- Which issue is most likely to determine whether Priya is entitled to inspect the records?
Answer: Whether the operating agreement's prior-approval requirement is an unreasonable restriction on Priya's right to information.
Whenever you see an LLC member seeking records, focus on the scope of the statutory inspection right and whether the operating agreement can limit it. Under manager-managed LLC law, members have a right to inspect books and records for a proper purpose, but an operating agreement may impose reasonable restrictions. The central issue here is whether the clause requiring the manager's prior written approval is an unreasonable restriction on Priya's statutory right to information. That threshold determines everything: if the clause is enforceable, her claim fails; if it is unreasonable, she can inspect despite the manager's refusal. The manager's denial in good faith and in Apex's best interests is not the standard for a member's inspection demand—the statutory right is independent of the manager's view of her motives. Nor must Priya support her concern about unauthorized payments with specific facts before gaining access; a credible desire to investigate self-dealing is a proper purpose. Finally, Priya's interest in a competing company does not automatically disqualify her; it may be relevant to balancing, but it cannot override an unreasonable restriction. On exam day, when an operating agreement seems to eliminate a member's right to records, ask whether the restriction is reasonable—not whether the member has proven her case.
- Will Northgate be bound by the purchase order?
Answer: Yes, because Dan's act was in the ordinary course, Priya's statements held Dan out to OfficeSource, and OfficeSource did not have notice that Dan lacked authority.
When a question asks whether an LLC is bound by an unauthorized member's act, focus on actual authority, apparent authority, and notice. Section 301(b) gives the statutory test: the LLC is bound if the act is apparently in the ordinary course of its activities and the other party reasonably believes, based on the LLC's conduct, that the person is authorized — unless the other party has notice of the lack of authority. Buying $35,000 of office supplies is ordinary course, and Priya, the manager, repeatedly told OfficeSource that Dan handled supply purchases and directed invoices to him. That managerial conduct held Dan out as authorized, so OfficeSource reasonably believed he could sign. OfficeSource knew Dan was only a member, but Section 301(c) says that alone does not establish notice of lack of authority; and OfficeSource had no notice of the operating agreement's limit. Thus Northgate is bound.
The "No, because Dan lacked actual authority" answer misses that apparent authority can bind the LLC without actual authority, and knowing Dan was not manager is not enough under 301(c). The "nonmanager member can never have apparent authority" answer misreads Section 301(a): it negates agency solely from membership, but 301(b) allows apparent authority based on LLC conduct. The "every member has actual authority" answer misstates the statute: 301(a) says membership alone is not agency, and the operating agreement did not grant Dan actual authority. The purchase order binds through apparent authority.
On exam, separate actual from apparent authority: look for the LLC's conduct clothing the person with authority, and check whether the third party had notice of limits.
- Which of the following best describes the court's proper ruling?
Answer: The court may issue the charging order, but Carter has no right to receive distributions from Summit unless Summit would have made a distribution to Walsh, and Carter cannot control Walsh's vote.
When you see a question about a judgment creditor trying to reach an LLC member's interest, the key is the charging order: it is the exclusive remedy, but it is deliberately narrow. The creditor steps into the debtor-member's economic rights only—not into the member's management rights.
Here, the court should issue the charging order, but Carter's rights are limited by the rule from In re Willow Creek. Carter may receive only distributions that Summit would otherwise pay to Walsh. If Summit makes no distribution to Walsh, Carter gets nothing, and Carter cannot force Summit to distribute cash. Likewise, the charging order gives Carter no voting rights, so the court cannot require Walsh to vote as Carter directs.
The wrong answers each stretch the charging order too far. The choice saying the court may issue the charging order and direct Walsh's vote is wrong because a charging order does not convey voting power. The choice saying the court may order Summit to distribute all available cash is wrong because the creditor cannot compel distributions—it only receives distributions the LLC already chooses to make to the debtor. The choice saying the charging order places Carter "in the member's shoes" for distributions is the same flaw: it overstates the creditor's rights. Finally, the choice claiming the court cannot issue a charging order without the other members' consent is wrong because a charging order does not transfer membership; it merely reaches distributions, so the operating agreement's transfer restriction does not block it.
Study tip: always separate economic rights (distributions) from governance rights (voting, management). A charging order gives only the former.
- Was the sale properly authorized?
Answer: Yes, because A and B together hold 75% of the voting interests, satisfying the 70% requirement, and D properly signed after member approval.
This question tests the interplay between statutory default rules and an LLC's operating agreement for dispositions of all or substantially all assets. Start by checking the operating agreement first: it may change the default approval requirement.
Here, the operating agreement explicitly requires member approval of any sale of all or substantially all assets outside the ordinary course, and sets that approval at "at least 70% of the Voting Interests." A and B together hold 75%, so the member-approval condition is satisfied. The statute also respects that percentage: Section 701(b) says the operating agreement's specified percentage controls, and only if it is silent does unanimous approval apply. D then signed the contract after that approval, which was proper because the manager executes the sale once members have authorized it.
The "unanimous approval of all members" answer is wrong because it ignores the operating agreement's 70% provision. The "manager had exclusive authority" answer misreads the agreement: the manager's exclusive authority is subject to the express carve-out requiring member approval for this kind of sale. The "sale was in the ordinary course" answer is wrong because selling all assets to a third party is outside the ordinary course, which is exactly why the member-approval requirement exists.
On exam day, when you see an LLC asset disposition, ask: what does the operating agreement require, and did the required percentage approve? Then check whether the proper party signed.
- If Roman later challenges the lease as unfair, which statement is correct?
Answer: The lease is valid because Dana made full disclosure, the required vote of disinterested members was obtained, and the operating agreement's conclusive-presumption provision is permitted by the Act.
Whenever you see a manager-conflict transaction under an LLC Act, focus on full disclosure and approval by a majority of the disinterested voting power. Here Dana disclosed the material terms and her conflict in writing. The disinterested members were Priya (40%) and Roman (30%), so Priya's approval alone represented more than half of that 70% disinterested voting power, even though Roman voted no. The operating agreement then makes such an approved transaction conclusively presumed fair, and the Act expressly permits that conclusive-presumption provision while still preserving the duty of loyalty. Thus the lease is valid, and Dana need not separately prove fair-market rent.
The argument that the lease is void because Dana is sole manager misreads the statute: a conflicted manager may deal with an affiliate if the statutory approval process is followed. The argument that Dana must prove fair-market rent because Roman did not approve ignores both the enforceable conclusive-presumption clause and the fact that Roman's no vote did not defeat the majority. Finally, the idea that the lease is valid as to Priya's 40% but voidable as to Roman's 30% misunderstands LLCs: the transaction is unitary, and proper approval binds all members, not just those who consented.
Remember: in conflict-of-interest questions, calculate disinterested voting power, require full disclosure and majority approval, and respect an operating-agreement conclusive-presumption clause if the Act allows it.
- In a dispute between the landlord and Solstice, which additional fact would be most important in determining whether Solstice is bound by the lease?
Answer: Whether Maya had previously allowed Elena to negotiate and sign contracts for Solstice and the landlord knew of that practice.
This question tests authority to bind a manager-managed LLC. Because Solstice is manager-managed and the operating agreement names only Maya as manager, Elena, as a mere member, has no actual authority simply by being a member. But an LLC can still be bound under apparent authority if the principal, through Maya, cloaks Elena with apparent authority and the third party reasonably relies on it. That is why the most important fact is whether Maya had previously allowed Elena to negotiate and sign contracts for Solstice and the landlord knew of that practice: prior similar dealings by Maya, known to the landlord, are the kind of manifestation that creates apparent authority.
The writing requirement is irrelevant: even if the lease must be in writing, that goes to enforceability, not whether Elena had authority. Elena's reasonable belief that Maya would approve is also beside the point — apparent authority depends on the third party's reasonable reliance on the principal's actions, not the agent's subjective hopes. And whether the rent was below market may suggest the deal is favorable, but it does not establish authority or ratification.
Study tip: in entity-authority questions, always ask what the principal did to cause the third party to believe. Actual authority looks inward; apparent authority looks outward.
- Which issue is most likely to determine whether Rosa's suit can proceed?
Answer: Whether the disinterested members' refusal to sue was made in good faith after a reasonable investigation.
Whenever you see a member suing on behalf of an LLC, you are in derivative-action territory. The claim belongs to the LLC, not the member personally, and courts generally require the member to make a demand on the company before suing. If the company refuses, the key question becomes whether that refusal deserves deference.
Here, Rosa demanded that the LLC sue the manager. The two disinterested members investigated and unanimously refused, citing cost and reputational harm. That refusal is exactly the issue that will determine whether Rosa's suit proceeds: courts will defer to a refusal made in good faith and after a reasonable investigation. If the refusal meets that standard, Rosa cannot override it; if the investigation was a sham or the refusal was self-dealing, her derivative suit may continue.
"Whether Rosa can show that she was personally harmed" misunderstands standing — a derivative plaintiff needs harm to the LLC, not personal injury. "Whether the manager's bonus was so excessive" goes to the merits of the claim, but it does not decide the procedural question of whether Rosa can step into the LLC's shoes after a refusal. "Whether Rosa made her demand before the bonus payment was disclosed" misstates the timing rule: she demanded after discovering the bonus, which is sufficient; disclosure to other members is not the controlling test.
Study tip: for derivative suits, separate the demand/refusal issue from the merits. Focus on whether the decision-makers were disinterested, investigated, and acted in good faith.
- Which issue is most likely to determine whether the distribution is valid?
Answer: Whether distributions under a silent operating agreement must be made in equal shares among all members.
When you see an LLC distribution dispute, first ask: "What do the operating agreement or default rules say about sharing?" An LLC's operating agreement is its contract, but when it is silent, state LLC statutes supply default terms. Here, the agreement says nothing about how distributions are shared, so the determinative question is what default rule applies. In most LLC default rules, distributions are shared in equal shares among all members, not in proportion to capital contributions, unless the operating agreement says otherwise. That makes the correct issue whether a silent operating agreement mandates equal shares. Dario and Elena's vote cannot override Faiza's statutory default right, so their attempt to give themselves $30,000 and Faiza nothing is likely invalid.
The other choices miss the point. Whether Faiza's brewing services were a valid form of contribution is irrelevant because her membership is not disputed, and services can be valid contributions; this choice distracts you from the distribution-sharing question. Whether the distribution left sufficient assets to pay debts is also not the issue—the facts expressly say it did, and solvency tests address creditor protection, not internal fairness among members. Finally, whether the vote was a proper exercise of majority management authority conflates management decisions with member economic rights; a majority can run day-to-day affairs, but the default distribution rule protects every member's share unless agreed otherwise.
On exam day, whenever an operating agreement is silent, default statutory rules fill the gap—and for LLC distributions, equal shares often control. Watch for facts that tempt you into contribution-based reasoning.
- Which statement is correct?
Answer: Maria is liable to Kessler for $300,000, and Ben is liable to Kessler for $150,000; Amy has no liability to Kessler.
Whenever you see a distribution question under an LLC statute, separate the actors: the manager's liability turns on assenting to an unlawful distribution, while a member's liability turns on knowledge at receipt.
Maria declared a $300,000 distribution when Kessler's total liabilities already exceeded its assets. Section 404 forbids any distribution if, after giving it effect, liabilities would exceed assets; because the company was already insolvent, no amount could lawfully have been distributed. Under Section 405(a), Maria as manager is personally liable for the amount by which the distribution exceeded the lawful amount—the entire $300,000. Therefore, an answer limiting Maria to $150,000 misapplies the statute by effectively splitting the unlawful distribution.
For recipients, Section 405(b) reaches only a member who knew the distribution was prohibited. Ben is liable for his $150,000 because he reviewed a balance sheet showing liabilities exceeding assets both before and after the distribution, so he had actual knowledge. Amy, however, received her $150,000 without knowledge and with no reason to know; Section 405(c) expressly excuses her, so any answer saying Amy is liable is incorrect.
The answer claiming Maria is not liable because the operating agreement gave her discretion is also wrong: statutory prohibitions bind managers regardless of internal discretion.
Thus the correct result is: Maria liable for $300,000, Ben liable for $150,000, Amy no liability.
- May Rosie compel inspection?
Answer: No, because Rosie is in competition with Beacon and her actual purpose is to obtain the customer list for her outside company, which is not reasonably related to her interest as a member.
Whenever you see an LLC inspection question, focus on the statutory standard: the member must make the demand in good faith and for a purpose reasonably related to her interest as a member. Here, Section 410(b) adds a crucial limit—if the member is in competition with the LLC, the purpose is not reasonably related unless the records are needed to protect her LLC interest.
Rosie cannot compel inspection. Her written demand claims she wants to verify Tessa's discounts to Sam, but her actual purpose is to obtain Beacon's customer list for her competing outside company. Because she is in competition with Beacon and the customer list is not needed to protect her membership interest, the demand fails the good-faith and reasonable-purpose test. The statute allows the LLC to refuse an improper demand, and the court will not order inspection.
The first wrong answer ("Section 410(c) says the right may not be eliminated") confuses non-waivability with an absolute right; the right still depends on a proper demand, and Tessa's refusal was not arbitrary because Rosie's actual purpose was improper. The second wrong answer ("written demand states a proper purpose, and a manager has no authority") ignores that actual purpose controls and that the LLC may judge whether the demand satisfies the statute. The fourth wrong answer ("members of a manager-managed LLC have no right to inspect customer lists") misstates the law; Section 410(a) broadly covers records, not just financial statements and tax returns.
Study tip: whenever a member's stated purpose differs from her actual purpose, the actual purpose decides the inspection right—especially if she competes with the LLC.
- Which issue is most likely to determine whether Chen must contribute?
Answer: Whether an operating agreement amendment can impose a new capital contribution obligation on a non-consenting member.
This question tests the limits of majority power under an LLC operating agreement. Whenever you see an LLC amendment, separate the procedural validity of the vote from the substantive power to bind a non-consenting member. Here, Amal and Ben held 65%, so the operating agreement's amendment requirement was likely met. But meeting that threshold only answers how the agreement can be changed; it does not answer whether the change can impose a fresh $100,000 capital call on Chen.
Under LLC law, a member's obligation to contribute capital is generally limited to what was agreed in the operating agreement or by separate consent. An amendment that creates a new affirmative obligation to fund the company changes the economic deal of membership, so a non-consenting member is not automatically bound, even if the amendment was validly adopted by the required vote. The key dispute is therefore whether such a capital obligation can be imposed on Chen without his consent.
The 65% vote issue is a trap because it conflates the power to amend procedure with the power to alter substantive rights. The notice-meeting issue is irrelevant because nothing suggests defective notice. Chen's refusal is not wrongful dissociation; it is a refusal to pay an obligation whose validity is exactly the contested question.
When you see a capital-contribution question, remember: consent matters unless the operating agreement clearly says otherwise.
- Which issue is most likely to determine whether Nadia breached a duty to the LLC?
Answer: Whether Nadia, as a non-manager member of a manager-managed LLC, owed a duty to refrain from competing with the LLC.
Whenever you see an LLC question involving fiduciary duties, check the management structure first. In a manager-managed LLC, the operating agreement typically places management authority—and fiduciary duties—in the managers, not in the members who are not managers. Here, Omar is the manager and Nadia is a non-managing member; the agreement is silent about outside business activities. The decisive threshold issue is therefore whether Nadia, as a non-manager in a manager-managed LLC, owed a duty not to compete with the LLC. If she did not, then no amount of competition or lost profit creates liability. If she did, the other facts become relevant.
Directly competing and serving the same customers: relevant to whether competition occurred or harmed the LLC, but it does not establish a duty. Lost profits: damages are not liability; a court must first find a duty and a breach. Confidential information: using LLC secrets could implicate a separate duty or trade-secret law even for a non-manager, but Omar's claim is about competition—and without a no-compete or loyalty duty, competition alone is not a breach. The real trap is assuming all members owe the same duties as managers; in manager-managed LLCs, they generally do not unless the operating agreement imposes them.
When a question asks what determines liability, look for the gatekeeper issue—here, the existence of a duty—before analyzing facts.
