Business Entities – Professor McClendon FALL 2014
The Limited Partnership + Fiduciary Duty (Lesson 1)
• Principle held responsible for K between A and B if there is an agent relat.
• Legal significance of particular relationship within the parties have chosen to conduct their business
• Study determine whether liability (K or tort) can be imposed on a person other than the one who actually breached the K or duty. Hierarchy
• Days of old: masters and lords had servants, lord’s send their servants to buy fish in the market, when servant enters in to K with fish monger on behalf of the Lord
• Provides ability of a person to bind another person
• Important in partnerships b/c partners will bind other partners
• Association of 2 or more persons who have manifested intention to co-own business for profit (not necessarily through a written K. manifest means words and mutual understanding)
• UPA 1914 adopted notion that a partnership is an entity
• 1997 UPA was re-written giving us RUPA
• RUPA provides statutory framework for partnerships with 2 set of rules (mandatory or default rules). Gives room for ppl to enter into their own agreement among themselves, but in default of any such agreement, RUPA provides rules.
• RUPA governs relationships between partners, which can be customized if they have a specific agreement or RUPA will give you default rules if there is not specific agreement
• Florida has adopted RUPA
• Byker v. Mannes: parties had a “super partnership” because they were sharing profits and liability for all their entities and investments. Partnership can occur whether or not the parties intend to form a partnership.
• “Carry on” as co-owners probably means more than 1 shot
• Florida Tomato Packers case: Yes, there is a partnership. You do not have to have an agreement to share loses, the absence of any expression to share losses does not matter
§8101(7) “Partnership” means an association of two or more persons to carry on as co-owners a business for profit formed under §620.8202, predecessor law, or the comparable law of another jurisdiction.
The general partnership:
• Partnership law, both judicial and statutory, provides a set of standard form for persons who wish jointly to own and operate a firm.
• Every state except Louisiana bases its partnership law on the Uniform Partnership Act (UPA 1914) or the Uniform Partnership Act (UPA 1997).
• Formation of a general partnership requires no written agreement or governmental action. All that is required is a statutorily specified mutual manifestation of consent. Under partnership law norms, the association of two or more persons to carry on as co-owners a business for profit creates a partnership.
• There are four defining characteristics of general partnerships:
(1) equal sharing of ownership and management functions: each partner also has an equal share of profits and responsibility. Also, each part performs three ownership and management functions:
a. residual claimant: ultimate risk bearer- share the risk
b. full and equal right to participate in management of the firm
c. equal right to act as an agent of the partnership
(2) Lack of adaptability and continuity? à if the partnership wishes to terminate its association with a partner, it may do so only by dissolving the partnership and paying the expelled partner the value of her interest in case. Also, the firms sacrifice adaptability because each partner’s right to participate and make decisions
(3) Unlimited personal liability: all partners are jointly and severally liable for all obligations of the partnership and there is no limit on this potential personal liability
(4) Fiduciary duty: fiduciary duty reduces the likelihood that one or more partners will misuse their ownership powers or rights because each partner owes a fiduciary duty to other partners
A. The Limited Partnership
a. A limited partnership is a business association composed of one or more general partners and one or more limited partners.
B. Separating of Ownership and Management Functions
a. In a limited partnership, ownership and management functions are divided among the firm's general and limited partners.
b. Under statutory default norms, limited partners have essentially no management power and no authority to act as agents in carrying out the partnership's business.
c. General partners are the active participants in the firm, empowered to make and carry out the firm's business policies.
C. Limited Liability
a. Limited partners are not personally liable for the limited partnership's obligations.
b. General partners, as in general partnership, are jointly and severally liable for the firm's obligations.
D. Firm's Continuity and Adaptability to Change Circumstances Favored Over Individual's Adaptability.
a. Under limited partnership default rules, general partners may withdraw from the partnership at will, but limited partners may not.
b. As in general partnership law, general partners make ordinary decisions by majority vote and extraordinary decision unanimously.
B. Emergence of Additional Limited Liability Entities as the Norm
a. Impetus for New Forms
a. Dissatisfaction with the risks associated with partnership form led smaller firms to adopt corporate form (often under a separate professional corporation code available in many states.)
b. Planners and policy makers considered and debated alternative means to provide the favorable tax treatment of general partnership form while avoiding its unfavorable limited liability rules.
b. The Limited Liability Partnership
a. One of the characteristics of the LLC is “limited liability.”
b. In other words, if an LLC were unable to satisfy its obligations, its owners (members) would lose only the capital they had actually invested in the company; LLC members would not be personally liable for the debts and obligations of the LLC that could not be satisfied out of the firm's assets.
c. Limited Liability Limited Partnership (LLLP).
d. The sole purpose of the two new entities was to make limited liability available as an opt-in default rule for firms operating as a general or limited partnership.
e. Once created, and LLP is governed by general partnership law in all respects except for special statutory liability and asset-distribution-limiting provisions d
uties and obligations to principal
· Principal has certain duties and obligations to agent
· Principal responsible for tortuous acts of agent within scope of agency
· Agent has the ability to enter into contracts for principal if endowed with authority
· Agent's knowledge is imputed to principal
Vicarious Tort Liability (the main thing is CONTROL!)
· ER/EE Relationship
· Control, with factors set forth in Agency 3rd, Sec. 7.07
· Act within scope of relationship
Non- EE Agents (Independent Contractors)
· Principals are not responsible for torts of independent contractors
· Exceptions where principal in control, inherently dangerous activity, non-delegable duty, negligent hiring.
Types of Authority [P= principal, A = agent, TP = third party] · Actual Authority (there is an expressed or implied agreement for action or inaction)
· Actual express authority
· Actual implied authority
· Apparent Authority
· About what a TP reasonably believes the principal has authorized to do
§ If P created apparent authority but A goes beyond scope of actual authority, A is liable to P for losses and damages.
· Granted after the contract has been made. Agent had no actual or apparent authority, but (1) did the principal manifest his assent to affirm the agreement and (2) will the law give effect to the assent
· Limitations on ratification
§ Principal must show of all material facts at time of ratification
§ Principal cannot ratify a transaction in part
§ Principal cannot ratify if TP withdraws
§ Denied where necessary to protect rights of innocent parties
· Liability of Undisclosed Principal
· UP liable where agent had actual authority
· Agent can't have apparent authority because no manifestation by UP
· Doctrine of liability of undisclosed principal – where P held liable for unauthorized transactions of A when TP has made a detrimental change in position, if the P had notice of possibility of detrimental change, and P did not take reasonable steps to notify TP of facts.
· Estoppel – keeps principal from arguing that no authority existed
· Equitable principle that prevents P from denying agency relationship exists
· Usually applies where P has done something improper
§ Acts or omissions by P that create appearance of authority
§ TP reasonably and in good faith acts in reliance on appearance of authority
§ TP changes position in reliance upon appearance of authority
· Different from apparent authority because TP changes position in reliance and no manifestation by P
· Binds the P but no the TP