Ca Bar: Agency And Partnership (2009)

CA Bar 2009: Agency and Partnership QUESTIONS What’s the test for respondeat superior/vicarious liability? What does the P-A relp require? What does control entail? What are sub-agents? What are borrowed agents? What are the typical bar exam hypos for sub-agents and borrowed agents?

How are independent contractors diff from agents? What’s the rule for IC’s? When can they be held VL?

What are the scope factors and subfactors? (5)

Are principals V/L for the intentional torts of their agents? What are the exceptions? (3)

What is the test for whether a P is liable for K’s entered into by A? What are the types of authorization? What is the rule for actual express authorization?

AGENCY LAW PART I: LIABILITY OF PRINCIPAL TO 3RD PARTIES FOR TORTS OF AN AGENT A. Whether the principal will be vicariously liable for torts committed by the agent? B. Test: 1. A principal-agent relationship exists, and 2. Tort was committed by the agent w/in the scope of that relationship C. Principal-Agent Relationship 1. Requires: a. Assent: an informal agreement b/t principal (who has capacity) and agent b. Benefit: agent’s conduct must be for the principal’s benefit c. Control: principal must have the right to control the agent (or sub-agent) by having the power to supervise the manner of the agent’s performance 1) Sub-agents: P instructs A1 to do a task, who then asks A2 to do the task. A2 commits a tort. Can P be held liable? A) Rule: there can be no vicarious liability for a sub-agent’s tort unless there is assent, benefit, and the right to control the sub-agent. B) Tip: you usually can’t find assent b/c A2 didn’t strike an agreement w/ P, so no vicarious liability 2) Borrowed agents:Employer 1 borrows Employer 2’s agent, who then commits a tort. Is E2 liable to E1 for the acts of its agent? A) Rule: there can be no vicarious liability for a borrowed agent unless there is assent, benefit and control B) Tip: you surely will find assent and benefit for the borrowed agent’s help, but there is usually no right to control 2. Contrast agents w/ independent contractors? a. Distinguishing factors: no right to control IC b/c no power to supervise IC b. Rule: there’s no VL for the acts of an IC c. Exceptions: 1) Ultra Hazardous Activity Exception: if IC commits a tort while engaged in an ultra hazardous activity, then VL to the P (it’s a nondelegable duty) 2) Estoppel: if you hold out your IC w/ the appearance of agency, then you are estopped from denying VL d. Tip: brake repair can be ultra hazardous b/c tortious repair can result in death or IC is held out as agent of the mechanic. D. Scope 1. Scope factors: a. Was the tortious conduct likely to be w/in the job description of the agent? b. Did the tort occur on the job or somewhere else? 1) Frolic: new and independent journey  outside the scope 2) Detours: mere departure from an assigned task  in scope c. Benefit: if the agent even in part intended to benefit the principal  in scope 2. Tip: Employer will instructthe employee (so yes principal-agent relp is met) to do something. On the way back to work, employee does something resulting in a tort. Scope question results w/ detour and frolic issues. 3. Intentional Torts? a. Rule: intentional torts are generally outside the scope b. Exceptions: still in scope if intentional tort was: 1) Specifically authorized by the principal, or 2) Natural from the nature of the employment (ie bar owner-bouncer), or 3) Motivated by a desire to serve the principal PART II: LIABILITY OF PRINCIPAL FOR K’s ENTERED INTO BY AGENTS A. Whether a principal is liable to a third party for a K entered into by its agent B. Test: the principal will be liable only for its authorized K’s C. Types of authorizations: 1. Actual Express Authority 1

CA Bar 2009: Agency and Partnership What is the exception? When can actual expressed authority be revoked? What is the exception to the exception? What is the rule for actual implied authority? What is necessity? Custom? Prior dealings? What is apparent authority? What are the two common apparent authority hypos?

What is ratification? Elements? Can the principal pick and choose which K terms to ratify? Exception?

Summarize the rules of liability on the K? What’s the exception that can make the principal liable?

What duties are owed to the principal by the agent? What are the duties of loyalty? What are the principal’s remedies for breach of the DoL? QUESTIONS

a. Rule: principal used words to express authorization to enter into K; can be

oral, private (a whisper) and narrow (narrowly construed) Exception: but if the K itself must be in writing, then the express authority must be in writing as well 1) Writing: governed by SoF, ie conveyance of land c. Express authority can be revoked by: 1) Unilateral act of either party 2) Death or incapacity of the principal, thereby making the agent liable A) Exception to the death/incapacity exception: principal remains liable if principal gives the agent the durable power of attorney (written expression of authority to enter into a txn, using conspicuous survival language) 2. Actual Implied Authority a. Rule: authority which agent reasonably believes the principal has given b/c of: 1) Necessity: to do all tasks necessary to accomplish an expressly authorized task 2) Custom: to do all tasks which are by custom performed by persons w/ the position/title of the agent 3) Prior Dealings: to do all tasks which the agent believes to be authorized from prior acquiescence by the principal 3. Apparent Authority a. Test: 1) Principal “cloaked” agent w/ the appearance of authority, and 2) 3rd Party reasonably relies on appearance of authority b. Tip: apparent authority fact patterns: 1) Secret limiting authority: agent has actual authority but principal secretly limits that authority and the agent goes beyond the scope of the limitation. A) Result: Yes P is liable b/c P cloaked A w/ appearance of authority and 3rd party can rely on that appearance. 2) Lingering authority: actual authority has been terminated but afterwards, agent continues to act on principal’s behalf. A) Result, Yes P is liable. 3rd parties can continue to rely on the lingering authority until they receive notice of the termination of authority. 4. Ratification a. Rule: authority conferred after the K had been entered. Principal can be liable for the ratified txn/K if: 1) Principal has knowledge of all material facts on the K 2) Principal accepts benefits of K b. Exception: ratification cannot alter the terms of K or ratify in part. Ratification must accept the K as is. Unauthorized agents become liable for their unauthorized K’s. D. Rules of Liability on the K 1. General Rules a. If no authority, principal is not liable the K. If no authority, agent is liable on the K. b. If authority, principal is liable on the K. If authority, agent is not liable on K. 2. Exception: if principal is partially disclosed (only ID of principal is concealed) or undisclosed (fact of principal concealed), authorized agent may nonetheless be liable at the election of the third-party b.

PART III: DUTIES AGENTS OWE TO THE PRINCIPAL A. Duty to exercise reasonable care B. Duty to obey reasonable instructions C. Duty of Loyalty 1. Self-dealing: agent cannot receive a benefit to the detriment of the principal 2. Usurping the principal’s opportunity 2

CA Bar 2009: Agency and Partnership

3. Secret profits that otherwise could’ve gone to the principal

What formalities are required of gen partnerships? What is the def of a gen partnership? What is ‘sharing of profits?’

What rules govern partnership liability? What are gen partners liable for? What are the liability rules for incoming partners? For outgoing partners? What is the liability rule on partnerships and estoppels?

How to form a limited partnership? What’s the obligation of the gen partners? Of the limited partners? How to form an RLLP? What is the liability of partners in an RLLP? Why were LLC’s created? How to form? What is the liability of the owners? What are the state law characteristics? Summarize the LLC characteristics?

D. Remedies for the principal if agent has breached: 1. Principal may recover losses caused by the breach and 2. Principal may disgorge profits (unearn those profits made by the breaching agent) PARTNERSHIP LAW -tracks the Revised Uniform Partnership Act -may have to compare/contrast diff biz arrangements PART I: GENERAL PARTNERSHIP FORMATION A. Formalities: no formalities to becoming a general partnership, no filing, no writing etc. B. Def: an association of 2+ persons, who are carrying on as co-owners of a business for profit 1. Tip: bar q will give you a close call question where you can’t easily the nature of the arrangement. You will know what it is based on sharing of the profits. C. “Sharing of profits”-the contribution of capital (ie money or services) in return for a share of profits, if any, which creates a presumption that a gen partnership exists PART II: LIABILITIES OF PARTNERS TO THIRD-PARTIES A. Agency principles apply in context of partner liability b/c partners are just agents of the partnership. 1. Partners are agents of the partnership for carryon the usual partnership business 2. Partnership is bound by torts committed by partners in scope of partnership business 3. Partnership is bound by contracts entered by partners w/ authority B. General partners: are personally liable for debts/obligations of the partnership. 1. Tip: a. Incoming partners are generally not liable for prior debts but money paid into the partnership by the new partner can be used by the partnership to satisfy those pre-existing debts. b. Outgoing partners (dissociating partners) retain liability on future debts until actual notice of their dissociation is given to creditors or until 90 days after filing notice of dissociation w/ the state. C. General partnership liability by estoppels: one who represents to a third party that a general partnership exists will be liable to the third party as if they were part of the general partnership. (This is likely to appear in June!) D. Related biz form: Limited Partnership 1. Def: a partnership w/ at least 1 general partner and at least 1 limited partner 2. Formation: must form a limited partnership by filing a limited partnership certificate w/ state that includes: names of all general partners 3. Liability and control among gen partners: are still gen partners and this general partners are liable for all limited partnership obligations/debts, but they have the right to manage the business 4. Liability and control among limited partners: are not liable for the obligations of the partnership but they may not manage the business w/o forfeiting their limited liability status E. Related biz form: Registered Limited Liability Partnership: (RLLP) 1. Formation: register by filing a statement of qualification + annual reports 2. Liability: no partner is liable for the obligations of this partnership F. Related biz form: Limited Liability Companies 1. Originally, idea was to give to the owners (ie members) the same limited liability of shareholders in a corporation + the benefits of partnership (ie tax status: partnership tax: good; corporate tax: bad). 2. Formation: a. File articles of organization b. Adopt an operating agreement c. But you do not file any articles of incorporation. 3. Liability of owners: a. Owners (members) are not liable for obligations of the company itself b. By state law, must abide by 2 of the 3: 3

CA Bar 2009: Agency and Partnership

1) Owners have the right to manage (though this can be delegated to a team

What do gen partnerships owe to each other? What can they not do, per the DoL? What’s the remedy for breach by gen partners? What are the partnership property rights? What are some types of specific partnership assets? What is the share of profits and surplus? What is the share in management? Why is the partnership form illiquid? How do you tell if an asset belongs to the partnership or is personal property? What is the default management rule? How do you get around it? What is the default rule on salary? When can salary be given to a partner? What are the profit/loss sharing default rules? What are the profit/loss sharing perms?

What’s the default rule on dissociation? What is termination?

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of managers, thus the last 2 characteristics are taken on) 2) Membership interest in the LLC is illiquid to some extent 3) Life of LLC is limited Summary of traits of the LLC: a. Limited liability b. Limited liquidity c. Limited life d. Limited tax

PART III: RIGHTS AND LIABILITIES B/T PARTNERS A. General partners are fiduciaries of each other and the partnership 1. They owe each other and the partnership the DoL 2. Thus they cannot: a. Engage in self-dealing b. Usurp partnership opportunities c. No secret profits at partnership expense 3. Remedy for breaches: action for accounting a. In the action for accounting, the partnership may recover losses caused by the breach and also may disgorge profits made by the breaching partner B. Partnership property rights: 1. Specific partnership assets a. Ie land, leases or equipment owned only by the partnership b. Thus, no individual partner may transfer these assets w/o partnership authority 2. Share of profits and surplus a. Share of profits = personal property, owned by individual partners b. Thus, individual partners may transfer their share of profits to some 3rd party 3. Share in management a. Gen partners have right to share in partnership management b. Management = an asset owned only by the partnership itself c. Thus, no individual partner may transfer their share in management to some 3rd party. 4. Conflict b/t specific partnership assets and personal property: A general partnership is relatively illiquid b/c only 1/3 of the assets are liquid and transferable personal property a. Tip: how do you know if it’s personal property or something else? b. Test: whose money was used to buy the property? c. If partner money is used to buy  asset of the partnership. d. If personal money used to buy  personal property C. Management 1. Default rule: absent an agreement on management, each partner gets equal control/vote 2. If partnership agreement has unequal pay in and profit sharing, absent an agreement on management, it’s still 1 person, 1 vote. D. Salary 1. Default rule: absent an agreement, partners get no salary (they are not employees) even if they work unequal hours 2. Exception: for helping to wind up the business, partners get a salary for that time E. Partner’s share of profits and losses 1. Profit Rule: w/o an agreement on profits, they are shared equally 2. Losses Rule: w/o an agreement on losses are shared like profits 3. Hypos: a. If agreement is silent on profit loss and sharing  w/o agreement on profits, they are shared equally; w/o an agreement on losses, losses are shared like profits, thus shared equally here b. If agreement says profits are shared 60/40  w/o agreement on losses, losses are shard 60/40 c. If agreement says losses are shared 60/40  w/o an agreement on profits, profits are shared equally 4

CA Bar 2009: Agency and Partnership What is winding up? What are the liability rules during winding up for old business? What about brand new business?

What is the priority of distribution after dissolution? What happens if there’s not enough money/assets to repay the capital contributions?

d. A puts up all of the money. B does all of the work. C gives the partnership its name. D does nothing. How to share profits?  W/o an agreement, share profits equally.

PART IV: PARTNERSHIP DISSOLUTION A. Key terms: 1. Dissolution: a. Default rule: in the absence of an agreement that specifies events that will dissolve the partnership, dissolution occurs automatically upon notice of the express will of 1 general partner to dissociate b. Is the first stage of ending the partnership 2. Termination: real end 3. Winding up: period b/t dissolution and termination in which the remaining partners liquidate the partnership’s assets to satisfy the partnership’s creditors by selling off assets, contracting for the assets etc. (during this phase, partners can receive a salary) a. Liabilities during winding up: 1) Old business: partnership and therefore its individual general partners retain liability on all txns entered into to wind up old business w/ existing creditors 2) Brand new business: the partnership and therefore its individual gen partners, still retain liability on new biz until actual notice of dissolution is given to creditors or until 90 days after filing the statement of dissolution w/ the state B. Priority of Distribution 1. Each level of priority must be fully satisfied before beginning the next level 2. Order: a. Creditors must be paid: 1) Outside, nonpartner trade creditors, and 2) All partners or insiders who have loaned money to the partnership b. All capital contributions by partners must be paid 1) The partnership is liable to its own partners for the full repayment of their own capital contributions into the partnership 2) Only if outside and inside creditors have been paid. c. Then, profits and surplus, if any 1) Default rule: if no agreement, profits are shared equally 2) Or else follow agreement. 3. Rule: First each partner’s loans to the partnership must be repaid, and capital contributionsmust be repaid. Then add the partner’s share of profits or minus their share of losses. 4. Suppose all the assets are repaid to the insider and outsider creditors of the A-B Partnership, and there’s no money left but Partner B still hasn’t gotten his capital contribution of 200k. What result? a. Rule: The partnership is still liable to Partner B for his capital contribution. b. Thus w/ no assets left to repay B, the 200k is a loss. c. Rule: Share losses based on profit sharing. 1) Default: profit sharing is equal, thus loss sharing is equal. 2) A and B are each liable for the losses of the partnership. d. A and B each put in 100k to cover the 200k loss. e. B gets the 200k, his capital contribution.

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