Bar Exam (Next Generation) Quiz: Limited Liability Companies Llcs

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Limited Liability Companies LlcsQuestion 1 of 12

Nadia formed GreenLeaf Landscaping LLC and is its only member. She signed a supply contract with Allied Materials as "Nadia, Member, GreenLeaf Landscaping LLC." When GreenLeaf defaulted, Allied obtained a judgment against GreenLeaf and now wants to collect from Nadia personally. Nadia kept a separate bank account for GreenLeaf and filed the LLC's annual reports, but she never held formal member meetings and used the LLC account once to pay a personal credit card bill, repaying the LLC a week later.

Which additional fact, if true, would most strongly support Allied's effort to hold Nadia personally liable?

The supply contract and invoices identified GreenLeaf, not Nadia individually, as the party.

Nadia was GreenLeaf's only employee and made all of its management decisions.

Allied's contract was negotiated by Nadia on behalf of GreenLeaf.

Nadia regularly used GreenLeaf's account to pay personal expenses without repayment.

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Bar Exam (Next Generation) Quiz

Bar Exam (Next Generation) Quiz: Limited Liability Companies Llcs

Practice Limited Liability Companies Llcs in Bar Exam (Next Generation) with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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This quiz focuses on Limited Liability Companies Llcs, giving you a quick way to practice the rules, question types, and explanations that matter most for Bar Exam (Next Generation).

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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.

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Question 1

Which additional fact, if true, would most strongly support Allied's effort to hold Nadia personally liable?

The supply contract and invoices identified GreenLeaf, not Nadia individually, as the party.
Nadia was GreenLeaf's only employee and made all of its management decisions.
Allied's contract was negotiated by Nadia on behalf of GreenLeaf.
Nadia regularly used GreenLeaf's account to pay personal expenses without repayment. (correct answer)

Explanation: When you see a member being sued personally for an LLC's debts, remember the default rule: limited liability protects owners unless the owner has abused the corporate form. Courts will "pierce the veil" when the LLC is treated as the member's alter ego—especially through commingling funds, failing to keep separate accounts, or using LLC assets as personal cash. Here, Nadia mostly acted properly: she had a separate account, filed reports, and even repaid the one personal charge. The strongest additional fact for personal liability is that Nadia regularly used GreenLeaf's account to pay personal expenses without repayment. That shows real commingling and disregard for the LLC's separate existence, which is exactly the kind of abuse that justifies piercing the veil. Now consider the wrong choices. The fact that the contract and invoices identified GreenLeaf as the party actually supports the opposite result—it shows Allied dealt with the LLC, not Nadia personally. Similarly, the fact that Nadia negotiated the contract on behalf of GreenLeaf is normal agency behavior; an agent is not personally liable just for signing as a representative. And Nadia being the only employee and making all management decisions is routine for a single-member LLC—courts do not penalize an owner for being actively involved or being the sole decision-maker. On exam day, when a question asks about personal liability for an LLC debt, look for facts about co-mingling, undercapitalization, or misuse of the entity. Proper formalities, even if informal, usually keep the shield intact.

Question 2

Maple & Main LLC is a member-managed LLC operating coffee shops. Its filed statement of authority, on file with the Secretary of State, states: 'No member has authority to incur an obligation of $60,000 or more without approval of at least two members.' Before signing, GreenBean Equipment Co. received and read a copy of that filed statement. Priya, one of the three members, nevertheless signs a contract to buy $90,000 of espresso equipment from GreenBean in the LLC's name. She does not obtain another member's approval.

State LLC Act § 402:

(a) In a member-managed LLC, a member is an agent of the LLC for carrying on its business. A member's act that is apparently for carrying on in the ordinary course the LLC's business binds the LLC unless a filed statement of authority limits the member's authority.

(b) A filed statement of authority is notice of the authority or limitation stated. A person who has read the statement has actual notice of the limitation.

Does the contract bind Maple & Main LLC?

Yes, because Priya is a member and buying espresso equipment is in the ordinary course of a coffee shop business, so the contract binds the LLC.
Yes, because GreenBean gave value in good faith, and a filed statement cannot defeat the apparent authority of a member in a member-managed LLC.
No, because GreenBean had actual notice of the filed limitation on Priya's authority before signing, and a member's act binds the LLC unless a filed statement limits the member's authority. (correct answer)
Yes, because a filed statement of authority limits only conveyances of real property and does not limit ordinary-course equipment purchases.

Explanation: Whenever you see an LLC authority question involving a filed statement of authority, stop and ask: did the third party actually know about the limitation? That fact controls everything. Under § 402(a), a member's act in the ordinary course binds the LLC unless a filed statement limits that member's authority. Here, the statement expressly required approval of at least two members for obligations of $60,000 or more. Priya signed a $90,000 contract alone. GreenBean had read the filed statement before signing, so it had actual notice of Priya's missing authority. Therefore, the contract does not bind Maple & Main. The choice saying "Yes, because Priya is a member and buying espresso equipment is in the ordinary course" misses the exception: ordinary-course apparent authority is overcome by a filed limitation that the third party actually knew. Likewise, the choice saying "Yes, because GreenBean gave value in good faith" misunderstands the statute—good faith does not protect a party with actual notice of the filed limit. The choice claiming a filed statement only limits real-property conveyances is simply wrong; the statute here applies to authority generally, including equipment purchases. Your takeaway: when a third party has read a filed limitation, apparent authority is defeated. Spot the words "received and read" or "actual notice"—they signal the limitation will bind. That factual hook is the key to answering this type of question correctly.

Question 3

Bluebird Farm LLC has two members, Dana and Milo. The operating agreement provides: 'Section 9.1. If a member withdraws before the end of the LLC's stated 10-year term without the other member's written consent, the withdrawing member's interest shall be purchased by the LLC at its fair value determined as of the date of withdrawal, reduced by any damages the LLC proves were caused by the withdrawal. The non-withdrawing member may continue the business in the LLC.' At year 3, Milo gives notice of withdrawal without Dana's consent. His withdrawal causes Bluebird to lose a supply contract and the LLC proves $80,000 in damages. The fair value of Milo's distributional interest, determined as of the date of withdrawal, is $200,000. Dana continues Bluebird.

What amount, if any, must Bluebird pay Milo for his interest?

Nothing, because a member who withdraws in breach of the operating agreement forfeits the distributional interest and loses all economic rights in the LLC.
$200,000, because the purchase price is the fair value on the withdrawal date, and the $80,000 loss is a separate breach claim that Bluebird must pursue rather than offset.
$280,000, because the buyout consists of fair value plus damages for the premature withdrawal, after which Dana may continue the business.
$120,000, because Section 9.1 expressly requires the buyout to be reduced by the damages caused by Milo's wrongful withdrawal. (correct answer)

Explanation: Whenever you see an LLC member withdrawal question, your first move is to read the operating agreement's buyout provision carefully. The agreement controls the economic consequences, including any offsets for damages. Here, Section 9.1 sets the purchase price as the fair value of Milo's interest on the withdrawal date, reduced by any damages the LLC proves were caused by the withdrawal. The fair value is $200,000, and Bluebird proved $80,000 in damages. So the calculation is straightforward: $200,000 − $80,000 = $120,000. Because the agreement expressly authorizes the reduction, Bluebird must pay Milo $120,000, and Dana may continue the business. The "Nothing, because a member who withdraws in breach forfeits the interest" choice is wrong: breach does not automatically forfeit economic rights; the agreement provides for a buyout, not forfeiture. The "

200,000, because the loss is a separate breach claim” choice is also wrong: Section 9.1 does not require Bluebird to pursue a separate claim—it specifically makes damages a reduction to the buyout. Finally, the “

280,000, because the buyout consists of fair value plus damages" choice gets the math backward: damages are subtracted, not added, to compensate the LLC for the harm. Your study tip: when an operating agreement says a buyout is "reduced by damages," treat that as a contractual offset. On the bar, don't assume general default rules—apply the agreement's express terms.

Question 4

Ravi and Lena are the only members of NorthBridge Logistics LLC. Its operating agreement states that the LLC is manager-managed, that Ravi is the manager, and that only Ravi may enter contracts for more than $5,000. Despite that provision, Lena has negotiated and signed all of NorthBridge's contracts, including several over $100,000, with Ravi's knowledge and without objection. The warehouse landlord had previously seen Lena sign contracts on NorthBridge's behalf. Without telling Ravi, Lena recently signed a $90,000 warehouse lease as "Lena, Member, NorthBridge Logistics LLC." NorthBridge now wants to avoid the lease.

Which additional fact, if true, would most strongly support NorthBridge's argument that it is not bound by the lease?

The landlord knew before signing that Lena was not authorized to enter contracts over $5,000. (correct answer)
Lena did not tell Ravi about the lease before signing it.
The lease was for a longer term than NorthBridge usually accepted in its shipping contracts.
Ravi had never personally signed a warehouse lease for NorthBridge.

Explanation: Whenever you see a question about whether a company is bound by an unauthorized contract, think in terms of authority: actual authority, apparent authority, and ratification. A manager-managed LLC with a $5,000 limit in its operating agreement gives Lena no actual authority to sign this lease by herself. But NorthBridge is still bound if Lena had apparent authority—that is, if the landlord reasonably relied on NorthBridge's manifestations that Lena could contract on its behalf. The key is what the landlord knew or reasonably believed before signing. The strongest fact for NorthBridge is that the landlord knew before signing that Lena was not authorized to enter contracts over $5,000. That knowledge destroys the "reasonable reliance" element of apparent authority: you cannot claim you reasonably believed someone had authority when you knew she lacked it. So the LLC can avoid the lease. out The other choices do not help. "Lena did not tell Ravi about the lease before signing it" is irrelevant because apparent authority is based on the principal's manifestations, not the agent's secrecy—and NorthBridge's priorpattern with Lena gave the landlord a basis to believe she had authority. "The lease was for a longer term than NorthBridge usually accepted in its shipping contracts" sounds unusual, but the term was not the feature the landlord knew was unauthorized; the $90,000 amount was the problem, and term length alone doesn't affect authority. "Ravi had never personally signed a warehouse lease for NorthBridge" is also irrelevant: Ravi could delegate or allow Lena to negotiate real-property leases, and his failure to sign personally is not a manifestation to the landlord that Lena lacked authority. In fact, previous knowledge of Lena signing contracts without objection may support apparent authority. STRategy tip: Separate actual authority (what the operating agreement or principal actually gave) from apparent authority (what the principal led the third partyto believe). When a manager violates an internal limit, ask whether the third party knew that limit—if the third party did know, the principal can escape; if not, the principal usually cannot.

Question 5

Maya and Theo are equal members of Beacon Health Analytics LLC, which advises clinics on data security. Theo manages the LLC's day-to-day business. A hospital asks Theo to bid on a data-security consulting project that is squarely within Beacon's services. Without telling Maya, Theo forms a separate LLC and submits the bid himself, using Beacon's proprietary pricing model to prepare it. Maya wants to challenge Theo's conduct.

Which issue is most likely central to Maya's challenge?

Whether Maya may dissolve Beacon because the members are deadlocked.
Whether Theo is liable to the hospital for misrepresenting the new LLC's qualifications.
Whether Theo breached his fiduciary duty of loyalty to Beacon. (correct answer)
Whether Theo's separate LLC is a successor to Beacon's existing contracts.

Explanation: When a manager of an LLC secretly takes a business opportunity that belongs to the company, you should immediately think of fiduciary duty—specifically the duty of loyalty. That duty requires managers to put the LLC's interests ahead of their own and refrain from self-dealing or usurping corporate opportunities. Here, Theo, who manages Beacon, was asked to bid on a project squarely within Beacon's services. Instead of presenting that opportunity to Beacon, he formed a separate LLC, used Beacon's proprietary pricing model, and submitted the bid himself. That is a classic usurpation of a business opportunity and a breach of loyalty to Beacon, so Maya's challenge is most centrally about Theo's breach of that duty. The other choices miss the mark. Dissolution for deadlock is irrelevant because there is no evidence the members are deadlocked—Theo acted secretly, not in a tied vote. Theo's possible liability to the hospital for misrepresenting the new LLC's qualifications concerns the hospital's rights, not Maya's challenge to Theo's conduct toward Beacon. And calling the separate LLC a successor to Beacon's contracts is unsupported; no existing Beacon contracts are mentioned, and forming a new entity to bid on new work is not a successor transaction. On the next-generation bar exam, when you see a manager diverting a business opportunity from the entity for personal gain, recognize the loyalty-duty pattern. Ask: "Who did the opportunity belong to, and who took it?" That will point you to the right answer.

Question 6

CraftWorks Studio LLC has a 10-year term under its operating agreement. June, a member, gave written notice that she is withdrawing after three years and demanded that the LLC pay her the fair value of her 25% interest. The operating agreement is silent on buyouts. The remaining members want to continue the business and have refused to pay, saying June's departure was a breach of the agreement.

Which issue is most likely to determine whether June is entitled to be paid for her interest?

Whether June's notice of withdrawal was witnessed or notarized.
Whether June's early withdrawal was wrongful and how that affects her buyout. (correct answer)
Whether the remaining members may continue using the CraftWorks Studio name.
Whether June can transfer her membership interest to an outside investor.

Explanation: Whenever you see a member leaving an LLC, ask: Is this an at-will or term LLC, and was the dissociation wrongful? That framework drives everything. Because CraftWorks has a 10-year term, June's withdrawal after three years is an early, wrongful dissociation unless the operating agreement says otherwise. Under default LLC law, a wrongfully dissociating member from a term company is not entitled to a fair-value buyout; she may only recover contract damages if she proves them. The fact that the operating agreement is silent on buyouts means the default rules fill the gap, so the key issue is whether her early withdrawal was wrongful and how that affects her buyout. The "witnessed or notarized" notice point is a trap—statutes generally require written notice, not witnesses or notarization. The "continuing use of the CraftWorks Studio name" is irrelevant; business-name rights are separate from a member's economic interest. And "transferring her membership interest to an outside investor" confuses transfer with dissociation—a transfer may transfer economic rights, but it does not trigger a buyout and cannot cure a wrongful withdrawal. Thus June's entitlement turns on the legal consequences of her early exit, not on formalities, the company name, or assigning her interest. Study tip: For LLC and partnership questions, always classify the entity as term or at-will first, then apply the buyout/damages consequences of wrongful versus rightful dissociation.

Question 7

Vega v. Brightpath Analytics (State Ct. App. 2021): 'Taking a business opportunity that a manager discovers while acting for the LLC and that is within the LLC's actual or reasonably anticipated business is a classic breach of the duty of loyalty unless the operating agreement validly authorizes it. The LLC Act forbids an operating agreement from eliminating the duty of loyalty, but it may identify specific types or categories of activities that do not violate that duty. A clause allowing a manager to take any business opportunity in any industry is a wholesale waiver and is unenforceable. A clause allowing a manager to participate in one specifically described line of business, however, may be enforceable.'

Novara Analytics LLC provides data-analytics services to independent bookstores. Its operating agreement says: 'A manager may pursue for the manager's own account any business opportunity in any industry, whether or not related to Novara's present or reasonably anticipated business, and may compete with Novara.' While Omar, Novara's manager, is negotiating on Novara's behalf to provide data-analytics services to a public library consortium, Omar forms his own analytics company and submits a competing proposal to the consortium. The consortium selects Omar's company.

Can Novara recover from Omar for breach of the duty of loyalty?

No, because the operating agreement explicitly authorized Omar to compete and to pursue any opportunity in any industry, and the consortium was not yet a customer of Novara.
No, because Omar's proposal was made to a new customer and the library consortium had no binding contract with Novara when Omar solicited it.
Yes, because no LLC operating agreement may permit a manager to take any opportunity in the LLC's current line of business, regardless of how specifically the category is described.
Yes, because the operating agreement clause is the type of wholesale waiver held unenforceable in Vega, and Omar took an opportunity he discovered while acting for Novara in its reasonably anticipated business. (correct answer)

Explanation: Whenever you see a duty-of-loyalty question involving an LLC operating agreement, remember the line between permissible tailoring and forbidden elimination: the agreement may carve out specific, described activities, but it cannot be a wholesale waiver of loyalty. In Vega, that distinction controls. Here, Novara's clause says a manager may pursue "any business opportunity in any industry" and may compete with Novara. That is exactly the kind of wholesale waiver Vega calls unenforceable. Omar also discovered the library consortium opportunity while negotiating for Novara, and it was within Novara's reasonably anticipated business. So Novara can recover. The first wrong answer, claiming the operating agreement explicitly authorized Omar and the consortium was not yet a customer, ignores that the authorization is unenforceable as a blanket waiver; a customer relationship was not required. The second wrong answer similarly relies on the consortium being a new customer with no binding contract—but actual contract or existing customer status is not necessary when the manager exploits an opportunity in the LLC's reasonably anticipated business. The third answer is a "yes" but for the wrong reason: it says no operating agreement may permit taking opportunities in the LLC's current line of business no matter how specifically described. Vega explicitly allows a specifically described line of business to be carved out; it only invalidates the broad "any industry" waiver. Study tip: on these questions, spot "any" language versus "specifically described" language. If the agreement is a blanket release, it is unenforceable, and the manager still owes loyalty.

Question 8

Pinwheel Games LLC has two managers, June and Amir. At the end of the year, the company's actual assets are $1.6 million and its liabilities are $1.1 million. The CFO prepares a balance sheet that, because of a double-counted receivable, shows assets of $2.1 million. June reviews the balance sheet before the meeting, has no reason to doubt it, and votes with Amir to distribute $700,000 to members. The distribution is made. Based on the true financial condition, only $500,000 could lawfully have been distributed. Within 18 months, the LLC sues June.

State LLC Act § 505:

(a) An LLC may not make a distribution if, after giving effect to the distribution, the LLC's total assets would be less than its total liabilities.

(b) A manager who votes for or assents to a distribution in violation of subsection (a) is personally liable to the LLC for the amount by which the distribution exceeded the amount that could lawfully have been made.

(c) A manager is not liable under subsection (b) if the manager relied in good faith on financial statements prepared by an employee of the company whom the manager reasonably believed was reliable and competent and the manager did not have knowledge that made the reliance unwarranted.

(d) An action under this section must be commenced within two years after the distribution.

Is June personally liable to the LLC?

Yes, because the distribution made the LLC's total assets less than total liabilities, and §505(b) imposes liability on every manager who votes for an unlawful distribution; reliance on an employee's mistake is not an exception.
No, because §505(c) excuses a manager who relied in good faith on financial statements prepared by a company employee whom the manager reasonably believed was reliable and competent, and June had no contrary knowledge. (correct answer)
Yes, because the CFO is a company employee rather than an independent outside accountant, and §505(c) excuses reliance only on financial statements prepared by an outside accountant.
No, because June did not receive any part of the $700,000 distribution, and §505(b) imposes liability only on a manager who personally received more than the manager's share.

Explanation: When you see a manager-liability question under an LLC act, map the statute: unlawful distribution? manager voted? affirmative defense? Here the actual numbers show a

500,000 lawful ceiling (

1.6m assets − $1.1m liabilities), so the $700,000 distribution was unlawful under §505(a), and June did vote for it. But §505(c) is a complete defense: June reviewed the CFO's balance sheet, had no reason to doubt it, and reasonably believed the CFO was reliable and competent. Nothing made her reliance unwarranted. Therefore she is not liable even though the distribution violated the solvency test. The choice saying reliance on an employee's mistake is not an exception misreads the statute: §505(c) expressly covers statements prepared by an employee, not only outside accountants. The choice saying the CFO's employee status defeats the defense is the opposite mistake—the statute allows reliance on a company employee. The choice about June receiving none of the distribution confuses liability: §505(b) imposes liability on a manager who votes for or assents to an unlawful distribution, not on a manager who personally received funds. The statute of limitations is satisfied (18 months < 2 years), so that is not a reason to deny liability either. Strategy: read statutory defenses carefully—"employee" and "outside accountant" are not interchangeable, and personal receipt is irrelevant to manager liability.

Question 9

Jade is a non-manager member of Harbor & Pine LLC. A creditor obtained a $200,000 judgment against Jade personally. The LLC has not authorized any distributions this year, and the operating agreement gives the managers sole discretion over distributions. The creditor asks the court for an order charging Jade's distributional interest, requiring the LLC to distribute $200,000 to the creditor, and directing that the creditor may vote Jade's interest at member meetings.

State LLC Act § 506:

(a) On application by a judgment creditor of a member, a court may charge the member's distributional interest with the unsatisfied judgment. To the extent the interest is charged, the LLC shall pay to the judgment creditor any distribution that would otherwise be paid to the member.

(b) A charging order is the sole and exclusive remedy by which a judgment creditor may satisfy a judgment out of a member's distributional interest.

(c) A court may order foreclosure of the distributional interest. The purchaser at foreclosure obtains only a distributional interest and has no right to participate in management or to obtain company records.

(d) A court may not compel an LLC to make a distribution that the LLC is not otherwise required to make.

Which statement accurately describes the relief the court may grant?

The court may charge Jade's interest and direct that future distributions be paid to the creditor; it may also order foreclosure, but neither the creditor nor a foreclosure purchaser obtains voting rights. It may not compel a distribution. (correct answer)
The court may charge Jade's interest and order the LLC to make an immediate distribution of $200,000 because otherwise the charging order would be an empty remedy, but it may not give the creditor voting rights.
The court may order foreclosure of Jade's interest, and the purchaser at the foreclosure sale may exercise Jade's voting rights until the LLC redeems the interest.
The court may not charge Jade's interest unless the LLC or a majority of the members consents, because the operating agreement gives managers sole discretion over distributions.

Explanation: When you see a question about a judgment creditor trying to reach an LLC member's interest, your mental anchor should be the charging order and its key limitation: it is an economic remedy, not a governance one. The statute tells you everything you need to know here, so read it carefully. Under §506(a), the court may charge Jade's distributional interest, which means the LLC pays any future distribution directly to the creditor instead of Jade. §506(c) separately permits foreclosure, but it explicitly states that the purchaser at foreclosure obtains only a distributional interest with no right to participate in management — meaning no voting rights. Finally, §506(d) prohibits the court from compelling the LLC to make a distribution it isn't otherwise required to make. The operating agreement gives managers sole discretion, and the LLC hasn't authorized any distributions, so the court cannot order an immediate $200,000 payout. The correct answer mirrors all three provisions: charge the interest, direct future distributions, allow foreclosure, deny voting rights, and refuse to compel a distribution. Now, why are the others wrong? The choice saying the court may compel an immediate distribution because otherwise the remedy would be "empty" directly violates §506(d) — the remedy is limited to what the LLC actually distributes, and a "hardship" argument doesn't override the statute. The choice granting the foreclosure purchaser voting rights ignores §506(c)'s explicit denial of management rights. Finally, the choice requiring consent from the LLC or a majority of members is a trap: a charging order is a court order under §506(a), not a voluntary act, and §506(b) makes it the exclusive remedy — no consent is needed, though manager discretion still controls whether distributions occur. Study tip: For LLC creditor remedies, memorize this pair — money yes, management no. A charging order never gives voting rights, and you can never compel a distribution the LLC isn't otherwise obligated to make.

Question 10

Omar is a member of Silverline Properties LLC, which owns a commercial building. Omar incurred a personal debt to Atlas Bank, and Atlas obtained a judgment against Omar. Atlas has asked the court to order Silverline to pay Omar's monthly distributions directly to Atlas and to allow Atlas to seize the building to satisfy the judgment. Silverline objects.

Which legal issue is most likely to determine whether Atlas may obtain this relief?

Whether Silverline's operating agreement permits members to assign their economic interests to personal creditors.
Whether Omar's debt to Atlas was incurred before or after he became a member of Silverline.
Whether a personal creditor of a member may reach LLC assets or is limited to the member's economic interest. (correct answer)
Whether Omar has the power to withdraw from Silverline without the other members' consent.

Explanation: Whenever you see a judgment creditor trying to collect from a member's interest in an LLC, think "charging order." A personal creditor of an LLC member generally cannot reach LLC assets; it may only obtain a charging order against the member's economic interest—meaning distributions that would otherwise go to the member. So the decisive issue here is whether Atlas may seize the building or is limited to Omar's economic interest. Because the building belongs to Silverline, not Omar, Atlas cannot force Silverline to sell or surrender it. The operating agreement's assignment provision is not the key: that governs voluntary transfers by the member, not a creditor's statutory remedy. The timing of Omar's debt, whether incurred before or after he became a member, also does not expand Atlas's rights against the LLC. And Omar's power to withdraw concerns possible dissolution or buyout rights, not whether his personal creditor can collect directly from LLC property. On exam day, remember that an LLC's "entity shield" protects company assets from members' personal creditors, who are limited to charging orders against economic interests. Contrast this with a sole proprietorship or general partnership, where personal creditors may reach business assets. This question tests that core distinction.

Question 11

Calderon v. Mesa Ridge, LLC (State Sup. Ct. 2021): 'Piercing the limited-liability veil of an LLC is an extraordinary remedy. A member is not liable merely because the member owns all interests, serves as manager, or signs documents in a representative capacity. A plaintiff must show the LLC was a mere instrumentality or alter ego of the member and that failure to pierce would sanction fraud or promote injustice. Factors include commingling, failure to keep separate records, inadequate capitalization, diversion of LLC assets for personal use, and disregard of formalities. No single factor is conclusive; inadequate capitalization alone is insufficient.'

Thorne Rental Holdings LLC, wholly owned by Victor, owns a rental property. Victor signed an equipment lease with Apex Equipment Co. as 'Victor, Member, Thorne Rental Holdings LLC.' Victor pays personal expenses from the LLC account, keeps no separate books, commingles rents with personal funds, and after Apex delivered the equipment he transferred Thorne's only cash to his personal account to pay a gambling debt. Thorne stops paying the lease, and Apex sues Thorne and Victor.

Which statement best states Apex's ability to hold Victor personally liable under Calderon?

Apex can hold Victor liable because Victor used the LLC for a personal purpose after signing the lease, and the lease was in the LLC's name.
Apex can hold Victor liable if the evidence shows Thorne was Victor's alter ego and honoring limited liability would sanction fraud or promote injustice; the commingling and asset-stripping are relevant factors. (correct answer)
Apex cannot hold Victor liable because Victor signed only in a representative capacity, and no single factor such as commingling or inadequate capitalization is enough to pierce.
Apex cannot hold Victor liable unless it proves Thorne was undercapitalized at formation and that Victor made a false representation to Apex.

Explanation: When you see an LLC veil-piercing question, start with the default rule: limited liability protects members. But that protection can be lost if the LLC is merely the member's alter ego and honoring it would sanction fraud or promote injustice. Under Calderon, no single factor controls; the court weighs the whole picture. Here, the correct statement is that Apex can hold Victor personally liable if the evidence shows Thorne was Victor's alter ego and limited liability would sanction fraud or promote injustice. The facts support that inquiry: Victor commingled rents with personal funds, kept no separate books, paid personal expenses from the LLC account, and stripped Thorne's only cash to pay a gambling debt. Those are exactly the relevant factors—commingling, disregard of formalities, and diversion of assets—and the asset-stripping supports the "promote injustice" prong. The first wrong choice focuses only on Victor's personal purpose after signing and the lease being in the LLC's name. That shows misconduct, but without showing alter ego and injustice, it is not enough. The next choice incorrectly says Victor cannot be liable because he signed in a representative capacity and no single factor is conclusive. Representative capacity is not a shield when the member treats the LLC as himself, and the combination of factors here is enough to go to the jury. The last choice wrongly demands undercapitalization at formation and a false representation; Calderon rejects inadequate capitalization alone and does not require a fraud-on-creditors representation—the standard is broader. Study tip: when facts pile up commingling, empty accounts, and personal use, think alter ego plus injustice—not just "bad facts."

Question 12

Marta and Devon are the only members of Pinpoint Digital LLC. Its operating agreement states: "Members and managers may compete with the LLC and need not present business opportunities to the LLC." Marta, Pinpoint's manager, starts a competing business and bids against Pinpoint for a contract. Devon objects because Marta copied Pinpoint's confidential customer list to solicit the client. Marta says the operating agreement allows her to compete.

Which issue is most likely to determine whether Devon can challenge Marta's use of the customer list?

Whether an operating agreement may waive a manager's fiduciary duty of loyalty to the LLC.
Whether the operating agreement's competition clause extends to using Pinpoint's confidential customer list. (correct answer)
Whether Devon's continued membership after signing the operating agreement amounted to consent.
Whether Marta's competing business was formed before or after the customer list was created.

Explanation: LLC operating agreements can reshape fiduciary duties, but a competition clause is not a blank check. The key question here is scope: does "may compete" authorize Marta to use Pinpoint's confidential customer list? That list is an LLC asset; competing generally means soliciting the same clients with your own resources, not appropriating the company's confidential information. Even if the agreement waives the duty not to compete, it does not necessarily waive confidentiality or the duty of loyalty unless it clearly says so. So the decisive issue is whether the competition clause extends to using the customer list. The wrong choices are traps. "Whether an operating agreement may waive a manager's fiduciary duty of loyalty" asks whether waiver is legally possible; it generally is, so that alone will not resolve this dispute. "Whether Devon's continued membership after signing the operating agreement amounted to consent" confuses consent to the agreement with consent to every act; Devon may be bound to allow competition, but not to allow misappropriation. "Whether Marta's competing business was formed before or after the customer list was created" misses the point because the agreement's language, not chronology, controls; formation timing might matter for trade-secret law, but the contract issue is scope. Study tip: whenever an operating agreement waives a duty, read it narrowly—permission to compete does not equal permission to use company property or confidential information.