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86 Cards in this Set

  • Front
  • Back
2 Agency Objectives
i.To minimize the inevitable divergence of interest b/t principal and agent
(Agents are required to prefer his principal’s interests to his own) AND

ii.To avoid disadvantaging 3rd parties who deal with agents rather than directly with principals
3 Elements of Agency
1. Consent of 2 persons
2. Act on Behalf Of, AND
3. Under control of the other

Note: Do not need intent to create an agency (can arise accidentally)
Termination of Agency
1. can be terminated at any time by withdrawal of consent by either the agent OR the principal.

2. ANY action inconsistent with consent terminates the agency

3.The power to terminate always exists, even if the right to exercise it has been contracted away

4. HOWEVER, if one has bargained away their right to terminate the agency, the other party can sue for breach of contract

5. Methods of termination
a. Agreement by the parties
b. Unilateral renunciation
c. Expiration of time
d. Accomplishment of the objective
e. Loss or destruction of the subject matter
f. Death or incapacity of either the agent or principal

Note: Some agencies survive termination (can't engage in unfair competition by using customer lists or trade secrets)
a. Noncompetes are disfavored in SC and will be struck down UNLESS:
i.Reasonable as to:
1.Time (no longer than 2-3 years),
2.Place, and
3.Activity/Subject Matter
ii.Supported by valid consideration AND
iii.A valid proprietary interest is being protected
--SC courts will NOT edit down a non-compete clause to an enforceable scope

Note: "Irrevocable Agencies"--(Agencies coupled with interest)--these are NOT agencies b/c the person who looks like an agent is not acting on behalf of the principal (Ex: Where proxy is to a bank as a security loan, the bank will invest on their own behalf)
1. the one for who the action is to be taken

2. ANY person who can give a legally binding consent can be a principal

3. Persons who have been adjudicated to lack capacity can NOT be principals

4. Infants—an agency relationship with an infant principal is voidable at the instance of the infant
1. One who is to act

2. ANY person can act as an agent, BUT their liability is coextensive with their capacity

3. Thus, a person who does not have the capacity to comprehend the nature of a fiduciary relationship can NOT be held personally liable for breach of fiduciary duty
3 Categories of Agents
Depends on the degree of control exercised by principal

1. Servants (subject to the control of the principal, principal = master)
i. Respondeat superior (principal liable for tort)
ii. Can bind principal in K to the extent they are authorized

2. Agents who are NOT servants
i. bind principal in K (NOT TORT) or by representations w/in the limit of the agent's authority

3. Independent Contractors
i. IC Rule-->Does NOT bind the person who hires them in K or Tort

ii. Exception "Non-delegable duty doctrine" (similar to strict liability--A person who delegates to an IC an absolute duty owed to another person remains liable for negligence of the IC just as if the IC were an EE/servant.
a. Talking about "inherently dangerous activities"
b. Simmons (Hospitals are vicariously liable for harm caused by IC physicians)

iii. Lawyers--are not normally ICs and cannot bind their clients in tort UNLESS they step outside the scope of legal representation (i.e, participate w/client in fraud or illegal act)
2 Main Objectives of Agent's authority which determines whether the agent can bind the principal in K or by representations
1. Agency Relationships

2. Power or Authority of an Agent to Bind the Principal
Agency Relationships
Classification of Principals

i. Disclosed Principal--3rd party has notice that the agent is not acting on his own behalf and knows who the principal is
a. Principal--bound
b. 3rd party--bound to principal
c. Agent--NOT bound/not liable

ii. Partially disclosed principal--3rd party knows, or has reason to know that the agent is acting for another but does not know who the principal is
a. ALL parties are bound

iii. Undisclosed principal--3rd party believes that the agent is acting on his own behalf
a. ALL parties are bound

Classification of Agents

iv. General Agent--An agent who conducts a series of similar transactions (acts in the same way) involving a “continuity of service”
a. General agents CAN bind their principals to agreements w/in the nature of the general agency EVEN if outside the scope of the agents’ actual authority (3rd parties are entitled to rely on general agency—do not have to inquire about the agent’s authority)
b. HOWEVER, a general agent is NOT one with general authority to act for the principal in all matters (ONLY to the particular type of act they perform)

v. Special Agent--One who is authorized to conduct a single transaction or a series of transaction not involving a “continuity of service”
a. Special agents normally can NOT bind the principal outside the scope of actual or apparent authority
b. Duty of Inquiry3rd parties are generally under a duty to ascertain the extent of the agent’s authority

vi. Co-Agents--Two or more agents acting for the same principal. They have NO duty to each other.

vii. Subagents--An agent assigned a task has no authority to delegate the task to another. HOWEVER, when a principal DOES authorize an agent to delegate all or part of a task, the delegate is a “subagent”
a. For a subagent to bind a principal, the subagent’s act must be w/in BOTH the subagent’s power to bind the agent AND the agent’s power to bind the principal
b. Delegation does NOT relieve the agent of reasonability to the principal
c. Subagent’s primary relationship is with the agent, but the principal and subagent also owe each other the usual duties that run b/c principal & agent Ex: principal is liable for subagents injuries

viii. Agent's Agent--When an agent is NOT authorized by the principal to employ further agents to assist in performance of the agent’s duties, but the agent does so anyway, the employed person is the agent’s agent
a. NO duties run b/t the principal and the agent’s agent
b. Principal is NOT liable for the acts of the agent’s agent
c. Principal is NOT liable for subagent’s injuries
d. The agent is the principal of the agent’s agent
Power or Authority of an Agent to Bind the Principal
Distinction b/t Power and Authority – Agent always has to power to bind the principal, but this is limited by the agent’s authority

Agency Authority MUST derive from the principal. However, there are doctrines under which the principal can be bound absent authority

1) Actual Authority--principal is bound by the agent's acts w/in the scope of authority
i. Express (written or oral)
ii. Implied (conduct--authority reasonably necessary to carry out express authority)

2) Apparent Authority--arises when the principal manifests his consent directly to the 3rd party (just as binding as actual authority)
i. Express or implied
ii. Agent for undisclosed principal can NEVER have apparent authority
iii. Extinguished by contrary notice to 3rd party

3) Inherent authority--arises out of fairness to the 3rd party who has no notice of the agent's secret limits
i. Most often applied in cases of general agents or undisclosed principals
ii. Does not apply if:
a) 3rd party knows that agent is acting w/o authority or
b) agent not acting in principal's interest

4) Estoppel (not agency)--no agency exists but 3rd party is foreseeably and reasonably justified in relying on appearance of agency and DOES SO RELY--principal is estopped from denying agency exists (remedy is reliance interest)

5) Emergency authority--Designed to allow the agent to act in circumstances where some unforeseen emergency threatens the interest of the principal and it is not possible to get the principal’s authority to act before some substantial loss occurs

6) Ratification--Is the later supplying of authority where none existed at the time one person purported to act for another (applies to corporations who have not yet formed)
i. Requires:
1.the person on whose behalf the action was purportedly taken must have had capacity to take the action at the time
2.the 3rd party must have believed that the purported agent was authorized and acting on behalf of the principal
3.the ratifying person must be in possession of all material facts relating to the action being ratified
4.the ratification must be complete; there are no partial ratifications
5.the ratifying person must make an effective affirmance (this can be implied, as by knowingly accepting and retaining the benefit of the act)
Agent's warrant of authority
Person may be liable to 3rd party on account of representation to 3rd party that they had authority when they did not

2 types of breach:
1) misrep or breach of warranty of authority
2) nonexistent principal
To what extent will what an agent knows, or has notice of, and admits be imputed to the principal?
Notice = knowledge & notification

Notification--if an agent has, or appears to have, authority to receive notifications on behalf of the principal, such notification will be imputed to teh principal if given at a proper time and if the 3rd party giving notice has no reason to believe that the agent is acting adversely to his principal's interest

Knowledge--an agent's knowledge is imputed to the principal if the agent is under a duty to disclose, or has actual authority to act on behalf of the principal. Knowledge will NOT be imputed where an agent is acting on his own behalf, for another principal, or when the agent & 3rd party are attempting to defraud the principal.

Admissions--evidence rule. Statements of agent are admissible against principal concerning matter w/in the scope of employment & made during the existence of the relationship.
Agent's duties to the principal
Agent's are fiduciaries--they owe:

1) Duty of Loyalty
1. Agent acts exclusively for the principal
2. Breached by:
i. Usurpation
ii. Self-dealing
3. Remedies
i. Injunction
ii. Accounting
iii. Constructive trust

2) Duty of Care
i. duty to exercise reasonable care in conducting principal's business and managing property in his custody & control
i. Includes duty of full disclosure
ii. Breached by negligence
iii. Remedies ($ damages)
Principal's duty to agent
a. Duty to Disclose Risks
b. Principal is liable to the agent for any injury caused by principal’s negligence
c. Principal owes a duty of reimbursement for expenses
d. Principal owes a duty of indemnifying the agent for liability the agent may incur in performing his duties
e. Duty to furnish opportunity to work (Ex: principal hires person hired to sell insurance in part of state, then he can’t turn around and hire someone else to sell in the same part of the state)
f. Principal is liable for injuries that the agent sustains w/in the scope of employment (Note: Grant--even if act outside usual duties, if taken in good faith to advance ER's interest such as to reduce danger to co-workers or customers, the act IS w/in the scope of employment)
Respondeat Superior--in addressing principal's vicarious liability there are two major questions you should ask
Preliminary Note: Remember that the tortfeasor is liable for his own tort!

1) Is the relationship one of master-servant? Nelson v. Yellow Cab

--Control is the issue
i. Direct evidence of the right to control (whether or not exercised)
ii. Method of payment (hourly payment or salary=EE/agent, peicework payment or fixed amt=IC)
iii. Furnishing of equipment (ER's equipment=EE/agent)
iv. Right to fire (if you fire them, do they have a job at all?)

2) Was the act/tort committed w/in the scope of employment?
-Restatement Elements:
1) conduct is of the kind servant is employed to perform
2) conduct occurs substantially w/in the authorized time and space limits
3) it is actuated, at least in part, by a purpose to serve the master; and
4) if force is intentionally used by the servant against another, the use of force is not unexpected by the master (normal risk in furtherance of master's business)

Note: SC uses a broader test. If the servant acts for some independent purpose wholly disconnected w/furtherance of master's business, the not w/in scope of employment. If there is any doubt, it is decided against the master/principal/ER.
SC Cases "scope of employment" analysis
Deviation, Detour, and use of car by S – if deviation from scope is slight, not unusual, it’s a detour & in scope. If it was marked and unusual, it is a frolic & out scope.

Going & Coming Rule--workers en route to or from work are NOT w/in scope of employment. (Exception: Firefighters going to the fire)

S’s unauth guests – M not liable

Use of Instrumentality not furnished by M - whether the use was authorized expressly or impliedly (Ex: Servant's use of his own car does not preclude M's liability if it is not reasonable to walk & the only way S can perform is to use his car - auth. implied).

Unauth Intentional torts – M is normally NOT liable for S’s willful act unless act is at least partly in furtherance of M's business (ex: bartender)

Conduct ratified - If M ratifies the conduct, it is w/in scope

S disregards instructions or misunderstands - may be w/in scope; however, if S uses radically different means & increases risk of harm M is NOT liable.

Incidental Acts - acts done by S on his own behalf may be so connected with the task as to be w/in scope (ex: build fire to keep warm). If partly done for M and partly for S, M may be liable (ex: S driving to see eye doctor)

Smoking - outside scope unless M aware of smoking. Smoke breaks benefit ER (has to be in interest of ER) and has been held to be w/in scope.

Omission/failure to act - w/in scope

Libel and Slander - SC applies respondeat superior to both

Assault and Battery - may be w/in scope (employment must be such as to likely bring S in conflict w/others)

False Imprisonment - corporations held vicarious liabile for FI

Trespass and Conversion - can be w/in scope (ex: improper repossessions)
i. Family Purpose Doctrine applies in SC (liab of parent for child driving)

Owner in car; Driver presumed owner’s S
Master can be held liable for torts of servant OUTSIDE scope of employment OR of NON-servants if:
i. Employer intended the consequences or conduct

ii. Employer negligent or reckless in hiring/retention or supervising servant
1) Doctrine of Negligent Hiring Elements
a) ER's knowledge of EE's propensity AND
b) Foreseeability of harm to others
2) Doe v. ATC--One previous assault is NOT ENOUGH to charge the ER with notice

iii. Conduct violated a non-delegable duty of the employer or involved inherently dangerous work (Ex: IC physicians in hospital cases that cause harm--M hospital can be held liable)

iv. Servant purported to act or speak on behalf of a principal-master and there was reliance upon apparent agency

v. Employer, though not a master, retained control over the performance of the task caused by the injury

vi. Employer ratified or adopted the tort

Remember: Tortfeasor is liable for their own tort!
Volunteer services
one who volunteers services w/o agreement or expectation of reward may be the servant of the one who accepts the services
Borrowed servants
One MAY serve 2 masters

Ex: Crane comes with the skilled operator.
1. Leasing company liable b/c their servant is operating the crane
2. If the foreman of the construction company assumes control over the operator while he is operating the crane, then the construction company is ALSO liable
Negligence of Servant's Servant
Master is NOT liable for the negligence of one hired by his servant when this hiring was
i. Not reasonably necessary to get the job done but simply a matter of the servant’s convenience; or
ii. Not expressly or impliedly consented to by the master; or
iii. Not brought about by an emergency or unforeseen contingency
Nelson v. Yellow Cab Elements for determining the existence of ER/EE (master/servant) Relationship
Fundamental test is the right of the ER to control the details EE's work. It is not whether actual control is exercised, but whether it exists.

Four elements determine right to control
1) Direct evidence of right to control (e.g. documentary evidence - employment application, wage receipts, pay stubs)
2) furnishing of equipment
3) right to fire AND
4) method of payment
Sole Proprietorship
1. One owner—owner is the only equity owner (puts in all the capital)
2. Not a legal entity; No separate legal entity apart from the individual
3. Default business association
4. Easy/Inexpensive to form; No paperwork; No formalities; No filing required
5. Owner is personally entitled to all the profits, liabilities (including taxes--filed on his person tax return), and obligations
6. Owner makes rules and controls the business
Definition of Partnership
association of two or more persons to carry on a business for profit as co-owners.
i. Associationinformal grouping
ii. 2 or More People “Person” includes individuals, partnerships, corporations
iii. Co-Owners2 equity owners w/power of control
iv. Business for ProfitNo charities
1. Charities are governed by pre-statute common law on unincorporated associations—charities are risky, it is better to organize as not-4-profit corporation
Determining the Existence of Partnership
1. All that’s required is the INTENT to do those things which in law makes them partners--not to actually "create" a partnership (parties intention is the controlling factor)

2. K is NOT required but do need certain elements of K:
a. Capacity to K &
i. Infant’s contract of partnership voidable—infants may disaffirm to avoid liability, infant’s K can also be ratified upon maturity
ii. Action to set aside a power of atty and an instrument revoking a pwr of atty on the ground of a lack of mental capacity sounds in equity
b. Consent
c. *These may be proved by language, declarations, conduct, course of dealings, etc.

3. Sharing of profits is treated as prima facie evidence of existence of partnership. Agreement to share losses even stronger evidence.
a. If not rebutted, you win
b. Ex: Paying liability insurance is sharing in the risk of loss

4. Community interest in control or management can help establish a partnership.
Partnership Elements (under agency principals)
i. Each partner is principal and agent (see agency fiduciary duties above)
1. Owe each other high level of fiduciary duty—this is the defining characteristic of partnership law
a. Duty of Loyalty—“the punctilio of an honor the most sensitive.”
i. Good faith & Fair dealing (watch for fraud)
ii. Prohibited from:
1. Competing w/ the partnership
2. Usurping business opportunities
3. Engaging in conflicting interest transactions
4. Self-Dealing
b. Duty of Care
1. Includes FULL & ACCURATE DISCLOSURE of all material information
2. Breached by negligence BUT Business Judgment Rule—may apply to partnerships in both the duty of care
--It is a judicial presumption that
--parters (in honest belief) have acted in the best interest of the partnership
--on a fully informed basis and
--in good faith.

ii. Each partner has apparent authority to bind partnership w/in ordinary scope of business
1. Except as to 3rd parties on notice as to some limitation
2. An act NOT in the ordinary course of business binds ONLY IF authorized by other partners. (acceptance & retention of benefits)

iii. Each partner has statutory power of control
1. Business of partnership is managed by the partners
2. Votingper capita is the default (each partner has 1 vote)

iv. Partners jointly and severally liable for all obligations of partnership
Extent of authority measured in 3 ways
1) partnership agreement
2) course of business of a particular partnership
3) course of business of similar partnerships in the locality
Liability of those in a partnership
i. PartnershipLiable for partnership obligations and any authorized wrongful conduct
1. Liable for torts committed by partners acting within ordinary scope of business for partnership
2. Liable for breach of trust or loss of property of third persons caused by the act of a partner within the scope of his authority
3. Partnership can sue or be sued in its own name. If a judgment exceeds the assets of the partnership, personal assets of the partners CAN be reached if partners joined in lawsuit

ii. Unlimited Personal Liability of Partners
1. All partners are jointly and severally liable for all obligations of the partnership
2. There is no limit on this potential personal liability; thus the misconduct of one partner could result in financial ruin for fellow partners
3. Personally liable for authorized misconduct but not personally liable for misbehaving partner conduct not authorized

iii. Misbehaving Partnerpersonally liable for misconduct

iv. New partnerresponsible for existing firm debts, but only to the extent of his interest in the firm
Why not form a corporation instead of partnership?
1. Tax advantages
a. The partnership pays no tax; only the partners do
b. On the other hand, most corporations face double taxation

2. Greater flexibility in structuring the “deal” among the participants
a. Partners have almost unlimited flexibility in structuring their relationship with each other
UPA default rules for partnership (unless changed by the partnership agreement)
i. Per capita voting (“1 partner/1 vote”)
1. Problem w/ deadlock if have even # of partners

ii. Majority rules, EXCEPT that must have unanimous agreement for:
1. changes in partnership agreement,
2. breaking the agreement, or
3. admission of new partner

iii. Per capita sharing of profits and losses (equal share of profits & losses)

iv. Partners have unlimited access to partnership books and records and a duty to notify each other as to matters material to partnership

v. Partners not compensated for working for partnership EXCEPT that a partner working to wind up the partnership after dissolution is entitled to remuneration in quantum meruit

vi. Upon dissolution, partnership pays the creditors 1st and then each partner is repaid original contribution, dollar for dollar. Surplus then divided according to the share of profits
Rights (ownership interest) of a partner
i. Right to use partnership property
a. Can NOT be assigned

ii. Right to Control (“vote”)

iii. Right to Interest (“profits”)
a. CAN be transferred
Define Dissolution
i. (any departure results in dissolution) the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business
ii. Catapults the partnership into termination mode by way of wind-up
Causes of Dissolution that do not violate the partnership agreement
1. Good faith withdrawal of any partner in a partnership at will
2. Accomplishment of the purpose in a partnership for a particular purpose
3. Dissolution by agreement of all partners
4. Expulsion of any partner in accordance w/ partnership agreement
5. Any event making it unlawful for the business of the partnership to be carried out
6. Death or incapacity of a partner (estate does NOT become a partner—only a transferee)
7. Bankruptcy of a partner or the partnership
8. By decree of court based on incapacity or inappropriate behavior of a partner, or other equitable reasons
Wrongful dissolution in a partnership
Dissolution can be “wrongful” if it violates a provision in the partnership agreement.
1. The only reason we care if dissolution is wrongful is liability.
2. Partnership still has to cash out wrongfully dissolving partner, but the cash out price will bet set off against payment for any injury caused to the partnership by the wrongful dissolution
General Effect of Dissolution on the authority of a partner
i. Dissolution generally revokes authority
ii. HOWEVER, after dissolution, a partner CAN BIND the partnership
1. By any act appropriate or necessary to wind up partnership
2. By any act as to 3rd parties who are unaware
General Effect of dissolution on liability of partner
Does NOT discharge liability
i. the middle phase after dissolution (or continuation of partnership business until termination) in order to pay off debts, settle accounts with partners, and distribute any remaining partnership assets.
ii. Surviving partners or personal representatives of the last partner generally have right to wind up
Rules for distribution during wind up
Liabilities are paid in the following order
1. Outside creditors (if decide to continue business after dissolution however, the creditors of the firm remain creditors of the continuing business)
2. Partners other than for capital or profits
3. Partners in respect to capital
4. Partners in respect to profits
Creation of LP
i. Filing of a “certificate of limited partnership” with Secretary of State
1. Must set forth name, agent, office and mailing address of each general partner

ii. Name must contain “limited partnership,” “LP,” or “L.P.”
1. This puts the public on notice that equity owners are not personally liable
2. May not include name of limited partner.

iii. Must have registered agent for service of process

iv. Limited partner must pay consideration, but this can take any form
Types of Partners in an LP
1) General partner--active
a. Must have at least 1
b. Can be a corporation w/no assets
2) Limited partner--passive investor

Note: Can be BOTH a general partner & a limited partner
Personal liability of general partners in an LP
Like the partners of an ordinary general partnership, the general partners of an ordinary limited partnership are personally liable for the partnership’s debts. General partners have unlimited liability to third persons, but liability to partners may be limited by agreement
Personal liablity of limited partners in an LP
Are NOT personally liable beyond their mandatory investment. HOWEVER, limited partners may lose their limited liability if they:
1. Are general partners
2. Permit their names to be used in the partnership
3. Knowingly execute a false certificate
4. Act as or hold themselves out to be general partners, OR
5. Take part in control of the business, but not to the extent of acting as a general partner

Limited partners can take the following “safe harbor” actions without having participated in control of partnership
i. Being contractor, agent, employee of general partner
ii. Consulting with general partner
iii. Voting on amendments to agreement/change in business
iv. Voting on dissolution
v. Voting on removal of the general partner
vi. Participating in wind-up
vii. Assumption of debt (acting as a surety)
viii. Bringing a derivative action on behalf of the partnership (equity owner can bring suit on behalf of business)
ix. Plus other things (list is not exclusive)
Allocation of profits & losses in an LP
Distributed on the basis of value of the contributions made by each partner.

Upon withdrawal, a partner may demand any distribution to which he is entitled.
Management of the LP & Authority to Bind the LP
Limited partners
1. Have essentially no management power and no authority to act as agents in carrying out the partnership’s business. (However, limited partners now have the ability to do quite a lot under "safe harbor" provisions w/o losing limited liability)
2. NO power to bind the partnership

General partners
1. Empowered to make and carry out the firm’s business policies.
2. The right to manage and the power to bind a limited partnership is reserved to the general partners
Dissolution events in an LP
1. Death or incompetence of a general partner
2. Withdrawal of general partner (the dissociation of a limited partner does NOT dissolve the partnership)
3. Assignment of all of the general partner’s interest
4. Bankruptcy or insolvency of a general partner
5. Dissolution or termination of entity (for non-natural general partners—i.e. corporation)
6. Judicial dissolution
Priorities of distribution of proceeds from liquidation of an LP
1. Creditors (including partner creditors)
2. Partners and former partners
3. Partners as past due returns of capital
4. Partners respecting their interest in proportion to their share of distributions

*Note: Limited partners have NO right to priority in the absence of an agreement
Voting in a LP
i. General partners may vote separately or with all limited partners or with any class of limited partners.
ii. Agreement determines voting rights of limited partners.
iii. New general partner may only be admitted with written consent of each partner
Fiduciary Duties in an LP
a. General partners owe a fiduciary duty to the LP and to the limited partners.
b. Limited partners owe NO duty to one another or to the LP, unless they undertake duties of some nature
General points of LLC
a. statutory hybrid of the traditional corporation and partnership forms of enterprise organization
i. limited liability for equity owners, and
ii. one tax—pass through tax so the organization itself does not pay taxes.
1) May elect how they want to be taxed – as a partnership (chosen by most), as a C corporation, or as an S corporation.

b. Biggest advantage is it’s flexibility—big importance on contracts

c. Disadvantage—expense to form

d. Creature of statute formed by registration with the Secretary of State. As such, what it can do is limited to what the statute permits.

e. Exists as a legal entity, separate from its owners

f. Corporate Veil--Members of an LLC are protected from personal liability for the LLC’s obligations

g. Very few provisions of the LLC Act are mandatory.

i. LLCs are governed largely through an “operating agreement,” a contract among the members.
Creation of LLC
File “Articles of Organization” with the Secretary of State--must contain

1. Name (must contain "LLC" or something along those lines & must be distinguishable)

2. The address of its initial designated office.

3. The name and street address of its initial agent for process.

4. The name and address of each organizer (analogous to incorporator).

5. Whether the LLC is to be at will or a term company. At-will is default. If a term company, the term must be specified

6. whether the company is to be manager-managed or member managed. The presumption is that it is member managed.

7. Whether one or more members are to be personally liable for the LLC’s obligations. This is never done.

The articles MAY include:
1. Anything else “not inconsistent with law.” This is the place to limit the authority of a member or manager to transfer interests in real property.

Note: Amendment of the articles requires unanimous agreement
Operating Agreement
a. Operating Agreement May cover
1. Membership
2. Governance—member managed or manager managed, voting rights, number of managers, selection procedures, duties
3. Finance
4. Dissolution—events which trigger dissolution, etc.

b. Most statutory provisions can be waived (customized goverance) by a provision in the operating agreement

c. Unwaiveable statutory provisions--the operating agreement MAY NOT
i. Unreasonably restrict members’ access to information or records.
1. If member-managed, cannot restrict.
2. If manager-managed, may possibly restrict
ii. Eliminate the duty of loyalty of managers or managing members.
iii. Unreasonably reduce the duty of care of managers or managing members. May lower, just not unreasonably
iv. Eliminate the obligation of good faith and fair dealing
v. Vary the right to expel a member by judicial determination.
Resolving Conflicts b/c Articles of Organization and Operating Agreement
1) Operating agreement controls as to managers & members
2) Articles control as to 3rd parties
At Will vs. Term
1. At Will
a. Default
b. A member of an “at-will” LLC can dissociate at any time,
c. Upon a member’s dissociation from an at-will company, if the company is NOT dissolved (pursuant to a provision in the operating agreement) the company must purchase the dissociating member’s distributional interest for fair value immediately.

2. Term
a. Member of a “term” LLC cannot dissociate prior to the expiration of its term without the dissociation being wrongful (have to pay damages for wrongful dissociation)
b. Upon a member’s dissociation from a term company, if the company is not dissolved, the company must purchase the dissociating member’s interest for fair value at the expiration of the term.
c. LLCs preferring to be term companies must so elect, and specify the term, in their articles. § 33-44-203(a)(5). The term must be specified by a specific and final date (description of a project will not suffice).
Member managed vs. Manager Managed
1. Member
a. Default
b. Every member has the apparent authority to bind the company in the ordinary course of its business (much like a partnership).
c. Memberships are not presumed to be securities

2. Manager
a. Only the managers have authority to bind the company (much like a corporation).
b. Companies preferring to be manager managed must so elect in their articles.
c. Memberships are presumed to be securities.
Authority to Bind in LLC
i. Member managed—power to bind attaches to the members
a. If not in the ordinary course of business must have been authorized by other members to bind
b. Dissociated member's apparent authority to those w/o knowledge of dissociation persists for 2 yrs after dissocation UNLESS statement of dissociation is filed an then it persists for only 90 days

ii. Manager managed—power to bind attaches to the managers and not to members
Real Property of the LLC
Any member of member-managed, or manager of manager-managed may sign and deliver ANY instrument affecting the company’s instrument in real property (even if not in the ordinary course of business)--this is unless of course their power is limited in the articles
Respondeat Superior in LLC
An LLC is vicariously liable for actionable conduct of a member or manager acting either in the ordinary course of business or with the authority of the company
Limited Liability of members and managers of LLC
not personally liable for the obligations of an LLC, UNLESS they make themselves liable in some way, e.g, by committing a tort, or by acts leading a third party reasonably to rely on their personal credit instead of or in addition to the credit of the company.
Corporate Veil in LLC
Applies mostly the same as for corporations except that failure to comply with company formalities is not grounds for piercing
Decision Making in LLC
Requires unanimous consent
Consideration/Contribution to the LLC
Any valuable consideration will suffice if approved by all members or as specified in the operating agreement (default rule)
Idemnification for costs & liabilities occurred in ordinary course of bus. in LLC?
Renumeration for services in LLC?
Management in the LLC
1. Member-managed
-Default rule: Each member has equal management rights (votes) with each other
-Default rule: Where there is more than one member, majority rules, with the exceptions requiring unanimous consent

2. Manager-managed
-Managers are appointed or removed by a majority of the members.
-Default rule: Each manager has equal rights in management.
-Default rule: Where there is more than one manager, majority rules.
Matters requiring unanimous approval of the MEMBERS in the LLC

(ARADMADCUM) Note that 4 of these are the extraordinary acts:
A: Amendment of operating agreement

R: Ratification of acts that would otherwise violate the duty of loyalty
-i.e. interested members acts can be ratified by other members

A: Amendment of the articles

D: Dissolution

M: Merger

A: Admission of new member (most likely on the bar)

D: Disposition/sale of all assets outside the ordinary course

C: Compromise of obligation to make a contribution
-Members decide whether they want to get diluted

U: Use of company assets to redeem a charging order

M: Making interim distributions, including redemption of an interest
Taking action in LLC
Members and managers CAN take action W/O a meeting and CAN act by proxy (compare that corporation board of directors cannot act by proxy).
Distributions in the LLC
Defined: any transfer of value from an LLC to a member in connection with that person’s status as a member


a. distributions of profits while carrying on business (“interim distributions”),
i. The default rule is that interim distributions must be in equal shares

b. redemption of a membership, and

c. distribution of the residue following liquidation.
Before a distribution can be made in the LLC, what two tests must be passed?
1. Equity insolvency test, AND
-LLC would not be able to pay its debts as they become due in the ordinary course of business

2. Balance sheet test
-LLC’s total assets would be less than its total liabilities plus any preferential dissolution rights.
Fiduciary Duties of Member in a Member-Managed LLC
a. Duty of loyalty

i. To account to the company for any profit made in the course of the
company’s business or using the company’s property,

ii. To act on the companies’ behalf (not to deal with the company as or on behalf of an adverse party), and
--No self-dealing
--No usurpation of corporation opportunities

iii. Not to compete with the company

b. Duty of care

i. refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law
ii. Ordinary negligence does NOT violate this duty of care (codification of business judgment rule).

c. Good Faith & Fair Dealing
Fiduciary Duties in a Manager-Managed LLC
a. A member of a manger-managed company owes NO duties to the company or its members solely by reason of being a member.
i. UNLESS it is employed by the company in some way
ii. A member who is not a manager but exercises the powers of a manager owes the duties described above, to the extent of such exercise of power.

b. A manager of a manager-managed company owes the company the same duties as a member of a member-managed company, described above.
Are the fiduciary duties waivable in LLC?
NO--may NOT be waived OR eliminated by the operating agreement, but the agreement MAY, if not manifestly unreasonable, reduce these duties
Members action against the LLC
1. A member may maintain an action against the LLC at law or in equity without first seeking an accounting.
a. Accountingperson to whom you owe a duty can make you account for how you disposed of assets

2. HOWEVER, compare Mallon
a. Appears to hold that the dissolution of an LLC requires an accounting in most cases, despite the contrary words of the LLC act
Interests of members in the LLC
1) Property interest--no transfer

2) Distributional interest--can transfer

Note: Transfer of the distributional interest transfers no management powers or right of access to information (unless operating agreement provides or unanimous consent of all members), only the right to receive distributions, and the right to seek judicial dissolution.
Rights of Creditors/Charging Orders
1) judgment creditor of a member may obtain a type of lien against the member’s distributional interest
a. Creditor receives distribution interest & has the right to seek dissolution

2) Charging order MAY be redeemed by any member, or if permitted the LLC
Members dissociation
1. describe certain events inconsistent with a person remaining a member

2. MAY lead to dissolution, winding up and termination

3. default rule is that member has the power to dissociate at ANY time

4. Events causing dissociation
a. Receipt by the company of notice an a member’s decision to withdraw.
b. An event described by the operating agreement as an event of dissociation.
c. Transfer of all of a member’s distributional interest, except (1) pledge as security or (2) a court charging order, not foreclosed on.
d. Expulsion pursuant to the operating agreement.
e. Expulsion by vote of all of the members upon certain circumstances, including transfer of substantially all of a member’s distributional interest.
f. Expulsion by judicial determination based on persistent violation of the operating agreement or other actions harmful to the company (not practical to carry on the business)
g. A member becoming a bankrupt or anything similar.
h. Death or incapacity or, if the member is not a human being, termination.
Wrongful dissociation in LLC
a. By a general provision in the operating agreement revoking the power of free dissociation.

b. By provisions in the operating agreement making certain acts of dissociation wrongful.

c. Before the expiration of the term of a term company,
i. Member withdraws by expression of will,
ii. Member is expelled by judicial determination,
iii. Member is dissociated by become bankrupt, or
iv. In case of a member that is not human, the member dissociates by terminating itself.

Note: members are liable to the LLC for damages (may be set off against distribution interest)
Effects of Dissociation in LLC
a. can cause dissolution & wind up (if so, dissolution rules apply and company ceases business except for the purpose of winding up, then liquidates, and terminates)

b. at-will company, if the company is not dissolved, the company must purchase the dissociated member’s distributional interest immediately at fair value

c. term company, if the company is not dissolved, the company must purchase the dissociated member’s distributional interest at fair value upon the expiration of the term.

d. Apparent authority to bind: As to third parties without notice of the dissociation, a dissociated member has apparent authority to bind the company for two years following dissociation, unless the company files a statement of dissociation with the Secretary of State, in which case apparent authority lapses after 90 days. The dissociated member’s duties of care and loyalty terminate.

e. Death. When a member dies, the estate does not become a member but does become the owner of the distributional interest.
If dissolution occurs, the LLC must be wound up upon:
1. An event specified in the operating agreement.

2. Consent of the number or percentage of members specified in the operating agreement (agreement often has a required vote to windup).

3. An event making the carrying on of the company’s business unlawful.

4. On application to a court by a transferee, should a court deem it equitable (ct can require LLC to wind up) .

5. By judicial decree upon application of a member based on (LLC statute provision analogous the oppressed SH provision):
a. Economic frustration of purpose,
b. Failure to purchase a member’s distributional interest as required, or
c. The managers or controlling members act in a manner that is illegal, oppressive, fraudulent, or unfairly prejudicial to the petitioner.

Note: The above are default rules, with these exceptions: Dissolution can NOT be waived for:
1. unlawfulness of business, administrative dissolution, OR
2. upon application of a member to a court (protection of oppressed SH can not be waived)
LLC after dissolution (during wind-up)
LLC continues in existence after dissolution, but only for wind up.

1. The corporate veil continues.

2. Any member who did not wrongfully dissociate MAY participate in the winding up AND receive reasonable compensation therefore. Alternatively, any member or transferee can petition for court supervision of winding up.

3. During winding up, the apparent authority of members and managers continues to the extent “appropriate” for winding up, or, as to third parties without notice of the dissolution, to the pre-dissolution extent. Members or managers who cause injury to the company during winding up are liable to the company and for a corresponding setoff against their distributional interest in liquidation.

4. A unanimous vote of members, including a member whose dissociation caused the dissolution, can waive the right to wind up and terminate, and the LLC will resume business as if dissolution had not occurred.
Distributions in winding up LLC (in order of priority)
1. Creditors, including members who are creditors,
2. Members’ contributions,
3. Any surplus (residue) in equal shares (default rule).
Dispose of known claims in LLC
-LLC must send claimants a specified notice setting a deadline for the claim to be brought forward. Once the notice is sent, claimants are barred unless they present their claims by the deadline.

-If a claim is presented, but rejected by the LLC, an action must be begun within 90 days of receipt of the notice, or the claim is barred.
Dispose of unknown or contingent claims in LLC
LLC must make publication at least once in a paper of general circulation in the county of the LLC’s principal office

a. Claims are barred if not brought forward against LLCs within five years after publication of such notice.

b. Claims not barred may be enforced against any remaining assets of the LLC, or against assets distributed to members, up to the amount received by each member.
Termination of LLC
Must make sure everything else is complete b4 do this

File articles of termination w/ Sec of state
Administrative dissolution of LLC
1. Sec of state may dissolve LLC that does not pay taxes w/in 60 days of due date
-LLC is given 60 days to cure

2. LLC may apply for reinstatement for 2 years following dissolution
Merger of LLC
An LLC may merge with another LLC, corporation, partnership, limited partnership, or any other foreign or domestic entity.

1. A plan of merger must be approved
a. By all members of any LLC that is party to the merger, UNLESS specified otherwise in the operating agreement;
b. By all partners to a partnership or LP that is a party to the merger, UNLESS the partnership agreement specifies otherwise;
c. As required by the law of this or any other state where any other merger partner is organized.

2. Merger is accomplished by filing articles of merger, including the plan of merger, with the Secretary of State.

3. When a merger takes effect, the separate existence of all parties ceases and the surviving party inherits all rights and obligations of the parties. Persons who were personally liable for obligations of merger parties prior to effectiveness of the merger remain so liable.
Tax issues of merger
-conversion of a partnership into an LLC or vise versa = NOT a taxable event,

-conversion of a corporation to an LLC, or merger of a corporation with an LLC where the LLC is the survivor = IS A TAXABLE EVENT.
Foreign LLCs
-If "transact business" must register

-Examples of activities that do not constitute transacting business include (meaning NO registration is required):
a. Engaging in lawsuits
b. Holding meetings
c. Maintaining bank accounts
d. Selling through independent contractors
e. Soliciting or obtaining order that can be accepted only outside this state
f. Lending on the security of real property and holding realty so acquired
g. Isolated transactions not part of a regular pattern of business
h. Interstate commerce
Derivative Actions in LLC

1. A member of an LLC may bring a derivative action on behalf of the company if the member:
a. Was a member at the time of the action complained of, OR
b. Obtained membership from one who was a member at the time of such action, either by operation of law or pursuant to the terms of the operating agreement.

2. The member bringing the action must specify with particularity the effort to get the members or managers to bring the action. The company may take control of the action.

3. The proceeds of a derivative action go to the company.