- Can the manager amend the operating agreement to authorize catering services over the chef's objection? Select one.
Answer: No, because amending the operating agreement requires unanimity under both the agreement itself and the ULLCA default rule.
The correct answer is B. The operating agreement is a contract among the members, and its amendment is governed by its own terms or, if silent, by the ULLCA. Here, the operating agreement explicitly requires a unanimous vote for any amendment. Furthermore, the ULLCA default rule for amending the operating agreement is also unanimity. Therefore, the manager cannot proceed without the chef's consent. (A) is incorrect because while the decision to start catering might be a business decision, the amendment of the foundational governing document is a structural matter requiring member consent as specified. (C) is incorrect because voting on amendments to the operating agreement is typically on a per capita basis unless specified otherwise, and even if it were pro rata, the agreement's unanimity requirement would control. (D) is incorrect because the certificate of organization typically contains only basic information; the scope of the business is defined in the operating agreement, and changing it does not usually require a public filing.
- Is the supplier's contract likely enforceable against the LLC? Select one.
Answer: Yes, because the LLC's public filing as member-managed clothes every member with apparent authority to bind the LLC in ordinary business matters.
This question tests your understanding of apparent authority in LLC management structures, particularly the tension between public filings and private operating agreements.
When an LLC's certificate of organization designates it as "member-managed," this creates apparent authority for all members to bind the LLC in ordinary business transactions. Third parties who reasonably rely on publicly available information are generally protected, even when internal agreements restrict certain members' actual authority. The supplier here had no access to the private operating agreement and could reasonably assume that any member had authority to make ordinary business decisions like purchasing inventory.
Answer A is correct because the public filing as member-managed gives every member apparent authority to bind the LLC in routine business matters, and the supplier reasonably relied on this public designation.
Answer B is wrong because internal restrictions on authority typically don't affect third parties who lack notice of those restrictions. The operating agreement's delegation to a Managing Member wasn't publicly filed, so it can't defeat the supplier's reasonable reliance on the public record.
Answer C is incorrect because there's no legal principle giving priority to earlier contracts simply because they were signed first. Both obligations would typically be valid debts of the LLC.
Answer D overstates members' authority by calling it "inherent." Member authority in LLCs depends on the management structure - it's not automatically inherent for all members in all circumstances.
Remember: apparent authority protects third parties who reasonably rely on public information about business entity management structures, even when private agreements say otherwise.
- What is the most appropriate and direct course of action for your client and the other non-culpable member to take to expel the embezzling member? Select one.
Answer: They can apply to a court for an order of judicial dissociation of the member due to his wrongful conduct that has adversely affected the business.
The correct answer is C. The ULLCA provides for judicial dissociation (expulsion) of a member in certain circumstances. These include when a member has engaged in wrongful conduct that has adversely and materially affected the company's business. Embezzlement clearly meets this standard. Since the operating agreement is silent, the members cannot unilaterally expel the third member, but they can seek a court order to do so. (A) is incorrect because expelling a member is an extraordinary event, not an ordinary business decision, and cannot be done by a simple majority vote without authorization in the operating agreement. (B) is incorrect because judicial dissociation provides a remedy short of dissolution. (D) is incorrect because amending the operating agreement requires unanimity by default, which the embezzling member would not provide, and applying it retroactively for punitive reasons would be highly suspect.
- Is the member likely to prevail in the lawsuit against the manager? Select one.
Answer: Yes, because the operating agreement's safe harbor provision required not just disclosure, but also the members' consent or refusal of the opportunity.
The correct answer is D. While the ULLCA allows an operating agreement to modify the duty of loyalty, it cannot be eliminated. A common modification is a safe harbor procedure for corporate opportunities. However, such procedures typically require not only disclosure but also that the LLC be given a chance to act. By purchasing the property before the members could respond, the manager usurped the opportunity without fully complying with a reasonable interpretation of the safe harbor. The provision for disclosure implies a need for the members to consider and potentially act on that disclosure. Her actions preempted that, constituting a breach of her duty of loyalty. (A) is incorrect because mere disclosure without an opportunity for the LLC to act is insufficient. (B) is incorrect because the duty of loyalty can be modified, though not eliminated. (C) is incorrect because managers, whether members or not, owe fiduciary duties to the LLC.
- What is the likely outcome of the client's lawsuit? Select one.
Answer: The suit will succeed, because a member's right to inspect records for a proper purpose cannot be unreasonably restricted by the operating agreement.
The correct answer is B. The ULLCA provides members with a statutory right to inspect company records, and this right cannot be 'unreasonably restricted' by the operating agreement. A provision that completely eliminates the right of inspection and leaves it to the sole discretion of the manager who is suspected of wrongdoing would almost certainly be found to be an unreasonable restriction. The client's purpose—investigating potential mismanagement or breach of fiduciary duty—is a proper purpose. (A) is incorrect because this statutory right is one of the few provisions that cannot be completely bargained away in the operating agreement. (C) is incorrect because the right of inspection applies to members in both member-managed and manager-managed LLCs. (D) is incorrect because the standard for inspection is a proper purpose based on a credible basis of suspicion, not a requirement to prove the underlying fraud before being allowed to see the records that would prove it.
- What is your client's strongest argument that the other members' action was improper? Select one.
Answer: Assigning a long-term lease is an act outside the ordinary course of business that requires unanimous consent under the operating agreement.
The correct answer is A. The central issue is whether assigning the LLC's primary, long-term lease is an 'ordinary course' decision. Given that the lease is a critical asset and relocating the entire business is a fundamental change, it is highly likely to be considered an act outside the ordinary course of business. As such, under the explicit terms of the operating agreement, a unanimous vote was required. The four members' action in defiance of the client's vote was therefore unauthorized. (B) is too absolute; not every sale of an asset requires unanimity, only those that are extraordinary or constitute substantially all assets. However, this lease assignment is likely extraordinary. (C) is incorrect as the ULLCA does not have a specific default rule about business location; this is governed by the general rules for ordinary vs. extraordinary decisions. (D) is less precise; the primary breach is of the operating agreement and exceeding authority, not necessarily a breach of the duty of care, which relates to prudent management.
- What is the best advice regarding the enforceability of the two-year notice provision for dissociation? Select one.
Answer: The provision is unenforceable to prevent dissociation, but it can form the basis for a claim of wrongful dissociation and damages against a member who leaves earlier.
The correct answer is C. Under the ULLCA, a member always has the power to dissociate at any time, even if the operating agreement purports to limit this right. This is similar to the power to breach a contract. However, the operating agreement can define certain dissociations as wrongful. While the provision cannot legally prevent the member from leaving (i.e., obtain an injunction forcing them to remain a member), it can establish that leaving without giving two years' notice is a wrongful dissociation. This would make the dissociating member liable for any damages caused by their premature departure. (A) is incorrect because while the power to dissociate cannot be eliminated, the consequences of that dissociation can be governed by the agreement. (B) is incorrect because the provision cannot stop the member from actually dissociating. (D) is incorrect because the enforceability of this internal governance rule does not depend on public filing.
- How should the $50,000 distribution be allocated among the members? Select one.
Answer: The distribution should be allocated in proportion to the members' capital contributions.
The correct answer is D. Under the ULLCA, the default rule for distributions is that they must be made in proportion to the value of the members' contributions. The operating agreement can specify a different allocation, but since it is silent here, the default rule applies. Therefore, the member who contributed $10,000 (10% of total capital) gets $5,000, the member who contributed $30,000 (30%) gets $15,000, and the member who contributed $60,000 (60%) gets $30,000. (A) is incorrect; while unanimity might be required for extraordinary acts, the allocation of distributions is governed by a specific statutory default. (B) is incorrect because it confuses the default rule for voting (per capita) with the default rule for distributions (pro rata by contribution). (C) is incorrect because the general provision on management decisions does not override the specific statutory default rule for distributions.
- Is the LLC bound by the purchase agreement signed by the manager? Select one.
Answer: Yes, because selling a single location out of five is considered an ordinary business decision within the manager's authority.
The correct answer is A. The key issue is whether the sale of one of five coffee shops constitutes an act in the ordinary course of business or an extraordinary act requiring member consent. ULLCA requires unanimous member consent for acts outside the ordinary course of business, such as the sale of all or substantially all of the LLC's assets. Selling one of five locations is unlikely to be considered a sale of 'substantially all' assets and would likely be deemed within the ordinary course of business for a company that operates multiple locations. The operating agreement's broad grant of authority to the manager further supports this conclusion. (B) is incorrect because there is no per se rule requiring unanimous consent for any sale of real property; the analysis depends on whether it's in the ordinary course of business. (C) is too broad; while the grant of authority is strong, it is still subject to statutory limitations on extraordinary acts. (D) is incorrect because selling 20% of the business locations does not typically meet the legal standard for 'substantially all' assets.
- Will the landlord's suit to enforce the lease likely succeed? Select one.
Answer: No, because the landlord had notice of the restriction on the manager's actual authority.
The correct answer is B. While a manager in a manager-managed LLC generally has apparent authority to bind the company, this authority does not exist if the third party has actual knowledge or notice of a restriction on the manager's authority. Here, the landlord was given a copy of the operating agreement, which explicitly stated that the approval of two managers was required. This gave the landlord notice that the single manager lacked actual authority to sign the lease alone, thereby defeating any claim of apparent authority. (A) is incorrect because apparent authority is negated by the third party's knowledge of the agent's lack of authority. (C) is incorrect because internal voting requirements do affect third parties when those parties have notice of them. (D) is incorrect because a five-year lease is generally considered an ordinary, not extraordinary, business transaction for most companies.
- What is the most likely outcome if the dealership sues the LLC for enforcement of the contract? Select one.
Answer: The LLC will not be bound, because a member in a manager-managed LLC is not an agent of the LLC and lacks authority to bind it.
The correct answer is B. In a manager-managed LLC, members who are not managers are not agents of the LLC and have no statutory authority (actual or apparent) to bind the company simply by virtue of their status as members. Agency authority is vested in the managers. Since the LLC is designated as manager-managed in its public filings, third parties are on constructive notice of this structure. The client, as a non-manager member, had no authority to enter into the contract. (A) is incorrect because this rule applies to general partnerships and member-managed LLCs, not manager-managed LLCs. (C) is incorrect for the same reason; a non-manager member has no apparent authority to begin with. (D) is incorrect because while the client may be liable to the dealership for breach of the implied warranty of authority, the question asks about the outcome of a suit against the LLC.
- Is the LLC bound by the $25,000 contract? Select one.
Answer: Yes, because in a member-managed LLC, a member has apparent authority to bind the LLC in the ordinary course of business, and the supplier was unaware of the restriction.
When you encounter LLC authority questions, focus on the distinction between actual authority (what the operating agreement permits) and apparent authority (what third parties reasonably believe a member can do).
In member-managed LLCs, members generally have apparent authority to bind the LLC in ordinary business transactions. This apparent authority protects innocent third parties who reasonably rely on a member's power to act. Here, purchasing raw materials is clearly ordinary business, and the supplier had no notice of the internal $10,000 restriction. Since the supplier reasonably believed the member could bind the LLC, apparent authority makes the contract enforceable against the LLC.
Answer B incorrectly focuses solely on actual authority. While the member did exceed their actual authority under the operating agreement, this doesn't determine whether the LLC is bound to third parties. Answer C misapplies voidability concepts - the contract isn't voidable simply because it exceeds actual authority when apparent authority exists. Answer D creates an artificial split that has no basis in law. You can't partially enforce a contract based on authority limits unknown to the third party.
The key insight is that apparent authority protects third parties even when actual authority is exceeded. The LLC remains bound by the full contract, though it may have internal remedies against the member who exceeded their authority.
Study tip: Remember the apparent authority rule for LLCs: if a reasonable third party would believe a member has authority to act, and the transaction is ordinary business, the LLC is typically bound regardless of internal restrictions the third party couldn't know about.
- What is the best advice to give your clients regarding this proposed provision? Select one.
Answer: The provision is likely enforceable, as it properly limits liability for breaches of the duty of care but does not eliminate liability for bad faith or willful misconduct.
The correct answer is C. The ULLCA allows the operating agreement to alter the duty of care, except to authorize intentional misconduct or knowing violations of law. Many states interpret the duty of care as preventing liability for simple negligence, holding fiduciaries liable only for gross negligence, reckless conduct, or intentional misconduct. The proposed provision, which exculpates the manager for acts done in 'good faith,' effectively shields the manager from liability for simple negligence while preserving liability for actions taken in bad faith, which would violate the duty of loyalty, or for willful misconduct, which would violate the irreducible minimum of the duty of care. (A) is incorrect because the ULLCA does not permit the complete elimination of all fiduciary duties (e.g., the duty of loyalty). (B) is incorrect because the duty of care can be altered by the operating agreement, and this provision effectively does that by establishing a 'good faith' standard rather than a simple negligence standard. (D) is incorrect because it overstates the standard; the business judgment rule protects managers from liability for many decisions that turn out poorly, as long as they were made on an informed basis and in good faith.
- Is the member entitled to reimbursement from the LLC? Select one.
Answer: Yes, because a member is entitled to indemnification for liabilities incurred in the ordinary course of the company's business.
The correct answer is B. Under the ULLCA, an LLC must indemnify a member for a liability incurred by the member in the course of the company's business. When the member paid the LLC's debt pursuant to a personal guarantee he provided for the LLC's benefit, he incurred a liability in the ordinary course of business. Therefore, he is entitled to be indemnified (reimbursed) by the LLC for the full amount. (A) is incorrect because this right to indemnification is statutory and does not require a separate agreement. (C) is incorrect because the issue is not whether the guarantee was properly authorized, but whether the member is entitled to be made whole after paying a company debt. His payment discharged a liability of the LLC. (D) is incorrect because the primary obligation is on the LLC itself. The member is not seeking contribution from fellow members but reimbursement from the entity.
- Was the manager's sale of all the LLC's properties properly authorized? Select one.
Answer: No, because selling all the properties makes it impossible to carry on the ordinary business of the company, which was managing real estate.
The correct answer is D. The operating agreement specifically requires a unanimous member vote for any act that would make it impossible to carry on the ordinary business of the company. The ordinary business was managing a portfolio of commercial real estate. By selling all the properties, the manager has made it impossible to continue that specific business, even if he plans to start a new one. This action falls squarely within the provision requiring a unanimous member vote. (A) is incorrect because a manager's discretion is limited by the operating agreement and statutory rules on extraordinary acts. (B) is also correct as a general ULLCA principle, but (D) is the better answer because it directly applies the specific language of the controlling operating agreement. (C) is incorrect because the analysis focuses on the ordinary business as it was defined, not on whether some form of business could continue.
- Is the LLC now authorized to hire the new senior engineer? Select one.
Answer: No, because hiring decisions are ordinary business matters delegated to the managers, and they have not reached a majority decision.
The correct answer is B. In a manager-managed LLC, authority over ordinary business matters is vested in the managers, not the members. The operating agreement specifies that a majority vote of managers is required. Since the managers are deadlocked 1-to-1, there is no majority approval, and thus no authority to act. The members' vote is irrelevant for an ordinary business decision that has been delegated to the managers. (A) is incorrect because the members' voting rights are limited to the extraordinary matters specified in the agreement or by statute; they cannot simply override the managers on ordinary matters. (C) is incorrect because there is no default rule that reverts authority to members in case of manager deadlock; often, this leads to paralysis that may require judicial dissolution. (D) is closer but less precise than B; the reason no action can be taken is that the required authorization (a majority of managers) has not been obtained.
- If the builder brings an action to void the contract with the high-end supplier, what is the most likely outcome? Select one.
Answer: The court will uphold the contract, because the decision was approved by a majority of the members.
The correct answer is B. Under the Uniform Limited Liability Company Act (ULLCA), the default rule for a member-managed LLC is that each member has equal rights in the management and conduct of the company's business, and matters in the ordinary course of business are decided by a majority of the members (per capita). Here, two of the three members voted in favor of the contract, constituting a majority. The operating agreement's silence on voting means the default rule applies. (A) is incorrect because unanimity is generally required for extraordinary matters, not ordinary business decisions like choosing a supplier. (C) is incorrect because the ULLCA default for voting is per capita, not pro rata based on contributions, unless the operating agreement specifies otherwise. (D) is incorrect because no single member has unilateral authority in a member-managed LLC by default, regardless of contribution size.
- What is the most likely result of Member B's lawsuit? Select one.
Answer: Member B will win, unless Member A can show that he fully disclosed the conflict to Member B and that Member B consented to the arrangement.
The correct answer is C. This scenario involves a conflict-of-interest transaction, which implicates the duty of loyalty. In a member-managed LLC, members owe this duty. A self-dealing transaction is not a per se breach. Under the ULLCA, such a transaction can be validated if the interested member fully discloses the material facts of the conflict and the transaction, and the other members authorize it. Since the operating agreement is silent, this statutory safe harbor applies. Without disclosure and consent from Member B, Member A has breached his duty of loyalty. (A) is incorrect because self-dealing is not a per se breach; it can be validated. (B) is incorrect because fairness alone is not always sufficient; the transaction must typically be disclosed and approved by the disinterested members or be demonstrably fair, but the primary breach here is the failure to disclose and seek consent. (D) is incorrect because a majority interest does not negate fiduciary duties owed to the minority member and the LLC.
- What is the likely outcome of the developer's lawsuit? Select one.
Answer: She will not recover, because the operating agreement explicitly bars remuneration for services, and members are presumed to contribute services as part of their investment.
The correct answer is B. The ULLCA's default rule is that members are not entitled to remuneration for services rendered to a member-managed LLC. The operating agreement here explicitly reinforces this default rule. The provision is valid and enforceable. While her services provided a benefit, she rendered them as a member, and under the terms of the agreement she freely entered, she is not entitled to compensation. (A) is incorrect because it states the opposite of the default rule and ignores the operating agreement. (C) is incorrect because the ULLCA's rule is a default that can be altered by the operating agreement (e.g., to provide for salaries), and here the agreement confirms the default. (D) is incorrect because profit sharing is based on contributions unless otherwise agreed; her 'sweat equity' does not automatically adjust her profit share without an amendment to the operating agreement.
- Is the contract for the sale of the building enforceable against the LLC? Select one.
Answer: No, because the sale of all or substantially all of the LLC's assets requires the unanimous consent of the members.
The correct answer is B. Under the ULLCA, an act outside the ordinary course of business, such as the sale of all or substantially all of the company's assets, requires the unanimous consent of all members. Since the building is the LLC's sole asset, its sale constitutes a sale of substantially all assets. The operating agreement is silent, so the default rule of unanimity applies. The father cannot bind the LLC to this contract without the son's consent. (A) is incorrect because ownership percentage does not grant unilateral authority for extraordinary acts; the default voting rule is per capita for ordinary matters and unanimous for extraordinary matters. (C) is incorrect because a member's apparent authority does not extend to extraordinary transactions like selling the entire business, for which a third party would be expected to seek proof of authority. (D) is incorrect because it's too broad; ordinary business decisions would only require a majority (which is impossible with two members, effectively requiring unanimity), but the specific rule for selling all assets is what controls here.
