become effective as between the principal and a third party until
the third party has notice of the termination (general agents have lingering apparent authority until notice given)
Agent:
-may renounce the agency and withdraw his or her consent to act on behalf of the principal.
Notification by principal to third party & lingering apparent authority in the interim:
General Rule: Principal must inform third parties that the agency relationship has been terminated to avoid liability
o R2A: Publication in a general newspaper is appropriate notice of revocation of general agents apparent
authority.
 Except when:
**in below situations going to need to send some kind of communication alerting 3P
 (1) Third person has previously extended or received credit to or from the principal through the
general agent
 (2) The principal specifically invites the third person to deal with the agent
 (3) The principal should have known that the agent had begun to deal with the third party
 (4) When the principal has given the agent a power of attorney or other writing as evidence of the
agency.
o R2A: Specific Agents usually do not have lingering apparent authority UNLESS: (in these situations the
principal is going to have to notify the 3P of the Agent being released)
 (a) the principal has specially accredited the agent to the third person
 (b) the principal has notice that the agent has begun to deal with the third person;
 (c) the principal has entrusted the agent with an indica of authority (POA, other documentation) RS §
132
o R3A approach: It may be impossible for the principal to give notice to every single third party, so the
apparent authority of the agent is cut off (regardless of notice) when it is no longer reasonable for the 3P to
believe the agent acts with authority. (the same for general or specific agents)
 Notice of any facts that would call the agent’s authority into question, are inquiry notice,
o Third Parties & “Inquiry Notice” for Reasonableness Requirement
 If a 3P has notice of facts that call the agent’s authority into question, and these facts
would prompt a reasonable person to make inquiry of the p
rincipal before dealing
w/ the agent, the agent does not act w/ apparent authority.

Zukaitis v. Aetna Cas. & Sur.- Dr. received malpractice ins from insurer through its agent, an ins agency. Yr after policy
lapsed, dr. received notification of a malpractice claim that occurred w/in the policy period. Dr. notified the ins agency, and
forwarded the claim to the ins agency at their request. Ins agency forwarded the claim to dr’s insurer during a different policy
period. Ins agency was no longer the agent of insurer from the current policy period; no one notified dr. that agency relationship
terminated. The atty for the insurer to which the claim was sent didn’t notice that the claim occurred outside the policy date until
3 yrs into litigation. Atty w/drew and notified the correct insurer, but the insurer refused to defend on the grounds of insufficient
notice. Dr. retained own counsel to resolve the case, then sued insurer for costs of the defense. Agents may receive notices for a
principal. A revocation of the agent’s authority does not become effective as between the principal and 3P until 3P receives
notice of the termination. Thus, the termination of agency btwn ins agency and insurer isn’t effective btwn insurer and dr until dr
receives notice of the termination. When dr sent the claim to ins agency, this was effective notice to insurer b/c ins agency was
still an agent for insurer w/ respect to dr.
44
o Effects of Rule re: Lingering Apparent Authority: It’s next to impossible for a principal to notify every individual w/ which
a former agent has dealt when the agency relationship terminates. A bitter agent might be tempted to use his/her apparent
authority to generate additional liability for the principal. Thus, R3A has developed a standard that cuts off an agent’s
apparent authority (regardless of notice) when it’s no longer reasonable for 3P to believe that agent acts w/ authority.
o R3A 3.11(2)- Apparent authority ends when it is no longer reasonable for the 3P w/ whom the agent deals to believe that
the agent continues to act w/ actual authority.
o R3A 2.03, com d: If a 3P has notice of facts that call the agent’s authority into question, and these facts would prompt a
reasonable person to make inquiry of the principal before dealing w/ the agent, the agent does not act w/ apparent authority.
Ex: notice that principal revoked actual authority, agent renounced it, agent’s authority was ltd to specific
undertaking, or circumstances otherwise changed so that it’s no longer reasonable to believe the principal consents to
agency
o R3A 3.11, com c: Lingering authority doesn’t survive a statement that the agent’s authority has terminated, made by the
principal to 3P w/ whom the now-former agent deals. Principal’s statement is effective even thought the agent succeeds in
persuading the 3P to disregard it. Ill 2: Agent’s apparent authority is terminated when local newspaper publishes a story
about agent’s termination on its front page.
45
b. Termination
of the Agency Relationship by Law
 Death of Principal
o Majority: Death of the principal instantaneously terminates the agency relationship AND all actual and apparent
authority of the agent without notice.
 Any actions taken by the agent after the principals death are a breach of the implied warranty of authority and
the agent may be liable (( if warranty is not disclaimed))
 Policy: as between the third party & the agent, agent is closest to the principal and should bear the risk of the
principal’s death; “oneness” of agent & principal - when principal dies the agency relation dies as well.
o Minority: Death of the principal terminates the agency relationship AND the agents actual authority. However,
apparent authority remains (given by POA or otherwise) remains until the agent has notice of the principal’s
death. (R3A’s approach)
 Policy: The doctrine of apparent authority exists in order to allow third parties to depend on the Agents
without investigating their Agency before every single transaction. The risk of death should be in the
Principal and not on third parties the Agent deals with.
** How can agents protect themselves against the risk of death:
1) durable PoA; 2) frequent contact with Principal; 3) Insurance on Principal’s life; 4) K with Principal for
indemnity; 5) exculpatory agreements with 3 rd parties the Agent deals with; 6) disclaimer of implied
warranty of authority.
Written Durable Power Of Attorney: [[can be used for DEATH & INCAPACITY]] gives an agent actual
& apparent authority to act for principal before they know of the principal’s death. Most states have statutes
authorizing the use of these ((Uniform Durable Power of Attorney Act))
Note: a regular power of attorney terminates at death of the principal
 Death of Agent:
o Terminates the agency relation and all powers to bind the principal

Incapacity of Principal:
(coma, in hospital)
o Permanent Incapacity known from the onset:
 eliminates the agent’s actual & apparent authority once permanent incapacity known
o Unknown if condition is permanent/temporary:
 agent keeps authority, but his actions are voidable; if condition becomes permanent the agent’s authority
terminates
 voidable either by the principal upon recovery, or by principals estate if he dies
 Principal Adjudicated Insane
o Terminates agency relationship & all of agents authority
 Impossibility of Performance of Duties
o Impossibility of the agent being able to perform the duties contracted to do for principal terminates the agency
relationship
 In these situations look for:
o Breach of Warranty of Authority -- unless waived
o Breach of Duty of Loyalty

Estate of Krempasky- Decedent left estate to niece and made her executrix of will. Decedent had 4 CDs worth $5K each; kept
them in a metal box in home. Executrix could not locate them. Executix later discovered that another woman had prepared
authorization (POA) and had decedent sign it the day she died. Authorization was designed to allow her to put her own name on
the CDs- to make them joint tenants w/ right of survivorship- so that they would pass to her automatically. Estate sued to
recover CDs. An agent does not have lingering apparent authority after death. Death terminates all authority. [Rationale: as
between the agent and 3P, agent is closest to the principal and should bear the risk of agent’s death.] Decedent died before
agency act was completed; thus, the agent’s act of adding her name to the CDs was invalid.
*Note: there is also an issue here w/ duty of loyalty b/c agent has POA signed so she can obtain an interest in the
principal’s asset, but this isn’t addressed in the opinion b/c there’s no authority.
46



o An agent who enters into a K on behalf of the principal after the principal’s death is liable on the K; breach of the warranty
of authority. *For attys acting on behalf of aged clients, may be wise to disclaim warranty of authority & make principal’s
legal existence a prerequisite of the K for representation.
Rule opposing CL: R3A 3.11, com b; Schock v. U.S.- A principal’s death or loss of capacity does not by itself or automatically
end the agent’s apparent authority. R3A cites Schock & Schock cites R3A. There is no other case citing R3A or Schock. The CL
continues to be followed b/c it’s established in most states. But it may be used in the future. Ricks thinks the reasoning is faulty.
Estate is not trying to put all the loss from the principal’s death on 3P- it’s the agent who bears the loss. Estate is a 4th party.
Campbell v. U.S.- Campbell gave son full and universal POA. Eleven years later, he suffered a cerebral hemorrhage and became
incompetent. Son, acting under POA, bought flower bond for father- used as estate planning device to avoid taxes. Mental or
physical incapacity which does not preclude recovery should render the interim acts of the agent voidable rather than void. In
this case the estate did not avoid the son’s acts; the affirmed them. Bond saved the estate over $20K so not about to avoid
transaction.
o Rationale for cutting off agency w/ incapacity: Protect the incapacitated principal- no longer have the ability to monitor the
agent.
o Crt suggests that once it is determined the principal won’t wake up from a coma (out for a long time), the agency is then
terminated completely.
TX rule re: insanity: If principal is adjudicated insane, all agency terminates.
47
2. Irrevocable
Agencies
 Rule: An Agent’s authority to act for a Principal is always revocable at the will of the Principal and
may be withdrawn at any time UNLESS the (1) authority is coupled with an interest OR (2) has been
conferred on the Agent for a valuable compensation moving from him to the Principal.
o (1) Authority coupled with an interest: is an interest in the thing itself on which the power is
to be exercised, and not an interest in that which is to be produced by the exercise of the power-- -“given to secure the performance of a duty or to protect title”
 Agency with an interest survives death
 Examples:
 Creditor with a mortgage or a lien on the property to secure repayment AND who is given
a power to sell on default
 Commission is not sufficient to confer an interest
o (2) Powers given for consideration/as security: created for the benefit of the power holder
and given to secure the performance of a duty or to protect a title, such title given when the duty is
created
 examples:
 Bowling: the agent (Bowling) created the enterprise itself and then relinquished its direct
financial interest in exchange for management control over the contract. National Convoy
tried to fire Bowling. HELD: he could not be fired - he gave away his idea for the
consideration of being manager until his death.
 Creditor: when the creditor gives the debtor a loan, and the debtor gives the creditor a
right to sell on default.
 Creation: Courts have recognized that an agency coupled with an interest can be created not only
where an agent is a party to a joint enterprise or an investor in the enterprise, but also where the
agent created the enterprise itself and then relinquished its direct financial interests in the business
while retaining management control by contract.

Lee v. O’Brien- Lee’s death terminated her rights as beneficiary to farm conveyed in trust to her by her mother. At death,
trustee was to have prop appraised and then offer at private sale for 90% of appraised value to each of Lee’s 4 children,
beginning w/ the oldest. Children requested that trustee convey prop to all of them as tenants in common, each w/ undivided
1/4th interest; trustee agreed. Agreement made oldest child POA to grant & convey prop; she had the ability to determine price
of sale. At her death, the next oldest child became POA according to agreement. POA agrees to sale; youngest child objects to
purchase price. Sued saying he wasn’t bound by the purchase agreement. Crt H youngest child isn’t bound b/c sister (then acting
POA) wasn’t his agent. Rejection of the first K terminated the agency relationship. When principal exerts a reasonable
manifestation of rejection/ dissent to continuance of agent’s authority, the agency relationship terminates. EXCEPTIONs: when
agency is coupled with an interest (separate interest in agency itself, ie- secured creditor who is also given power to sell property
on default- have an interest in the property through mortgage but then give yourself an agency power to help protect stream of
income that will pay that interest; employee set up business he was going to manage & then arranged to have a share of the
profits- bought his agency; fam who were editors of newspaper gave up ownership to remain editors- again bought agency); or
interest in what is to be produced by agency relationship (ie- contingent fee arrangement, realtor getting cut of sale price).
o Could argue in this case that both POA (oldest and next to oldest child) bought their agency, thus falling under the
exception and making youngest children rejection irrelevant. Argument: oldest child gave up her option to buy the prop in
exchange for being made agent w/ power to sell the property whenever she wanted. Next oldest child gave up her right to
buy in order to right to be next appointed agent.
48
II. Unincorporated
Business Entities
1. Formation

of General Partnerships- default structure of ownership for businesses.
Elements of General Partnership-- UPA §8; TBOC 152.051(b)
1) an association of 2 or more persons
* intent can be inferred from conduct of parties, surrounding circimstances, how the parties label themselves
*association can be inferred even if the parties did not intend to create a partnership/blatantly disclaimed one
2) to carry on a business
3) for profit
4) co-owernship of profits [not general revenue], property & control [right to control is a key element]
**result: Question of Law
Analysis:
 (1) Ricks Analysis: The court first analyzes the contract for economic effect to decide if it is FAIR to hold that there
is a partnership (partnership is mainly a loss allocation doctrine); looks to:
o (1) how much money each partner put in
 if drastically different amount evidence that it is not a partnership
o (2) expectations of each party
o (3) whether the parties were contracting for the same thing or different things
o THEN WITH EQUITABLE RESULT IN MIND  apply the factors below
 (2) 152.052- Rules for Determining if a Partnership is Created
(a) Factors indicating that persons have created a partnership include:
(1) sharing profits -- pre-requisite to creating a partnership, but not sufficient in itself to establish a
partnership relationship
a. note: sharing general revenue (all gross income w/o costs) is not evidence of a partnership
b. parties do not actually have to share profits, just have to intend to (i.e. non-profitable business still
sharing profits, but there just are none)
(2) expressing intent to be partners
a. courts rely heavily on the intention of the parties - shown through their statements, how they
carried on, language of the contract.
b. However, §152.051(b)(2) provides: partnership is created regardless of what name it is called or
whether the parties actually intended to create a partnership.
(3) participating in control of business or retaining the right to control
a. to be a partner have to have the same right to control as the other, able to make decisions
b. Control:
1. The right to participate in control is the essence of co-ownership; absolute control isn’t
required.
2. Examples: giving instructions, hiring & firing employees, say on how money is spent, say in
important business decisions
c. Joint Control:
1. Holding of licenses, assuming a firm name, keeping joint books, joint bank account, filing of
partnership taxes
(4) agreement to share/sharing losses or liability of 3P claims against business
a. this can often be inferred from an intent to share profits
(5) agreement to contribute/contributing money/prop to business
a. note: when property is donated as a contribution, it is likely the property of the partnership,
unless intent shows otherwise
(b) Creation on a partnership is a question of law.
(c)
One of the following, by itself, doesn’t indicate that a person is a partner:
(1) receipt or right to receive a share of profits as payment:
a.
of debt
b.
of wages [Dalton]
c.
of rent
[Chariton]
49
d.
to former partner, surviving spouse, rep of deceased/disable partner, or transferee of a
partnership interest
e.
of interest on a loan
f.
of consideration for sale of business or other prop
(2) co-ownership of prop, regardless of whether it’s JT, TC, TE, JP, CP, PO- part ownership; or combined
w/ sharing profits from prop
(3) right to share/sharing gross returns or revenues
(4) ownership of mineral prop under a joint operating agreement
(d) Agreement to share losses isn’t necessary to create a partnership.
 (3) Result:
o If partnership found:
 sharing of profits & share in losses (each responsible for losses)
 each partner is liable for the other in contract & in tort
 partner may not sue the partnership or the other partner on a matter arising out of the partnership UNTIL
the partnership has been dissolved and and there has been an accounting.
Related Concepts:
1) A lease are not partnerships in the absence of stipulations or evidence clearly manifesting a contrary purpose
2) Joint Ventures: is basically a partnership -- use the same elements -- just said to “relate to only one transaction”
3) Relevant Statutes:
§152.051(b): Partnership defined: An associate of two or more persons to carry on a business for profit
as owners creates a partnership, regardless of whether:
(1) the person intends to create a partnership
(2) the association is called a “partnership” or “joint venture”
4) Sharing of Gross Returns: Sharing of gross returns does not in it self establishes a partnership. But, the receipt
by a person of a share of the profits of a business is prima facie evidence that the person is a partner, unless the
profits are received in payment of Debts, wages, annuities, interest on loan, consideration for sale of good-will or
other property.


Dalton v. Austin- P & D disagreed about the terms of their agreement concerning the mgmnt and subsequent sale of a restaurant. P
sued D for conversion, claiming he unlawfully took equipment left at the restaurant. Crt must first determine whether a partnership
existed. Crt H a partnership was created in this case. *Ricks: Stack of inconclusive evidence was listed; crt said that it all added up to
a partnership. Evidence could be rebutted:
o Evidence of an agreement related to operation of the business.
 The K arrangement could relate to running a business that isn’t a partnership.
o Assets used in the business & capital contributions to the business were made by both.
 Probably more like an employment agreement- P is an employee who makes contributions to the business w/ a plan to
purchase the business.
o Both parties testified that they were partners.
 Lupien- “names go for nothing when the substance of the arrangement shows them to be inapplicable.” People may say
they’re partners when they aren’t; might not understand the difference btwn partner/ lender, etc.
 TX: 152.051(b)(2) specifically states that a partnership is created regardless of what name it is called or whether the
parties actually intended to create a partnership. However, 152.052(a)(2) lists expression of intent to be partners as a
factor indicating that a partnership has been created.
o P actively managed business for several months.
 But that doesn’t necessarily mean she’s a partner.
o Case is of no use in predicting the future. On the facts, still don’t know who should win b/c parties didn’t share the same
intent. So really didn’t have much of an agreement.
Chariton Feed & Grain v. Harder- Harder (L) & Davidson (T) entered into a traditional farm lease- L-T mentioned many times
throughout. Bills for feed, etc. were in L’s name; then T started paying them directly & subtracting expenses out of gross receipts due
to L under the lease. L didn’t require paper accounting from T; just called occasionally to see how things were going. Owner of feed
store didn’t even know that all the livestock wasn’t owned exclusively by T until he was attempting to collect for outstanding debt &
T disclosed that L had an interest. Feed store contacted L & he said over the phone he was a partner. Crt H a partnership didn’t exist
in this case.
o Analysis under Dalton; UPA rule: They had a voluntary K that involved placing $ in lawful commerce (business purpose).
They had an understanding re: splitting the profits. Using the rationale from Dalton, crt could find a partnership.
o Evidence used by crt to negate partnership: There was no intent by the parties to create a partnership, express intention was to
maintain a L-T relationship. Profits were different under crop share leases than under partnership agreements- expenses all
went to Harder but receipts were split 1/2 & 1/2. They didn’t file a joint tax return.
o Additional factors Ricks thinks crt relied on: Failure to monitor what happens on the lease doesn’t warrant L being liable to all
of T’s creditors. Every crop share lease in IA creating a partnership would cause great turmoil; crt wants to maintain common
economic expectation. Ricks doesn’t think intent is really a factor- T didn’t mean anything by lease; L didn’t understand the
50



implications of the lease at all. What parties call themselves really doesn’t mean that much, even if it is on a written
instrument.
Joint venture- is in the nature of a partnership, but is formed for the purpose of carrying on a single transaction instead of a series of
transactions—a business. Partnership definition is used to determine if a joint venture was created.
P&M Cattle Co. v. Holler- Maxfield and Holler entered into an agreement arranging payment to pasture cattle. Crt H parties did not
form a partnership or joint venture.
o Analysis under Dalton; UPA rule: The parties entered into a voluntary K w/ the understanding that a community of profits
would be shared. The agreement clearly relates to the operation of a business. Both appear to have management rights under
the agreement: Holler- furnishing grass & managing cattle; Maxfield- supplying cattle. Appears to be a partnership under this
rule.
o Evidence used by the court to negate partnership: No evidence that a partnership was intended by the parties. Agreements is
labeled partnership agreement; term partnership isn’t used anywhere in the agreement. Division of profits was just a measure;
there wasn’t an express agreement. No partnership fed income tax return was prepared/ filed.
o Additional factors Ricks thinks crt relied on: Crt hangs a lot on the tax return, but this relies on what the parties say
themselves. Ricks thinks crt really used an economic analysis. Holler was in the business of supplying grass. He is trying to
recover at least fmv of renting land, but profits are factored into rent. Maxfield is trying to make a profit off selling cattle.
Parties have such different investments- inequitable to make both pay equally if cattle sells at a loss. Judges are very familiar
w/ these arrangements.
Bottom Line: Test for partnership/ joint venture isn’t driving these cases. It’s really a loss allocation method; this issue is only
addressed when the partnership suffers a loss.
51
2. Formation of Limited Liability
 Limited Liability & Limited Partnership
Firms
 General Rules



(1) To create a limited partnership/limited liability company there must be a filing & a partnership
agreement
 L.P. & L.L.P did not exist at common law -- statutory entity
 Policy:
o (1) to give notice to the public who may transact with the entity, and
o (2) a ceremony to make people believe that something happened
 mind concept: if they have a filed name we know they exist & who they are
(2) 3P knowledge of the firm as limited liability is irrelevant; the firm is a statutory creature and all rules
must be abided by to attain the benefit (limited liability)
 Dwinells v. Cosmo Hotel: having actual knowledge that the Firm you’re dealing with is an LLP
does not trump the statutory requirement of notice – filing for formation is required.
(3) Once the statutory requirement of filing is met, it cannot be back dated to past transactions -- no
retroactive creation of the partnership
 Statutory Creation of Entities: General Filing Requirements for All Entities
o
o
o
o
o
o
3.001(c)- Existence of a filing entity [includes: Corp, LP, LLC- 1.001(22)] commences when filing of the
certificate of formation takes effect.
§3.005 General Filing Requirements for all entities ((more below for specific entities))
 Name of the filing entity being formed
 Type of entity being formed
 [other than LP] purpose of filing entity
 [other than LP] Period of Duration, if not perpetual
 street address of the agent
 Name and address of: (1) organizer or (2) general partner
3.001(d)- Acknowledgment of the filing of a certificate of formation issued by the filing officer is
conclusive evidence of: [EXCEPT in a proceeding against the state]
a. formation and existence of the filing entity
b. satisfaction of all conditions precedent to the forming of the filing entity
c. authority of the filing entity to transact business in this state
§5.053: No deceptively similar names
§4.001: Signature & Delivery
 A filing instrument must be:
 Signed by person authorized by this code to act on behalf of the entity
 Delivered to the secretary of state in person, by mail, by fax, electronic transmission
 Person is not required to show their authority to sign at the time of filing
4.051- Filing instrument submitted to secretary of state takes effect on filing.
a. Filing Requirements for Limited Partnerships
 Purpose of LP:
 Encourage investment, with limited liability
 Reason for filing requirements:
 Policy:
o (1) to give notice to the public who may transact with the entity, and
o (2) a ceremony to make people believe that something happened
 mind concept: if they have a filed name we know they exist & who they are

1.002(50)- Limited partnership- includes 1 or > general partners & 1 or > limited partners
 General Partners: have rights & powers and are subject to liability as in a firm w/o limited liab
 Limited Partners: have only limited liability & obligations

3.011- Supplemental Provisions for Certificate of Formation of LP
(a) To enter into a LP the members must sign a partnership agreement & file certificate of formation
(c) address of principal office of partnership in US where records are kept
52
(d) Fact that the certification of formation is on file w/ sec of state is notice that the partnership is a limited
partnership.

5.055(a)- Name of LP must contain:
(1) word “limited”;
(2) phrase “limited partnership”; or
(3) abbreviation of that word/ phrase

Dwindell’s Central Neon v. Cosmo- A 3P’s actual knowledge re: status of a LP is irrelevant. Whether or
not a LP is created rests on compliance with the statutory requirements. Purpose of filing: put people on
general notice; knowledge is presumed.
b. Filing
requirements for Limited Liability Companies

LLC must form Articles of Organization

3.010- Supplemental Provisions for Certificate of Formation of LLC
(1)whether LLC will or will not have managers
(2) name/address of each initial manager
(3) name/address of each initial member [if no managers]

5.056(a)- Name of LLC must contain:
(1) phrase “limited liability company” or “limited company”; or
(2) an abbreviation of one of those phrases
(b) Provision only applies to LLCs formed after 9/1/93.
c. Filing Requirements for Limited Liability Partnerships
 153.351- Requirements for Forming a LLP
(1) register as a LLP: (A) as permitted by partnership agreement; or (B) on consent of partners required to
amend partnership agreement

152.802- Registration
(a) LLP must file an application with the secretary of state. Application must:
(1) set out: (A) name;
(B) fed tax id #;
(C) street address of principal office;
(D) number of partners at the date of application
(2) brief statement of partnership business
(b) Application must be signed by:
(1) majority-in-interest of the partners; or
(2) 1 or > partners authorized by a majority-in-interest of the partners
o 153.352- Application must be signed by at least one GP.
(c) Partnership is registered as LLP by secretary of state on:
(1) date on which a completed initial or renewal application is filed; or
(2) later date specified in the application
(d) Registration is not affected by subsequent changes in the partnership agreement
(e) Registration is effective until 1st anniversary of registration/effective date, UNLESS:
(1) w/drawn or revoked at an earlier time; or
(2) renewed
53
 Non-Statutory Entities: Creation of Entities in Equity
((creation in fact))
* Texas Codes does not allow de facto incorporation, but may allow corporation by estoppel *
**Application of below: promoter liability cases


De Facto Incorporation -- Elements
 (1) a valid law existed under which such a corporation (or partnership) could be lawfully
organized
 (2) an attempt had been made to organize thereunder
 (3) the defective corporation was an actual user of the corporation ((i.e. they acted like a
corporation)
 (4) All elements done in good faith
o policy: created to keep individuals from personal liability when they had attempted to
abide by the statute and corporate business took place before formailities complete

Corporation by Estoppel
(contraversial because they completely contradict the purpose of the statute)
 Purpose: comes about when parties are estopped from denying an entities existence because they
have acted like one exists
 Elements:
o (1) There is a statement or conduct showing a belief that a partnership exists by the
purported members
o (2) There is reliance on this statement by a third party
o (3) Reasonably
o (4) The third party receives a detriment as a result of the reliance

Mistake in Transcription
 Where a mistake relates, not to a factual premise in the argument, but to the way in which the
agreement is expressed




Policy For having Corp by Estoppel
Promotes risk-taking.
Reflects intent of parties.
Protects the innocent.
Accountability.

Liability Involved in Creation of Each Firm




Policy Against have Corp by Estoppel
TBCA eliminates it.
Incorporating is easy.
Uniformity of the system.
Discourages sloppiness.

LIMITED PARTNERSHIP
 Has both: (1) limited partners and (2) general partners
 Limited Partners: (§153.102(a))
o Generally have no liability (investors) to third parties
o Exceptions:
 (1) also a general partner or
 (2) participates in control of the business
 General Partners: (§153.152)
o Liable to third parties for acts of partners in contract & tort (just like CL gen partner)

LIMITED LIABILITY PARTNERSHIP

a partnership can be both a limited partnership & a limited liability partnership (just need file as
an L.L.P. too)
 Only has general partners, but all the general partners have limited liability
American Vending Serv. v. Morse- Morse sold car wash business to two attorneys acting as officers of AVSI, Morse claimed they
represented themselves as incorporated. At the time they signed the K, they hadn’t filed the articles of incorporation. They attempted
to file but were unsuccessful due to name conflicts. AVSI operated at a loss and failed to make payment under K to Morse. AVSI
eventually allowed bank to foreclose on prop. Morse sued for BOK. TC held AVSI was a de facto corporation & awarded judgment
54
against AVSI, but not attys individually. Morse appealed. Crt H corp was created through issuance of a certificate of incorporation.
According to the crt, enactment of the Business Corporation Act did away w/ de facto corporations and corporations by estoppel
(unless both parties thought there was an actual corporation). Crt primarily relies on comment which states that the purpose of
enactment is to do away w/ de facto corporations. Results are different under TX law:
o De jure entity- created by compliance w/ all the constitutional or statutory requirements of a particular government entity
 TX: Existence begins when filing takes effect. [3.001(c); 4.051]
o De facto entity- entity exists, but not a de jure entity
 TX: Acknowledge of filing issued by secretary of state is conclusive evidence of the formation & existence of the
entity except as against the state. [3.001(d)] Thus, a de facto entity is created by receipt of acknowledgment- entity is
created but not de jure (filing). De jure entity is good against the state. *CL is revived so de facto corp could be
created by other means under CL doctrine.
o Entity by estoppel- parties, by agreement or conduct, estop themselves from denying the existence of the entity
o Sunny’s suggestions:
 The Court never mentioned the statutory requirements to become a corporation - almost avoid it -- talk about filing
requirements needed to become a LLP or LLC
 The lawyers were AGENTS of the corporation -- if no corporation by estoppel-- argue agency principles
 Talk about controversy of corporations by estoppel-- totally undermine the filing requirement, which is the essence of
what gives the entity limited liability (especially since the filing requirements for each entity are fairly strict) Why
allow corporation by estoppel here and not in Dwinell when the corporation claims that the parties knew they were
contracting with an entity?
 Talk about the fact that at the time the contract was signed with the agents Morse thought they were an entity


Cranson v. IBM- Cranson was asked to invest in a new business organization. Atty told him a corp was formed. He
was shown corp seal and min bk. Conducted bus as if corp. Cranson was elected pres. Bought typewriters from IBM.
Someone at IBM learned typewriters were bought after corp formed. Crt said estoppel against IBM. Estoppel applies
to atty, but not Cranson. Cranson relied on atty’s statement and took actions on behalf of corp to his detriment.
Thomspon Optical Institute v. Thompson- Thompson carried on an optical business for years; he then organized a corp
to buy his business and purchased most of the stock in the corp. He chaired the first meeting where corp decided to
buy the business. He entered into a K w/ corp which contained a covenant not to compete. He later sold his stock and
entered into another optical business in violation of the K. Corp sued Thompson; he defended on grounds that corp
wasn’t legally organized. In this case, issuance of a certificate is beside the point. Thompson, through conduct, made a
statement re: validity of corp, and others relied on it to their detriment. Thus, corp was created by estoppel. ((argue
this on exam as the reason that corporation by estoppel should not be discarded))
55
B. What Is It? Entity v. Aggregate
1. Partnership (notice the Texas

Code has some entity & some aggregate sections)
Entity Theory: minority approach (RUPA/TBOC)- --152.056- Partnership is an entity distinct from its
partners. [TX: Entity theory presumed. But partners still have management rights, liability for premiums, etc. These
factors must be taken into acct by the crt.]
o 152.203(a)- Each partner has equal rights in management & conduct of the business.
o 152.304(a)- Usually partners are jointly-severally liable 4 partnership debt/ obligations.
 152.306: A judgment against the partnership is not by itself a judgment against a partner. To sue a
particular partner have to serve them with process.
o Entity Theory applies on when:
 matters of procedures (can file suit against the partnership in the entity name)
 in the holding & conveyance of property & assets
o Policy:




Property may be held in the individual names or 1 or more partners and still be partnership property
Procedure -- can sue partnership in its own name; partnership may be a π
Marshalling Assets
Aggregate Theory: majority approach (UPA) the partnership is not an entity separate from its members;
equal management rights gives them the aggregate appearance
o §152.305: An action may be brought against a partnership or any and all partners in the same action or in separate
actions
o 152.203(a)- Each partner has equal rights in management & conduct of the business.
o Policy:




Historical viewpoint -- partners are mutual agents of each other
Partners are managers -- each have equal rights of control of the business & management
Each are personally liable for partnership obligations
Partner may own property and allow the partnership to use it for a fee -- this does not make the property
partnership property -- leaseback agreement
 NOTE: The Texas Code has some entity & some aggregate sections -- not clear about which a partnership is!

Swiezynski v. Civiello- Grocery store clerk was injured when she fell in the store. Partnership operated the grocery store. Partners
owned the land individually as TC and leased it back to the partnership. Employee received worker’s comp benefits for injury; then
sued partners individually under premises liability. If partners were considered employers individually, then employee can’t sue them
as landowners b/c employer is immune from liability under WC statute. Crt follows aggregate theory- ie partnership is not a separate
entity from the partners- and holds that partners are employers individually.
o Rationale behind aggregate theory:
*Historical viewpoint. Crts H partnerships to be a mutual agency btwn partners.
 Partners are managers.
*Ricks thinks this is irrelevant. They have mgmnt rights b/c they’re partners, not b/c they’re landowners. Doesn’t
effect whether they are liable for premises liable under WC.
 To hold partnership was an entity would frustrate the policy of WC- partners are liable for premiums & should
receive the benefit of shielded liability.
 To hold prop is owned by partners individually doesn’t frustrate the UPA (expressly recognizes that title to real
prop owned by partnership may be held in names of all the partners).
*Ricks thinks reasoning re: partnership prop doesn’t apply b/c it’s not partnership prop. If individuals own prop
& become part of partnership, prop doesn’t necessarily become partnership prop. Parties intentionally created
lease back arrangement for tax purposes. If partners made a deliberate decision to hold the prop individually, crt
shouldn’t disregard this arrangement. Owning prop is a separate econ activity from store ownership/
management. Here partner are getting a landfall b/c have benefit of prop ownership w/out liability. Also
inequitable result if there was an individual landowner who wasn’t a partner. This landowner would be liable
under premises liability, while partners remained immune.
56
2. Liability Arising from a Limited Liability Partnership
 FORM: In essence an LLP is a General Partnership where all the Partners have limited liability as to certain of the
Partnership’s debts. Liability for certain debts is limited to their capital contribution. It requires a filing for formation;
filing has to be renewed each yr.
o All partners have equal management authority, unless otherwise agreed
o Have equal rights to share in profits
o Withdrawal of any member triggers at least a technical dissolution of the partnership
 152.801- Partner in a LLP is NOT personally liable for a debt or obligation:
(a) of the partnership
(b) arising from an error, omission, negligence, incompetence, or malfeasance committed by another partner or
representative (agent, servant, employee) in the course of the partnership business (note: they are still liable for
their own negligence & torts)
Exceptions creating liability: [(b)(1-3)]
(1)partner was supervising or directing the other partner/ representative when occurred (ex: billing attorney)
(2)partner was directly involved in the specific activity in which the error, etc. occurred
(3) partner had notice/knowledge of act & failed to take reasonable action to prevent/cure
 152.304: the partnership and partners are jointly & severally liable
 152.306: Enforcement of Remedy
o To sue one particular partner you must serve them with process along with the partnership
o When a partner & a partnership are being sued & both are found liable-- the π must first seek payment
from the partnership, if after 90 days the partnership has not paid, the π may seek payment from the
partner
 153.353- “Partner” in 152.801 refers to a general partner and a limited partner liable under other provisions for
debts/obligations of LLP.

Kus v. Irving- Client sues all 3 partners in atty’s law firm, claiming that her atty improperly collected a higher fee out of her
settlement. Client claims atty had already receive the full policy limit, but filed suit to collect his higher percentage contingency fee.
Fraud is easy to prove in this situation b/c ck has an issuance date & receipt. Atty is clearly at fault. But other partners claim they
aren’t liable b/c firm is a LLP. Crt H partners were protected under Conn statute: Partner in a registered LLP is NOT liable for debts,
obligations, and liabilities chargeable to the partnership or another partner(s); partner IS liable for own negligence, wrongful acts, or
misconduct, or such acts of another person under partner’s direct supervision or control. In this case, the partners didn’t even know
about atty’s actions. He wasn’t under their direct supervision/ control. Thus, partners were not liable.
o Could argue partners were liable under Conn Rules of Professional Responsibility: Rules provide that a partner should make
reasonable efforts to ensure that the firm has measures giving reasonable assurance that all lawyers in the form conform to the
Rules of Professional Conduct. There was no evidence that the partners did or didn’t make reasonable efforts to ensure
compliance. Ricks thinks any firm where this happens has some problems- should have trust fund ck rules to protect against
fraud/embezzlement.
57
3. Liability

Liability in Limited Partnerships Generally:
o
o
o
o

o
o
o

Def: a partnership formed by two or more persons… having one or more general partners and one or more
limited partners
Formed: by the filing of a certificate of LP with appropriate state officials -- formation is solidified on filing
General Partner: manages the partnership
 Duties: has the rights & power of a person in a general partnership,
 Power to bind: has the power to bind the partnership
 Liability: may be held personally liable for acts, debts, obligations of the partnership
Limited Partner: basically an investor
 Statutory requirements: in order to have limited partners, must meet all the statutory requirements
above
 Duties: No general right to participate in management of the partnership on day to day basis -- only
voting rights & other rights under the partnership agreement
 Power to bind: limited partners cannot bind the partnership
 Liability: only liable up to the amount of their contribution
 Exceptions (may be liable)
o Also a general partner
o Are managing/controlling the partnership & a third party relied
o Liable for his own torts
 Policy:
 Created to encourage investment
Fiduciary Duties Vary Depending on the view of Partnership
o

of Partnership Members in Limited Partnership & Fiduciary Duties
“Entity Theory”
 Then an agents fiduciary duty is to the partnership itself, not the individual partners
 If there is conflict between limited partners & general partner  defer to what is best for the
partnership itself
“Aggregate Theory”
 Technically, agent’s duty runs first and foremost to the individual partners
 If there is a conflict bw partners & cannot fix in all of their favor: use ABA Model Rules of
Professional Conduct Rule 1.13 to proceed as “reasonably necessary in the best interest of the
partnership” -- i.e. act for the interest of the partnership itself
 Burden: It is the agents burden to prove that there was a significant divergence between the
partners
“Hybrid” (Life Care Centers v. Charles Town)
 (1) The agent must first prove that a conflict of interest between the individual general partners &
the limited partners that would justify his conduct OR that the agent reasonably believed that there
was a discord
 (2) The interest of the partnership in general is placed above the interests of the individual agents
Conflicts of Interest & The legal sect
 If there is a conflict of interest bw the partners -- the attorney likely has a fiduciary duty to all of the
partners
 SHOULD RESIGN!!
Life Care Ctrs. v. Charles Town- Life Care was the managing agent of a nursing home owned by Charles Town. LPs voted to make
another entity their managing GP. Life Care attempted to initiate a bid among LPs to become GP. Life Care was eventually
terminated b/c it refused to cease solicitation efforts. Life Care sued Charles Town for BOK (the managing agreement). In defense,
Charles Town claimed that the managing agreement created agency by K. As an agent, Life Care owned Charles Town a fiduciary
duty. Breach of this fiduciary duty was a material breach of K, thus cause for termination of the agency. The crt must decide to
whom Life Care owes a fiduciary duty. This depends on whether the limited partnership is viewed as an entity or an aggregate. The
crt adopts a hybrid approach: While fiduciary duties flow to the individual partners of a limited partnership, it is appropriate to
subordinate those interests to those of the entity when a conflict of interest arises. A conflict that warrants subordination of the
partner’s interest may be characterized as a specific divergence of interest. The crt overruled SJ b/c a issue of material fact remained
re: reasonableness of Life Care’s belief that the specific interests of the GPs and Charles Town were in conflict (what GP were doing
wasn’t good for the partnership), which would warrant its solicitation of LPs notwithstanding its fiduciary duty to the GPs.
o Ricks thinks this case will just result in more litigation b/c have to go to crt to prove that there is a divergence of interest.
ABA Model Rules of Professional Conduct, Rule 1.13- Organization of Client: Atty retained by an organization represents the
organization acting through its duly authorized constituents. If atty knows that an officer, employee, or other person associated w/
organ intends to or is acting in violation of a legal obligation of the organ, atty shall proceed as is reasonably necessary in the best
58
interest of the organ. Atty should refer the issue all the way up the chain of command. If atty takes up to the highest authority and
they insist upon continuing action/inaction likely to cause substantial harm to the organ, atty may resign.
o Hypo: Suppose LP is aggregate. Partner asks you to do something to benefit him but will hurt LP as a whole. May have to go
to LPs and request they throw GP out. If no cause for removal, may resign.
o Someone asks you to form an LP. The entity is your client. Under Life Care, LP is a hybrid. So you have a duty to LPs and
GPs. A possible conflict may arise at the time of formation. When drafting, difficult to write provisions with a trade off btwn
mngmnt and capital so that you don’t breach your duty to partners or entity. Could argue that you represent the entity but not
the partners b/c not yet in existence. Your duty is to create the best entity possible- form it for the betterment of the company.
But the promoter, who will become the mngr, typically pays the bill. He is paying you to form an organ in his favor. The law is
all over the place re: who atty represents and if LP is an entity or an aggregate. *Be alert to issues- would make an interesting
essay.
59
4.
Liability for Members of a Limited Liability Company
 Generally
o FORM: A firm where all members have equal management authority, but can also elect managers to run the
business
 An LLC should usually be seen as an aggregate, unless the parties agreement states that it is an entity
o CHARACTERISTICS:
 Formed by filing with the state - “Articles of Formation” -- file one document, no need to re-file every year
 Members also form an Operating Agreement detailing governance structure
 Owners are “members” -- may elect “managers” to run the LLC
 Can have an LLC with one member
 Internal affairs are manages according to either the operating agreement or stautory default rules
 Owners have no personal liability for debts owed by the LLC
o History:
 Creators of LLCs were seeking a favorable tax treatment. After IRS approved tax treatment, states quickly
passed statutes governing LLCs. There’s no uniform legislation. Diversity around the country re: types of
LLCs. Businesses are usually small and local. Makes sense to form the entity under the local state code.
But DE statute is very popular.
o Liability of members:
 No unlimited personal liability, do not even need one member with unlimited personal liability
 Can be formed in ways that give the members little or no authority to bind the firm
o Liability of LLC for contracts:
 The LLC is liable on contracts signed by its members ((even if the LLC doesn’t sign)) [Elf v. Jaffari]
 LLC can enter into an agreement even before it is formed
 LLC can be formed in a way to give no actual or apparent authority to members to bind the firm

Elf Atochem N. Amer. v. Jaffari- Elf was a PA co that manufactured solvent-based maskants to aviation industries. Jaffari, pres of
Malek, Inc., developed an innovative, environmentally friendly alternative. Elf approached Jaffari about investing in product and
assisting in marketing; they agreed to undertake a joint venture carious out using an LLC- Malek LLC. Elf, Jaffari, & Malek, Inc.
entered into an agreement detailing the governance of the LLC- contained an arbitration clause. 2 members & CEO signed, but LLC
didn’t sign. Elf wants to sue Jaffari for mismanagement- so he sues Jaffari and LLC derivatively and individually in Chancelory crtwants to force LLC to sue Jaffari. Since LLC is the D, and LLC didn’t sign the agreement containing the arbitration clause, Elf
claims action may be brought in crt. But crt H arbitration agreement is enforceable. LLC is an aggregate: members are the real parties
in interest; LLC is simply their joint business vehicle. If parties’ agreement doesn’t specify that it’s an entity, could be an aggregate.
In red states, like DE, there are more republican (free market) judges, and thus a greater push for codes that are enabling rather than
mandatory. Viewpoint that each party to the K has greater overall utility when private ordering/ freedom to K is enforced.
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C. Management & Control
1. General Partnership
 Management Conflicts
o




First, always look to the partnership agreement to see if has been an agreement as to the rights of the
parties
 If there is no mention, continue….
When there is a majority vote:
 The majorities decision governs
o 152.209(a)- A difference arising in a matter in the ordinary course of the partnership
business may be decided by a majority in interest of the partners.
 Majority in interest [151.001(4)]- partners who (in combination) own > 50% of
the profits. *Absent an agreement to the contrary, all partners share equally in
the profits. *
o When there is a majority, the minority has no authority to act in opposite of the
majority’s wishes
o If a partner in the minority does go out and bind the partnership (against the majority’s
will) because the parent has apparent authority to conduct the transaction the partnership
will be bound, however, the partnership may seek indemnification from the “rogue”
partner
When there is no majority:
 Covalt v. High: “if the partners are equally divided, those who forbid a change, must have their
way.” -- the power of either partner to act on behalf of the partnership is suspended, neither
party may bind the partnership
o Examples:
 Covalt: Since the two parties disagreed on the rental rate to be charged the
tenant of the partnership land (one wanting to raise it, the other not wanting to)
nothing could be done  the rent stayed the same.
 National Biscuit: the two parties disagreed about whether to keep ordering bread
from National Biscuit (which they had routinely done in the past). One partner
tried to orally disclaim the other partner’s authority to continue to order bread,
National Biscuit sent it anyway (as had been done in the past). Since the
partners disagreed  no change could be made. Both partners bound to pay the
bread paytment -- even though one expressly disclaimed liability.
 Solution: dissolve the partnership -- likely cannot continue on if fundamentally disagree
 If a partner does go out and bind the partnership (against the other’s will) because the parent has
apparent authority to conduct the transaction the partnership will be bound, however, the
partnership may seek indemnification from the “rogue” partner
WHEN ACTING OUTSIDE ORDINARY BUSINESS:


152.203(a)- Each partner has equal rights in the management & conduct of the business of a partnership. A
partner’s right to participate in the mgmnt & conduct of the bus isn’t CP.
 Therefore, each partners has equal authority to bind the partnership-- agents (UPA §9; TBOC)
 Note: the partnership maybe able to sue the partner who acted outside his authority for indemnity
The status of a Partnership requires of each member an obligation of good faith & fairness in their dealings
with one another, and a duty to act in furtherance of the common benefit of all Partners in transactions
conducted within the ambit of Partnership affairs.
Every partner is an agent
WHEN THERE IS CONFLICT:

o
*See ex prob pg. 311
MANAGEMENT GENERALLY:

o
When There is Conflict
152.209(b) An act outside the ordinary course of business of the partnership may be undertaken only w/ the
consent of all the partners.
 Examples:
o Selling the good will of the partnership
o Selling the partnerships real property & only asset (unless a real estate partnership)
National Biscuit v. Stroud- Stroud told Nabisco that he would no longer be liable for breach sold to partnership. Partner, Freeman,
purchased bread and Nabisco delivered. When partnership dissolved, agreement called for Stroud to pay all debts of grocery store.
Stroud offered to pay 1/2 of $171 due to Nabisco, but they refused anything < full pymnt. Crt H Stroud was liable. Activities w/in the
scope of the business of a partnership should not be limited, except by the expressed will of the majority. Half of the members is not
61

a majority. In the case of gridlock, everyone has equal authority. *Same result under TX Code. In order to protect himself from
potential liability, Stroud should’ve dissolved the partnership.
o Freeman had actual authority: UPA § 9- Every partner is an agent for the purpose of the business. (All partners have
management rights.)
o Questionable whether Freeman had apparent authority: Stroud said he wasn’t responsible for food orders; told them not to send
anymore. *Analogize case about H who called store and said W didn’t have authority to buy on his credit. Didn’t have
apparent authority, but had actual authority. Argument: didn’t think she had authority.
Covalt v. High- Covalt & High are shareholders in CSI- corp. Covalt- 25%; High- 75%. Orally agreed to formation of partnership
(each 50%), which created building on land and leased to CSI for 5 yr term. Corp & partnership orally agreed to increases in rent.
Covalt resigned and went to work for CSI’s competition. Covalt wrote to High and demanded rent increase. But High took no action
to renegotiate rent. Crt H High wasn’t liable- didn’t breach his fiduciary duties; he was fulfilling his duty to corp & shareholders,
including Covalt. If the parties are evenly divided as to a business decision affecting the partnership, partners’ power to act on behalf
of the partnership is suspended. (absent a written provision in the partnership agreement providing for such contingency) So High
had no management power.
o Compare to Stroud: If rule in Covalt was applied, it’s possible Freedman had apparent authority even w/out actual authority.
Nabisco could reasonably rely on Freedman’s authority. Reason behind the different rule in Covalt: Under Stroud rule, if
Covalt acts for the partnership in giving notice to CSI re: raising the rent, High has the same right to send a notice saying the
partnership rescinds the notice to raise rent. Could go back and forth forever; so crt has to shut them both down. But in Stroud,
dealing w/ a 3P.
o Ricks thinks the result is unfair b/c it allows High to steal $ from Covalt. High is hiding behind his own rights as partner in
order to not treat other partner fairly is a breach of fiduciary duty. When he exercises rights on own behalf, breaches duty to
other partner. High should’ve w/drawn b/c of conflict. Before suing High, Covalt should’ve w/drawn. Even though it’s a stupid
rule, not much harm b/c if Covalt w/draws he gets his $.
2. Limited Partnership
-- Liability for General Partner -- see above
 153.153- A person who is both a general partner and a limited partner:
(1) Has the rights and powers and is subject to the restrictions and liabilities of a general partner; and
(2) Except as otherwise provided by the partnership agreement, this chapter, or the other limited partnership
provisions, has the rights and powers and is subject to the restrictions and liabilities if any of a limited partner to
the extent of the general partner’s participation in the partnership as a limited partner
3. Limited Liability Company -- Management & Conflicts
 GOVERNING AUTHORITY
o RULE:
 If the management of the LLC is vested in a manager or managers, any manager has

o
authority to bind the limited liability company, unless otherwise provided in the articles
of organization or operating agreement
If the LLC is vested in members  manage in accordance with the operating agreement
& statutes
Texas Rules:
 101.251- governing authority of an LLC consists of: (1) managers, if COF states LLC will have 1 or more
mngrs; or (2) members, if COF states LLC won’t have managers.
 101.252- Governing authority of LLC shall manage the bus & affairs of LLC as provided by:
(a) company agreement; and
(b) BOC provisions to extent company agreement doesn’t provide for mgmnt of LLC
 WHEN THERE IS CONFLICT -- ASK RICKS
o
o
o

(1) Look to the operating agreement to see if the members established how the conflict should be worked out
(2) Default rules: When there is a majority on ordinary business matters: 101.355- Vote of majority of governing
persons members, or committee members of LLC present at a meeting at which a quorum is present constitutes an
act of the governing authority, members, or committee
 101.353- Quorum- majority of all the governing persons, members, or committee members of a LLC
constitutes a quorum for the purpose of transacting bus
 101.354- Each governing person, member, or committee member of a LLC has an equal vote
Act outside ordinary course of business: 101.356(b)- Act not apparently for carrying out the ordinary course of
business of LLC must be approved by the affirmative vote of the majority of all of the LLC’s governing persons
 Examples:
 Disposing of the good will of the business
 Selling the property (unless real estate partnership)
Taghipour v. Jerez- LLC created to purchase and develop real estate. Articles of organization designated Jerez as manager, and
provided that no loans could be executed on behalf of the LLC unless authorized by a resolution of the members. Jerez entered into a
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loan agreement w/out knowledge/ consent of members or managers then absconded w/ the funds. Lender sued LLC when defaulted.
LLC filed suit against lender and Jerez. Crt H loan agreement was valid. State statute gave 1 or more managers the authority to sign
such instruments and bind the LLC. (same as TX statute [101.254]: execution of instrument, doc, mortgage, or conveyance in the
name of the comp). But there’s also a statute saying that manager’s authority may be limited by the operating agreement. When 2
statutory provisions conflict, crt consider rules of statutory construction, legislative intent, & which provision is more specific in
determining which governs. Here, the statute authorizing managers to bind the LLC was given effect over the agreement b/c the
section was tailored to address the exact documents/instruments Jerez executed- trust deed & accompanying note. Rationale: 3P
shouldn’t have to read all the internal LLC documents before K-ing w/ an LLC.
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D. Partnerships as Agents and Principals -- A Partners Ability to Bind the Partnership
1. General Partners
 THE COURT SEEM TO BE SPLIT BETWEEN:
o (1) following the statute in the jurisdiction (that usually does not have the CL elements of apparent/actual
authority) or
 includes Texas & UPA Approach (UPA on next page)
o (2) following the CL elements of agency, applied to partnerships
 (1) STRICT TEXAS STATUTORY APPROACH:
(Burns v. Gonzalez)
o Synopsis:
(§152.302)
 Since every partners is an agent, a partner can bind the partnership:
 If it reasonably appears (either to the court or a third party)
 that the transaction is done while carrying on the ordinary business
 of the partnership in the usual way
 Exception: if the third parties knows that the partner they are dealing with lacks authority & the
partners does lack authority, then partner cannot bind partnership
 If the act is not regularly done in the ordinary course of business  all partners must sign off
 Note: this rule cannot be applied if the partnership is undisclosed
o Each partner is an agent:
 §152.301: Each partner is an agent of the partnership for purposes of its business
 exception: if: (1) the partner has no authority to act for the partnership in a particular manner AND (2)
person with whom dealing has knowledge that the partner has no authority
o Liability Of Partnership for Partners Actions:
 §152:302:





an act of the partner, including the execution of an instrument in the partnership name,
binds the partnership if the act is apparently for carrying on in the ordinary course:
o usual business of the partnership or
o of a partnership in the same business in the community
If not for carrying on the ordinary course of business  authorization of all partners
EXCEPTION: Unless a
o (1) partner does not have authority to act for the partnership in a particular matter
and
o (2) the person with whom the partner is dealing knows that the partner lacks
authority, [actual knowledge §152.002]
An act of a partner that is not apparently for carrying on in the ord course a business
described by (a) binds the partnership only if authorized by the other partners.
o If acting outside regular business  all partners must sign off
BOP: On 3P- Whe 3P has the BOP that the participating partner committed an act that was “in
the usual way” and apparently for carrying on in the ordinary course of business described in
152.302(a).
o Example: A conveyance of real property by a partner on behalf of the partnership not
otherwise binding on the partnership binds the partnership if the property has been
conveyed by the grantee or a person claiming through the grantee to a holder for value
without knowledge that the partner exceeded that partner’s authority in making the
conveyance.

§153.303: Liability of the Partnership for a Partner’s Tortious Conduct

A partnership is liable for loss or injury to a person, including a partner, or for a penalty caused by
or incurred as a result of a wrongful act or omission or other actionable conduct of a partner
acting:
o in the ordinary course of business of the partnership; or
o with the authority of the partnership
 A partnership is liable for the loss of money or property of a person who isn’t a partner that is:
o received in the course of the partnership’s business; and
o misapplied by a partner while in the custody of the partnership
 Evaluating “Apparently for carrying on in the ordinary course”
(Gonzalez v. Burns)
 look to the way in which other firms engaged in the same business in the locality usually transact
business & how this firm has operated in the past
 Becomes necessary to consider:
64
the character of the business,
the manner in which it is usual to carry on such a business
and where the agency has continued for a long time, the manner in which the particular
business was carried.
 Ordinary Business & Real Estate Partnership (Vinson v. Marton & Associates)
 Numerous cases holding that where the partnership‘s purpose is to buy and sell real estate, the sale
of the only asset—a piece of land—is in the usual course of business
o That was the purpose of this partnership
o Additionally the sale of the only asset is not an act that would make it impossible to carry
on the ordinary business of a partnership; could have reinvested the money from the land
and bought more land for the partnership.
 Result:
o
o
o


If the evidence does not find that the partner was performing an act for apparently
carrying on the usual business of the partnership  the partnership not bound, neither are
the other partners
o Requires the signature of all partners to bind the partnership
 If the evidence does establish that the partner was performing an act for apparently
carrying on the usual business of the partnership  partnership/ individual partners liable
UPA Provisions (very similar to Texas)


UPA provides – every partner is a general agent of the partnership[ for the purpose of its business,
and the act of every partner , including the execution in the partnership name of any instrument,
for apparently carrying on in the usual way the business of the partnership he is a member binds
the partnership, unless
o (1) the partner so acting has in fact no authority to act for the partnership in the particular
matter,
o (2) and the person w/ whom he is dealing has knowledge of the fact that he has no such
authority
Authorization of all partners is required to do certain acts, including:
 dispose of the good-will of the business
 do any other act which would make it impossible to carry on the ordinary
business of a partnership
 (2) COMMON LAW APPROACH: PARTNERS ARE AGENTS OF EACH OTHER
(Kansallis Finance v. Fern)
o Apply the Usual Elements of Apparent Authority, Actual Authority, Abuse of Position, Agency by Estoppel
o
Texas Code provides that agency common law may be supplemented:

o
o
o
152.003- Supplemental Principles of Law: The principles of law & equity & other partnership provisions
supplement this chapter unless otherwise provided by this chapter or the other partnership provisions.
 Code appears to follow agency principles, but it’s different. That why this provision specifies that
agency rules may still be applied.
 Kansallis- Crt doesn’t view agency law as separate from the Code, so crt interprets the Code to
mean any agency principles you can think of. Agency principles may be used in addition to
152.301-302 to determine liability of partnership for partner’s conduct.
Policy behind CL approach:
 Between two innocent parties, the partner who put the other partner in a position to do harm to
third parties should bear the loss.
Vicarious Liability for Partnerships:
(applies only when no apparent/actual authority)
 “Scope of Employment” Elements
 (1) conduct is of the kind the partner is employed to perform
 (2) within the partnerships authorized time & space limits
 (3) actuated, at least in part, by a purpose to serve the partnership.
Actual Authority:
1) Manifestation of intent by the partner to the agent that the agent is authorized
2) Such that the agent (other partners) actually believes
(subjective standard)
3) Reasonably, that the agent (other partner) is authorized
(RPP objective standard)
o
Apparent Authority:
65
1)Manifestation of intent by the principal that the agent is authorized
“Holding out”- intentional or by negligence: 1) direct- oral/written or actions; 2) positiongenerally recognized duties; 3) prior acts- reputation 4 authority
2) Such that the 3P actually believes
(point of view of the 3P)
3) Reasonably, that the agent is authorized
(RPP standard;reliance not at issue)
*May be proven w/out the presence of an actual agent. Principal must be the source of info to 3P.
Can’t be based on the agent’s conduct. (Ex. I can’t go to the Mercedes dealership and claim I’m
buying a car as Bill Gates’ agent
Abuse of Position:
(1) Aided in accomplishing the tort by the existence of the agency relation.
(2) A principal who puts an agent in a position which enables the agent, often while apparently acting
within its authority, to commit a fraud or other tort on a 3P is subject to liability for the tort
Agency by Estoppel
 Statement
 Reliance
 Reasonable
 Detriment
o
o
Burns- Partnership sells airtime on a radio station. Burns pays for airtime. Station isn’t running. Burns negotiates w/ one
partner for a PN to repay lost profits in exchange for a promise not to sue. Partnership becomes insolvent. Burns sues. Crt
H partner who wasn’t a party to the agreement wasn’t liable. In interpreting 152.302(a)(1), crt determines that an act
“apparently for carrying on in the ordinary course the partnership business” is determined by looking at what is usual in
the course of business; ie- is the act done in: (1) the same way in which the particular partnership usually transacts
business; or (2) the same way in which other firms engaged in the same business in the locality usually transact business.

Analysis: The parties had a prior agreement in which both partners signed, thus the execution of the PN by only one
partner was not an act apparently for carrying on in the ordinary course the partnership business under 152.302(a)(1)
b/c it was not done in the same way in which the particular partnership usually transacts business. Also, the execution
of the PN wasn’t for the purchase of airtime, which is what the partnership was created to do, and therefore wasn’t an
act apparently for carrying on in the ordinary course the business of the kind carried on by the partnership under
152.302(a)(2).

Counter: Under 152.003, could argue that the doctrine of apparent authority applies. Non-participating partner/
partnership (principal) is holding out the participating partner (agent) as having authority by making him a partner
(giving him management power). There is no evidence that the non-participating partner objected to this authority.
Burns (3P) was reasonable in believing the participating partner was authorized b/c there was only 1 prior transaction
where both signed, and he normally dealt w/ the participating partner. This view, however, doesn’t consider whether
the 3P was reasonable in relying on the participating partner as having authority- Thus, it’s like the TX version of
apparent authority promulgated in Sampson (hospital case) where the patient’s viewpoint is irrelevant.
o

Vinson v. Marton & Assocs.- Partnership was formed to sell RE; entered into K to sell the partnership’s only asset. Not all
partners signed the K/ escrow instructions. Partnership then got a better offer. Partnership claimed the K was invalid under UPA
§ 9(3). UPA 9(3) provides that the authorization of all partners is required to do certain acts, including: disposal of the good will
of the business, and doing any other act which would make it impossible to carry on the ordinary business of the partnership.
Partnership argued selling the business’ sole asset would make it impossible to carry on the partnership business and thus the K
for sale was invalid b/c not all of the partners had signed the agreement. Crt H that where the business of the partnership is to sell
RE, the sale of RE- including RE that is the sole asset of the business- is a sale in the usual course of business. Partnership can reinvest; selling the RE doesn’t mean they won’t be able to continue the business.

Transaction would be unauthorized if: (1) the partnership business was to sell vending machines or running an apartment
complex & partnership wanted to sell sole asset; (2) change the partnership agreement to say that all partners are required
to authorize the sale of partnership assets; (3) argue ratification by signing escrow agreement.

Analysis under the TBOC: B/c sale of RE is in the ordinary course of business, the signature of one partner on the K will
bind the partnership under 153.302(a). If it was not in the ordinary course of business, authority of the other partners
would be required under 152.302(b)- corollary to UPA 9(3).
Application
 Cook- Cook gives $ to law firm. Atty misappropriates funds (suggests Cook invest proceeds from prop sale in bus & made
misrepresentations re: business & investment). Crt H firm was liable under agency principles.

Agency analysis used by the crt: (1) Firm held the atty out as being an agent- partner in firm; trust generated through
practice of law; $ sent to law firm; ck made out to: atty for Cooke. (2) Cooke is reasonable in thinking that atty is an agent
for the firm- crt took Cooke’s testimony into acct. This case took 3P’s belief into acct when determining whether the
agent had apparent authority; doesn’t reconcile w/ Sampson.

Burns/ TBOC analysis: Firm isn’t liable b/c this isn’t the business of law firms, and the other partners didn’t authorize
the act.
66

Prob: 3 partners run a grocery store. Partners agreed not to sell alcohol. Gus decided they could make more $ selling beer b/c there
were lots of college students in the area. He ordered beer. One of the other partners refused to accept the delivery. Brewing co.
sued for BOK.
o Agency: (apparent authority)
(1) Manifestation of intent by the principal that the agent is authorized. - Gus is a partner of business, and thus an agent of the
partnership.
(2) Such that the 3P actually believes. - Brewing co. believes he’s authorized.
(3) Reasonably, that the agent is authorized. - Reasonable that grocery store would buy beer; Gus appears to have authority.
But there’s no prior dealings.
o TBOC: Under Burns construction, Gus has authority. This is what grocery stores do.
2. Limited Partners as Agents -- must “act” like a GP
 When a LP can become a GP (and, therefore personally liable)
o Usually:
 Limited Partners have limited liability
 Policy: 1) encourage settlement 2) decrease cost of capital
o (1) §153.102: A limited partner is NOT liable for obligations of limited partnership UNLESS:
1. Takes part in control of the business AND
a. look to amount of control in running the day to day business is the key OR
i. do not look to things done by LP that are permissible by PA or statute(153.103 - below), look to the
participation that each had in relation to the GP
b. look to see if the LP has a decision making authority that may not be checked/nullified by the GP
i. likely would only happen in a situation where the LP had a controlling (<50% interest), therefore
making his “suggestions” more like commands to the GP (or GP may face removal)
c. Control is an issue of fact for the jury
2. Reliance by the 3P on the belief that the LP was a GP is required
a. basically pleading estoppel that you thought that the LP was in control
 Who LP is laible to: If limited partner participates in the control of the business, the limited
partner is liable only to a person who transacts w/ the limited partnership reasonably believing, based
on the limited partner’s conduct, that the limited partner is a general partner.
 Control + reliance- consider the degree of control a LP has in the day to day functions &
operations of the business & whether the person transacting business w/ the LP reasonably
believes that they are GP
 Policy: if LP has that much control, then they are in the best position to prevent harm &
should be liable for the harm
o (2) Ricks Alternative: If you are the 3P, plead estoppel that the LP was a GP, stop them from denying it in court
 Statement (LP told me they were GP)
 Reliance
 Reasonableness
 Detriment
o 153.103- LP is NOT participating in control of the business if he is acting as:
(1)(A) contractor, agent, or employee of the limited partnership;
(1)(B) contractor, agent, or employee of a general partner;
(1)(C) officer, director, or stockholder of a corporate general partner;
(1)(D) Partner of a partnership that is the general partner of the limited partnership;
 Codified Frigidaire. Provision is wrong on substance, but says they aren’t in control b/c distinct legal
entity. Honoring parties’ decision re: how to run bus.
(1)(E) member/ manager of a LLC that is general partner of the limited partnership;
(3) consulting or advising the GP on matters of business of the limited partnership;
(8) serving on a committee
(9) proposing, approving, or disapproving, by vote or otherwise, important business matters (ie election of
trustees, termination of LP-ship, or merger of the LP-ship)
 153.104- List in .103 is not exclusive. Just b/c activity isn’t on the list doesn’t mean it constitutes control per se.

Limiting Liability of General Partner:
o
Can LPs be held liable if found to control the LP because (1) sole shareholders of (Corporation) acting as the
GP; (2) on Board Of Directors of (Corporation); (3) president and Secretary of (Corporation); and (4) exercised
day-to-day ops of (Corporation)?
 Two positions:
67


3. Limited
(1) Case in TX that resolved issue similar to this – held that the LPs controlled the biz of the
LP as officers, directors, and stockholders of the corporate GP
o The COA in TX found that the reason an LP is held liable is to prevent 3 rd parties
from mistakenly assuming that the LP is a GP; hard to believe that a creditor
knowingly dealing with GP that is a corporation
(2) In the absence of fraud or other inequitable conduct, the corporate entity should be
respected, and no liability will attach to the individuals who run the corporation as GP of the
LLP
o Especially where a creditor dealt with the corporate entity in full awareness of the
corporate status of the GP; no showing of fraud, wrong, or injustice perpetrated upon
the creditor.
o Policy for limited liability:
 Support investing in companies
 Encourages entrepreneurial activity and establishment of small and large
business
 Since it is a controlled risk, Partners don't have to watch the manager as
closely
 Allows people to diversify their investments to an extent
 Allows ownership shares to be transferable
Liability Company Members As Agents -- Liability of LLC
(b) 101.114: Liability for Obligations:
(1) Except to the extent that the company agreement provides otherwise, a member or manager is NOT
liable for a debt, obligation, or liability of a LLC, including a debt, obligation, or liability under
judgment, decree, or order of a court.
(c) 101.254- Designation of Agents; Binding Acts
a. Each governing person of a LLC and each officer or agent of a LLC vested w/ actual or apparent authority is
an agent of the LLC for purposes of carrying out the company’s business.
b. Act committed by an agent of the LLC for purposes of carrying out the ordinary course of business binds the
company, UNLESS
(a) agent doesn’t have actual authority to act for the company; and
(b) person w/ whom the agent is dealing has knowledge of the agent’s lack of actual authority
(c) Act of an agent of the LLC not apparently for carrying out the ordinary course of business binds the company
ONLY if the act is authorized.
(d) No catch all: There’s no catch all provision for LLCs like in partnership code saying that CL agency principals
may be used to supplement the code. Left w/ apparent/ actual authority.
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E. PARTNER STATUS & ESTOPPEL
1. Parnership by Estoppel
 Note: §152.054 purports to get rid of Partnership by Estoppel in Texas, but a person may still be liable as a
partner under §153.307 on an estoppel theory
o §152.054:
 False representation or other conduct falsely indicating that a person is a partner w/ another person does
not of itself create a partnership.
 False representation that a person is a partner in an existing partnership doesn’t of itself make that person
a partner in the partnership
o 152.307(a)- the rights of a person extending credit in reliance on a representation are determined by applicable
law and other partnership provisions, including the law of estoppel, agency, negligence, fraud, and unjust
enrichment
 Elements of Partnership by Estoppel: (generally, only applicable when 3P extends credit to pship)
A person represents himself, or consents to another representing him as a partner in an existing partnership
or w/ one or more persons not actual partners;
o A 3P relies on the representation;
o Reasonably
o To 3P detriment [usually because 3P extended credit bc thought a party was a part of the pship]
Applying Partnership by Estoppel to Corporate entities: even though an enterprise is a corporation, a person can
be treated as a partner, and consequently exposed to personal liability for the corporation’s debts, when
representations are made that the enterprise is a partnership and the person is a partner.
o The representations must be made by the purported partner or with the purported partner’s consent;
o Distinguishes between public and privately made representations:
 If Private may be taken advantage of by persons to whom it was made;
 If Public anyone (almost) can make use of it
Element 1: “Representation/ Consent to Representation”
o Can be shown by circumstantial evidence either before or after reliance that
o Ex: “acting like a partner” coupled with the alleged partners statement that “There was a partnership
o Can look to how the bank account was opened -- in the names of people (evidencing a partnership) or in the
name of a corporation
o Employee’s beliefs
Element 2: “Reliance” Two tests:
o CA Rule (more liberal): Reliance on the existence of a partnership is enough to prove reliance; no duty to
check the financial status of a partner to rely
 Only need to be told that a partnership existed
 really no reliance whatsoever
o NM Rule: Cheesecake Factory: There is a presumption of reliance on the defendant’s financial
responsibility when a 3P extends credit based on the defendants association w/partnership, subject to
possible rebuttal by a showing of complete indifference on the part of the plaintiff to the representation. To
get the presumption, the party must prove that they believed in the existence of a partnership & and it was
reasaonable to believe that person “X” was a party. [[The only question is whether it was reasonable for
one of the factors to be that a certain person was a partner.]]
 Need to know:
 Partnership Existed
 Individual Partners
Case:
o Cheesecake Factory v. Baines: Cheesecake Factory made deliveries to a restaurant owned by a corporation
who then defaulted on payments. Cheesecake claimed it thought it was extending credit to a partnershipbased on the representation of Kolk, manager- and that Baines (member) should be liable b/c representation
created a partnership by estoppel. Requirements to prove that a partnership by estoppel was created:
 Consent to being represented as a partner
o Statement doesn’t have to be true
o Can consent after the fact (ratification)
 Here Baines consented through his actions: frequently in the bar & entered business
offices; told others that he had a sports bar & he was a partner; employees believed
he was a partner; opened bank accts in his own name
o Distinction between public & private representations
o




69

o
Public- D is liable to any person who relied in giving credit, regardless of whether
representation was made or communicated to that person
 Private- estoppel doctrine can only be taken advantage of by the person to whom the
representation was made
Reliance: that P reasonably relied on the person being a partner
 Test for determining reliance from case doesn’t require actual reliance; creates a
presumption of reasonable reliance if extend credit w/ notice of holding out.
 Here Cheesecake relied by extending credit. B/c they believed Baines was
the proprietor of an established business (based on Kolk’s representations),
they were reasonable in thinking Baines would be responsible.
70
2.
Mistaken General Partner

Texas Approach:




§153.106: Erroneous Belief of Contributor being Limited Partner; Person who erroneously but in good
faith (objective & subjective - person must held the erroneous belief & it must be reasonable [not utterly
foolish, not deliberately in different]) believes that the person has made a contribution to and has become a
LP is not liable as a GP b/c of making or attempting to make the contribution if within a reasonable time
after ascertaining the mistake, the person:
(1) Causes an appropriate cert of formation to be signed and filed (files as a limited partnership)
(2) Files or causes to be filed with sec of state a written stmt or
(3) Withdraws from participation in future profits of enterprise by executing and filing with sec a certificate
declaring withdrawal
exception: §153.109: Liability of Erroneous Contributor: person having a mistaken belief that they were a
limited partner may be liable to third parties for transactions before an action under 153.106 if:
 (1)the contributor has knowledge or notice that no certificate has been filed or that the certificate
inaccurately referred to the contributor as a general partner; and
 (2)the third party reasonably believed, based on the contributor’s conduct, that the contributor was a
general partner at the time of the transaction and extended credit to the partnership in reasonable
reliance on the credit of the contributor.
 Ricks thinks these will almost never be met, very friendly to erroneous general partners
INSTEAD OF USING §153.109 JUST PLEAD REGULAR ESTOPPEL! [[153.109 is going to be almost
impossible for the creditor to prove]]
Related Issue: Timeliness requirement “within a reasonable time” is required because, it PREVENTS:
 Unjust economic advantage to the mistaken partner
 Protects third parties
 RULPA § 304 & UPA §11:
(basically the same as Texas, but no timeliness requirement)
(a) Except as provided in (b), a person who makes a contribution to a business enterprise, and erronesously but in
good faith believes that he has become a LP in the enterprise is not a GP in the enterprise and is not bound by its
obligations by reason of making the contribution, receiving distributions from enterprise, or exercising any rights
of a LP if on ascertaining the mistake, he
(1) Causes an appropriate certificate of limited partnership to be executed or filed or
(2) Withdraws from future equity participation in the enterprise
(b) A person who makes a contribution of the kind described in (a) is liable as a GP to any 3P who transacts business
with the enterprise
(1) Before the person withdraws from the enterprise or
(2) Before the person gives notice to the partnership of his withdrawal of future equity participation
i. But only if the 3p actually believed in good faith that the person was a GP at the time of the
transaction.
1. good faith is objective- look to see if belief was reasonable under the circumstances
o Different from Texas: RULPA/UPA do not specify how quickly a proper certificate or notice of withdrawal
must be filed after person ascertains he is not a LP (removed “promptly” from older). Arguments for not
requiring timliness:
(1) Reliance based claim
 Case:
o
Briargate Condo v. Carpenter: Judith Carpenter claims she was a Limited Partner but is being attacked as a General
Partner of a Condo Partnership that owned a bunch of properties in the Briargate Condo Association.
 The partnership did not pay maintenance fees and ran up a huge bill to the Association.
 Carpenter thought she was in a Limited Partnership, not a General Partnership.
 She played dumb, she must have known by tons of facts (tax returns labeled as GP, meetings where
documents had GP on them, etc) showing that she ought to have known. Then she withdrew after
she found out liability was ad portas.
 Where someone is in this position they must:

(1) Have believed in good faith (objective), at the time of the
contribution, that the business was a Limited Partnership and that she was
participating as a Limited Partner;

(2) Upon learning the mistake, must do one of two things:
o (a) Correct the mistake by filing for an Limited Partnership; or
71
o (b) May give notice and withdraw completely from the business.
72
F. Partners
Duty of Loyalty
- General Partnership -- Common Law Rule


Duty of loyalty: not honesty alone, but the puntilio of an honor the most sensitive, is then the standard of behavior
A partner has a duty of loyalty to:
(**note there can be no waiver of fiduciary duties by GP (Dolan))
o Disclose: the partner must make a full disclosure of all relevant facts fully & completely, and if the partners decide to
continue the project, with informed consent, then the partner acts lawfully.
 Informed consent: the partner simply mentioning the partners conflicts/profits is not enough, he must fully
disclose & then obtain the partners consent
 material facts: all facts which are likely to have a bearing on the desirability of the transaction to the principal
o includes: commissions the partner may earn on the transaction, any conflicts of interest a partner may
have, the actual sale price of the item
 where to make the disclosure:
o if conflict known before partnership formed likely needs to be made in the partnership agreement or
before the partnership agreement is signed
o If conflict arises later  informed consent must occur before the partnership enters into the transaction
 note: §152.205: TBOC makes not mention of duty to disclose, but it is likely implied from common law
o Accounting: every partner must account to the partnership for any benefit gained individually without consent and
holds as trustee, in constructive trust for the partnership, any profits derived by him without the consent of the other
partners.
 The partners receive the whole profit gained by the partner + interest
 This amount even includes amounts paid to employee’s as salaries -- all must be disgorged by the partner
acting in secret
o Not to compete: a partner must not act adversely to the partnership in his performance
 Cannot buy an item at a higher price, because it gets the partner more commission.
o Discharge duties in Good faith (§152.204):


a party must discharge all of his duties under the agreement or at law in good faith
must act to promote the best interests of the partnership

UPA§21(a):
o Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him
without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation
of the partnership or from any use by him of its property

RUPA 404(b) Partner’s duty of loyalty is limited to:
o To account to the Partnership and hold as trustee for it any property, profit, or benefit derived by the Partner in the
conduct and winding up of the Partnership business or derived from a use by the Partner of Partnership property,
including the appropriation of a Partnership opportunity;
o To refrain from dealing with the Partnership in the conduct or winding up of the Partnership business as or on behalf
of a party having an interest adverse to the Partnership; AND
o To refrain from competing with the Partnership in the conduct of the Partnership business before the dissolution of
the Partnership.
o CASE:

Starr v. Intl. Realty- Harris convinced drs & other high income investors to join him in a partnership for
the purchase of an apartment complex by telling them that the entire down payment could be treated as
prepaid interest for tax purposes. Harris didn’t disclose his RE comp was getting paid commission- it was
part of the purchase price the partnership paid. Harris argued that he didn’t conceal info- everyone knows
that realtors get paid commission. But in addition to being a realtor, he is also a partner. Crt H Harris
breached his duty to disclose. Several material facts were w/held: 1) commission; 2) he received an
assignment of the vendor’s interest so the partnership was now paying him
 UPA §21(a): Every partner must account to the partnership for any benefit, and hold as trustee
for it any profits derived by him without the consent of the other partners from any transaction
connected with the formation, conduct, or liquidation of the partnership or from any use by him
of its property
o Informed Consent- can’t just tell them about it, have to get their consent; must
have knowledge of facts necessary to the giving of an intelligent consent
o Material Facts- must make a full disclosure of all facts material to the
transaction
73


Remedy for self-dealing: return of full amt appropriated (even if dealt w/ 3P & gave them some
of the $)
Compare w/ Covalt: Under Covalt, if partners enter into partnership w/ conflicts, all bets are off.
But in Starr, existence of a conflict alone isn’t enough to negate duty of loyalty
*Limited Partnership & Fiduciary Duties [[look to above for GP’s & Common Law Rule, additional
below]] Duty of Loyalty
There are two approaches: (analyze both for the test)
 Summary Fiduciary Duties in Different Jurisdictions:
o Texas Code: §152.202(b)(2-4): duty of loyalty is modifiable if not manifestly unreasonable
o Common Law: Labovitz: duty of loyalty and good faith are not waivable
o Deleware/RUPLA: Sonet: agreement can waive/modify/eliminate fiduciary duties & the contract is
default; only look to other rules if the agreement is silent

(1) Common Law Rules for Limited Partnership’s: (more above)
o A general partner cannot contract away his fiduciary duty of loyalty by giving himself broad discretion. The discretion
is limited by his fiduciary duties.
o Even though a general partner is given broad discretion, the discretion is encumbered by a supreme fiduciary duty
of fairness, honesty, good faith & loyalty to the partners.
o Waiver: There can be no prior waiver of fiduciary duties in neither a general or a limited partnership
o BOP when GP accused of breaching duty of loyalty: The burden is on the fiduciary (GP) to show by clear &
convincing evidence that the transaction was equitable and just
o Case:
 Labovitz v. Dolan: Dolan owned/ controlled CMC, which was GP of CPI. CPI sold LP units to investors.
CMC made lots of $, but purchased interest in another Dolan-controlled entity. CPI (LP) didn’t distribute
income, and thus the partners had to pay taxes out of pocket. Dolan, acting through another entity, offered
to buy back their interest for $71K > they paid- marketed it as an opportunity to avoid next tax liability. Crt
H: Dolan must prove that he wasn’t acting adversely to the interest of the LPs. Duty of loyalty standard
[fiduciary duty which encompasses duty of GF, honesty, & fairness in dealings w/ them & the funds of the
partnership- Cardozo lang; means D will lose] is required even though it is disclaimed in the partnership
agreement (non-waivable). BOP shifts to the GP to prove by CCE that as a fiduciary he wasn’t acting
adversely (must prove no breach of duty of loyalty- that the transaction is equitable & just).

“Contract Theory:”
(two theories Texas (more moderate) & Delaware (more liberal)
o Premise:
 The partnership agreement rules over common law fiduciary duties
 Common Law rules are efficient, so if he parties wanted to include them in the agreement, they would have
 This theory is based on economics
o (A) Texas Approach/RUPA approach:
 §152.205: Partner’s duty of loyalty is limited to:
 (1) To account to the Partnership and hold as trustee for it any property, profit, or benefit derived
by the Partner in: *“accounting” could also imply duty to disclose- need to obtain consent
o (a) the conduct and winding up of the Partnership business or
o (b) From use of partnership property
 (2)Refraining from dealing with the partnership on behalf of a person who has an interest adverse
to the partnership; and
 (3) Refraining from competing or dealing with the partnership in manner adverse to the
partnership
 §152.002: Limiting Duty of Loyalty
 (a) except as provided by subsection (b), a partnership agreement governs the relations of the
partners & the partnership
 (b) a partnership agreement may not:
o (2) eliminate the duty of loyalty, except that the partners may identify specific types of
activities or categories of activities that do not violate the duty of loyalty if the types are
not manifestly unreasonable.
74
(3) eliminate the the duty of care, except that the partners by agreement may determine
the standards by which the performance of the obligation is to be measured if the
standards are not manifestly unreasonable.
o (4) eliminate the obligation of good faith, except that the partners by agreement may
determine the standards by which the performance of the obligation is measured if the
standards are not manifestly unreasonable.
o (B) Deleware Approach/RULPA: (more liberal)
 Policy: “It is the policy of this chapter to give maximum effect to the principle’s of freedom of contract and to
the enforceability of partnership agreements”
 Look to PA: The parties can modify, limit, or waive fiduciary duties of loyalty, care, etc -- THE TERMS OF
THE AGREEMENT RULE (DRUPLA §17-1011(d))
 Common Law Fiduciary duties are only default rules if the agreement is silent

Principles of contract preempt fiduciary principles where the parties to a limited partnership have
made their intentions to do so
 Only duty implied: There is a contractual duty of good faith required by the general partners, even when
given a broad grant of discretion
 Case: Sonet v. Plum Creek Timber
 Plum Creek, a LP, wants to covert into REIT. Units to be converted on 1-to-1 basis, but
management’s 2% interest to be converted to 27%. Sonet sues claiming self-dealing. Crt adopts K
position: partnership agreement is default; only look to statutory default rules when the agreement
is silent/ ambiguous as to whether the principles of equity are implicated. Principles of K preempt
fiduciary duties where the parties to a limited partnership have made their intentions plain to do
so. [based on DE Code: fiduciary duties may be expanded/ restricted by agreement] Here, crt puts
together 3 partnership agmnt provisions & reads them as waiving fiduciary duty.
 Ricks arguments “on appeal:” (*Ricks arguments against Deleware Rule)
o (1) The merger & the re-alignment of the profit % of the GP should have been treated
separately. The re-alignment of the profits should have been determined under the
general provisions of the partnership agreement, rather than the merger provision
o (2) This is a dangerous result -- is it really fair for the GP to be able to do whatever he
wants as long as he gets a 2/3 vote? He could deceive the LP into voting for something
(hide behind legalese) and then the LP don’t really know that they are voting for a
secondary issue that could greatly effect them. This is a guarantee to succumb to unfair
dealings by the GP.
o (3) The LP likely didn’t actually consent to this clause in the partnership agreement
because: (a) the document itself was too thick; (b) if they had seen the terminology they
wouldn’t know what it means. So by purchasing their shares they are agreeing to waive
something they didn’t know about -- seems like need to have knowledge to waive.
o (4) This deal is almost unchallengable -- the LP don’t have the resources to create their
own proxy statements challenging the merger especially if the investment is small, if the
LP does notice the statement they likely will think that “someone else” will notice it &
challenge it (which will never happen), the only way that this is going to be challenged
o Analysis:
 (1) Look to the partnership agreement, if the partnership agreement unambiguously speaks with terms
pertaining to duty of loyalty/care this is the parties intent-- these terms rule & must be enforced
 caveat: In Texas, may not be enforced if they are “manifestly unreasonable”
 (2) Only where the partnership agreement is SILENT or AMBIGUOUS do the common law duties come in
o
 Duty of Contractual Good Faith when distributing profits:
o (1) Look to the Partnership agreement to see how profits/losses will be allocated to the limited partners
o (2) If no express way of deciding how to allocate profits, the GP has authority to decide whether to distribute
profits/reinvest & how much of each
o (3) Duty of Good Faith in allocating:
 if partnership agreement only mentions the allocation of profits, the GP has wide discretion, but must abide
by contractual duty of good faith (below)
 if partnership agreement mentions how profits are distributed  duty to distribute in good faith
 “Good Faith:” Means to not exercise your discretion as to deprive the other party of its bargained for
benefits
 simply re-investing profits instead of paying out to the partnership is not a breach of the
contractual duty of good faith
 Only way to breach duty of good faith:
 If the GP has profits that he does not have a plan to re-invest, but is just holding them
75
 If no plan to re-invest  must distribute
o Code Provisions:
 153.003(a)- If not provided for in 153, the provisions of 152 [partnership code] & rules of law/equity
govern.
*Go back to 152 for duty of loyalty.

153.153: A person who is both GP and LP:
(1) has rights and powers and is subject to restrictions of a GP; and
(2) [Except as provided in partnership agmt], has rights and powers and is subject to restrictions and
liabilities (if any) of a LP to the extent of the GP’s participation in the partnership as a LP

153.206: Allocation of Profits and Losses (And distributions)
(a) The profits and losses of a LP shall be allocated among the partners in the manner provided in the
written partnership agmt
(b) If agmt doesn’t provide for allocation, profits and losses shall be allocated:
(1) In accordance with current % or other interest in partnership provided in partnership
records;OR
(2) If the allocation of profits and losses is not provided for in partnership records, in proportion to
capital accounts

153.208: Sharing of Distributions
(a)Distribution (of cash or another asset of LP) shall be made to a partner in the manner provided by a
written partnership agreement
(b)[Unless agreement provides otherwise] Distribution that iso Return of capital- made on the basis of the agreed value of the contribution made by each
partner to the extent the contribution hasn’t been returned
o NOT a return of capital- made in proportion to allocation of profits
(c)[Unless otherwise defined by written agreement] Return of capital = distribution to a partner: to the
extent that partner’s capital acct (immediately after distribution) < amt of partner’s contribution (-) any
prior distributions from return of capital
 153.209: Interim Distributions: A partner is entitled to receive a distribution from a LP-ship to the extent
& at the time/ on the occurrence of an event specified in partnership agmt before
(1) The partner withdraws from the partnership; and
(2) The winding up of the partnership business
o Case:

Brooke v. Mt. Hood Meadows: Generally, a broad grant of authority to manage a business includes the
authority to conduct all affairs reasonably necessary or incidental to the expressly authorized business. The
Ct. addressed the question of whether the Limited Partners can compel the General Partner to distribute
profits allocated to them under the Partnership Agreement. Ct. concluded that the General Partner’s
authority includes the authority to control interim profit distributions. In order to reach this conclusion the
Ct. analogize the Limited Partner to a Corporate shareholder and the General Partner as the Board of
Directors. The Limited Partners can not force the General Partners to distribute cash, unless they show bad
faith.
76
G. OWNERSHIP OF FIRM PROPERTY
1. Partnership
 Common Law Rule:
o Real property was held between partners as tenants in common
 Treated the partnership is an aggreagate
 To divest yourself used a quitclaim deed
o For personal property, were treated as joint tenants with rights of survivorship (meant credtiors could execute
against the property itself)
 Rule Today:
o §152.101: Partnership property is NOT property of the partners, it is property of the partnership
o UPA 25(1): Property is held in TENANCY OF PARTNERSHIP; rights of the partners:
 Property held by the partnership is an undivided interest
 Possess partnership property for partnership purposes only
 Cannot separately convey the interest OR be attached to a mortgage for non-partnership purposes
o §152.102: Classification of Partnership Property
 Property is property of the partnership if it is purchased:
 With partnership property; or
 Acquired in the name of the partnership; or
 Bought by a partner in his capacity as a partner (John, Partner in High Stakes)
o Partner has no right to partnership property:
 The partner only has possessory (use or possession) rights to partnership property for partnership
purposes, and these rights cannot exist absent the partnership
 Exists only as an incident to being a part of the partnership
 No co-partner owns a personal specific interest in any specific property of the partnership
 Partner cannot convey any property interest of the partnership alone OR mortgage his interest, because
never had a right to the property (§154.002: a partner does not have an interest that can be transferred
individually in partnership property)
 Spouses of partners have no individual rights to partnership property
o Partners interest in the Partnership:
 154.001: Nature of Partners Partnership Interest
(a) A partner’s partnership interest is personal property for all purposes
(b) A partner’s partnership interest may be community prop
(c)A partner is not a co-owner of partnership property
 Partner has an interest in the share of profits of the partnership & can convey this interest §152.401
o Statute of Frauds Issues
 SoF does not apply to the transfer of a partners interest
 SOF does apply to conveyance of partnership property by the partnership
o Case:
 Beach v. Anderson- Oral agreement to enter into a partnership to run an amusement park. Partners got into a
disagreement. Settled it by agreeing to alternate management every 2 days. Ltr agreed Beach would pay Anderson out
for his partnership interest & partnership prop. Anderson ltr tried to get out of the agreement by claiming that it violated
the SOF since his W didn’t sign. When a partnership sells RP, it must comply w/ SOF. When a partner conveys
partnership prop, it doesn’t have to comply w/ the SOF b/c it’s personal prop. SOF N/A here b/c partnership owns RP.
Just conveyed Anderson’ partnership interest, which is personal prop.
 Putnam v. Shoaf: H died. W (Putnam) succeeded to H’s interest in partnership. Although partnership had a long history
of profits, it appeared to now be operating at a loss & W wanted to get out before it incurred more liability. Shoafs agreed
to purchase her interest if she & Charltons (co-partners) each paid $21K into partnership. Putnam got a release (novation)
from the bank. Shoafs took on liability w/ the bank. Putnam transferred her partnership interest to the Shoafs via a quit
claim deed. Partners later learned that bookkeeper had embezzled money & obtained a portion of the judgment the bank
had to pay. Putnam then claimed that she was entitled to a portion of the judgment b/c she hadn’t conveyed that interest to
the Shoafs. Crt H: although she didn’t have an interest in the claim against the bank when deed was executed and thus
didn’t convey the interest, she also has no individual right to the property absent the partnership. When Putnam conveyed
her interest, she conveyed her share of the profits & surplus. The claim against the bank was the partnership’s asset, not a
part of Putnam’s partnership interest. Since she has conveyed her interest, she no longer has a right to obtain a percentage
of the settlement.
3. Limited Liability Company
 101.106: Nature of Membership Interest
(a) Membership interest in LLC is personal property.
(b) The members have no interest in any specific property of the LLC
77
H. TRANSFEREE’S & TRANSFEROR’S RIGHTS WHEN ASSIGNED PARTNERSHIP INTEREST
1. Limited Partnership
i.
o Recall: Partners interest in the Partnership:
 Partner has an interest in the share of profits of the partnership
 This is a personal interest, and may be considered community property (§154.001)
 NO INTEREST in the property held by the partnership
o Effect of transferring partnership interest: (152.401: a partners can transfer all/a part of pship interest)
 The only thing a partner can convey is his interest in profits
 On the transferor: (person giving away their profit share)
 Is not enough to eliminate his partner status
 §152. 402: Is not a withdrawl
 §152.403: The transferor remains a partner with all of the rights & duties, just his profit share is
given to the transferee (still has a right to manage)
o Policy: preserve association
 On the transferee: (person receiving the profit share)
 Does not become a partner
 Does not entitle the transferee to participate in management or control of partnership
(§152.402(c))
 §152.404(d) - provides that an assignee is owed a contractual duty of good faith -- “For a proper
purpose the transferee may require reasonable information or an account of a partnership
transaction and make reasonable inspection of the partnership books. In a winding up of
partnership business, a transferee may require an accounting only from the date of the latest
account agreed to by all of the partners”
o Bauer approach: transferee is not entitled to a duty of good faith by the other partners
 §152.404(a): Just receives the transferor’s assigned profits under the partnership agreement
(subject to the GP’s discretion of whether or not to distribute profits/how to distribute profits)
 Does not make the transferee liable for partnership debts (§152.404(c))
o Effect on the Partnership Itself
 §152.401: Nothing really happens:
 Transfer of a partnership interest does not cause a dissolution of the partnership
 Original partner remains able to manage & control - just his profit share is assigned out
o Case:
Bauer v. Blomfield Co.- Partner (Holden) assigns to Lender (Bauer) his right, title, & interest in partnership as security for
a loan. Other partners agreed to the assignment. Partner defaulted, and Lender began receiving distributions. But Lender
stopped receiving payments when the partnership agreed to pay commissions to Chuck. Bauer still has an asset- just
complaining b/c he isn’t being paid now. Bauer’s claim is overreaching b/c he’s claiming loss of amt of claim, but he’s still
entitled to that amt after commissions are paid out. (but this isn’t addressed by the crt. Crt H: Lender, as assignee, was not
entitled to managerial rights. Under UPA 27(a), an assignee cannot require any info/acting of partnership transactions or to
inspect the books. Assignment only gives the assignee the right to receive partnership profits. Lender/assignee (Bauer)
looses b/c under the agmnt he was not entitled to receive any more partnership profits until commissions were paid out.
2. Limited Liability Company
 101.108: Assignment of Membership Interest
(a) Membership interest in LLC can be wholly or partly assigned.
(b) It is not an event of winding up and doesn’t entitle the assignee to participate in mgmt or become a member
 101.109: Rights of Assignee
(a) Assignee of membership int in LLC can receive gain, loss, or distributions; inspect books
(b) Assignee may become a member of the LLC on approval of all company’s members
(c) Assignee of membership int is not liable as member until assignee becomes a member
78
I. AN INDIVIDUAL PARTNER’S CREDITORS RIGHTS AGAINST PARTNERSHIP INTEREST
1. General Partnership


General Information:
o Charging Order: statutory means by which a judgment creditor of an individual partner may reach the partnership
interest of a particular partner who owes a debt to the creditor.
o This is essentially an execution of an intangible - the partners partnership interest in the partnership
Procedure for Creditor Obtaining a Judgment on Partnership Interest:
o Texas code does not provide for charging orders against general partnerships, but you can foreclose on
the general partnership interest according to below


o Process a creditor should use to attain a debtor partners partnership interest:
 1) Creditor should obtain a writ of garnishment from the court
 this is an order of the court that takes the intangible property (stream of payments) from the debtor
 the debtor can eliminate the writ by paying the full debt to the creditor
 2) If debt remains unpaid, request a writ of attachment
 [[the only reason to foreclose is so now you can inspect the books & have an accounting -owed a duty of good faith (154.404(d))]]
 1) attach the partnership interest
 2) execute the attachment & foreclose
 3) Other requirements:
o The court must ratify the foreclosure transfer for it to be final
 Sale is subject to judicial supervision
o Partner-creditor has a right of redemption until the foreclosure sale is ratified
 Can come back, pay the debt + interest, and remove the writ of attachment
 Result: now the creditor is an assignee
o according to §154.404(d) the assignee is owed a duty of contractual good faith
o does not have any right/duties as a partner
General Rules:
o Creditor cannot go after partnership property -- it is property of the partnership not the partner-creditor
o The creditor can only receive the partners interest (assignment of profits!) in the partnership up the amount of the debt
+ interest
Dissolution is not an option for creditors:
o A creditor cannot force dissolution of a general partnership in order to obtain assets to liquidate to pay debt
o §11.057: unless otherwise provided, the dissolution of a general partnership at will requires the express will of the
majority in interest
 other things that will cause dissolution:
 if a partnership for an undertaking, the completion of the undertaking
 partnership purpose has become illegal
 sale of all (or substantially all) of the partnerships assets, if outside the ordinary course of business
2. Limited Partnership
 General Information:
o Charging Order: statutory means by which a judgment creditor of an individual partner may reach the partnership
interest of a particular partner who owes a debt to the creditor.
 Assigns all of the profits gained from the partnership interest to the creditor until the judgment is satisfied
o This is essentially an execution of an intangible - the partners partnership interest in the partnership
 Procedure for Obtaining a judgment on a partnership interest:
o §153.256/RULPA 703: Partnership Interest Subject to Charging Order: you cannot foreclose on
partners interest OR general partners interest in a limited partnership -- can only get a
limited
charging order
 (a) get a charging order which allows a garnishment -- assign the profit distributions to the creditor
o Creditor has no rights or duties to partnership & is not a partner (§152.402(c))
o Creditor is not liable for a partnership debt
o Not owed any fiduciary duties
 (b) Creditor gets only the rights to the profits that the debtor would be able to receive from the partnership
79
 (c) charging order constitutes a lien on the partners profit interest
 (d) entry of a charging order is the only remedy which a judgment creditor of a partner may satisfy the
debtor partner’s debt.
 An alternative: claim fraudulent conveyance from debtor-partner to partnership: if you can prove
that the partner is trying to shelter assets in the limited partnership by proving that the limited
partnership took the asset for less than adequate consideration
 (e) Does not deprive the owner of an ownership interest in the partnership (can still manage & control)
 (f) No forced dissolution of the partnership to obtain partnership assets to pay debt: the creditor may
not try to obtain possession of the limited partnership property
 Policy:
o Helps the limited partnership to continue to conduct business
o Limited Partners did not bargain to cover debts of other limited partners
o No need for judicial supervision or right of redemption, because a foreclosure is not allowed
3. Limited Liability Companies
 Procedure for Obtaining a Judgment against a single partner on a partnership interest:
o §101.112 Controls: MEMBERS MEMBERSHIP INTERST SUBJECT TO CHARGING ORDER -- THE CREDITOR cannot
foreclose on the partnership interest BUT CAN:
 (a) upon motion of the creditor, a court with jurisdiction may issue a charging order against the
membership interest of the judgment debtor to the creditor
 assign the members right to profits to the creditor
 (b) creditor has only the right to receive any distribution the judgment debtor would be entitled to in
regard to membership interest
 (c) charging order constitutes a lien on the debtor membership inerest, that cannot be foreclosed upon
 (d) No forced dissolution of the partnership to obtain partnership assets to pay debt: this is the
exclusive remedy of any judgment creditor against a member-debtor’s partnership interest
 (e) the member remains a member of the LLC with all control & management duties
 Case:
o 91st Street J.V. v. Goldstein- Goldstein, a GP-ship, & a LP-ship were joint venturers in 91st Street J.V. Dispute re: capital
calls resulted in arbitration award against Goldstein. TC entered a charging order against Goldstein’s interest in the J.V.,
and appointed atty as receiver to effectuate a transfer, assignment, or conveyance if judgment remained unsatisfied.
Receiver executed transfer, but TC set aside the transfer, vacated the charging order, and terminated the receivership.
Creditors appealed. Crt discussed CL procedures used prior to charging order statutes: partnership prop was seized under
writes of execution & debtor partner’s interest was sold- resulting in compulsory dissolution & winding-up of the
partnership. In determining the procedure that should apply to foreclosure on partnership interest, AC reads a requirement
into the statutes (UPA/ state statutes) requiring judicial foreclosure. Once a creditor owns a partnership interest, it has the
right to petition for judicial foreclosure under the UPA. TC must ratify the foreclosure. Standard: abuse of discretion. AC
H: TC did not abuse its discretion in vacating the charging order.
80
J. VEIL PEIRCING
1. Limited Liability Companies
 In general
o Veil piercing: usually a corporation is identified as an entity separate from the shareholders, however the legal entity
status will be disregarded (and personal liability will attach) whenever the application of limited liability will lead to
injustice
o A common law doctrine, very fact intensive
o Kaycee v. Flahive- Flahive Oil & Gas is LLC w/ no assets. Flahive is managing member. Entered in K w/ Kaycee.
Kaycee alleges that Flahive O&G caused das to property. Kaycee did not allege fraud, but attempted to hold Flahive
personally liable. Crt H: no reason exists in law or equity for treating an LLC different than a corporation is treated
when considering whether to disregard the legal entity. (so can pierce the corp veil for LLC). But crt suggests factors
may not be the same for LLC.

o
(1) By the Texas Code (Texas Code does not allow veil piercing -- Ricks thinks it is ambiguous &
wrong -- apply the arguments below to get to the common law)
o §21.223 -- Controls Veil Piercing for Corporations
 (a)(2) Specifically disallows veil piercing for corporations
 (b) However, allows veil piercing only in the instance of fraud
o Arguments against applying §21.223 to LLC’s:
 (1) the statute on its face is ambiguous and should not be extended beyond its application to LLC’s to
create further ambiguity
 (2) 21.001: makes all of the Chapter 21 statutes only applicable to corporations -- would violate the plain
language of the statute to extend it to LLC’s
 (3) §101.113: does not allow a 3P to bring an action against a specific member of an LLC, the action must
be brought againt the LLC itself
o §101.114-- LLC statute does not allow veil piercing
o Arguments against applying §101.114:
 (1) A code provision when applied that reaches absurd results should be construed differently
 I.E. according to the code a member of an LLC can commit fraud on a 3P and be sheltered from
liability by the LLC veil -- this result is just wrong.
 (2) You run the risk of allowing entities to shelter assets under fraudulent conveyances & not suffer any
consequence
 fraudulent conveyance: convey away propery for less than adequate consideration in order to
avoid having the asset liquidated to pay
o veil piercing is like fraudulent transfer in instances where you cannot prove the transfer
because the entity has destroyed the records
 Without making the member personally liable, the injured 3P will receive no payout because all
the assets have been transferred
 (3) argument in Kaycee Land & Livestock: Just because the legislature made a statute does not mean that
they wanted to modify or destroy the veil piercing doctrine of common law

(2) At Common Law
o Factors used to peirce the LLC veil:


(fact intensive inquiry)
Fraud or Injustice: i.e.
 holding out of an individual that he is liable,
 Unauthorized diversion of corporate funds or assets to other than corporate uses
 The treatment by an individual of the assets of the corporation as his own
 The concealment and misrepresentation of the identity of the responsible ownership, management
and financial interest or concealment of personal business activities
 The failure to maintain arm’s length relationships among related entities (if you are promoting that
you are)
 The contracting with another with intent to avoid performance by use of a corporation as a
subterfuge of illegal transactions
Co-mingling funds:
 Failure to segregate funds of the separate entities
o The treatment by an individual of the assets of the corporation as his own
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The use of the corporate entity to procure labor, services or merchandise for another
person or entity
When trying to find evid of co-mingled funds, subpoena checking personal and business checking
accounts to see how money moves back and forth. Also look at books of the company itself and
minutes to see if all purchases are authorized
ex: everything done out of 1 bank account (personal and business expenses)
o



The LLC is a mere shell:
 no stock, no certificates no board, no ONE but the owner,
 no economic reason for the entity to exist, the existence is just a façade
 The use of the corporate entity to procure labor, services or merchandise for another person or
entity
 When one company is sued for liability, there isn’t any money there- the parent company has all
the money. No meetings or officers of shell company- there just so it can get sued and not the
parent.
 rationale: if the people involved don’t treat it as an entity, why should any one else.
 Diverted assets from one corporation to another:
 diverting money bw entities money,
 diverting liabilities to one company and assets to another,
 diverting employees, equipment, business activities,
 treatment by the individual of the assets of the corporation as his own
 use one entity to procure labor or property for the benefit of the other entity
 Caused damages and has inadequate capitalization: corporation has no assets to pay obligations, (note
in the Texas Code 152. 804 likely makes having insurance adequate capitalization)
 Ricks Hypos on inadequate capitalization:
o Corp buys & operates a swimming pool the only assets they have are to pay for
maintenance and the pool itself. Subsequently, someone drowned -- and there were no
assets. Is this inadequate capitalization ?
 HELD: Yes!
o Cabs owned by two separate companies were all in one building. All of the cabs were
serviced by the same person, filled up there, etc. The only assets the company had were
the cabs (that were not paid for) & each driver had liability insurance. Is this inadequate
capitalization?
 MAYBE
 Against inadequate capitalization:
o This means there is no difference between individual drivers
& a business (businesses likely should be treated differently)
o For an individual, they know they can personally liable for
any amount over their auto insurance, the corporation should
be liable for amounts over insurance (shows inadequate)
o Cab company is conducting business for profit - should have
to pay for its externalities
 For adequate consideration:
o Insurance will likely cover the accident, so adequate
o Under Texas Code, insurance would likely be enough-§152.804
o Side Note: It is very difficult to peirce the veil of an actual corporation (i.e. Exxon Mobil)
o Case:
 Kaycee Land and Livestock v. Flahive:
Limited Partnerships & Limited Liability Partnerships


Veil-piercing does not apply against LPs, at least not to date. One could make the argument, but against it one
could argue that the managers, general partners, do not have limited liability, and this unlimited liability is
sufficient. So far, this argument has won out in the decisions that I've seen.
A similar argument might apply to veil piercing arguments with respect to LLPs. Exceptions to the liability shield
seem to indicate that piercing would be inappropriate
82
K. Distributions on Liquidating & the Service Partner Problem
o
152.203: Rights and Duties of Partners
(c) A partner is not entitled to receive compensation for services performed for a partnership other than reasonable
compensation for services rendered in winding up the business of the partnership.
(d) A partner who, in the proper conduct of the business of the partnership or for the preservation of its business or
property, reasonably makes a payment or advance beyond the amount the partner agreed to contribute, or who
reasonably incurs a liability, is entitled to be repaid and to receive interest from the date of the:
(1) payment or advance; or
(2) incurrence of the liability
i. 152.202- Credits of & Charges to a Partner:
(a) Each partner is credited w/ an amt equal to:
 cash/ value of property partner contributes
 partner’s share of partnership profits
(b) Each partner is charged w/ an amt equal to:
(1) cash/ value of other prop distributed by the partnership to the partner
(2) partner’s share of the partnership losses
(c) Share of profits/losses: Each partner is entitled to be credited with an equal share of the partnership
profits and is chargeable with a share of the partnership’s capital or operating losses in proportion to
the partner’s share of the profits.
b. In absence of an agmnt to the contrary, profits/ losses are distributed equally. Rationale: people never talk about
losses, so agreement re: profits governs loss distribution. Also, under 152.304, partners are jointly/severally liable
so it makes sense for partners to equally share in profits & losses.
c. §152.002(b): allows partners by PA to split profits unevenly
i.
Services as Capital Contributions (only applies when 1 service part & 1 money part)
*Depends on jurisdiction
a. Default Rule When No Partnership Agreement: §152.202(a) & Parker:
i. Each partner is credited w/ an amt equal to:
 cash/ value of prop partner contributes
 partner’s share of partnership profits
 Notice that services are not considered capital contributions by statute

When there is an agreement to split profits in PA Agreement and there is a LOSS:
ii. (1) Becker v. Killarney (CA, maj):
(split)
1. When parties agree to share profits/ losses equally, then absent an agreement to the contrary, the parties shall be
deemed to have agreed that the value of the contribution, whether property or services, are likewise equal
[whether there is a net amount owing to a third party].
2. Result: Therefore, partners share equally in the losses and partner that contributed money is not entitled to
recover any part of it from the partner who contributed services
3. Policy: Prevent unjust enrichment
a. Ricks arguments that this is the right result:
i. (1) They would not have agreed for one to put up money & one to put up services unless they
thought the value of both was the same
ii. (2) Service partner would not have agreed to be liable for ½ of the contributers money front AND
work for free (almost a double loss to partner who provides services -- a) lost a lot of time b)
lost money))
iii. (2) Parker v. Northern Mixing (AK)- Absent contrary agmt, services don’t count as capital contributions and the
partner is not entitled to any share of partnership capital on dissolution-- in line with the rule in §152.202(a)
1. However, personal services may apply as capital contributions if the partnership agreement expressly or
impliedly requires it
2. Therefore, a partner who only provides services may be liable to cash capital contributor if the partnership
suffers a loss on dissolution
b. TX: Code leaves the issue ambiguous so could argue either rule applies.
1. Code sections seem to suggest that services do not count toward capital contributions. 152.202(a)(1) says that
capital contributions consist of cash/ prop, doesn’t list value of services. Also, 152.203(c) states that a partner isn’t
entitle to receive compensation for srvcs performed for the partnership other than reasonable compensation for
services rendered in winding up the business of the partnership.
83
ii.
Liquidation:
iii. 152.706: Disposition of Assets- In Winding up the partnership business
(a) partnership property- including contributions- shall be applied to discharge the obligations of creditors first
(a) creditor may be a third party OR
(b) a partner if the partner loans money with the intent for it to be a loan NOT a capital contribution
(b) then any amount left over will be applied to make the distributions to partners in accordance w/ 152.707 (amt equal
to partner’s positive balance in capital acct)
iv. 152.707: Settlement of Accounts
(a) Each partner is entitled to settlement of all accts on the winding up of the partnership business
(b) W/drawn partner: partnership interest no redeemed under subchap H is credited w/ share of profits for period
after w/draw but is charged w/ losses only to the extent of profits credited for that period (no negative balance is
created after w/draw)
(c) Profits/ losses from liquidation of the partnership property must be credited/ charged to the partners’ capital
accounts.
(d) Distribution- amt = to positive balance in capital acct
Contribution- amt = to negative balance in capital acct
**Effect on Distribution if there is a loss & one partner paid in capital & the other service, when there is a PA to split
profit, but the company suffers a loss:
*Under Becker: the partner who contributed services will not have to pay into the partnership to make even the
contribution
*Under Parker: the service provider will have to pay into the partnership in the amount equaling half the losses
v. 152.708: Contribution to Discharge Obligations
I. To the extent not taken into act in settling accts among partners under 152.707:
A. each partner shall contribute (in proportion in which share losses) amt necessary to satisfy partnership obligations,
including non-recourse obligations where can only go after partnership prop
(2-3) If one partner doesn’t pay, the other partners must cover. Can then go after that partner/ estate for amt
paid.
vi. Balance sheets: Formula- Total Assets = Total Liabilities + Equity (A-L)
d. Types: (1) balance sheet- financial condition of a firm as of a specific date
(2) statement of income- balance sheet is a bridge that connects balance sheet at the beginning & end of a period
Example of Accounting when there is only CASH capital contributions
Assets – Liabilities = Equity (equation that governs the balance sheet)
Chandler, Joey, and Ross are partners in a partnership; except for an agreement to be partners, and to make capital
contributions and loans described below, there is no other agreement among the partners as to partnership business or affairs.
At the time of the partnership was formed, the partners made following capital contributions:
Chandler $1000
Joey $1000
Ross $3000
Also borrowed $10,000 from the bank
Assets
$10K - bank
$ 5K - tot. cont.
$15K total
Balance Sheet as of Day 1
Liabilities
($10K) - bank
Equity = $5K
J= $1000
C= $1000
R = $3000
a. If we had to distribute in this moment in time, how would we do it?
i. §152.706 – who would be paid first if the partnership was wound up and had to distribute
assets?
1. Creditors are paid first; the bank is paid first
2. Partners then paid §152.707(d) – the amount equal to that partners portion of the balance
84
b. Assume partnership operated for a year, no distributions made to the partners, and no capital contributions
have been returned. As of the end of its first year, Partnership has total assets of $20,000.00 and total
liabilities of $12,000.00, and Partnership is current on all interest owed to partners and non-partners
i. Profit = Assets - Liabilities = $8000
ii. To get the equity = $8000 (profit) - $5000 (cont.) = $3000 profit
iii. Unless agreement says otherwise, §152.202(c) says split evenly -- 152.002(b) allow partners
to split profits unevenly
Assets
$20,000
Liabilities
($12,000)
Equity = $3k profit (see above)
Year 1
Year 2
J=
1K
1K
C=
1K
1K
R=
3K
1K
Tot
2K
2K
4K
C. Now assume that the assets are $20,000 and the liabilities are $18,000
1. Profit = assets - liabilities = $2000
2. Equity= profit (2000) - capt. (5000) =$3000 loss
3. §152.202(c) states to split losses like you would profits, unless parteners agree otherwise (§152.002(b) allows),
profits are split evenly, so therefore, are losses
Assets
$20,000
Liabilities
($18,000)
Equity = $3K loss (see above)
Year 1
Year 2
J=
1K
(1K)
C=
1K
(1K)
R=
3K
(1K)
Tot
0
0
2K
D. Now assume that the assets are $20,000 and the liabilities are $21,000
 20,000 (assets) - 21,000 (liab) = ($1K) - ($5K) = 6K loss
 §152.707(d) now applies -- “shall contribute to amount equal to their negative balance”
o Look to equity
o C & J will each have to pay in 1K for their net loss
Assets
Liabilities
Equity = 6K loss
$20,000
($21,000)
Year 1
Year 2
J=
1K
(2K)
C= 1K
(2K)
R= 3K
(2K)
Tot
(1K)
(1K)
1K
85
L.
Dissolution of Firms
o
At will v. Particular Undertaking (UPA) Canter’s Pharmacy v. Elizabeth A.
 Termination v. Dissolution of the Partnership:
 Termination: the partnership ceases doing business
 Dissolution: means that a partner is no longer associated with the partnership; the partnership
does not immediately cease doing busness
 Dissolution at will:
 Requirements for dissolution:
o (1) Caused by the express will of one of the parties
o (2) He must give the other partners notice of withdrawal
o (3) Must give 3P notice that partner is no longer associated with the business
 Partnership at will v. for a particular undertaking/definite team:
o At will: at will dissolution does not violate the PA, partnership may continue to operate
o If for a particular undertaking/definite term: at will dissolution is still effective, nondissolving partners may recover damages for breach AND may continue to carry on the
partnership if certain condition are met
 “particular undertaking:” must be capable of accomplishment at some time,
although the exact time may be unknown and unascertainable at the date of the
agreement
 EX:
o A partner advances money to partnership with the
understanding that the amount contributed was to be a loan
and was to be repaid as soon as feasible from the prospective
profits of the business -- partnership undertook to repay the
loan.
o One partner contributes all the capital and the other services
and it was understood that upon repayment of the
contributed capital from profits the partner who contributed
services would receive a one-third interest in the partnership held undertook to repay contributed capital
 NOT particular undertaking:
 Entering into a contract to lease a building and run a business - may
continue indefinitely, no particular undertaking.
o Ie running a nursing home
o
Texas Code:
 Generally:
 Unlike the UPA, the withdrawal of a partner does not cause dissolution under the Texas Code, the
business continues
o A partner always has the power to withdraw, but not necessarily the right
 It does not cause a wind up unless the majority agrees (sell assets, collect debts) and the
withdrawn partner will be paid based on whether his withdrawal is rightful or wrongful:
o IF withdrawal rightful:
 The partner receives “going concern” the value of his capital contribution + % of
assets + goodwill, the firm may:
 (1) Dissolve to pay the debts OR
 (2) Pay out the partner in this amount and continue the business
 The withdrawn partner also is released from all past/future liability
o IF withdrawal wrongful:
 The partner receives “salvage value” of assets + capital contribution
 No needs for liquidation
o
 §152.501: What events cause withdrawal
 (a) A person ceases to be partner on the occurrence of an event of withdrawal
 (b) An event of w/drawl of a partner occurs on:
86
o



(1) receipt by the partnership of notice of the partner's express will to w/drawl as a
partner on:
 (A) the date on which the notice is received; or
 (B) a later date specified by the notice
o (2) an event specified in the partnership agreement as causing w/drawl;
o (3) the partner's expulsion as provided by the partnership agreement (can provide for
expulsion at will in the partnership agreement)
o (4) the partner's expulsion by vote of a majority-in-interest of the other partners if:
 (A) it is unlawful to carry on the partnership biz w/that partner
 (B) there has been a transfer of all or substantially all of that partner's
partnership interest, other than:
 (i) a transfer for security purposes that has not been foreclosed; or
 (ii) the substitution of a successor trustee or successor personal
representative
 (C) Tell the partner within 90 days that he will be expelled or
 (D) an event requiring a winding up has occurred w/respect to a nonfiling entity
or foreign nonfiling entity that is a partner…..
o (5) The partners expulsion by judicial decree if the judicial decree determines that the
partner:
 (A) the partner engaged in activity that adversely and materially effected the
partnership business
 (B) willfully committed a breach of
 i) the partnership agreement or
 ii) duty owed to the partnership
 (C) engaged in conduct that made it not reasonable practicable to carry on the
partnership business with the partner
o (6) the partner ha become a debtor in bankruptcy
 (B) executing an assignment for the benefit of the creditor
 (C) acquised to the assignment of a trustee for all or substantially all of the
partners property
 (D) within 90 days failing to have the appointment vacated or a stay put in place
o (7) if the partner is an individual:
 the partners death
 appointment of a guardian; or
 judicial determination that the partner is otherwise incapable of performing the
partners duties under the partnership agreement
o (8) termination of the partner’s existence;
o (9) if partner transferred all of the partnership interest, redemption of the transferee’s
interest
o (10) Request under 11.057 that the partnership be wound up
11.057(d):, withdrawn partner cannot move to wind up.
 11.057(d)- partnership is not wound up when partner disassociates, so there’s no problem with the
others continuing the business.
 There will only be a windup if the majority in interest agrees
152.502 – A partnership continues after an event of withdrawal;
 the event of w/drawl affects the relationships among the w/dran partner, the partnership, and the
continuing partners as provided by 153.503-152.506
 Entity approach, even though the partners aren’t associated there is still a business
152.503 – Wrongful w/drawal; liability
87



o
(a) At any time before the occurrence of an event requiring a winding up of partnership biz, a
partner may w/draw from the partnership and cease to be a partner as provided by 152.501
(b) A partner's w/drawal is wrongful only if:
o (1) the w/drawal breaches an express provision of the partnership agreement;
o (2) in the case of a partnership for a definite term or particular undertaking or for which
the partnership agreement privdes fro winding up on a specified event, before the
expriation of the term, the completion of the undertaking or the occurrence of the event,
as appropriate:
 (A) the partner w/draws by express will
 (B) the partner w/draws by becoming a debtor in bankruptcy; or
 (C) in the case of a partner that is not an individual, a trust other than a biz trust,
or an estate, the partner is expelled or otherwise w/draws b/c the partner
willfully dissolved or terminated; or
o (3) the partner is expelled by judicial decree under 152.501(b)(5)
(c) in addition to other liability of the partner to the partnership or to the other partners, a
wrongfully w/drawing partner is liable to the partnership and to the other partners for damages
caused by the w/drawl
UPA:
 Dissolution under the UPA Explained:
 Overview of UPA rightful withdrawal:
o 1) A partner wants to withdraw and it is rightful under §31
 a partner always has the power, but not necessarily the right to withdraw
o 2) Dissociation (one partner choosing not to associate with the partnership) of the
rightfully withdrawn partner causes dissolution of the partnership under §29
 the withdrawal causes of a dissolution of the partnership relationship, not
necessarily the business of the partnership (this may be continued)
o 3) Dissolution automatically puts the partnership into a stage of winding up under §30
o 4) Partnership must decide whether or not to liquidate or to continue & how much the
withdrawing partner is owed
 Must look to the partnership agreement to see what it calls for
 if liquidate  the partnership business will have to end -- sell of assets,
pay debts, collect unpaid fees, distribute in each partners share
 If continue  do what the partnership agreement says
 If no partnership agreement, default rules of UPA apply  liquidation occurs
UNLESS the remaining partners either before or after dissolution agree to continue
the business (however, if there is no agreement to continue but the partners act
as if there is, then the court may find a tacit agreement to continue)
 if liquidate  the partnership business will have to end -- sell of assets
(salvage value), pay debts, collect unpaid fees
o partners gets: capital contributions of each partner, pay % of
profits, and % of any remaining goodwill
 If continue  the continuing partners must pay the withdrawing
partners his going concern value in cash -- either by finding someone to
buy him out or each paying a portion-- OR liquidate enough to pay
partner and keep going
o Partner gets: Going concern: capital contribution (calculated
by using the going concern value of the assets)+ share of
profits/losses+ goodwill of business AND partner is released
from liability
 38(1) -- allows a rightfully withdrawn partner to force liquidation if the
other partners cannot afford to pay him going concern value for his
share
 Overview of UPA wrongful withdrawal:
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
o
1) A partners wants to withdraw and its wrongful -- §31 [[partner always has the power, but not
necessarily the right to withdraw]]
o Partnership for a particular undertaking that is not complete
o Partnership for a definite amount of time
 2) Dissociation (one partner choosing not to associate with the partnership) of the rightfully
withdrawn partner causes dissolution of the partnership under §29
 the withdrawal causes of a dissolution of the partnership relationship, not
necessarily the business of the partnership (this may be continued)
 3) Dissolution automatically puts the partnership into a stage of winding up under §30
 4) Partnership must decide whether or not to liquidate or to continue & how much the
withdrawing partner is owed
o a) Look to partnership agreement if have one to see what happens upon wrongful with.
o b) if no partnership agreement:
 §38(2) gives the remaining the partners the option to continue the business on
the unanimous consent of all partners OR partners may choose to liquidate
 If the partners choose to continue  the withdrawn partner will get his share
based on the salvage value of the assets as applied to his capital account
 If the partners choose to liquidate  the withdrawn partner will get his share
based on the going concern value of the assets as applied to his capital account
 5) What the wrongfully withdrawn partner gets:
o if the business is continued: capital contribution + % of profits - DAS caused by
withdrawal.
 The wrongful withdrawer is released from liability
 NO goodwill
o If the business is liquidated: capital contributions + % of profits + GOODWILL - DAS caused
by withdrawal
 If the business is liquidated, the wrongfully withdrawing partner basically gets
going concern value - DAS (since the equipment will be
UPA Code Sections:
 §29: Dissolution:
 The Dissolution of a partnership is the change in the relation of the partners caused by any
partner ceasing to be associated in the carrying on as distinguished from the windup up of the
business.
o Dissolution = Disassociation
o View partnership as an aggregate
 Does not mean that the partnership immediately ceasing doing business
 §30: Partnership not terminated by Dissolution
 On dissolution the partnership is not terminated, but continues until the winding up of the
partnership affairs is complete
 §31: Causes of Dissolution
 Dissolution is caused:
o (1) without violation of the agreement between the partners if:
 by the ending of the written term of the partnership OR particular undertaking
 by express will of any partners when no definite term or particular undertaking
 by the express will of all of the partners who have not assigned their interests
 by expulsion of any partner from the business that is allowed by the partnership
agreement
o (2) In contravention of the agreement, where the circumstances do not permit a
dissolution under ant other provision of this section, by the express will of any partner at
any time (may be wrongful though)
o (3) Any event that makes the partnership’s purpose unlawful
o (4) Death of any partner
o (5) By the bankruptcy of any partner
 reasoning: (1) bankrupt partner no longer is liable for debts, is shielded by the
bankruptcy; (2) trustee would take over all of the partner assets
 §32: Dissolution by Decree of the Court
 (1) On application by of for a partner the court shall decree a dissolution whenever:
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o
o
o
o
(A) A partner is declared insane
(B) A partner becomes in any way incapable of performing the contract
(C) A partner has committed an act that prejudicially effects the business
(D) A partner commits a breach against the partnership agreement or commits other
conduct where it is not reasonably practicable to carry on business with the partner
o (E) The business can only be carried on at a loss
o (F) Other circumstances
 (2) On the application of the purchaser of a partner’s interest:
o (A) After the termination of the specified term or particular undertaking
o (B) At any time if the partnership was a partnership at will when the interest was
assigned
 §38: Rights of Partners to Partnership Property During Dissolution
 (1) When dissolution not in contravention of the PA:
o When dissolution is not in contravention of the partnership agreement, partner shall be
paid in cash (have to either liquidate assets or sell business). Partner is entitled to receive
the value of investment: capital contribution + % of profits + GOODWILL
 Sell the business as a whole
 (2) Dissolution caused by the expulsion, allowed by PA agreement:
o If the partner is discharged from all personal liabilities, he shall receive only the net
amount due to him
 Dissolution caused by contravention of PA, effect on property/liability of other partners:
o Partner who has not caused dissolution the rights of the partners shall be:
 may have the partnership property applied to discharge his liability, and the
surplus applied to pay in cash the net amount owing to the respective partners
AND
 right against each partner who has caused dissolution wrongly to damages &
breach of the agreement
o ***If all the partners who have not caused wrongful dissolution desire to continue the
business they may do so. They may retain partnership property (no liquidation), but must
pay the wrongfully dissolving partner the value of his interest - any damages recoverable
by the pship. The wrongfully dissolving partner is indemnified from all past/future
liabilities
 Effect on wrongfully dissolving partner:
o A partner who has caused the dissolution wrongfully shall have:

If the partnership is not continued:
 Partnership property applied to discharge his liability
 Surplus after liabilities are discharged - any damages for breach
 If the partnership is continued:
 Value of his interest - any damages caused in breach
 Partner is discharged from liability of all past/future liabilities
 No interest in the value of the good will
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K. Expulsions from Partnership -- Fiduciary Duties
 Partnership
o Does expulsion violate a fiduciary duty?:




A partnership remains at will notwithstanding that one partner has reported overbilling by another partner;
fiduciary duties do not stop an expulsion in this case.
 The only way to set breach a fiduciary duty is to expel is bad faith (for the remaining partners
personal profit)
 Fiduciary duty does not encompass a duty not to expel because there is no duty to remain
partners.
Other instances where fiduciary duties were not breached by expelling partner:
 For purely business reasons
 To protect the relationship of the firms clients
 For not being as productive as the firm expected
 Loss of trust
 “Fundamental schism”
 Personal & Professional conduct abrasive to fellow partners & clients
 Recovering alcoholic (afraid of relapse)
 Explicit reasons provided in the partnership agreement (UPA 31(1)(d); 152.501(b)(3))
 Vote of a majority in interest and (a) it is unlawful to carry on the partnership business with that
parter or (b) substantially all of partnerships assets have been sold (152.501(b)(4))
In order to be able to expel a partner, the PA must have a clause either:
 (a) Allowing expulsions for certain reasons or
 (b) Allowing expulsion at will
Examples of expulsion in bad faith:
 Cadwalader: partner in a law firm took a vote & put up names of less productive partners. These
‘less productive’ partners were expelled in order for the productive partners to get a higher profit
share. Found to be bad faith -- trying to keep from the expelled partner past & future profits, so
more money goes into your pocket.
o Breach of good faith: partners are using their discretion to take from the partners they
expelled a bargained for benefit
 Page v. Page: brothers operating laundry business at a loss for eight years, when start to make a
profit one brother wants out, and at this point they are 47K in debt. One brother is rich and the
other brother is poor, the rich brother wants out. HELD: breach of duty of loyalty -- “he was intent
to share the losses, but not the profits.” Court saw that he was just planning
o Does withdrawal when the partner has discretion violate a fiduciary duty?



Test from Konover v. Zeller:
 A parties decision about a projects feasibility when determining if the party should withdraw were
impressed with a fiduciary duty; BUT
 The expercise of that duty was to be viewed in light of all the facts of the case, including whether:
o (a) the plaintiff made full and frank disclosure of the relevant information
o (b) whether the consideration received was adequate
o (c) whether the defendant had access to competent, independent advice with regard to the
letter agreement; and
o (d) the relative degrees of sophistication and bargaining power between the parties with
respect to the letter agreement
Burden & Standard
 (1) Once fiduciary relationship is found to exist, the burden of proving fair dealing properly shifts
to the fiduciary that he/she acted fairly
 (2) The standard of proof the fiduciary must meet is proof by clearn & convincing evidence.
Bohatch v. Butler Binion- Bohatch, partner in a law firm, accused another partner of overbilling. After
conducting an investigation, the partnership determined that the allegations were false and expelled
Bohatch. Crt H: a partner may be expelled for accusing another partner of overbilling w/out violating any
fiduciary duties.
 Rationale: Partnership exists solely b/c the partners choose to place personal confidence and trust
in one another. Such charges (accusations re: overbilling), whether true or not, may have a
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


profound effect on personal confidence and trust essential to the partner relationship. Once charges
are made, partners may find it impossible to continue to work together to their mutual benefit and
the benefit of their clients.
Implications of this decision on firm culture: Shut up and put up with the working conditions.
Might discourage partners for reporting (if they aren’t going to protect a partner in this situation,
they surely aren’t going to protect an associate). The only incentive to report is compliance w/
ethical obligations.
How might decision going the other way have changed law firm culture? Firm might become full
of rats. People that report ethical violations will stick around (this might be a good/bad thing
depending on if they are true rats or liars). *Dangerous precedent- could apply across the board
to all partnerships.
Limited Partnership
o
153.155- A person ceases to be general partner on following events of withdraw: (3) general partner is removed as a
general partner in accordance with partnership agmt.
o 153.156. NOTICE OF EVENT OF WITHDRAWAL.A A general partner who is subject to an event that with the
passage of the specified period becomes an event of withdrawal under Section 153.155(a)(4) or (5) shall notify the
other partners of the event not later than the 30th day after the date on which the event occurred.

o
153.157- Withdrawal of GP in violation of Partnership Agreement: Withdrawal by GP of partnership for def
term or particular undertaking before expiration of that term or completion of that undertaking is a breach of the
partnership agreement.
o
153.158: Effect of Withdrawal: (a) If GP cease to be a GP through withdrawal, the remaining GPs or partners (or
if no more GP, a majority in interest of the LP) may:
(1) convert that GP’s partnership interest into that of a LP; or
(2) pay to the withdrawn GP in cash, or secure by bond approved by crt, the value of the partner’s
partnership interest minus the damages caused if the withdrawal constituted a breach of the partnership
agreement
(c) If there are no remaining general partners, the partnership may be reconstructed.
o
153.162: Das for Wrongful Withdrawal
(a)If GP’s w/drawal violates the partnership agmnt, partnership may recover das for breach, including cost of
obtaining replacement services
(b) Partnership may recover das by offsetting distribution to w/drawaling partner or reducing LP interest to which
GP’s interest is converted. (or pursue any other remedy available under applicable law)
Limited Liability Company
o
101.107: Withdrawal or Expulsion of Member Prohibited: A member of a LLC may NOT withdraw or be
expelled from the company.
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N. Judiciary Dissolutions

Texas Code: When a Judge is evaluating if the partnership should be allowed to continue after the disassociation of a
partner-- especially when the partner has engaged in “wrongful conduct” (conduct that is a derogation of the duties imposed
either explicitly by the partnership )
o Step 1: §152.501: The Judge must look to see if there has been an event of withdrawal--(b)(1)-(10)
 §152.501: Events causing withdrawal
 (a) A person ceases to be partner on the occurrence of an event of withdrawl
 (b) An event of withdrawal of a partner occurs on:
o (1) receipt by the partnership of notice of the partner's express will to w/drawl as a
partner on:
 (A) the date on which the notice is received; or
 (B) a later date specified by the notice
o (2) an event specified in the partnership agreement as causing w/drawl;
o (3) the partner's expulsion as provided by the partnership agreement (can provide for
expulsion at will in the partnership agreement)
o (4) the partner's expulsion by vote of a majority-in-interest of the other partners if:
 (A) it is unlawful to carry on the partnership biz w/that partner
 (B) there has been a transfer of all or substantially all of that partner's
partnership interest, other than:
 (i) a transfer for security purposes that has not been foreclosed; or
 (ii) the substitution of a successor trustee or successor personal
representative
 (C) Not later than 90th day after partnership notifies a partner that it will be
expelled b/c it has filed a certificate of termination or the equivalent, its
existence has been involuntarily terminated or its charter has been revoked, or
its right to conduct biz has been terminated or suspended by the jurisdiction of
its formation, if the certificate of termination or the equivalent is not revoked or
its existence, charter, or right to conduct biz is not reinstated; or
 (D) an event requiring a winding up has occurred w/respect to a nonfiling entity
or foreign nonfiling entity that is a partner…..
o (5) The partners expulsion by judicial decree if the judicial decree determines that the
partner:
 (A) the partner engaged in activity that adversely and materially effected the
partnership business
 (B) willfully committed a breach of
 i) the partnership agreement or
 ii) duty owed to the partnership
 (C) engaged in conduct that made it not reasonable practicable to carry on the
partnership business with the partner
o (6) the partner has:
 (A) become a debtor in bankruptcy
 (B) executing an assignment for the benefit of the creditor
 (C) acquised to the assignment of a trustee for all or substantially all of the
partners property
 (D) within 90 days failing to have the appointment vacated or a stay put in place
o (7) if the partner is an individual:
 the partners death
 appointment of a guardian; or
 judicial determination that the partner is otherwise incapable of performing the
partners duties under the partnership agreement
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o
o
o
(8) termination of the partner’s existence;
(9) if partner transferred all of the partnership interest, redemption of the transferee’s
interest
o (10) Request under 11.057 that the partnership be wound up by a partner
 Identify the category that fits the fact pattern
Step 2: is a two step process:
 (1) Must see if the partnership can continue, if the parties so choose: LOOK TO §11.057(d): under
the Texas Code one partners withdrawal does NOT CAUSE A WINDING UP -- the business remains,
majority in interest can continue the partnership & pay off the withdrawn partner:
 (a) Unless otherwise provided in the partnership agreement, a voluntary decision to wind-up the
partnership (other than in subsection (b)) express will of a majority in interest who have not
assigned their interest.
 (b) Unless otherwise provided for in the partnership agreement a partnership that is either: 1) has a
period of duration, 2) is for a particular undertaking, 3) PA requires winding up on a specified
event requires the express will of all of the partners.
 (c) An event requiring winding up of a partnership includes:
o (1) in a general partnership for a particular undertaking the completing of the
undertaking, unless provided for in the partnership agreement;
o (2) an event that makes the partnership business illegal & cannot be cured within 90 days
o (3) sale of all or substantially all the partnership assets outside the regular course of
business, unless provided for in the PA
 (d) If the partnership is not for a particular undertaking OR a specified period of duration no
one gets to windup unless the majority agrees. The continuation of the business by the other
partners without any settlement or liquidation of the partnership business is prima facie
evidence of an agreement to continue the partnership.
 (2) Must see if the dissolution was wrongful by the partner-- §152.503 (why does this matter? It has an
effect on whether the partnership can continue or not -- a) if the withdrawal is wrongful, then the
partnership only needs to pay the partners salvage value and continue in business; b) if the withdrawal is
not wrongful, the partnership must be wound up in order to pay the partner going concern value [but the
majority-in-interest can continue the partnership later])
 (a) At anytime prior to an event requiring winding up of the partnership business, a partner may
withdraw and cease to be a partner
 (b) Withdrawal is only wrongful if:
o (1) the withdrawal breaches an express provision of the partnership agreement;
 Face value argument: the partners must expressly state what instances cause a
breach of the agreement
 Monteleone argument:
 (1) even if there is no express agreement, if the partner breaches a duty
that is common to all partnership agreements (i.e. stealing from the
company is a breach of the express provision to split profits) then make
the argument that the partner owed a duty of good faith and breached
the express provision by acting wrongfully
 (2) (b)(1) is superfluous in regards to (b)(2) if you don’t allow (b)(1) to
apply to case like Monteleone where the partner was stealing from the
partners, firing employees with consulting w/o other partners, other bad
conduct).
o (2) in the case of a partnership that is for a particular duration, is for a particular
undertaking, or is required to windup on the happening of a specific event, before the
expiration of the completion of the undertaking, as appropriate:
 (A) partner withdraws by express will
 (B) partner withdraws by becoming a debtor in bankruptcy
 (C) for partners that are not individuals, a trust or an estate, the partner is
expelled or otherwise withdraws
o (3) the partner is expelled by judicial decree
 Face value argument: this just means that the partner is not expelled until the
judge expels him, any action taken before is not wrongful withdrawal
 Monteleone argument: “retroactive decree”
 (1) allow the partners to either engage in self help OR seek a temporary
restraining order to get rid of a partner who has engaged in wrongful
94
o
o

conduct (“conduct that is a derogation of the duties imposed either
explicitly by the partnership agreement or implicitly by virtue of the
nature of the partnership itself”)
 (2) then have the judge make a judicial decree stating that the
withdrawal was wrongful and apply it retroactively to the date the
partners first booted the adverse partner. Thus, the partner has
effectively wrongfully withdrawn.
Step 3: Result -- What does the partnership have to pay the partner? §152.602: Depends on whether he has
wrongfully dissolved or not….
 (a) redemption price when no wrongful withdrawal  must pay “going concern” the partners portion of
the stream of profits coming in from the assets as well as the value of the assets (i.e. fair market value of
the partners interst)
 (b) redemption price when wrongful withdrawal  the lesser of:
 FMV of partners interest on date of withdrawal
OR
 Amount the partner would have received had there been a winding up
Step 4: Policy for the Moneleone approach:
 (1) Allows a “wrongful” partner to be removed without the elimination of a thriving partnership businees
tha the rest of the partners want to continue
 (2) Practical solution for a code that was drafted without real problems in mind
Monteleone & The UPA Approach: Go through each section and explain how it applies to the facts at issue
o §29: Dissolution Defined
 Dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding up of the business
 Notice disassociation causes winding up under the UPA
o §30: Partnership not terminated on dissolution
 On dissolution the partnership agreement is not terminated, but continues until the winding up of the
partnership affair is complete
o §32: Dissolution by Decree of Court
 (1) On application by or for a partner the court shall decree a dissolution whenever:
 (a) a partner has been declared a lunatic
 (b) a partner becomes in any other way incapable of performing his part of the pship contract
 (c) a partner has been guilty of such conduct as tends to affect prejudicially the carrying on
of the business
 (d) a partner willfully or persistently commits a breach of the partnership agreement or
otherwise so conducts himself
o Monteleone: the case finds that (c) & (d) apply to lock outs that occur prior to anyone
filing a paper with the court, partners can self help
o Then court jumps to the conclusion that §38(2) applies after a dissolution under §32(c) or (d): Rights of Partners to
Application of Partnership Property:
 (2) When dissolution is caused by in contravention of the partnership agreement:
o (A) Partner who has not caused dissolution the rights of the partners shall be:
 may have the partnership property applied to discharge his liability, and the
surplus applied to pay in cash the net amount owing to the respective partners
(dissolving partner has a right to force liquidation unless an agreement made)
AND
 right against each partner who has caused dissolution wrongly to damages &
breach of the agreement
o (B)***If all the partners who have not caused wrongful dissolution desire to continue the
business they may do so. They may retain partnership property (no liquidation), but must
pay the wrongfully dissolving partner the value of his interest - any damages recoverable
by the pship. The wrongfully dissolving partner is indemnified from all past/future
liabilities
o (C) Effect on wrongfully dissolving partner:
 A partner who has caused the dissolution wrongfully shall have:

If the partnership is not continued:
o Partnership property applied to discharge his liability
o Surplus after liabilities are discharged - any damages for
breach
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


 Ie going concern
If the partnership is continued:
o Value of his interest - any damages caused in breach
o Partner is discharged from liability of all past/future liabilities
o No interest in the value of the good will
o the wrongfully dissolved partner get salvage value
Monteleone:
 §38(2) “conduct is wrongful” when it is taken in derogation of the duties duties imposed either
explicitly by the partnership agreement or implicitly by virtue of the nature of the partnership
itself.” DEFINED in §32(1)(c &D)
 Finds that §38(2) applies to a partnership at will -- “at will” is a kind of term
Monteleone analysis: Crt jumped to the conclusion that 38(2) applies after a judicial dissolution under
32(1)(c)&(d).
o The court says that since this conduct occurred [conduct warranting judicial dissolution
under 32(1)(c)&(d)], the partnership was wrongfully dissolved. -- we don’t need a court
decree under §32, the partners can self help themselves and then the court will apply §32
o Since there’s a wrongful dissolution, 38(2) applies.
o 38(2) provides that the partner who caused the wrongful dissolution is entitled to the
value of his interest, but this value doesn’t consider the goodwill of the partnership (just
bk val).
o This negates the language under 38(2) “in contravention of the partnership agreement”
b/c under 31 dissolution in contravention of the partnership agreement is only achieved if
dissolve by express will when there’s a definite term/ particular undertaking still in effect.
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O. Fiduciary Limits on Dissolution

Issue One: What is the legal classification of the firm’s actions?
o (1) Expulsion- first determine if the partnership agreement has a provision in it dealing with the right to expel partners
 UPA 31(1)(d): Partners have no CL right to expel or dismiss another partner from the partnership. They may
however, provide in their partnership agmt for expulsion.
 152.501 says also that withdraw occurs on the partners expulsion as provided by partnership agmt.
o (2) Withdrawal- If no provision, then see if partner voluntarily withdrew
o (3) if none of the above  Dissolution- If no provision for expulsion & partner didn’t voluntarily withdraw, then court
treats it as a withdrawal and dissolution must follow when determining what the rights of the expelled partners are
 UPA 31(d)- Absent a provision in the partnership agreement regarding expulsion, the removal of a partner may be
accomplished only through dissolution of the firm.
 UPA 22(d)- wrongful exclusion of one partner is grounds for judicial dissolution.

 152.501 doesn’t address how the firm’s actions are classified when they expel a partner when not provided for in the
partnership agreement. TX courts will probably treat it as withdrawal and apply 152.602(a) (“going concern”) as a
remedy.
Issue Two: What should the partner be paid back?
o Dissolution- (expulsion when not provided for in the partnership agreement)
 152.602(a)- would get redeemed for the fair value of the interest on the date of withdrawal (not sure if he would get
punitive damages though)
 No wind-up: Wind up likely isn’t required under TX Code b/c majority of partners aren’t wrongfully
dissolving.
 Rationale: shouldn’t let the mistake of management w/ regard to partnership law require dissolution of
a firm w/ hundreds of partners.
 “Going Concern;” value of capital contribution + assets + goodwill of firm
 Page v. Page- Partner may not use adverse pressure to freeze out a co-partner and appropriate the business to his
own use. A partner may not dissolve a partnership to gain the benefits of the business for himself unless he fully
compensates his co-partner for his share of the prospective business opportunity- remedy for breach of FD. (Unclear
standard b/c not sure what amt of $ parties will make off of the breach.) Crt also allowed punitive damages b/c of
wrongful expulsion.
 Cadwalader, Wickersham & Taft v. Beasely- Partner was expelled and it wasn’t provided for the partnership agmt.
This jurisdiction followed the UPA. UPA 31(1)(d): Partners have no CL right to expel or dismiss another partner
from the partnership. They may however, provide in their partnership agmt for expulsion. But absent such
provision, the removal of a partner may be accomplished only through dissolution of the firm. So b/c there was no
provision re: expulsion in the partnership agreement, partnership should have been dissolved. UPA 22(d)- wrongful
exclusion of one partner is grounds for judicial dissolution. But here it wasn’t. Court didn’t allow dissolution
(Why? don’t know). Court tried to compensate Beasely by giving him his interest in the partnership back (what he
would have received if they would have sold the partnership; everything in his capital acct). If crt had allowed
dissolution, would look to remedy under UPA 38(1), and Beasely would have the right to have the partnership
wound up & sold.
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P. Partnership Property on Dissolution

Physical Property
o
o
o
Rebuttable Presumption:
 Property is presumed to be partnership property if:
 1) purchased with partnership assets, even if not acquired in the pship’s name
 2) property bought by partner in capacity as a partner
 3) property purchased by the partnership in its name
 Presumption extends beyond the purchase with partnership funds to any acquisition of property
derived from the partnership labor, materials, or other assets.
Rebutting…
 To rebut the presumption look to the intent of the partners.
 Intent can be inferred from:
o The PA
o Their conduct
o No single factor determiniative
 Payment and Use alone do not conclusively establish property as partnership property
Texas Code Section:
 §152.102: : Classification of Partnership Property
 Property is property of the partnership if it is purchased:
o With partnership property; or
o Acquired in the name of the partnership; or
o Bought by a partner in his capacity as a partner (John, Partner in High Stakes)
o

Cases:
 In re Estate of Bollinger: partner allowed the partnership to use his property but the PA provided
that : 1) the property was transferred only for use; 2) required the partnership to pay his mortage;
3) lived on the property, 4) reserved the right to sell the property at will. These clauses were
found to rebut the presumption of partnership property.
 Eckart: farmer cooperative (partnership) -- one partner goes in and puts feed & other supplies
under his name, found to be property of the partnership-- look to intent of the partner when
purchasing: 1) purchasing for the partnership livestock; 2) partner would never agree to pay for
all of it himself.
Intangible Property -- Goodwill
o
o
Goodwill can exists either:
 1) in the partnership as an incident of the continuing business having locality or name  property
of the partnership
OR
 2) in the person -- attributable only to that person’s personal skills and talents  not property of
the partnership
Cases:
 Salinas: doctors formed a partnership as a radiologist company all under the same building. One
partner wants out, so they dissolve, and the other two partners stay in business at the same place
under a different name. Dissolving partner wants goodwill damages. HELD: the future good will
of the new partnership was held personally by Salinas w/ his contract in his name with the
hospital -- it was not partnership property.
 Geesbreght: physician owned corporation that supplied emergency rooms with doctors on a
contract basis -- over 100 doctors involved. Upon dissolution, the court found that the good will
belonged to the corporiation, not the individual doctors, because it was the reputation of the
corporation that the hospital was contracting for, not the individual doctors.
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**Goodwill
of the Company upon Dissolution
recall: if it is individual good will it is not subject to distribution
* Goodwill of an Entity: reasonable expectation of continued patronage of a business by its
clientele; reputation
*Factors for Goodwill:
-Continuity of Loation
-Continuity of Name
-Customer Lists
-Contracts with employees
-Customers & Suppliers
*Partners may contract around giving goodwill at withdrawal by including a term in the partnership agreement
*Goodwill & Law Firms:
CL: partnerships in business holding skills had no goodwill as a partnership
Modern: professional partnerships may have goodwill
*Definition of Goodwill as applied to Law Firms:
“ability to attract clients as a result of the firms name, location, or the reputations of its lawyers.”
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Fiduciary Duties Chart -- Highest Duty to Lowest
Case Name
Schock v. Nash
Konnover v.Zeller
Labovitz v. Dolan
King v. Backnerd
Facts
Law
Decedent gave neighbor POA.
Neighbor transferred property to
herself to keep the beneficiary of the
will, Thomas Jefferson University,
from getting it. Issue: Did the
neighbor exceed fiduciary duty? Crt H
decedent did not intend neighbor to
receive the property. As the neighbor
was unjustly enriched by the
appropriate of decedent’s prop, crt
ordered restitution.
Individual & a development company
form a partnership to build a shopping
mall. The individual signs the
modified PA which gives the developer
the sole discretion to back out of the
project “when it feels ths project is no
longer feasible” and be totally
reimbursed by the individual. The
developer decides after zoning issues
arise that the project isn’t feasible &
gives the individual notice of their
withdrawal. Do they have a fiduciary
duty when deciding to withdraw?
Creation of a POA imposes a fiduciary duty of loyalty
on the attorney in fact. An atty-in-fact, under the duty
of loyalty, has an obligation to act in the best interest
of the principal unless the principal voluntarily
consents to the atty-in-fact engaging in an
interested transaction after full disclosure. POA is
strictly construed & broad all-embracing expressions
are discounted. TC may carefully evaluate admissible
extrinsic evidence to determine if the principal
intended to make a gift/ consent to a strictly
enumerated act of dealing after full disclosure.
Test:
(1)A parties decision about a projects feasibility when
determining if the party should withdraw were
impressed with a fiduciary duty; BUT
(2) The expercise of that duty was to be viewed in
light of all the facts of the case, including whether:
(a) the plaintiff made full and frank disclosure of
the relevant information
(b) whether the consideration received was adequate
(c) whether the defendant had access to competent,
independent advice with regard to the letter
agreement; and
(d) the relative degrees of sophistication and
bargaining power between the parties with respect to
the letter agreement
Burden & Standard
(1) Once fiduciary relationship is found to exist, the
burden of proving fair dealing properly shifts to the
fiduciary that he/she acted fairly
(2) The standard of proof the fiduciary must meet is
proof by clearn & convincing evidence.
Dolan owned/ controlled CMC, which
was GP of CPI. CPI sold LP units to
investors. CMC made lots of $, but
purchased interest in another Dolancontrolled entity. CPI (LP) didn’t
distribute income, and thus the
partners had to pay taxes out of
pocket. Dolan, acting through another
entity, offered to buy back their
interest for $71K > they paidmarketed it as an opportunity to avoid
next tax liability.
Crt H: Dolan must prove that he
wasn’t acting adversely to the interest
of the LPs & didn’t breach the duty of
good faith
Duty of loyalty standard [fiduciary duty which
encompasses duty of GF, honesty, & fairness in
dealings w/ them & the funds of the partnershipCardozo lang; means D will lose] is required even
though it is disclaimed in the partnership agreement
(non-waivable). BOP shifts to the GP to prove by CCE
that as a fiduciary he wasn’t acting adversely (must
prove no breach of duty of loyalty- that the
transaction is equitable & just).
Client provided his attorney w/ a
broad POA after he left his W and
disappeared for yrs. POA said atty
could grant, convey, or sell property.
Atty transferred client’s interest in the
house to W. Client later sued atty. Crt
H that attorney did not have authority
to transfer. Here, atty was clearly
POA did create an agency relationship per se. But,
agent lacks the authority to gift the principal’s
property unless the power is: expressly conferred,
arises as a necessary implication from the conferred
power, or is clearly intended by the parties as
evidenced by the surrounding facts/ circumstances.
Based on the rules of construction, POA are always
strictly construed against the drafter. Crt is going to
Fiducairy Duty of Loyalty implied into all contracts!
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acting against client’s interest.
Sonet
Delaware Case & Statute
give effect to the word that extends the least amount
of power- in this case sell
Fiduciary Duties may be waived or abolished by a
written agreement by the parties.
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