NYLE Business Relationships 4 — Questions and Answers
Question 1: 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?
- The promoter is immediately released upon adoption because adoption is a novation by operation of law.
- The promoter remains liable unless the other party agrees to release the promoter as part of a novation. (Correct answer)
- The promoter is automatically released once the corporation ratifies the contract.
- The promoter has no liability because a pre-incorporation contract is void until the corporation acts.
Correct 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.
Question 2: 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:
- Any member requests it and the court finds the request timely.
- It is not reasonably practicable to carry on the LLC's business in conformance with the operating agreement. (Correct answer)
- A majority of members vote for dissolution but the managing member objects.
- The LLC has failed to generate profit for two consecutive fiscal years.
Correct 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.
Question 3: 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 dissenting director?
- The director relied in good faith on financial statements prepared by the corporation's auditor. (Correct answer)
- The director was absent from the meeting at which the dividend was declared.
- The dividend was approved by a supermajority of the shareholders at the same meeting.
- The director held a de minimis ownership interest in the corporation.
Correct answer: The director relied in good faith on financial statements prepared by the corporation's auditor.
BCL § 719(b) provides a safe harbor to directors who rely in good faith on financial statements or reports prepared by a qualified officer or independent accountant.
Question 4: 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:
- Not liable because she lacked knowledge and participation.
- Liable only up to the value of her partnership interest.
- Jointly and severally liable for the full amount of the tort judgment. (Correct answer)
- Liable only if she was a managing partner with supervisory authority over Partner A.
Correct 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.
Question 5: A 90% shareholder of a New York corporation freezes out the 10% 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:
- A derivative action on behalf of the corporation for breach of fiduciary duty.
- A direct action for breach of the majority's fiduciary duty to the minority, possibly seeking dissolution or buyout. (Correct answer)
- An action under BCL § 630 for unpaid wages owed to other employees.
- A declaratory judgment that all dividend payments be restored prospectively.
Correct 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 action for dissolution under BCL § 1104-a or a forced buyout.
Question 6: 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:
- Eliminated entirely because a PC provides full limited liability to all shareholder-physicians.
- Limited to their proportional ownership interest in the PC.
- Preserved for their own malpractice but they are shielded from liability for a co-shareholder's malpractice. (Correct answer)
- Extended to all PC liabilities because professionals may not limit liability for professional acts.
Correct 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.
Question 7: Under New York partnership law, which of the following events does NOT automatically cause dissolution of a general partnership?
- A court decree of dissolution on application of a partner.
- All partners agreeing in writing to dissolve.
- A partner's personal bankruptcy filing. (Correct answer)
- The expiration of the term specified in the partnership agreement.
Correct answer: A partner's personal bankruptcy filing.
Under the NY Revised Uniform Partnership Act, a partner's bankruptcy causes dissociation of that partner but does not by itself automatically dissolve the partnership; the remaining partners may elect to continue.
NYLE Business Relationships 4
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?