Bar Exam (Uniform) Quiz: Promoter Liability
20 questions · exam conditions
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Promoter LiabilityQuestion 1 of 20

A promoter acquired an option to purchase a tract of land for $1 million. She then organized a corporation and disclosed to the initial board of directors, who were all independent and unaffiliated with her, that she held this option. She offered to sell the option to the corporation for $1.2 million. After conducting their own due diligence and concluding the price was fair, the independent board voted to approve the purchase. The corporation later discovered that the promoter had paid nothing for the option itself. The corporation sued the promoter to recover her $200,000 profit.

Is the corporation likely to prevail in its lawsuit? Select one.

Yes, because a promoter is strictly prohibited from profiting on any transaction with the corporation she forms.
Yes, because the promoter breached her fiduciary duty by failing to disclose that she paid nothing for the option, making her disclosure incomplete and misleading.
No, because the promoter fully disclosed her interest in the transaction to an independent board of directors, who approved it.
No, because the profit was made on the sale of an option acquired before the corporation was formed, so no fiduciary duty had yet attached.
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Bar Exam (Uniform) Quiz

Bar Exam (Uniform) Quiz: Promoter Liability

Practice Promoter Liability 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 Promoter Liability, 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

A promoter acquired an option to purchase a tract of land for $1 million. She then organized a corporation and disclosed to the initial board of directors, who were all independent and unaffiliated with her, that she held this option. She offered to sell the option to the corporation for $1.2 million. After conducting their own due diligence and concluding the price was fair, the independent board voted to approve the purchase. The corporation later discovered that the promoter had paid nothing for the option itself. The corporation sued the promoter to recover her $200,000 profit.

Is the corporation likely to prevail in its lawsuit? Select one.

  1. Yes, because a promoter is strictly prohibited from profiting on any transaction with the corporation she forms.
  2. Yes, because the promoter breached her fiduciary duty by failing to disclose that she paid nothing for the option, making her disclosure incomplete and misleading.
  3. No, because the promoter fully disclosed her interest in the transaction to an independent board of directors, who approved it. (correct answer)
  4. No, because the profit was made on the sale of an option acquired before the corporation was formed, so no fiduciary duty had yet attached.
Explanation: A promoter owes a fiduciary duty to the corporation, including a duty not to make a secret profit. However, a promoter may profit from a transaction with the corporation if there is full disclosure of the material facts to, and approval by, an independent board of directors. Here, the promoter disclosed her interest (that she was selling the option) and the material terms. The independent board, after due diligence, approved the transaction. This disclosure and approval insulates the transaction from being set aside or the profit being disgorged. (A) is incorrect; profiting is allowed with disclosure. (B) is incorrect because disclosure of the promoter's self-interest and the transaction terms to an independent board that conducts due diligence is sufficient; the board was able to evaluate the fairness of the transaction. (D) is incorrect as the fiduciary duty applies to transactions the promoter brings to the corporation.

Question 2

Three individuals acted as co-promoters to form a new software company. Two of the promoters entered into a one-year contract with a consultant to help develop the business plan. The third promoter was aware of the negotiations but did not participate and never signed the agreement. The company was later successfully incorporated, and all three promoters became its initial shareholders and directors. The corporation, however, never adopted the consulting contract. When the consultant was not paid, she sued all three promoters personally.

Is the third promoter, who did not sign the contract, personally liable to the consultant? Select one.

  1. Yes, because as a co-promoter, she is treated as a partner and is jointly and severally liable for the obligations entered into by the other promoters within the scope of the venture. (correct answer)
  2. Yes, because she became a shareholder and director of the resulting corporation, thereby ratifying the pre-incorporation activities of her co-promoters.
  3. No, because she did not sign the contract and therefore cannot be held personally liable for its performance.
  4. No, because once the corporation was formed, any liability of the promoters was extinguished and transferred to the corporate entity.
Explanation: Promoters who work together to form a corporation are often treated as joint venturers or partners in the pre-incorporation activities. As such, agency principles apply. One promoter can bind the other co-promoters on contracts entered into within the scope of the joint venture. Here, hiring a consultant for the business plan was within the scope of forming the software company. Therefore, the third promoter is liable along with the two who signed, based on their relationship as co-promoters. (B) is incorrect because becoming a shareholder does not automatically ratify pre-incorporation contracts. (C) is incorrect because agency principles can create liability without a personal signature. (D) is incorrect because formation of the corporation does not extinguish promoter liability.

Question 3

Three individuals acted as co-promoters to form a new software company. Two of the promoters entered into a one-year contract with a consultant to help develop the business plan. The third promoter was aware of the negotiations but did not participate and never signed the agreement. The company was later successfully incorporated, and all three promoters became its initial shareholders and directors. The corporation, however, never adopted the consulting contract. When the consultant was not paid, she sued all three promoters personally.

Is the third promoter, who did not sign the contract, personally liable to the consultant? Select one.

  1. Yes, because as a co-promoter, she is treated as a partner and is jointly and severally liable for the obligations entered into by the other promoters within the scope of the venture. (correct answer)
  2. Yes, because she became a shareholder and director of the resulting corporation, thereby ratifying the pre-incorporation activities of her co-promoters.
  3. No, because she did not sign the contract and therefore cannot be held personally liable for its performance.
  4. No, because once the corporation was formed, any liability of the promoters was extinguished and transferred to the corporate entity.
Explanation: Promoters who work together to form a corporation are often treated as joint venturers or partners in the pre-incorporation activities. As such, agency principles apply. One promoter can bind the other co-promoters on contracts entered into within the scope of the joint venture. Here, hiring a consultant for the business plan was within the scope of forming the software company. Therefore, the third promoter is liable along with the two who signed, based on their relationship as co-promoters. (B) is incorrect because becoming a shareholder does not automatically ratify pre-incorporation contracts. (C) is incorrect because agency principles can create liability without a personal signature. (D) is incorrect because formation of the corporation does not extinguish promoter liability.

Question 4

A promoter entered into a written agreement with an engineer to design a specialized machine for a corporation the promoter intended to form. The agreement was signed by the promoter personally. After the engineer completed the designs, the promoter formed the corporation. At its first meeting, the corporation's board of directors passed a formal resolution to "adopt and ratify the engineering agreement entered into by the promoter." The corporation used the designs but, due to financial trouble, failed to pay the engineer. The engineer sued both the promoter and the corporation.

Which parties are liable to the engineer for payment? Select one.

  1. Only the corporation is liable, because its formal adoption of the contract relieved the promoter of any liability.
  2. Only the promoter is liable, because the corporation cannot be bound by a contract made before its existence.
  3. Both the promoter and the corporation are liable, because the corporation's adoption made it liable without releasing the promoter. (correct answer)
  4. Neither party is liable, because the promoter's obligations ended upon incorporation and the corporation's adoption was ineffective.
Explanation: The promoter is liable because he signed the pre-incorporation contract personally. The corporation is also liable because it expressly adopted the contract through a board resolution. A key rule of promoter liability is that the corporation's adoption of the contract makes the corporation liable, but it does not, by itself, release the promoter from his original liability. The promoter remains liable along with the corporation until a novation occurs. Since there was no novation, both parties are liable to the engineer.

Question 5

An entrepreneur planned to open a chain of coffee shops. Before incorporating, she signed a contract with a coffee bean supplier. The contract stated: "This agreement is between Supplier and Jane Doe ('Promoter'). It is understood that Promoter intends to assign this contract to a corporation to be formed, and upon such assignment and assumption by the corporation, Promoter shall have no further liability hereunder." The entrepreneur formed the corporation and properly assigned the contract to it. The corporation's board passed a resolution explicitly assuming all obligations under the contract. The supplier was notified of these actions.

If the corporation later breaches the contract, is the promoter personally liable to the supplier? Select one.

  1. Yes, because an assignment of a contract does not relieve the original party of her obligations.
  2. Yes, because the supplier did not sign a separate release document explicitly discharging the promoter.
  3. No, because the contract terms created a valid novation that was completed upon the corporation's assumption of the contract. (correct answer)
  4. No, because the corporation's express assumption of the contract automatically released the promoter by operation of law.
Explanation: The language in the contract constitutes an agreement for a future novation. The supplier agreed in advance to release the promoter on the condition that the new corporation would assume the contractual duties. The promoter fulfilled these conditions by forming the corporation, assigning the contract, and having the corporation assume the obligations. This sequence of events executed the novation contemplated by the contract, thereby releasing the promoter from liability. (A) states the general rule for assignments but ignores the specific contractual language providing for a release. (B) is incorrect because the release was part of the original contract; a separate document is not required. (D) is incorrect because assumption alone does not release a promoter; the release is effective here because of the specific contractual provision.

Question 6

An individual, acting as a promoter for a future restaurant, signed a contract with a marketing firm for a pre-opening advertising campaign. The promoter made a good-faith effort to incorporate the business, filing what she believed were the correct documents with the state. Unbeknownst to her, the documents were defective, and the state rejected the filing, so the corporation was never legally formed. The marketing firm fully performed its services. When the promoter failed to pay, the firm sued her personally.

What is the promoter's strongest defense against personal liability? Select one.

  1. That she was acting as an agent for a principal and therefore is not personally liable on the contract.
  2. That the marketing firm should be estopped from denying the corporation's existence because it dealt with the business as if it were a corporation. (correct answer)
  3. That she is shielded from liability under the de facto corporation doctrine because she made a good-faith attempt to incorporate.
  4. That she is not liable because her personal liability was conditioned on the successful formation of the corporation.
Explanation: While a promoter is generally liable on pre-incorporation contracts, the doctrine of corporation by estoppel might provide a defense. This doctrine prevents a third party who dealt with an enterprise as if it were a corporation from later denying its corporate status to sue an individual. Here, the marketing firm contracted for services for the restaurant business. The promoter's strongest argument is that the firm should be estopped from denying the existence of the entity it contracted with. (A) is incorrect because an agent for a non-existent principal (the unformed corporation) is personally liable. (C) is incorrect because the de facto corporation doctrine, where recognized, generally protects shareholders from liability, not a promoter on a contract she personally signed. (D) is incorrect as there is no factual basis for this condition.

Question 7

A promoter for a planned technology company entered into a contract with a landlord for a three-year office lease. The corporation was never formed. The promoter occupied the office for six months for personal business unrelated to the planned company and then vacated, paying no rent. The landlord sued the promoter for breach of the lease.

What is the promoter's liability to the landlord? Select one.

  1. The promoter is liable for the full amount of the rent due for the entire three-year term of the lease, subject to the landlord's duty to mitigate. (correct answer)
  2. The promoter is liable only for the reasonable rental value of the office for the six months she occupied it.
  3. The promoter has no liability because the lease was contingent on the formation of a corporation that never came into existence.
  4. The promoter has no liability because her use of the space for personal business was outside the scope of her role as a promoter.
Explanation: A promoter is personally liable on pre-incorporation contracts. When the corporation is never formed, the promoter remains the sole liable party. The liability is based on the contract itself. Therefore, the promoter is liable for breach of the entire three-year lease, which would entitle the landlord to contract damages (the remaining rent), subject to the landlord's duty to mitigate damages by trying to re-let the premises. (B) suggests a quasi-contract or unjust enrichment theory, which is incorrect because there is an enforceable contract. (C) is incorrect because the contract is not automatically contingent on formation unless explicitly stated. (D) is irrelevant; her reason for using the space does not alter her contractual liability to the landlord.

Question 8

You are representing a client who is starting a new manufacturing business. Before incorporating, your client needs to secure a long-term supply contract for a rare raw material. The supplier is willing to enter into a contract but is concerned about your client's personal liability since the corporation does not yet exist. Your client wants to sign the contract now to lock in the price but wants to avoid personal liability once the corporation is formed and takes over the contract.

What advice should you give your client to best achieve her goal? Select one.

  1. Advise her to sign the contract as "Promoter, agent for a corporation to be formed," as this language automatically releases her upon incorporation.
  2. Advise her to include a clause in the contract stating that the supplier agrees to release her from liability upon the future corporation's adoption of the contract. (correct answer)
  3. Advise her to have the future corporation's board of directors pass a resolution adopting the contract immediately after incorporation, which will retroactively release her from liability.
  4. Advise her to form the corporation first and then have the corporation sign the contract, as this is the only method to avoid any personal liability on a pre-incorporation agreement.
Explanation: A promoter is personally liable on pre-incorporation contracts unless the contract provides otherwise. The best way for a promoter to avoid future liability is to secure a novation. A novation can be agreed to in advance. A clause in the original contract where the third party agrees to look only to the corporation and release the promoter upon the corporation's adoption of the contract is an effective way to achieve this. This clause essentially pre-authorizes the novation. (A) is incorrect because such agency language is typically insufficient to release a promoter. (C) is incorrect because adoption alone does not release the promoter. (D) is not responsive to the client's desire to sign the contract now before incorporation.

Question 9

A promoter for a new retail company signed a contract to purchase $50,000 worth of inventory from a supplier. The promoter then successfully incorporated the company. The corporation's board of directors, however, reviewed the contract and decided the price was too high. The board voted to reject the contract and sent a letter to the supplier informing them of this decision. The supplier, having already set aside the inventory, suffered damages and sued the promoter personally.

Will the supplier's suit against the promoter likely succeed? Select one.

  1. Yes, because a promoter is liable on a pre-incorporation contract unless and until a novation occurs. (correct answer)
  2. Yes, because the corporation is the promoter's alter ego, and its rejection of the contract is legally ineffective.
  3. No, because the formation of the corporation terminated the promoter's liability by operation of law.
  4. No, because the supplier's sole remedy was to sue the corporation, which had the power to either adopt or reject the contract.
Explanation: A promoter is personally liable on pre-incorporation contracts. This liability continues unless there is a novation. A novation requires an agreement by all three parties (promoter, corporation, third party) to substitute the corporation for the promoter. Here, the corporation never became a party to the contract because it expressly rejected it. Therefore, there was no adoption, and certainly no novation. The promoter's original liability remains fully intact. The supplier's suit against the promoter will succeed.

Question 10

A promoter owned a patent for a manufacturing process. She formed a new corporation with several outside investors who became the majority shareholders. At the first board meeting, the promoter, who was also a director, proposed that the corporation purchase her patent for $500,000. She fully disclosed her ownership of the patent and the price she originally paid for it. The board, consisting of the promoter and two of the outside investors, discussed the proposal. The promoter voted in favor of the purchase, as did one investor. The other investor voted against it. The purchase was approved by a 2-1 vote.

A disgruntled shareholder later files a derivative suit to void the transaction. What is the likely outcome? Select one.

  1. The transaction will be upheld because the promoter made full disclosure of her interest.
  2. The transaction will be voided because a promoter cannot participate in a vote on a transaction in which she has a personal financial interest.
  3. The transaction will be upheld if it was fair to the corporation at the time it was approved. (correct answer)
  4. The transaction will be voided because any self-dealing transaction by a promoter is a per se breach of the duty of loyalty.
Explanation: This question combines promoter fiduciary duty with the rules for interested director transactions under the MBCA. A transaction with a promoter (who is now a director) is not voidable simply because she is interested, provided there is disclosure and approval by a majority of disinterested directors OR the transaction was fair to the corporation. Here, the promoter disclosed her interest, but the vote was not approved by a majority of disinterested directors (it was 1-1 among them). Therefore, the transaction can be challenged. However, it will be upheld if the promoter can prove that the transaction was fair to the corporation. (A) is incorrect because disclosure alone is not enough if the vote is improper. (B) is incorrect as modern statutes often allow interested directors to vote, though their vote might not be counted for approval purposes. (D) is incorrect; self-dealing is not a per se breach if it is disclosed and fair.

Question 11

A promoter for a new airline signed a contract with an aircraft manufacturer to purchase a small jet. The promoter signed the contract as "Jane Doe, as agent for JetCo, a corporation in formation." The manufacturer delivered the jet. JetCo was later successfully incorporated. The corporation immediately put the jet into service, painted its logo on the tail, and made two monthly payments to the manufacturer. JetCo then became insolvent and defaulted. The manufacturer sued Jane Doe personally.

What is the most likely result of the lawsuit against Jane Doe? Select one.

  1. She will be liable because a promoter is always personally liable until an express novation is signed by all parties.
  2. She will be liable because the corporation's adoption of the contract does not by itself extinguish her liability. (correct answer)
  3. She will not be liable because the language "as agent for JetCo" in the contract clearly showed she did not intend to be personally bound.
  4. She will not be liable because the corporation's actions constituted a de facto novation, substituting itself for the promoter.
Explanation: The promoter (Jane Doe) is personally liable on the pre-incorporation contract. The corporation clearly adopted the contract by its actions (using the jet, painting its logo, making payments). However, adoption only makes the corporation liable; it does not release the promoter. Release requires a novation, which is a specific agreement to substitute the parties. There are no facts to support a novation here. (A) is too strong; a novation can be implied, though it's rare. (B) correctly states the standard rule. (C) is incorrect; this agency language is generally not enough to absolve a promoter of liability when the principal does not exist. (D) uses incorrect terminology; there is no such thing as a 'de facto novation,' and the facts don't support an implied agreement to release her.

Question 12

A promoter signed a contract to buy a commercial truck "for a corporation to be formed." The seller knew the corporation did not yet exist. The plan to form the corporation was subsequently abandoned, and the corporation was never formed. The seller of the truck, unable to sell it to another buyer for the same price, sued the promoter for breach of contract.

Is the promoter liable to the seller? Select one.

  1. No, because the contract was conditional on the formation of the corporation, which never occurred.
  2. No, because the seller knew the corporation was not yet in existence when the contract was signed.
  3. Yes, because a person who contracts on behalf of a nonexistent principal is personally liable on the contract. (correct answer)
  4. Yes, but only for the reasonable value of the seller's services, not for expectation damages under the contract.
Explanation: The general rule is that a promoter is personally liable on contracts made before the corporation is formed. This is because the promoter is acting as an agent for a nonexistent principal. The fact that the corporation is never formed does not change this result; in fact, it solidifies the promoter's liability because there is no other entity to look to for performance. (A) is incorrect unless the contract explicitly made formation a condition precedent, which is not stated here. (B) is incorrect; the third party's knowledge of the corporation's nonexistence does not release the promoter. (D) is incorrect; the liability is for breach of contract, which allows for expectation damages.

Question 13

A promoter signed a six-month employment contract with a chief technology officer (CTO) on behalf of a corporation to be formed. The promoter later formed the corporation. The corporation's board was aware of the CTO's contract and allowed her to begin work, providing her with an office and salary for two months. The board never formally voted on the contract. At the end of the second month, the board fired the CTO without cause. The CTO sued the corporation for breach of the employment contract.

Is the corporation liable to the CTO for breach of contract? Select one.

  1. Yes, because the corporation implicitly adopted the contract by knowingly accepting the CTO's services. (correct answer)
  2. Yes, because a corporation is automatically liable for all contracts made by its promoter for its benefit.
  3. No, because the board of directors never held a formal vote to ratify the employment contract.
  4. No, because the contract is unenforceable under the statute of frauds as it was not signed by the party to be charged, the corporation.
Explanation: A corporation becomes liable on a pre-incorporation contract if it adopts it. Adoption need not be formal or express. It can be implied from the corporation's conduct. By knowingly accepting the benefits of the contract—allowing the CTO to work, providing her an office, and paying her salary—the corporation implicitly adopted the employment contract. Having adopted the contract, the corporation is bound by its terms and can be held liable for breaching it by firing the CTO without cause. (B) is incorrect; a corporation is not automatically liable. (C) is incorrect because formal ratification is not required for an implied adoption. (D) is incorrect because the doctrine of adoption binds the corporation to the pre-incorporation agreement signed by the promoter.

Question 14

A promoter entered into a contract to purchase raw materials from a supplier. The promoter signed the contract as "John Smith, for a corporation to be formed." The corporation was formed a month later. The supplier delivered the materials to the corporation's factory. The corporation processed the materials and sold the finished goods at a profit. When the supplier sent an invoice, the corporation's board refused to pay, claiming it was not a party to the original contract. The supplier sued the promoter, who now seeks indemnification from the corporation.

Is the corporation obligated to indemnify the promoter if the supplier recovers a judgment against him? Select one.

  1. Yes, because the corporation accepted the benefits of the contract, creating an implied duty to indemnify the promoter. (correct answer)
  2. Yes, because a promoter always has a right to indemnification for liabilities incurred on behalf of the corporation.
  3. No, because the promoter is primarily liable and the corporation's adoption of the contract does not create a duty to indemnify.
  4. No, because the corporation expressly refused to pay the invoice, thereby rejecting the contract and any obligations under it.
Explanation: When a corporation adopts a contract made by its promoter, it becomes liable on the contract. If the promoter is subsequently forced to pay on that contract, he generally has a right to be indemnified (reimbursed) by the corporation. This right arises from the fact that the corporation has accepted the contract as its own. Here, the corporation implicitly adopted the contract by accepting, processing, and profiting from the raw materials. This adoption creates the corporation's liability to the supplier and a corresponding duty to indemnify the promoter. (B) is too absolute; the right depends on the corporation's adoption. (C) is incorrect; while the promoter remains liable to the third party (absent novation), the corporation that adopted the contract owes a duty to the promoter. (D) is incorrect because the corporation cannot accept the benefits and then reject the burdens; its actions constituted adoption.

Question 15

A promoter hired an architect to draw plans for a new building, signing the contract personally but noting his status as a promoter for a future corporation. The promoter paid the architect a $10,000 retainer from his personal funds. The corporation was later successfully formed. The board of directors voted to adopt the architect's contract and also voted to reimburse the promoter for the $10,000 retainer he had paid. However, before the reimbursement check was issued, the corporation became insolvent.

What is the promoter's legal position regarding the $10,000? Select one.

  1. The promoter is a secured creditor of the corporation because the funds were used for a corporate purpose.
  2. The promoter is an unsecured creditor of the corporation, with a claim for $10,000. (correct answer)
  3. The promoter has no claim against the corporation because promoters are not entitled to compensation for pre-incorporation services.
  4. The promoter can recover the $10,000 directly from the other shareholders under a theory of unjust enrichment.
Explanation: Promoters are not automatically entitled to compensation or reimbursement for their services and expenses. However, a corporation may choose to reimburse a promoter for reasonable expenses incurred on its behalf. Here, the corporation's board explicitly voted to reimburse the promoter for the $10,000 retainer. This created a legal obligation of the corporation to the promoter. In insolvency, the promoter is a creditor. As there are no facts indicating he secured the debt, he is a general unsecured creditor of the corporation. (A) is incorrect as there is no security agreement. (C) is incorrect because the corporation expressly agreed to the reimbursement. (D) is incorrect; the claim is against the corporation, not the other shareholders personally.

Question 16

A promoter signed a contract to buy a commercial truck "for a corporation to be formed." The seller knew the corporation did not yet exist. The plan to form the corporation was subsequently abandoned, and the corporation was never formed. The seller of the truck, unable to sell it to another buyer for the same price, sued the promoter for breach of contract.

Is the promoter liable to the seller? Select one.

  1. No, because the contract was conditional on the formation of the corporation, which never occurred.
  2. No, because the seller knew the corporation was not yet in existence when the contract was signed.
  3. Yes, because a person who contracts on behalf of a nonexistent principal is personally liable on the contract. (correct answer)
  4. Yes, but only for the reasonable value of the seller's services, not for expectation damages under the contract.
Explanation: The general rule is that a promoter is personally liable on contracts made before the corporation is formed. This is because the promoter is acting as an agent for a nonexistent principal. The fact that the corporation is never formed does not change this result; in fact, it solidifies the promoter's liability because there is no other entity to look to for performance. (A) is incorrect unless the contract explicitly made formation a condition precedent, which is not stated here. (B) is incorrect; the third party's knowledge of the corporation's nonexistence does not release the promoter. (D) is incorrect; the liability is for breach of contract, which allows for expectation damages.

Question 17

An entrepreneur, acting as a promoter, signed a two-year lease for office space with a landlord. The lease was signed in the promoter's name "on behalf of a technology company to be incorporated." One month later, the promoter successfully incorporated the company. The new corporation immediately moved into the office space, paid rent for three months, and conducted its business there. The corporation never held a board meeting to formally ratify the lease. After the third month, the corporation's business failed, and it stopped paying rent. The landlord has sued the promoter personally for the remaining rent.

What is the likely outcome of the landlord's lawsuit against the promoter? Select one.

  1. The promoter will be held liable because the corporation's implied adoption of the lease did not extinguish the promoter's personal liability. (correct answer)
  2. The promoter will be held liable because the corporation never formally adopted the lease through a board resolution, making the adoption invalid.
  3. The promoter will not be held liable because the corporation implicitly adopted the lease by occupying the premises and paying rent, thereby substituting itself as the sole obligor.
  4. The promoter will not be held liable because the lease was signed "on behalf of" the future corporation, indicating the parties did not intend for the promoter to be bound.
Explanation: A promoter who enters into a contract on behalf of a corporation not yet formed is personally liable on that contract. A corporation may become liable by adopting the contract, which can be done expressly (e.g., board resolution) or implicitly (by knowingly accepting the benefits of the contract). Here, the corporation implicitly adopted the lease by occupying the space and paying rent. However, adoption by the corporation does not, by itself, release the promoter from liability. The promoter remains liable until a novation occurs, which is an agreement among the promoter, the corporation, and the third party to substitute the corporation for the promoter. As no novation occurred, the promoter remains personally liable.

Question 18

Two individuals decided to form a corporation to develop software. Before incorporation, one promoter purchased a small office building for $200,000 in his own name. A week later, he formally incorporated the business. At the first board meeting, he proposed that the corporation purchase the building from him for $300,000. He presented it as a "good deal at current market rates" but did not disclose his recent purchase or the price. The board, consisting of the two promoters, approved the purchase. The corporation then spent $50,000 on renovations. Six months later, the other promoter discovered the original purchase price.

What is the corporation's best remedy against the promoter who sold the building? Select one.

  1. Compel the promoter to disgorge his $100,000 secret profit. (correct answer)
  2. Rescind the sale of the building and recover the purchase price.
  3. Pierce the corporate veil to hold the promoter personally liable for all corporate debts.
  4. Affirm the sale and sue the promoter for the difference between the sale price and the building's fair market value at the time of sale.
Explanation: Promoters owe a fiduciary duty of loyalty to the corporation, which prohibits them from making secret profits on transactions with the corporation. When a promoter sells property to the corporation, they must disclose their personal interest and any profit. If they do not, the corporation's remedy is to compel the promoter to disgorge the secret profit. Here, the secret profit was $100,000. (B) is a possible remedy, but it is less practical and thus not the 'best' remedy here because the corporation has already made significant renovations. (C) is incorrect; piercing the veil is a doctrine used by outside creditors, not for internal disputes over fiduciary duty. (D) is incorrect because the measure of damages for a secret profit is the amount of the profit, not the difference from fair market value.

Question 19

An individual, acting as a promoter for a future restaurant, signed a contract with a marketing firm for a pre-opening advertising campaign. The promoter made a good-faith effort to incorporate the business, filing what she believed were the correct documents with the state. Unbeknownst to her, the documents were defective, and the state rejected the filing, so the corporation was never legally formed. The marketing firm fully performed its services. When the promoter failed to pay, the firm sued her personally.

What is the promoter's strongest defense against personal liability? Select one.

  1. That she was acting as an agent for a principal and therefore is not personally liable on the contract.
  2. That the marketing firm should be estopped from denying the corporation's existence because it dealt with the business as if it were a corporation. (correct answer)
  3. That she is shielded from liability under the de facto corporation doctrine because she made a good-faith attempt to incorporate.
  4. That she is not liable because her personal liability was conditioned on the successful formation of the corporation.
Explanation: While a promoter is generally liable on pre-incorporation contracts, the doctrine of corporation by estoppel might provide a defense. This doctrine prevents a third party who dealt with an enterprise as if it were a corporation from later denying its corporate status to sue an individual. Here, the marketing firm contracted for services for the restaurant business. The promoter's strongest argument is that the firm should be estopped from denying the existence of the entity it contracted with. (A) is incorrect because an agent for a non-existent principal (the unformed corporation) is personally liable. (C) is incorrect because the de facto corporation doctrine, where recognized, generally protects shareholders from liability, not a promoter on a contract she personally signed. (D) is incorrect as there is no factual basis for this condition.

Question 20

A promoter hired an architect to draw plans for a new building, signing the contract personally but noting his status as a promoter for a future corporation. The promoter paid the architect a $10,000 retainer from his personal funds. The corporation was later successfully formed. The board of directors voted to adopt the architect's contract and also voted to reimburse the promoter for the $10,000 retainer he had paid. However, before the reimbursement check was issued, the corporation became insolvent.

What is the promoter's legal position regarding the $10,000? Select one.

  1. The promoter is a secured creditor of the corporation because the funds were used for a corporate purpose.
  2. The promoter is an unsecured creditor of the corporation, with a claim for $10,000. (correct answer)
  3. The promoter has no claim against the corporation because promoters are not entitled to compensation for pre-incorporation services.
  4. The promoter can recover the $10,000 directly from the other shareholders under a theory of unjust enrichment.
Explanation: Promoters are not automatically entitled to compensation or reimbursement for their services and expenses. However, a corporation may choose to reimburse a promoter for reasonable expenses incurred on its behalf. Here, the corporation's board explicitly voted to reimburse the promoter for the $10,000 retainer. This created a legal obligation of the corporation to the promoter. In insolvency, the promoter is a creditor. As there are no facts indicating he secured the debt, he is a general unsecured creditor of the corporation. (A) is incorrect as there is no security agreement. (C) is incorrect because the corporation expressly agreed to the reimbursement. (D) is incorrect; the claim is against the corporation, not the other shareholders personally.