NYLE Business Relationships 2 — Questions and Answers
Question 1: Under New York law, a general partner who withdraws from a partnership before its term expires is liable for damages caused by the wrongful withdrawal. Which statement best describes the withdrawing partner's continued liability to third parties?
- The partner is immediately released from all liability upon filing a notice of withdrawal with the county clerk.
- The partner remains liable for partnership obligations incurred before withdrawal, and for later obligations to creditors who dealt with the firm before and had no notice of the withdrawal. (Correct answer)
- The partner's liability ends automatically on the date withdrawal is communicated to the other partners.
- The partner remains personally liable for all future partnership debts for two years after withdrawal.
Correct answer: The partner remains liable for partnership obligations incurred before withdrawal, and for later obligations to creditors who dealt with the firm before and had no notice of the withdrawal.
New York follows the 1914 Uniform Partnership Act (Partnership Law), not RUPA. A withdrawing partner dissolves the partnership; the partner stays liable for obligations incurred before dissolution (§ 67) and for later obligations to persons who had previously extended credit to the firm and had no knowledge or notice of dissolution (§ 66). There is no 90-day RUPA window.
Question 2: Alice and Bob form an LLC in New York. The operating agreement is silent on management. Under the New York LLC Law, which default rule applies?
- The LLC is automatically manager-managed with a board elected by members.
- The LLC is member-managed, and management decisions are made by a majority in interest of the members. (Correct answer)
- Alice, as the first-named member, controls all management decisions.
- A court-appointed manager controls the LLC until the members adopt an operating agreement.
Correct answer: The LLC is member-managed, and management decisions are made by a majority in interest of the members.
Under NY LLC Law §§ 401(a) and 402(a), unless the articles of organization provide for management by managers, management is vested in the members, and decisions are made by a majority in interest of the members (by share of profits). It is not manager-managed, and a court does not appoint a manager by default.
Question 3: Under New York's Business Corporation Law, what is the minimum number of directors required to form a quorum for a board meeting in the absence of a contrary bylaw provision?
- A simple majority of the entire authorized board. (Correct answer)
- One-third of the entire authorized board.
- Two-thirds of the entire authorized board.
- All directors then in office.
Correct answer: A simple majority of the entire authorized board.
BCL § 707 provides that a majority of the entire board constitutes a quorum unless the certificate of incorporation or bylaws fix a different proportion, but not less than one-third.
Question 4: A New York limited partnership fails to file a certificate of limited partnership. What is the status of a person who invested capital believing they were a limited partner?
- Unless, on discovering the mistake, they promptly cause a certificate to be filed or withdraw, they can be liable as a general partner to persons who dealt with the business believing them to be a general partner. (Correct answer)
- They have no legal status and their investment is void.
- They retain limited liability as long as they exercise no management control.
- They are automatically converted to a silent partner under equitable principles.
Correct answer: Unless, on discovering the mistake, they promptly cause a certificate to be filed or withdraw, they can be liable as a general partner to persons who dealt with the business believing them to be a general partner.
Under Partnership Law § 121-304, a person who contributes to a purported limited partnership and erroneously but in good faith believes he is a limited partner is not a general partner if, on ascertaining the mistake, he promptly causes a proper certificate to be filed or withdraws by filing a certificate; if he does neither, he faces general-partner liability to third parties who transacted business believing him to be a general partner (§ 121-304(b)). Filing the certificate is what creates the limited-partner shield.
Question 5: A New York corporation's shareholder agreement restricts stock transfer without board approval. A shareholder transfers shares in violation of this restriction to a buyer who had actual notice of it. Is the restriction enforceable against the buyer?
- Yes, because the buyer had actual knowledge of the restriction. (Correct answer)
- No, because restrictions on alienation are disfavored under NY law.
- No, because the buyer is a bona fide purchaser for value.
- Only if the restriction was conspicuously noted on the stock certificate, regardless of the buyer's knowledge.
Correct answer: Yes, because the buyer had actual knowledge of the restriction.
Under BCL § 627, a lawful restriction on transfer may be enforced against a holder or transferee who has actual knowledge of it, even if it was not noted on the certificate (a noted restriction binds regardless of knowledge). A buyer with actual notice cannot claim to be an innocent purchaser.
Question 6: Under the New York LLC Law, when may a member bring a derivative action on behalf of the LLC?
- Any time the member disagrees with a management decision.
- Only after the member holds at least a 25% membership interest.
- After making a demand on the managers or members that was refused or after demonstrating demand futility. (Correct answer)
- Only with court permission obtained before any demand is made on management.
Correct answer: After making a demand on the managers or members that was refused or after demonstrating demand futility.
NY LLC Law § 1002 requires a member to make a demand on managers or members prior to filing a derivative suit, or to plead with particularity why demand would be futile.
Question 7: Two attorneys form a New York LLP. One partner commits malpractice. Under New York's LLP statutes, what is the other, non-negligent partner's personal liability?
- Jointly and severally liable for all partnership debts including the malpractice claim.
- Not personally liable for the malpractice claim but remains liable for ordinary contract debts of the partnership. (Correct answer)
- Not personally liable for any debts of the partnership whatsoever.
- Liable only up to the amount of that partner's capital contribution.
Correct answer: Not personally liable for the malpractice claim but remains liable for ordinary contract debts of the partnership.
Under NY Partnership Law § 26, an LLP partner is shielded from personal liability for malpractice of co-partners but retains liability for the partnership's own contractual obligations.
NYLE Business Relationships 2
Under New York law, a general partner who withdraws from a partnership before its term expires is liable for damages caused by the wrongful withdrawal.
Which statement best describes the withdrawing partner's continued liability to third parties?