Liability in K

P becomes liable to 3rd party on a K entered into by P's agent if: 

A & P both consent, and

A is subject to P's control

P must have contractual capacity…but A does NOT

Agency law requires NO writing, but SOF may 

Consideration is NOT required

Actual Authority

Actual authority may be created in 2 ways:

Express - P expressly tells A to act on P's behalf (note:  applies even if P is mistaken about the subject matter or the agent's identity)

Implied - P's conduct leads A to believe A has authority

Terminating Actual Authority

Actual authority may be terminated in the following ways:

1. After a specified time, a rzbl time, or a specified event occurs,
2. By change of circumstances (e.g. subject matter destroyed),
3. When A acquires an interest adverse to P's (e.g. joining P's competitor),
4. When A says so (agency is consensual),
5. When P says so unless the power is irrevocable ("coupled with an interest"),
6. On death, incapacity or bankruptcy unless the power is irrevocable

Note:  Delegation is okay if P consents (can be express or implied

Substitutes for Actual Authority

Apparent Authority

Ratification

Adoption

Apparent Authority

P leads T to believe A has authority (can ONLY exist in mind of third party)

• Protects innocent T who relies on P's holding out A as agent
• Reasonable belief must be created by P, NOT A alone (P's silence may be enough)
• Can linger after actual authority is terminated (P can protect himself by notifying T that A no longer has authority to act on his behalf)

Ratification

Even if A had no authority when he acted, P can ratify by:

Expressly affirming the K,

Accepting the benefit of the K,

Suing T on the K

Requirements

P must have knowledge of ALL material facts,

P must accept the entire transaction,

P must have contractual capacity BOTH at the time of ratification and time of the original K 

Notes: Ratification IS retroactive

Must be concerned about the intervening fights of BFPs 

Adoption

Adoption is NOT retroactive

The P and the A are liable on the K…UNLESS there is a novation

Relationship of Principal & Agent

A owes P strict fiduciary duties, even if agency is gratuitous:

Duty of care

Duty of loyalty

Duty of obedience

P must compensate and reimburse A

Both P and A have a broad range of remedies (K, tort, constructive trust, etc) 

Relationship of Principal & Third Party

P is always liable to T

T is always liable to a disclosed P or partially disclosed P

T is liable to an undisclosed P UNLESS:

Holding T liable  would unduly burden T

P fraudulently concealed her identity, or

T bargained for A's personal performance

Relationship of Agent and 3rd Party

T is not liable to A UNLESS A's power is coupled with an interest

A is not liable to T UNLESS: 

• P is partially disclosed or undisclosed, or
• A breached her warranty of authority (said she had authority when she didn't)

Liability in Tort

Policy - to protect innocent 3rd party

Key - Was the tort committed by a servant acting w/in scope of employment?

A servant is more likely a servant (as opposed to  an IC) if:

• Employer has the right to control performance, even if not exercised,
• Employer supplies tools and workplace,
• Employment is long-term,
• Little skill is required,
• The work is part of the regular business of the employer, and
• Payment is made in regular intervals, NOT by the job

Scope of Employment

Master is NOT automatically liable for every tort committed by servant… must have been acting within the scope of employment

If servant was doing what he was hired to do, the tort was within scope:

If servant was deviating from normal tasks, must determine extent of deviation:

Minor deviation (detour) - is usually within the scope

Substantial deviation (frolic) - is usually outside scope

Master is NOT liable for servant's intentional torts committed within scope, UNLESS:

• Force is used to further master's business (e.g. bouncer),
• Master ratifies the use of force ("nice job"), or
• Master authorized the intentional tort (e.g. misrepresentation)

Joint & Several Liability

If servant was within the scope of employment, BOTH master and servant are J/S liable, but T can only recover one total satisfaction)

Note:  master may have right of indemnification against servant

Negligence

Master may be directly liable for master's own negligence if master fails to properly train or supervise employees or fails to check an employee's criminal record or job history.

Note:

this is true even if tort committed by servant while he was on a frolic

Factors indicating Formation of a partnership

• Intent - court still may find involuntary p'ship to protect innocent 3rd parties
• Control - right to control may be enough, even if not exercised
• Capital Contribution - not required, but a factor
• Sharing in Profits - NO presumption of p'ship, just a factor

Factors NOT taken into account for Formation 

• Receipt of wages, rent, repayment of debt, or interest on a loan
• Getting a percentage of gross receipts instead of profits

Formation Formalities

• General K principles apply since a p'ship is a K among partners
• NO writing is required by p'ship law, but may be required by the statute of frauds (1 year rule, equal dignities rule . . .)

Joint Venture

Treated like a p'ship, but requires an express agmt on sharing of losses

P'ship by Estoppel

If no p'ship has been formed, parties may still be liable AS IF they are partners in order to protect rznble reliance by 3rd parties - Like apparent authority in agency law

Apply this on a creditor by creditor basis

Both parties can be held liable here

Classifying Partnership Property

• If it is acquired in the p'ship name
• If it is acquired in the name of one or more partners with an indication in the instrument transferring title that it's being acquired for a p'ship
• Property acquired with p'ship funds is PRESUMED to be p'ship property
• Property acquired in the name of one or more partners, without p'ship funds, is PRESUMED NOT to be p'ship property if the instrument transferring title does NOT indicate the property is being acquired for a p'ship

Rights in the P'ship Property

• The p'ship's rights are unrestricted - they own the sticking property --> their creditor can go after it
• A partner's only right in the p'ship property is the right to use it for p'ship purposes, UNLESS the other partners consent 
• A partner has NO rights in the p'ship property that he can transfer --> can't pledge it as collateral for a personal loan

Partners interest in the P'ship

• May be assigned, attached, devised or transferred
• Doing this only redirects the flow of profits and does NOT confer management rights or any other attributes of ownership
• This is community property

Law controlling p'ship Relationship

TRPA supplies the default rule, but the partners can always contract around it

Default rules under TRPA

• Sharing profits and losses** - split equally, NOT in proportion to capital contribution
• Split losses in same proportion as profits are split --> cannot agree to limit liability in relation to a 3rd party, would only be effective as an indemnification agmt b/t partners
• Remuneration - don't get compensation w/o an agmt
• Management rights - matters of ordinary business are decided by a majority in interest and NOT by a majority in #
• Indemnification and interest - paying off of debts or obligations entitles a partner to get paid back with interest
• Admission of new partners - need unanimous consent

Fiduciary Duties b/t partners

Owe strict fiduciary duties to the p'ship which can't be eliminated, but an applicable std may be set up as long as it is not manifestly unrznble

• Duty of care of an ordinarily prudent person in similar circumstances
• Duty of loyalty
• Duty to exercise good faith
• Duty to render full information about the p'ship on a rznble request

Liability of a Newly admitted partner

NOT personally liable on the debts incurred before admission, but their interest in the p'ship could be at risk

Relations b/t Partners and 3rd Parties

Apply the principles of agency: actual authority, apparent authority; ratification; adoption

Actual Authority May be conferred by: 

• The p'ship agmt
• A vote of the partners
• The statute, which makes every partner a p'ship agent for carrying on its business in the usual way, BUT can be negated by partners

Apparentl Authority May be conferred by: 

• A partner's title
• The way the p'ship has conducted business in the past
• The way similar firms in the area conduct business

Tort liability of a p'ship for acts of another

• If an employee use vicarious liability analysis
• If a partner, don't need to determine if they are a servant, just look at whether it was committed in the scope of the p'ship

Conveyance of Real Property by a Partner

• Principal is NOT bound if the agent lacks authority
• But if the property is sold by the 3rd party to a 4th party, who is a BFP, then the p'ship is stuck with the sale

Liability for P'ship 

P'ship itself is liable

The partners are JOINTLY and SEVERALLY liable for all p'ship obligations 

Still, the creditor MUST exhaust partnership resources before it can recover individually from the partner

Partner who pays has a right of indemnification from the p'ship and contribution from the other partners

Notice to a Partner

Imputed to the p'ship

Event of Withdrawal

• P'ship receipt of notice of a partner's express will to withdraw
• The occurrence of an agreed upon event
• A partner's expulsion, death, bankruptcy, or incapacity
• The appointment of a trustee, receiver, or liquidator for a partner
• The termination of a partner that is a business entity
• The redemption by the p'ship of a transferee's interest in the p'ship
• The conversion of the p'ship if the partner did not notify the p'ship in writing w/in 60 days of his desire not to withdraw

Effect of Withdrawal

Generally no big deal, the p'ship usually buys out the withdrawn partner for fair value and continues without her

Liability of a Withdrawing Partner

• To existing creditors, UNLESS released
• To subsequent creditors who rznbly believed she was then a partner AND were unaware of the withdrawal --> lasts for 2 years
• To other partners if the withdrawal was wrongful (breach of p'ship agmt)

-P'ship at will (all p'ship without a definite term or a particular undertaking) allows a partner to withdraw at ANY time w/o ANY penalty

Apparent Authority of a Withdrawn Partner

Withdrawn partner has this for 1 year if the 3rd party is unaware of the withdrawal

P'ship can seek indemnification from the withdrawn partner since she had no apparent authority to bind the p'ship

Events that REQUIRE a PS to be wound up

• Occurrence of an event that makes a PS's business illegal
• Sale of substantially all PS assets OUTSIDE the usual course of business
• Entry of a judicial decree requiring winding up of the PS
• End of a definite term, completion of a particular undertaking, or occurrence of a specified event;
• Unanimous consent in a PS for a definite term, etc.
• In a PS at will - agreement of a majority in interest of partners who have not assigned their PS interests

Distribution of PS Assets 

1st - Pay creditors

2nd - Pay to partners for what is in their capital accounts (contributions + profits - losses)

PS Assets Insufficient to Cover Liabilities

Follow same priorities.  If there is NOT enough $ to pay all the obligations, so the creditors split the money pro rata.  The rest of the debt & the partners' capital contributions are PS losses, which are split by the partners in same proportion as profits (UOA). 

Creditors' Rights

• PS creditors have priority on PS assets
• All creditors have equal claims on separate property of the partners

Tort Liability (LLPs)

A partner in an LLP is NOT liable for torts committed by other partners or LLP employees unless he:

• Was directly involved in the activity
• Was supervising the tortfeasor; or
• Had notice or knowledge of the tort & did nothing to prevent it

A partner is STILL liable for his OWN torts, malpractice, etc

The LLP ITSELF is vicariously liable for torts within the scope of its business

Contract Liability (LLPs)

Partners in an LLP are NOT liable on LLP contracts (BROAD SHIELD)

The LLP ITSELF is vicariously liable (assuming actual authority or a substitute)

Formation (LLPs)

• Must register annually with SOS and pay annual $200/partner fee
• Must include the words LLP, etc.
• Must carry $100,000 in liability insurance or segregate $100,000 in funds

Nature/Formation (LPs)

Definition: A PS having one or more general partners [generally liable for PS debts] & one or more limited partners [liability limited to investment

• Must file certificate with SOS and pay fee
• Must include words Limited Partnership, LP, etc
• General PS law governs except where LP statute is inconsistent

Liability (LPs)

General rule - Liability of limited partner limited to her capital contribution

Exception - Where a ltd partner takes part in control.  The statute does not say what "control" is - but it does provide certain safe harbors:

Being employed as a maitress

Advising the general partner

Guaranteeing a note for the LP

Scope of Liability for Participating in Control (LPs)

Reliance Test - Ex) C signs a bank loan on the LP's behalf.  Her conduct leads the bank to mistakenly believe she's a gen partner.  Bank can recover from her individually IF it rzbly believed she was a gen partner based on her conduct

Determine on a creditor-by-creditor basis

Rights/Obligations of Limited Partners (LPs)

A promise to contribute is enforceable ONLY if it is in writing

Can withdraw by agreement or by giving 6 months notice to each gen partner

Rights/Obligations of General Partners (LPs)

Same as in general PS

• If someone didn't want to risk their assets as a general partner - they could make someone whose broke or a corp the sole general partner b/c the statute doesn't require the general partner to have ANY assets at
• BUT a limited partner may not want to do this b/c they would not be able to exercise control w/out risking liability
• The better solution is to form a limited liability limited partnership (LLLP), which limits the liability of general partners to the same extent as an LLP

Priority for Distribution of Assets on Winding Up (LPs)

Creditors, including partner creditors, are repaid

Limited Partners get back their capital contributions

Profits are distributed according to the terms of the LP agmt

Formation (LLCs) - Like a Corporation

• Must file articles of organization, have registered agent, etc
• Must include words Limited Company or LLC, etc
• Professionals can form PLLC but all members & managers must be licensed in Texas
• May have ONE or MORE members.  No contribution required.  If one or more persons own a membership interest, the regulations provide that others may be admitted as members without acquiring a membership interest.  RECENT CHANGE!

Management (LLCs)- Total Flexibility & Limited Liability

• Can be structured like a corporation or PS, but managers run LLC unless otherwise provided in AO
• Can be taxed as a PS or a corporation 
• Profits and losses are split in proportion to capital contributions, unless otherwise provided in the regulations (RECENT CHANGE)
• Members get limited liability for all obligations except their own torts but the LLC itself is liable on contracts & torts under agency principles

Points to Remember (LLCs)

• A partner or member is ALWAYS liable for his or her own malpractice
• A firm itself is always liable if the act was within the scope of its business
• Can convert from 1 form of business association to another or merge one into another by getting approval from the owners and filing the appropriate documents with the SOS