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Agency and Partnerships
South Texas College of Law Houston
McGovern, Bruce A.

Agency & Partnership Outline – McGovern

Part I, Agency

I. The Firm and Its Agents and Servants

a. Problem 1.1

i. Facts: plaintiff’s son died of acute carbon monoxide poisoning after swimming behind a boat whose motor was manufactured by Mercury Marine, Inc.

ii. Plaintiff: Dealer is an agent of Mercury Marine because dealership…

1. Purchases manufacturer’s products for resale;

2. Performs warranty work on manufacturer’s products; and

3. Extends the manufacturer’s warranty to the consumer.

iii. Traditional rules of agency determine the existence of agency for purposes of venue:

1. An agent has the power to alter legal relations between the principal and third persons, and between the principal and himself.

a. Restatement 2nd Agency §12

b. The buyer’s warranty could not be altered by the dealer; therefore, the dealer is not able to alter the legal relationship with the customer.

2. An agent acts primarily for the benefit of the principal (i.e. a fiduciary relationship).

a. Restatement 2nd Agency §13

3. The principal has the right to control the conduct of the agent with respect to matters entrusted to that agent. Control is not defined rigidly (as a master-servant relationship) but the principal must have ultimate responsibility to control the outcome of his agent’s actions.

a. Restatement 2nd Agency §14J provides: “one who receives goods from another for resale to a third person is not thereby the other’s agent in the transaction; whether he is an agent for this purpose or is himself a buyer depends upon whether the parties agree that his duty is to act primarily for the benefit of one delivering the goods to him or is to act primarily for his own benefit.”

iv. The absence of any one of the three elements of agency defeats a claim that agency exists. All must be present.

v. A dealer who receives goods from a manufacturer for resale to a third person is not an agent of the manufacturer. The dealer acts primarily for his own benefit, not the benefit of the manufacturer.

vi. The relationship is therefore one of “buyer and seller” not “agent and principal.”

vii. In this case, the Dealer agrees to extend the warranty to any subsequent purchaser of the motor and notify Mercury Marine of the new holder of the warranty. This is not the same as a power to alter a legal relationship because the manufacturer (i.e., Mercury Marine):

1. Sells the product to the dealer for resale;

2. Unilaterally imposes the terms of the warranty prior to the sale to the dealer;

3. Forbids the dealer from altering the terms of the warranty in any way;

4. Requires the dealer to extend the warranty as part of the sale and notify the manufacturer of the new holder of the warranty; AND

5. Makes the warranty a part of the purchaser’s bargain when he/she purchases the product.

b. General definition of agency – Agency is the fiduciary relation which results from the manifestation of consent by one person (the principal) to another (the agent), that the agent shall act on the principal’s behalf and subject to the principal’s control, and consent by the agent to act. The parties don’t have to intend an agency relationship; nor do they have to be aware of an agency relationship. Restatement 2nd Agency §1.

c. Three essential factors: (1) agent has the power to alter legal relations between the principal and 3rd parties; (2) agent acts primarily for the benefit of the principal; (3) the principal has the right to control the conduct of the agent regarding matters entrusted to that agent.

d. Green v. H&R Block – class action was filed against H&R Block to determine whether they had a duty to disclose to customers the benefits it received from lending institutions to which it referred customers, who were seeking a bank loan in the amount of their anticipated tax refund. Plaintiff alleged breach of fiduciary duty based on an alleged agency relationship between plaintiff and defendant. Plaintiff alleged Block acted as an adverse party to its principal (the customers) and therefore violated its fiduciary duty by not disclosing information to customers.

i. Plaintiff appealed from a judgment of the Circuit Court for Baltimore City (Maryland), dismissing plaintiff’s claims and finding that defendant had no duty to disclose because no fiduciary obligation existed between defendant and plaintiff.

ii. Appeals Court: H&R Block acted as the taxpayer’s agent in preparing their income tax returns, and that the agency relationship included the process of securing RALs, because the taxpayers retained ultimate control over H&R Block’s actions in preparing and filing the tax returns and applying for the RALs.

iii. The court based its finding of an agency relationship as to the RALs on the fact that H&R Block “played an integral part in the customer’s receipt of the bank loan, which indisputably has legal ramifications for the H&R Block customer and the bank” p. 24.

iv. Additionally, the court emphasized that Block intended to create a scenario in which taxpayers would trust it to prepare and file their returns and obtain the most rapid refund possible resulting in the taxpayers’ reasonable belief that Block was acting as their agent.

e. Note: other cases have held to the contrary. For example, H&R Block does not have the power to enter into an RAL agreement on behalf of the customer. Block simply facilitated the process if the customer decided to apply for an RAL. Furthermore, the customer does not have the power to control the conduct of H&R Block.

f. Class notes: McGovern recommends reading the Restatement (Second) of Agency. For each assignment, start by looking at the statutes or sections that he’s provided. Work the problem last.

i. Basic issue for agency: will the agent’s action/inaction be attributed to the principal?

ii. Unincorporated business associations: are the partners liable for the actions of one?

iii. Primary fiduciary duty is the duty of loyalty. Under Restatement 2nd §387, the duty of loyalty requires the agent to act solely for the benefit of the principal in matters connected to the agency relationship.

II. The Firm and Its Owners

a. Class Notes (6/04): Sources of partnership law: UPA, RUPA, & TBOC.

i. UPA – National Conference of Commission on Uniform State Laws. Texas adopted the UPA except for certain provisions.

ii. RUPA – also promulgated by NCCUSL; adopted by 38 states. Texas adopted RUPA in 1993 (Texas Revised Partnership Act or “TRPA”), but has now adopted the Texas Business Organizations Code (“TBOC”) which applies to all forms of business organizations.

iii. TBOC – a “hub and spoke” structure. Hub = common provisions; spoke = provisions unique to each type of business organization when necessary (e.g., spoke for partnerships, spoke for corporations, etc.). For some provisions of the code, pay attention to the effective date of the code provisions, because it will make a difference on which code applies. TBOC is supposed to be a re-organization of Texas law.

iv. Co-owners must have some type of management rights and responsibilities.

b. Partnerships

i. Statutes:

1. Uniform Partnership Act (“UPA”)

a. §6(1). Partnership Defined – a partnership is an association of two or more persons to carry on as co-owners a business for profit. “Persons” is defined in §2. “Business” is also defined in §2.

b. §15. Nature of Partner’s Liability – all partners are liable (a) Jointly and severally for everything chargeable to the partnership under §§13 & 14. (b) Jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract.

c. §18(e). Rules Determining Rights and Duties of Partners – all partners have equal rights in the management and conduct of the partnership business. Majority of states have adopted this.

gate. Under the aggregate theory, there is no real partnership, it’s just a form of business made up of its individual partners.

3. Aggregate vs. Entity – If a partnership is a legal entity separate from each partner, then the partnership is the employer & the partner is not. If the partnership is considered an aggregate then it’s just a form of business that people use to make a profit.

4. Conceptual approach vs Functional Approach:

a. Conceptual: is the partnership an entity or an aggregate?

b. Functional: analyze issues on the merits and what makes the most sense in the context of the facts.

c. Limited Partnerships

i. Statutes

1. Revised Uniform Limited Partnership Act (“RULPA”). Promulgated in 1976; replaced the ULPA. Adopted by 36 states, including Texas.

2. §101(7). “Limited partnership” and “domestic limited partnership” mean a partnership formed by two or more persons under the laws of this state and having one or more general partners and one or more limited partners. The limited partner gives up his management rights in exchange for liability that is limited by his investment.

3. §302. The partnership agreement may grant to all or a specified group of the limited partners the right to vote (on a per capita or other basis) upon any matter.

4. §303(a). Liability to Third Parties – a limited partner is not liable for the obligations of a limited partnership unless he is also a general partner or, in addition to the exercise of his rights and powers as a limited partner, he participates in the control of the business. However, if the limited partner participates in the control of the business, he is liable only to persons who transact business with the limited partnership reasonably believing, based upon the limited partner’s conduct, the limited partner is a general partner.

5. §403.General Powers and Liabilities – a general partner of a limited partnership has the rights and powers and is subject to the restrictions of a partner in a partnership without limited partners.

ii. Cases

1. Life Care Centers of America, Inc. v. Charles Town Assoc. Ltd. Partnership – Under the “aggregate” theory of partnership, an agent’s fiduciary duty runs first and foremost to the individual partners who compose the partnership. However, under the “entity” theory of partnership, an agent’s fiduciary duty runs primarily to the partnership. The distinction of whether the fiduciary duty runs exclusively or primarily to the partners or the partnership becomes crucial when the interests between the partners and/or the partnership conflict. Under such circumstances, the agent will be required to act in the best interests of his “primary” principal, which in turn may require him to act against the best interests of the “subordinate” principal.

a. Holding: Agents of the limited partnerships not only owed a fiduciary duty to the partnership, but also to the partners.
This implicitly rejects the dichotomy that is presented by the “aggregate” and “entity” theories of partnership, finding that the limited partnership is a hybrid business structure with traditional “aggregate” aspects (i.e., the flow of fiduciary duty to the partners) and