Business Relationships Flashcards

In New York, a promoter signs a contract on behalf of a corporation not yet formed. After incorporation, the corporation expressly adopts the contract. Which statement is correct regarding the promoter's liability?

Answer: The promoter remains liable unless the other party agrees to release the promoter as part of a novation.

Corporate adoption of a pre-incorporation contract does not release the promoter from personal liability unless there is an express novation releasing the promoter with the third party's consent.

A New York LLC member who is dissatisfied with management seeks to compel the LLC's dissolution. Under NY LLC Law § 702, dissolution may be judicially ordered when:

Answer: It is not reasonably practicable to carry on the LLC's business in conformance with the operating agreement.

NY LLC Law § 702 authorizes judicial dissolution when it is not reasonably practicable to carry on the business in conformity with the articles of organization or operating agreement.

Under the New York BCL, a director who votes for an unlawful dividend is jointly and severally liable to the corporation for the amount of the dividend. Which defense is available to a director who voted for the dividend?

Answer: The director relied in good faith on financial statements prepared by the corporation's auditor.

Under BCL § 719, directors who vote for or concur in an unlawful dividend are jointly and severally liable, but a director is protected if, in good faith, he relied on financial statements or reports of the kind described in BCL § 717 (prepared by officers or independent public accountants) in determining the amount available for the dividend.

In a New York partnership, Partner A commits a tort while acting within the ordinary course of the partnership's business. Partner B had no knowledge of and did not participate in the tort. Under NY Partnership Law, Partner B is:

Answer: Jointly and severally liable for the full amount of the tort judgment.

Under NY Partnership Law § 24, each partner is jointly and severally liable for all loss or injury caused by any partner's wrongful act in the ordinary course of partnership business, regardless of personal knowledge.

A 75% shareholder of a New York close corporation freezes out the 25% minority shareholder by eliminating her dividend, refusing her employment, and diluting her interest. Under New York law, the minority shareholder's most appropriate remedy is:

Answer: A direct action for breach of the majority's fiduciary duty to the minority, possibly seeking dissolution or buyout.

In a close corporation, majority shareholders owe fiduciary duties to the minority. A freeze-out supports a direct (not derivative) action for breach of fiduciary duty, and a holder of 20% or more of the votes may petition for judicial dissolution under BCL § 1104-a (oppressive actions), which gives the corporation or other shareholders the option to buy out the petitioner under § 1118.

A New York professional corporation (PC) is formed by three physicians. One physician commits malpractice. Under NY law, the other two physicians' personal liability is:

Answer: Preserved for their own malpractice but they are shielded from liability for a co-shareholder's malpractice.

Under NY Business Corporation Law § 1505, professional corporation shareholders are not personally liable for the malpractice of co-shareholders, but each remains personally liable for their own professional negligence.

Under New York partnership law, which of the following events does NOT automatically cause dissolution of a general partnership?

Answer: A partner's assignment of his partnership interest to a third party.

New York follows the 1914 Uniform Partnership Act, not RUPA. Partnership Law § 62 lists the causes of dissolution (expiration of the term, express will of all partners, court decree under § 63, bankruptcy of a partner or the partnership, death, etc.), but under § 53(1) a conveyance by a partner of his interest in the partnership does not of itself dissolve the partnership.