Bar Exam (Uniform) Quiz: Fiduciary Duties

20 questions · exam conditions

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Fiduciary DutiesQuestion 1 of 20

You are representing a real estate developer who retained an agent to identify and purchase vacant lots suitable for commercial development. The agent identified a five-acre lot and informed the developer that the owner was asking for $1 million. The developer agreed to the price and purchased the lot. Later, the developer discovered that the agent had first purchased the lot herself for $750,000 through a shell corporation she controlled, and then immediately arranged the sale to the developer for $1 million without disclosing her ownership interest.

The developer has sued the agent for breach of fiduciary duty. Which remedy is a court most likely to award the developer? Select one.

Rescission of the land purchase contract, requiring the agent to return the $1 million and take back the property.

Disgorgement of the agent's $250,000 secret profit, requiring the agent to turn over the funds to the developer.

Compensatory damages limited to the amount of the commission the developer paid to the agent for the transaction.

Punitive damages only, as the developer agreed to the purchase price and therefore suffered no actual financial loss.

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Bar Exam (Uniform) Quiz

Bar Exam (Uniform) Quiz: Fiduciary Duties

Practice Fiduciary Duties in Bar Exam (Uniform) with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

What this quiz covers

This quiz focuses on Fiduciary Duties, giving you a quick way to practice the rules, question types, and explanations that matter most for Bar Exam (Uniform).

How to use this quiz

Try each quiz question before looking at the correct answer. Use the explanations to review missed ideas, then come back to similar questions until the pattern feels familiar.

All questions

Question 1

The developer has sued the agent for breach of fiduciary duty. Which remedy is a court most likely to award the developer? Select one.

Rescission of the land purchase contract, requiring the agent to return the $1 million and take back the property.
Disgorgement of the agent's $250,000 secret profit, requiring the agent to turn over the funds to the developer. (correct answer)
Compensatory damages limited to the amount of the commission the developer paid to the agent for the transaction.
Punitive damages only, as the developer agreed to the purchase price and therefore suffered no actual financial loss.

Explanation: The correct answer is B. An agent owes a strict fiduciary duty of loyalty to the principal, which prohibits the agent from making a secret profit from the agency relationship. Here, the agent breached this duty by self-dealing without disclosure. The standard remedy for such a breach is disgorgement, which forces the agent to give up the ill-gotten gains. The developer is entitled to the $250,000 profit the agent secretly made. A is incorrect because while rescission can be a remedy for breach of fiduciary duty, courts often prefer disgorgement as it is a more direct remedy for the secret profit and avoids the complexity of unwinding the land transfer, especially if the developer has already started to develop it. Disgorgement is the most common and direct remedy for secret profits. C is incorrect because the remedies for a breach of the duty of loyalty are not limited to the forfeiture of a commission. The principal is entitled to recover the secret profits made by the agent. D is incorrect because the developer did suffer a financial loss; they overpaid by $250,000 due to the agent's breach. Furthermore, punitive damages are typically awarded in addition to, not instead of, compensatory damages or disgorgement.

Question 2

An employee at a consulting firm was assigned to a team advising a major client on a corporate restructuring. During the project, the employee learned that the client was secretly planning to acquire a smaller competitor. The employee, knowing this information was confidential and would cause the competitor's stock price to rise, told his brother, who then bought shares in the competitor and made a large profit when the acquisition was announced. The firm's client discovered the leak and is threatening to sue the consulting firm.

On what basis would the consulting firm be liable for the client's damages? Select one.

Under the doctrine of respondeat superior, because the employee is an agent who breached his fiduciary duty of loyalty. (correct answer)
Under the principle of apparent authority, because the employee appeared to be acting on the firm's behalf.
Under strict liability, because consulting firms are guarantors of their employees' confidentiality.
The firm is not liable because the employee was acting outside the scope of his employment for personal gain.

Explanation: The correct answer is A. The employee, as an agent of the consulting firm (the principal), owes fiduciary duties to the principal. The firm, in turn, owes a duty to its client to ensure its agents handle confidential information appropriately. The employee breached his duty of loyalty to his firm by misusing confidential information obtained during his employment for personal (familial) gain. An employer (principal) can be held liable for the torts, including breaches of fiduciary duty, committed by its employee (agent) within the scope of employment under the doctrine of respondeat superior. Disclosing client confidential information is closely related to the work the employee was hired to do, bringing it within the scope of employment for liability purposes. B is incorrect because apparent authority relates to an agent's power to bind the principal in contracts with third parties. It does not apply to tort liability in this context. C is incorrect because there is no doctrine of strict liability for such breaches. Liability is based on agency and tort principles. D is incorrect because courts often find that acts done for personal gain can still be within the scope of employment if they are foreseeably related to the nature of the employment. An employee mishandling confidential information is a foreseeable risk in a consulting business, so the firm is not automatically shielded just because the motive was personal gain.

Question 3

A corporation's board of directors consists of seven members. The corporation's bylaws require a quorum of a majority of directors for a board meeting, and action can be taken by a vote of a majority of directors present at the meeting. The board held a meeting to approve a merger. Four directors attended. One of the attending directors, the CEO, had a significant financial interest in the acquiring company. The CEO fully disclosed his interest. The merger was approved by a vote of three to one, with the CEO voting in favor.

A shareholder has challenged the merger, arguing that its approval was procedurally defective due to the CEO's conflict of interest. Is the shareholder's challenge likely to succeed on this basis? Select one.

Yes, because the CEO's vote cannot be counted, so the vote was actually two to one, which is not a majority of the quorum.
Yes, because the CEO's presence cannot be counted towards the quorum, meaning no valid meeting took place.
No, because the merger was approved by a majority of the disinterested directors who were present at the meeting. (correct answer)
No, because a quorum of the board was present and the action was approved by a majority of those present.

Explanation: The correct answer is C. Under modern corporate statutes (like the MBCA), a transaction can be validated even with an interested director's participation if it is approved by a majority of the disinterested directors. Here, there were four directors present, establishing a quorum. One director (the CEO) was interested. Of the remaining three disinterested directors, two voted in favor of the merger. The vote of two to one represents a majority of the disinterested directors present (two out of three). This satisfies the procedural safe harbor for interested transactions, so the approval was not defective on this basis. A is incorrect because while the CEO's vote might be disregarded for purposes of the safe harbor, the vote of the two disinterested directors is sufficient on its own. The final vote tally (three to one) still represents an action approved by a majority of the directors present at a meeting with a quorum. B is incorrect because under most modern statutes, an interested director can be counted for purposes of establishing a quorum. D is too general. While factually correct that a quorum was present and a majority of those present approved, it misses the crucial analysis of the conflict of interest. The reason the approval is valid is because it also satisfies the more specific requirement for interested transactions.

Question 4

You are representing a member of a two-person, member-managed LLC that operates a successful restaurant. The LLC's operating agreement is silent on fiduciary duties. Your client's partner, without consulting your client, decided to purchase all of the restaurant's produce from a farm owned by the partner's spouse. The prices charged by the farm are approximately 15% higher than the prices offered by the restaurant's previous supplier for comparable quality produce.

Your client wishes to sue the partner for this decision. What is your client's most viable legal argument? Select one.

The partner breached the duty of care by failing to secure the lowest possible price for produce.
The partner breached the duty of loyalty through an interested, self-dealing transaction. (correct answer)
The partner acted outside the scope of his authority as a member of a member-managed LLC.
The partner's action requires piercing the LLC veil to hold the partner personally liable.

Explanation: The correct answer is B. Members of a member-managed LLC owe fiduciary duties of loyalty and care to the LLC and its other members. The duty of loyalty prohibits self-dealing. A transaction between the LLC and a close family member of a managing member is considered an interested transaction. By causing the LLC to enter into a contract with his spouse's company, especially at an above-market price, the partner engaged in a conflict-of-interest transaction that benefited him indirectly, which is a breach of the duty of loyalty. A is incorrect because while the decision might also be a breach of the duty of care, the core of the issue is the conflict of interest, which falls squarely under the duty of loyalty. A claim based on the business judgment rule might protect a manager from a duty of care claim for a bad deal, but it does not protect against self-dealing. C is incorrect because members in a member-managed LLC generally have broad authority to bind the LLC in the ordinary course of business. Making purchasing decisions is typically within that authority. The issue is not the lack of authority but the breach of fiduciary duty in exercising that authority. D is incorrect because piercing the veil is a remedy used by outside creditors to hold members liable for the LLC's debts; it is not the proper cause of action for an internal dispute between members regarding a breach of fiduciary duty.

Question 5

Your client wishes to sue the partner for this decision. What is your client's most viable legal argument? Select one.

The partner breached the duty of care by failing to secure the lowest possible price for produce.
The partner breached the duty of loyalty through an interested, self-dealing transaction. (correct answer)
The partner acted outside the scope of his authority as a member of a member-managed LLC.
The partner's action requires piercing the LLC veil to hold the partner personally liable.

Question 6

You are advising the board of directors of a manufacturing corporation. One of the directors, a woman, also owns a logistics company. The corporation needs to contract for new shipping services. The director has proposed that the corporation award the contract to her logistics company. She presented data showing her company's rates are competitive with other major carriers. She has offered to recuse herself from any board vote on the matter.

What is the best advice to give the board to ensure the transaction is protected from a later claim of breach of fiduciary duty? Select one.

Advise that the transaction is prohibited because it is a self-dealing contract, and the director must resign.
Advise the board to proceed with the vote, as the director's offer to recuse herself is sufficient to cleanse the conflict.
Advise the board to approve the contract only if it is approved by a majority vote of the fully informed, disinterested directors. (correct answer)
Advise the board to approve the contract only if it is fair to the corporation, regardless of the board's approval process.

Explanation: The correct answer is C. This scenario involves an interested director transaction (self-dealing), which is a potential breach of the duty of loyalty. Modern corporate statutes (like the MBCA) provide "safe harbors" that can validate such a transaction. The most common safe harbor is approval by a majority of disinterested directors after full disclosure of all material facts of the transaction and the director's interest. The director's recusal from the vote is part of this process. A is incorrect because self-dealing transactions are not per se prohibited. They can be validated if they fall within a statutory safe harbor. B is incorrect because while the director's recusal is necessary, it is not sufficient. The key is that the remaining disinterested directors must be fully informed and approve the transaction. D is incorrect because while fairness is another potential safe harbor, relying solely on a subjective fairness standard is risky. The procedural safe harbor of disinterested director approval provides stronger protection under the business judgment rule. Furthermore, courts often require both a fair process (like disinterested approval) and a fair price.

Question 7

On what basis would the consulting firm be liable for the client's damages? Select one.

Under the doctrine of respondeat superior, because the employee is an agent who breached his fiduciary duty of loyalty. (correct answer)
Under the principle of apparent authority, because the employee appeared to be acting on the firm's behalf.
Under strict liability, because consulting firms are guarantors of their employees' confidentiality.
The firm is not liable because the employee was acting outside the scope of his employment for personal gain.

Question 8

Yes, because the CEO's vote cannot be counted, so the vote was actually two to one, which is not a majority of the quorum.
Yes, because the CEO's presence cannot be counted towards the quorum, meaning no valid meeting took place.
No, because the merger was approved by a majority of the disinterested directors who were present at the meeting. (correct answer)
No, because a quorum of the board was present and the action was approved by a majority of those present.

Question 9

The president of a corporation, who is not a director, learned that the corporation's chief financial officer has been embezzling funds. The president chose not to report this to the board of directors, hoping to handle the situation quietly to avoid a scandal. He confronted the CFO, who returned some of the money but then fled the country before the full amount could be recovered. The corporation suffered a significant loss.

A shareholder brings a derivative suit against the president. Which of the following is the shareholder's strongest claim? Select one.

The president breached his duty of loyalty by trying to conceal the embezzlement.
The president breached his duty of care by failing to inform the board of directors of the misconduct. (correct answer)
The president is not liable because only directors, not officers, owe fiduciary duties to the corporation.
The president is protected by the business judgment rule because his decision was made in good faith to protect the corporation's reputation.

Explanation: The correct answer is B. Corporate officers, like directors, owe fiduciary duties of care and loyalty to the corporation. The duty of care requires an officer to act with the care that a person in a like position would reasonably believe appropriate under similar circumstances. Discovering illegal conduct by a fellow senior officer is a serious matter that requires prompt and effective action. A reasonably prudent president would have immediately informed the board of directors, which has the ultimate responsibility for managing the corporation and overseeing its officers. Failing to do so was a breach of the duty of care. A is incorrect because there is no indication that the president had a conflict of interest or personally benefited from the concealment. His motive, though misguided, was to protect the company, making this a care issue, not a loyalty issue. C is incorrect because corporate officers owe the same fundamental fiduciary duties of care and loyalty to the corporation as directors do. D is incorrect because the business judgment rule does not protect a decision to conceal illegal activity from the board. Such a decision is not a valid exercise of business judgment. The failure to inform the board of such a critical issue falls below the standard of care required to invoke the rule's protection.

Question 10

Your client is a minority shareholder in a close corporation. The majority shareholder, who is also the CEO, has caused the corporation to pay him a salary that is three times the market rate for CEOs of comparable companies. The corporation has never paid a dividend, despite being profitable. The minority shareholder believes the excessive salary is a way for the majority shareholder to take all the profits for himself, effectively freezing the minority out of any return on their investment.

What is the minority shareholder's best argument against the majority shareholder? Select one.

The majority shareholder has breached the heightened fiduciary duty owed to minority shareholders in a close corporation. (correct answer)
The majority shareholder's salary is protected by the business judgment rule as a compensation decision.
The minority shareholder's exclusive remedy is to demand an appraisal of her shares and sell them back to the corporation.
The majority shareholder has violated federal securities laws by failing to disclose his compensation.

Explanation: The correct answer is A. In close corporations, courts often impose a heightened fiduciary duty on majority shareholders, similar to the duty partners owe one another. This duty requires them to act with the utmost good faith and loyalty toward the minority shareholders. Using control to award oneself excessive compensation, thereby denying a fair return to the minority, is a classic example of oppressive conduct that breaches this heightened duty. B is incorrect because the business judgment rule does not protect decisions tainted by a conflict of interest. A CEO setting his own salary is an interested transaction, and when the salary is excessive, it is not shielded by the rule. It must be proven to be fair to the corporation. C is incorrect because appraisal rights are typically triggered by specific corporate actions like mergers or asset sales, not by ongoing oppressive conduct like payment of excessive salary. D is incorrect because while disclosure is required, the primary legal wrong here under state corporate law is the breach of fiduciary duty through oppressive conduct, not a failure to disclose under federal law.

Question 11

The managing partner of a law firm was responsible for renewing the firm's malpractice insurance. He missed the renewal deadline, and the policy lapsed for a period of two weeks. During this uninsured period, another attorney at the firm committed an act of malpractice, leading to a large judgment against the partnership. The managing partner had no personal involvement in the malpractice case itself.

Is the managing partner likely liable to the partnership for the loss resulting from the judgment? Select one.

No, because the loss was directly caused by another partner's malpractice, not the managing partner's actions.
No, because partners are not liable to the partnership for simple negligence in managing firm business.
Yes, because missing a critical deadline like an insurance renewal constitutes gross negligence, a breach of the duty of care. (correct answer)
Yes, because as managing partner, he is strictly liable for any administrative failures that harm the partnership.

Explanation: The correct answer is C. Partners owe the partnership a fiduciary duty of care. Under the Revised Uniform Partnership Act (RUPA), this duty is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. While simple negligence is not a breach, allowing the firm's malpractice insurance to lapse is arguably so careless and deviates so far from the standard of ordinary care that a court would likely find it to be gross negligence. This breach of the duty of care directly led to the partnership being uninsured and suffering the full loss from the judgment. A is incorrect because while the other partner's malpractice was a but-for cause, the managing partner's negligence was also a but-for and proximate cause of the financial loss to the partnership, which would have been covered by insurance. B is incorrect because while the standard is higher than simple negligence, the conduct here likely rises to the level of gross negligence, which is a breach of the duty of care. D is incorrect because there is no strict liability for managing partners. Liability must be based on a breach of a fiduciary duty, such as the duty of care.

Question 12

The developer has sued the agent for breach of fiduciary duty. Which remedy is a court most likely to award the developer? Select one.

Rescission of the land purchase contract, requiring the agent to return the $1 million and take back the property.
Disgorgement of the agent's $250,000 secret profit, requiring the agent to turn over the funds to the developer. (correct answer)
Compensatory damages limited to the amount of the commission the developer paid to the agent for the transaction.
Punitive damages only, as the developer agreed to the purchase price and therefore suffered no actual financial loss.

Question 13

An officer of a software corporation was tasked with finding a new vendor for cloud computing services. The officer conducted research and identified three reputable vendors. One of the vendors offered the officer an all-expenses-paid trip to a luxury resort to "discuss the proposal." The officer accepted the trip and, upon returning, recommended that the corporation select that vendor, even though another vendor offered a slightly better price for comparable services. The board, relying on the officer's recommendation, approved the contract. The officer never disclosed the trip to the board.

If the corporation discovers the facts about the trip, what is its strongest claim against the officer? Select one.

The officer breached the duty of loyalty by accepting a personal benefit from a party transacting with the corporation. (correct answer)
The officer breached the duty of care by not selecting the vendor with the lowest price for the services.
The officer exceeded his actual authority by negotiating with the vendor in an improper manner.
The officer has no liability because the board of directors ratified the contract with the chosen vendor.

Explanation: The correct answer is A. The fiduciary duty of loyalty prohibits officers from receiving personal benefits from third parties in connection with corporate transactions without full disclosure and approval. The luxury trip was a personal benefit that created a conflict of interest, compromising the officer's ability to act solely in the best interest of the corporation. This is a clear breach of the duty of loyalty. B is incorrect because the primary issue here is the conflict of interest (a loyalty issue), not negligence in the decision-making process (a care issue). While choosing a more expensive vendor could be framed as a care breach, the undisclosed personal benefit makes it a much stronger loyalty claim. The business judgment rule would likely protect the officer on a care claim if the decision was rational, but it offers no protection for a breach of loyalty. C is incorrect because the officer was acting within his actual authority to research and recommend a vendor. The breach was not in the scope of his actions, but in the conflicted manner in which he performed his duties. D is incorrect because ratification by the board is only effective if the board was fully informed of all material facts. Since the officer did not disclose the trip, the board's approval was not based on full information and therefore does not cleanse the breach of loyalty.

Question 14

A partner in a three-person general partnership that provides IT consulting services decided to retire. The partnership agreement was silent on post-dissociation competition. One month after dissociating from the partnership, the former partner formed a new, competing IT consulting firm. He then contacted several of the partnership's most lucrative clients, using his knowledge of their needs and the partnership's pricing structure to offer them a better deal. Several clients switched to the former partner's new firm.

Have the former partner's actions constituted a breach of a fiduciary duty owed to the partnership? Select one.

Yes, because a former partner's duty of loyalty continues indefinitely after dissociation.
Yes, because the former partner used confidential information acquired during his time as a partner. (correct answer)
No, because once a partner dissociates, all fiduciary duties to the partnership are terminated.
No, because the partnership agreement did not contain a non-compete clause.

Explanation: The correct answer is B. While most fiduciary duties terminate upon dissociation, certain duties persist. Specifically, a dissociated partner still owes a duty of loyalty with regard to matters that arose before dissociation and a duty not to use partnership property, including confidential information, for personal gain. Here, the former partner used confidential information (knowledge of client needs and pricing) acquired as a partner to compete with the firm. This is a breach of his lingering fiduciary duties. A is incorrect because the duty of loyalty does not continue indefinitely. For example, the duty not to compete generally terminates upon dissociation, but the duty concerning past matters and confidential information survives. C is incorrect because, as explained above, some fiduciary duties survive dissociation, particularly the duty not to misuse partnership property or confidential information. D is incorrect because the fiduciary duty not to use confidential information exists as a matter of partnership law (under RUPA), independent of any contractual non-compete clause. The absence of a non-compete clause allows him to compete, but not by using the partnership's confidential information.

Question 15

A director of a large, publicly traded electronics corporation learned through a board meeting that the corporation was planning to acquire a smaller company that specialized in battery technology. Before the acquisition was publicly announced, the director personally purchased a large block of the smaller company's stock. After the acquisition was announced, the stock price of the smaller company soared, and the director sold her shares for a substantial profit.

A shareholder has brought a derivative action against the director. What is the shareholder's strongest claim against the director? Select one.

The director breached the duty of care by failing to act as a reasonably prudent person.
The director engaged in an improper self-dealing transaction with the corporation.
The director usurped a corporate opportunity that belonged to the electronics corporation.
The director breached the duty of loyalty by personally profiting from confidential corporate information. (correct answer)

Explanation: The correct answer is D. The director breached her duty of loyalty. This duty requires a director to act in the best interests of the corporation and prohibits using confidential corporate information for personal gain. The director used non-public information obtained in her capacity as a director to make a personal profit, which is a classic breach of the duty of loyalty. This is also a violation of federal securities laws (insider trading), but the core corporate law claim is breach of the duty of loyalty. A is incorrect because the duty of care relates to the director's decision-making process in managing the corporation's affairs. The director's actions here relate to self-enrichment, which is a loyalty issue, not a competence or diligence issue. B is incorrect because a self-dealing transaction involves the director transacting with the corporation (e.g., selling property to the corporation). Here, the director's transaction was with a third party on the open market; the breach was the misuse of information, not the transaction itself. C is incorrect because usurping a corporate opportunity involves taking a business opportunity that the corporation could have pursued. Here, the corporation's opportunity was to acquire the company, which it did. The director did not take that opportunity; instead, she improperly profited from information about it.

Question 16

A manager of a manager-managed LLC was presented with a business opportunity to invest in a tech startup. The startup's business was tangentially related to the LLC's primary business but not directly competitive. The LLC's operating agreement states that "managers shall not be liable to the LLC for any action taken in good faith." Believing the LLC lacked the funds to invest and that the opportunity was risky, the manager personally invested in the startup without first presenting the opportunity to the LLC's members.

A member has sued the manager for usurping an LLC opportunity. The manager defends based on the operating agreement's exculpatory clause. Is this defense likely to succeed? Select one.

Yes, because the operating agreement validly eliminated the manager's duty of loyalty.
Yes, because the manager's good faith belief that the LLC could not invest is protected by the clause.
No, because operating agreements cannot eliminate the duty of loyalty, which includes the duty to present opportunities to the LLC. (correct answer)
No, because the opportunity was not related to the LLC's business, so no duty was owed in the first place.

Explanation: The correct answer is C. Under most LLC statutes (including the ULLCA), the operating agreement cannot eliminate the duty of loyalty, although it can alter it if not manifestly unreasonable. The duty of loyalty includes the duty to refrain from appropriating an LLC opportunity. The exculpatory clause here purports to protect actions taken in good faith, but it cannot be read to eliminate the core duty to offer the opportunity to the LLC first. The manager's breach was not a lack of good faith, but a failure to follow the proper procedure of disclosure and refusal required by the corporate opportunity doctrine (as applied to LLCs). A is incorrect because operating agreements typically cannot completely eliminate the duty of loyalty. B is incorrect because a "good faith" exculpation clause generally shields breaches of the duty of care, not breaches of the duty of loyalty like usurping an opportunity. The manager's subjective belief is not enough to excuse the breach of loyalty. D is incorrect because the opportunity was related enough to the LLC's business to potentially be considered an LLC opportunity. The determination would depend on the specific facts and the jurisdiction's test (e.g., line of business, interest or expectancy), but the manager cannot make that determination unilaterally without disclosure.

Question 17

A shareholder brings a derivative suit against the president. Which of the following is the shareholder's strongest claim? Select one.

The president breached his duty of loyalty by trying to conceal the embezzlement.
The president breached his duty of care by failing to inform the board of directors of the misconduct. (correct answer)
The president is not liable because only directors, not officers, owe fiduciary duties to the corporation.
The president is protected by the business judgment rule because his decision was made in good faith to protect the corporation's reputation.

Question 18

A shareholder has brought a derivative action against the director. What is the shareholder's strongest claim against the director? Select one.

The director breached the duty of care by failing to act as a reasonably prudent person.
The director engaged in an improper self-dealing transaction with the corporation.
The director usurped a corporate opportunity that belonged to the electronics corporation.
The director breached the duty of loyalty by personally profiting from confidential corporate information. (correct answer)

Question 19

A member has sued the manager for usurping an LLC opportunity. The manager defends based on the operating agreement's exculpatory clause. Is this defense likely to succeed? Select one.

Yes, because the operating agreement validly eliminated the manager's duty of loyalty.
Yes, because the manager's good faith belief that the LLC could not invest is protected by the clause.
No, because operating agreements cannot eliminate the duty of loyalty, which includes the duty to present opportunities to the LLC. (correct answer)
No, because the opportunity was not related to the LLC's business, so no duty was owed in the first place.

Question 20

Two individuals formed a general partnership to run a bakery. Their partnership agreement requires any expenditure over $1,000 to be approved by both partners. One partner, without the other's knowledge or consent, entered into a contract with a supplier to purchase a new oven for $5,000. The supplier was unaware of the restriction in the partnership agreement. When the oven was delivered, the other partner refused to allow the partnership to pay for it.

Is the partnership likely obligated to pay the supplier for the oven? Select one.

No, because the partner lacked actual authority to purchase the oven without the other partner's consent.
No, because the supplier had a duty to inquire about the partner's authority for such a large purchase.
Yes, because the partner had apparent authority to bind the partnership in the ordinary course of business. (correct answer)
Yes, but only the partner who signed the contract is personally liable for the debt, not the partnership.

Explanation: The correct answer is C. While the partner breached his fiduciary duty to his other partner by violating the partnership agreement (a breach of the duty of obedience owed between partners), this question is about the partnership's liability to a third party. Each partner is an agent of the partnership. A partner has apparent authority to bind the partnership for acts in the ordinary course of the partnership's business. Purchasing an oven is in the ordinary course of business for a bakery. Since the supplier was unaware of the internal restriction on the partner's authority, the partnership is bound by the contract under the doctrine of apparent authority. A is correct that the partner lacked actual authority, but that does not resolve the issue of liability to a third party who reasonably relied on the partner's apparent authority. B is incorrect because third parties are generally not required to investigate the internal workings of a partnership and can rely on a partner's apparent authority to conduct business as usual. D is incorrect because when a partner binds the partnership on a contract, the partnership itself is liable. Consequently, all general partners are jointly and severally liable for the partnership's obligation.