BarBri Summer 2011

Agency & Partnership

A) Agency
1) Liability in Contract – Principal becomes liable to a third party through the actions of his agent if Agent and
Principal both consent to Agent’s acting for Principal, and Agent is subject to Principal’s control.
(a) The principal must have contractual capacity, but the agent does not.
(b) No writing required in N.C. There is no 1 year prong in SOF
(c) No equal dignity rule in N.C. (only for items that must be signed under seal)
(d) Consideration is not required.
2) Actual Authority
(a) Bar Exam Answer starts: This is an agency issue in a contract setting. The issue is whether the agent has actual
authority to bind the principal, and if not, whether there is a substitute.
(b) Creation of Actual Authority
(1) Express – creates actual authority even if principal is mistaken.
(2) Implied – Principal’s conduct leads the agent to believe he has authority.
(c) Actual authority must exist when the agent enters into the contract.
(d) Actual authority can terminate in a number of ways:
(1) After a specified time, reasonable time, or specified event.
(2) By change of circumstances (e.g. subject matter is destroyed)
(3) When the agent acquires an interest adverse to the principal’s.
(4) When the agent says so – agency is consensual.
(5) When the principal says so – unless it is irrevocable, or “coupled with an interest.”
(6) On death, incapacity or bankruptcy of either party unless the power is irrevocable.
( a ) Saying it is irrevocable doesn’t make it so.
( b ) A’s right to take a commission not an interest in the subject matter of the agency – revocable
1. Agent’s right to share in proceeds of sale is not an interest in terms of agency
( c ) Revocation is only effective upon receipt.
(e) Delegation: Ok if Principal consents (may be express or implied from circumstances)
3) Substitutes for Actual Authority
(a) Apparent Authority – The principal leads a third party to mistakenly believe A has authority.
(1) This protects an innocent third party who relies on P’s holding out A as an agent.
(2) The reasonable belief must be created at least in part by the principal.
( a ) Principal’s silence in the face of a statement of agency will create apparent authority
(3) Apparent authority can linger after actual authority terminates.
( a ) Must look at it from the third person’s perspective.
( b ) Principal must tell the third party that A has no authority.
(4) To destroy Actual Authority: Principal needs only tell Agent
(5) To destroy Apparent Authority: Principal needs to tell third parties of the termination
( a ) Much harder to destroy apparent authority because it can exist with several 3rd parties.
(b) Ratification
(1) If A contracts without actual or apparent authority, P can still ratify by expressly affirming the contract,
accepting its benefit, or suing on it.
(2) Requirements:
( a ) P must have actual knowledge of all material facts.
( b ) P must accept the entire transaction
( c ) P must have contractual capacity both at the time of ratification and at the time of the original
contract → ratification is retroactive. Ex. Corp. can’t ratify a contract made by a promoter before
the corporation existed (didn’t have contractual capacity when lease entered).
(3) B/c ratification is retroactive, we must protect the intervening rights of a BFP.
( a ) Ex. A, acting without authority, sells B’s car to C for $6K. B later agrees to sell it for $5K. B cannot
ratify A’s earlier sale because C is a BFP.
(c) Adoption
(1) Similar to ratification, but not retroactive.
(2) In promoter/corporation context, the effect is to make both of them liable.
(3) A promoter is still liable if the corporation adopts a K unless there is a novation.
4) Relationships of the parties
(a) Principal and Agent
(1) Agent owes Principal strict fiduciary duties, even if the agent is gratuitous:
( a ) Loyalty (must disclose and get permission before competing)
( b ) Reasonable Care (Depends on any special skills A has)
( c ) Obedience (must follow P’s reasonable instructions)
(2) Principal must compensate (unless gratuitous), reimburse, and indemnify Agent.

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(3) Broad range of remedies. (contract, tort, constructive trust)
(b) Principal and Third Parties (assuming actual or substitute authority)
(1) Principal is always liable to the third party.
(2) Third party is always liable to a disclosed principal or to a partially disclosed principal.
(3) Third Party is liable to an undisclosed P unless:
( a ) Liability would unduly burden Third party.
( b ) P fraudulently concealed her identity or
( c ) Third party was bargaining for A’s personal skills or reputation.
(c) Relationship of Agent and Third Party
(1) Third party is not liable to A unless A has an interest in the subject matter.
(2) A is not liable to Third party unless:
( a ) P is undisclosed or partially disclosed, or
( b ) A misrepresented his authority.
5) Liability in Tort – Vicarious liability to protect an innocent third party.
(a) Answer begins with: This is an agency question in a tort context. The issue is whether A is a servant acting
within the scope of his employment.
(b) If the tort committed by a servant acting within the scope of employment, both the master and servant are
jointly and severally liable to the injured party.
(c) Tortfeasor more likely a Servant (as opposed to an independent contractor) if:
(1) Employer has the Right to control, even if not exercised.
(2) Employer supplies the tools & workplace.
(3) Employment is long-term.
(4) Little skill is required.
(5) Work is part of the regular business of the employer, and
(6) Payment is made in regular intervals, not by the job.
(d) Master not automatically liable for all of Servant’s torts → must be w/in Servant’s scope of employment.
(1) If S was doing what he was hired to do, it is w/in the scope.
(2) If S was deviating from normal tasks, ask how substantial the deviation was.
( a ) A minor deviation is a detour → within scope.
( b ) A substantial deviation is a frolic → outside scope.
(3) S’s intentional torts are outside the scope unless:
( a ) Force is used to further M’s business (bouncer)
( b ) M ratifies the use of force (“good job”)
( c ) M authorizes S to commit an intentional tort.
(e) M & S are jointly and severally liable → T can sue either or both.
(f) Borrowed Servant Doctrine: Borrowed Master will be liable for acts of servant if he had the right to control
the servant.
(g) Direct Liability: M is directly liable for M’s own negligence if M fails to train or supervise employees or fails to
check an employee’s criminal records or job history.
(1) May be free from vicarious liability but still liable for own negligence.
B) North Carolina General Partnerships
1) A partnership is an association 2 or more persons to carry on as co-owners a business for profit.
2) Formation
(a) To determine who is a partner, look to the following factors:
(1) Intent, (court may find involuntary partnership to protect the interest of innocent 3 rd party)
(2) Capital investment (capital contribution is not required to be a partner)
(3) Control (right to control may be enough even if control is never exercised)
(4) Sharing Profits (anyone receiving a share of profits is presumed to be a partner)
(b) All this is talking about is a presumption.
(1) If getting profits as wages, rent, repayment of a debt or interest on a loan - no presumption
(2) Can still show from other evidence that a partnership exists
(c) No writing is required by partnership law or the Statute of Frauds.
(d) Partnership By Estoppel: If no partnership has been formed, parties may still be liable as if they are partners
to protect reasonable reliance by 3rd parties.
3) Property Interests
(a) Partnership property
(1) Whether property is partnership property is determined by intent.
(2) Factors to consider:
( a ) Who furnished the funds to buy the property.
( b ) How the property was used.
( c ) Who paid for repairs, maintenance, and insurance.

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( d ) Any pertinent agreement.
( e ) How title is taken (not dispositive: title may be held in partnership or one or more partners)
(b) Rights in partnership property
(1) The partnership’s rights in partnership property are unrestricted.
(2) A partner’s only right in partnership property is the right to use if for partnership purposes unless the
other partners consent. This right is not transferable.
(3) A partner has no right to use partnership property as collateral.
(c) Partner’s stake in the partnership itself – the firth to have a pro rata share of the profits
(1) IS transferable: May be transferred, attached, assigned, or devised.
( a ) It is like any other financial asset.
(2) This merely redirects the flow of profits to a third party. It does not confer management rights or any
other attributes of ownership.
4) Relations among partners
(a) Statute provides the default rules, but the partners can contract around the statute. Therefore, the partnership
agreement usually controls the relationship among the partners.
(b) Sharing profits and losses. Unless otherwise agreed (UOA):
(1) Partners share profits equally.
( a ) Not in proportion of capital contributions (UOA)
(2) Partners share losses in the same proportion as they share profits.
(3) Partners cannot limit the rights of third parties (liability agreements).
( a ) Will be effective among themselves, but not effective against 3rd party.
(c) No partner is entitled to a salary for working to benefit the partnership (UOA).
(d) Even if ownership is not equal, the partners all have an equal vote unless otherwise agreed.
(1) Majority Rules (UOA)
(e) Partners can be indemnified with interest if they pay the debts of the partnership.
(f) Partners owe the partnership a duty of:
(1) Care,
(2) Loyalty, and
(3) A duty to render full information about the partnership on demand.
(g) Partners can inspect the books, can get a formal accounting when just & reasonable.
(h) Admission of new partners (UOA)
(1) Must be unanimous unless otherwise agreed.
(2) A new partner is not personally liable beyond his interest in the partnership, for debts incurred before
he’s admitted.
(i) An outgoing partner is liable for the partnerships outstanding debts unless relieved of liability by a particular
creditor.
5) Relation Between Partners and Third Parties
(a) Apply agency principles.
(1) Actual authority can be conferred by:
( a ) Partnership agreement.
( b ) Majority vote of partners.
( c ) Statute → makes every partner an agent of the partnership for carrying out its business in the usual
way, unless negated by the partnership (not absolute, may be negated by partners).
(2) Apparent authority can be created by:
( a ) A partner’s title,
( b ) The partner has conducted business for the partnership in the past, or
( c ) The way similar firms in the area conduct business (not created by principal, but gives 3d party
reasonable belief).
( d ) Torts: Partners are owners, so all that matter is whether the tort was committed within the
ordinary course of the partnership’s business
(b) Liability for Partnership Obligations
(1) The partnership itself is liable.
( a ) The 3rd party does NOT have to try to recover from partnership first.
(2) Partners are jointly and severally liable.
( a ) Partners have a right to be indemnified by the partnership and to get contribution from the other
partners for their share of the loss.
(3) Limited Liability Partnership (LLP)
( a ) Partners are not liable for partnership obligations except their own torts.
1. Not personally liable for breach of contract (partner is only agent)
( b ) The partnership will be liable for partnership liability.
( c ) Formed by filing an application with the N.C. Secretary of State and pay a fee

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1. Name must include words or an abbreviation indicating that the firm is an LLP.
(c) Conveyance of property by a partner
(1) When title to property is in the partnership name, any partner can convey title to the property by a
conveyance executed in the partnership name.
(2) When title is in the name of one or more of the partners, but not all, and doesn’t disclose the rights of the
partnership, the partners in whose name the title stands may convey title.
(3) When title is in the name of one or more or all of the partners, or in a third person in trust for the
partnership, a conveyance executed by a partner in the partnership name, or in his own name, passes the
equitable interest of the partnership.
(4) When a partner conveys property w/out authority, the partnership can recover the property unless the
grantee, in GF conveyed it to another good faith purchaser for value.
6) Dissolution (Dissolution----->Winding up----->Termination)
(a) Dissolution of a partnership is the change in relationship between partners. A partner ceases to be associated in
the carrying on of the partnership. It doesn’t mean the partnership is winding up.
(b) Causes
(1) End of a definite term OR accomplishment of a particular undertaking.
( a ) If partnership wrongfully dissolved, before definite term up or the task is finished, the partnership
is gone, but the party who ended it is liable for breach of K.
( b ) If all partners agree to dissolve there is no problem.
(2) A partner’s express will or withdrawal.
(3) Expulsion of a partner under the partnership agreement.
(4) By operation of law: bankruptcy or death of any partner; on the bankruptcy of the partnership or if the
partnership’s business becomes unlawful.
(5) Entry of a judicial decree.
(c) Winding Up:
(1) Old Business – A partner who has not wrongfully dissolved can wind up partnership affairs.
(2) New Business
( a ) Determining whether the partnership is liable.
1. A partner may continue to have apparent authority to act for the partnership after dissolution
even if he is not winding up affairs.
2. Partnership must provide notice of dissolution. (to creditors)
a. If creditor knew the partnership had dissolved, they cannot make the partnership liable
off of apparent authority.
b. Prior creditors are entitled to personal notice (write or call).
c. Others who knew of the partnership are entitled to newspaper notice.
d. Those who did not know of the partnership are not entitled to any notice.
3. If the partnership fails to provide proper notice, it will be liable on post-dissolution obligations
unless the third party learned of the dissolution in some other way.
( b ) If the partnership is liable, the partners are joint and severally liable.
( c ) Partners generally cannot get contribution. Exceptions:
1. If partner did not know of dissolution by express will before making a purchase.
2. If partner did not know of or have notice of dissolution bankruptcy or death.
(d) Distribution of Partnership Assets After Dissolution
(1) Priority of Payment or Assets:
( a ) 3rd Party Creditors,
( b ) Partners, other than for capital and profits (e.g. Loans, Salary),
( c ) Partners for Capital,
( d ) Partners for Profits,
(2) If there is not enough money, the rest of the liabilities are partnership losses, which partners bear in the
same way they share profits.
(e) Creditors’ Rights After Dissolution
(1) Partnership creditors have priority on partnership assets.
( a ) If both sets of creditors assert claims against separate property:
1. NC Partnership law: separate creditors have priority over separate property
2. Federal Bankruptcy law: both sets of creditors have EQUAL claims on sep
property.
(f) Continuing Partnership Business After Dissolution
(1) All partners who have not wrongfully dissolved must consent (UOA).
(2) Creditors of the dissolved partnership become creditors of the new one.
(3) Continuing partners must compensate the partner who is withdrawing.
( a ) If partners agree, he gets that amount.

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( b ) If they can’t agree, he gets his interest in partnership as of dissolution + either market rate of interest
or pro rata share of profits.
(4) A partner who wrongfully dissolves is not entitled to compensation for goodwill and is liable to other
partners for breach of contract.
C) Limited Liability Partners (LLP)
1) Exactly like a general partnership, except for vicarious liability of partners.
2) A partner in an LLP is not liable for any obligation of the LLP except his own torts & malpractice.
3) The LLP itself is liable for torts committed in the course of its business & Ks executed by an agent.
4) Formation
(a) Must file an application with the Secretary of States Office.
(b) Must use “LLP,” “L.L.P.,” “RLLP,” “R.L.L.P.,” or the words spelled out in the name.
(c) Must file an annual report with the Secretary of State.
D) Limited Partnerships (LP)
1) Nature & Formation
(a) It is a partnership with one or more general partners and one or more limited partners.
(b) Name must contain the words “Limited Partnership,” or “LP,” or “L.P.”
(c) Must file certificate with Secretary of State.
(d) General partnership law governs except where the L.P. statute is inconsistent.
2) Liability of Limited Partners
(a) General Rule: The liability of a limited partner is limited to her capital contribution, even if he participates in
control of the L.P.
(b) Rare exceptions where limited partner may be liable.
(1) If the certificate omits a material fact & the limited partner knows it.
(2) If a limited partner knowingly lets her name be included in the LP’s name. But liable only to creditors who
did not know he was a limited partner.
(3) If no certificate is filed – But can avoid future liability by filing a certificate or withdrawing from the L.P.
within a reasonable time.
(c) Limited partner can withdraw from an L.P. only if provided for in the L.P. agreement.
3) Liability of General Partners
(a) General partners in a limited partnership are jointly and severally liable.
(1) Exception: Limited Liability Limited Partnership (LLLP)
( a ) Where all the partners are shielded (combines LLP and LP)
(b) Limited partnerships may not become limited liability partnerships. § 59-84.2.
4) Distribution of Assets After Dissolution –
(a) Outside Creditors i
(b) Limited Partners who are creditors,
(c) General Partner creditors
(d) To Partners for Interim distributions & distributions on withdrawal.
(e) To Partners for return of capital
(f) To Partners for Profits (split according to LP agreement or if not provided: proportion to cap contrib.)
5) Uses of limited partnerships:
(a) Loopholes for real property ownership and tax shelters were closed.
(b) Still good for estate planning – family limited partnerships, but can do the same thing with LLC.

Limited Liability Companies (LLC)

I) Formation
A) Like a corporation
B) Name must have “LLC,” “L.L.C.,” “Limited Liability Company,” “Ltd.,” or “Co.”
C) Professionals can form PLLCs.
II) Benefits – Total flexibility & no vicarious liability
A) Can be structured like a corporation or a partnership.
B) Must file annual report and pay annual fee.
C) Taxed like a partnership (pass through) unless opt to be taxed like a corporation.
D) Members not liable for any LLC obligations except their own torts.
E) The LLC itself is vicariously liable on agency principles.
 LLCs are an entity for most purposes, but are treated as an aggregate for other purposes
o a) Aggregate: taxation and citizenship
 i) a group of people doing something
 ii) citizenship: LLC’s are like partnerships. Look at members to determine citizenship of the LLC.
 Distinctions

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o Terminology: member, manager, Aritcles of organization, operating agreement
o Management – every member is a manager; every manager is an agent
 Contributions
o Can be cash, property, services, or any other binding obligation
o Non-cash contributions valued at FMV on date of contribution
o Promise enforceable only if in writing signed by member
o Promise is enforceable even if member is unable to perform. (dead, disabled)
 Distributions
o Default – made in proportions to contribution
 Membership interests
o Assignable, subject to charging orders
o Assignment does not make assignee a member
o Assignment does not dissolve LLC
 Withdrawal and Dissolution
o M’s can withdraw only as allowed in AOO or OA
o OA or AOO are silent, dissolution requires: 1) written consent of ALL members, or 2) dissolution.
 LLC recent cases
o Membership interest can’t be seized to satisfy a judgment
o Judgment creditor’s only remedy is a charging order against distributions
o LLC’s managers owe fiduciary duties to LLC itself, not to other members or managers
 “Like directors, managers of a limited liability company also owe a fiduciary duty to the company, and
not to individual members. Cf: Partners owe f.d.s to one another.