NextGen Bar Exam Business Associations and Secured Transactions Syllabus

When does a partner's act bind the partnership under RUPA agency principles?

A partner is an agent of the partnership; an act apparently carrying on the ordinary course of partnership business binds the partnership unless the partner lacked authority and the third party knew or had notice of that lack of authority. Acts outside the ordinary course bind only if actually authorized.

What is the effect of filing a statement of partnership authority?

It may grant or limit a partner's authority. A filed grant of authority to transfer real property is constructive notice to the world; a filed limitation on authority is generally effective against third parties only for real property transfers (constructive notice via the recording), not for other transactions.

Define dissociation and identify common events of dissociation under RUPA.

Dissociation is a partner's withdrawal from the partnership. Events include: a partner's express will to withdraw, an agreed event, expulsion, bankruptcy, death/incapacity, or a court order. Dissociation does not necessarily cause dissolution.

After a partner dissociates without dissolution, what are the partnership's obligations and the partner's lingering liability?

The partnership must buy out the dissociated partner's interest (greater of liquidation or going-concern value). The dissociated partner remains liable for pre-dissociation obligations and can bind the partnership/be liable for up to 2 years post-dissociation unless proper notice (and a filed statement of dissociation, effective after 90 days) cuts off liability/authority.

What triggers dissolution and winding up of a general partnership under RUPA's default rules?

In an at-will partnership, a partner's notice of withdrawal triggers dissolution. Other triggers include an agreed event, an event making the business unlawful, judicial dissolution, or (in a term partnership) expiration of the term or unanimous consent. Winding up then liquidates assets and settles accounts.

State the order of distribution of assets on winding up of a general partnership.

(1) Pay creditors, including partners who are creditors; then (2) pay partners their accounts—return capital contributions and distribute remaining surplus as profits. Partners must contribute toward any deficit in proportion to their loss shares.

How is a limited partnership formed and what is the liability of each partner type?

A limited partnership is formed by filing a certificate of limited partnership with the state; it must have at least one general partner and one limited partner. General partners have unlimited personal liability and manage the business; limited partners have liability limited to their contributions and traditionally do not manage (though modern acts have eliminated the control-rule trap).

What is an LLP and an LLLP?

A Limited Liability Partnership (LLP) is a general partnership that files a statement of qualification, giving all partners limited liability (a liability shield for partnership obligations). An LLLP is a limited partnership that elects LLP status, extending the liability shield to its general partners as well.

What are the key formation and liability features of a Limited Liability Company (LLC)?

An LLC is formed by filing articles of organization with the state. Members enjoy limited liability (not personally liable for LLC debts), the entity offers pass-through taxation by default, and management may be member-managed or manager-managed. It is a hybrid of corporate and partnership features.

What fiduciary duties exist in an LLC and how does management structure affect them?

Members/managers owe duties of loyalty and care. In a member-managed LLC, all members owe these duties. In a manager-managed LLC, only the managers owe fiduciary duties; non-managing members generally do not (though they retain the obligation of good faith and fair dealing).

What are the steps to validly form a corporation (de jure corporation)?

File articles of incorporation with the state that include the corporate name, number of authorized shares, the registered agent and office, and the incorporators' names/addresses. The corporation exists upon filing; incorporators then hold an organizational meeting to adopt bylaws and appoint directors.

Distinguish a de facto corporation from corporation by estoppel.

De facto corporation: despite a defect, there was a good-faith, colorable attempt to incorporate and the parties acted as a corporation—shielding owners from personal liability. Corporation by estoppel: a party who dealt with the business as a corporation is estopped from denying its corporate status to reach owners personally. Both doctrines protect against contract (not tort) liability.

What is a promoter's liability for pre-incorporation contracts?

A promoter is personally liable on pre-incorporation contracts and remains liable even after incorporation unless there is a novation (release by the third party). The corporation becomes liable only if it adopts the contract; adoption alone does not release the promoter without a novation.

What is ultra vires and its modern treatment?

Ultra vires acts are those beyond the corporation's stated purpose. Modern statutes give corporations broad/general purposes, so ultra vires is rarely raised. It may be asserted only by: a shareholder seeking to enjoin the act, the corporation against an officer/director, or the state in a proceeding.

What is piercing the corporate veil and what are the most common grounds?

Piercing the veil holds shareholders personally liable for corporate obligations to prevent fraud or injustice. Common grounds: (1) alter ego / failure to observe corporate formalities and commingling of assets, (2) undercapitalization at formation, and (3) using the corporation to perpetrate fraud. Courts pierce more readily for tort victims than contract creditors and in closely held corporations.

Compare the business judgment rule with the duty of loyalty standard of review.

Duty of care claims are protected by the business judgment rule—a presumption that directors acted on an informed basis, in good faith, in the corporation's best interest; courts will not second-guess. Duty of loyalty claims (self-dealing/conflicts) get no such deference and are reviewed for entire fairness (fair price and fair dealing).

How can a director cleanse a conflicting (self-dealing) interest transaction?

A self-dealing transaction is upheld if: (1) approved by a majority of disinterested directors after full disclosure, (2) approved by a majority of disinterested shareholders after full disclosure, or (3) the transaction was fair to the corporation (entire fairness) when entered.

What is the corporate opportunity doctrine?

A director or officer breaches the duty of loyalty by usurping a business opportunity in the corporation's line of business (or in which it has an interest/expectancy) without first presenting it to the corporation and obtaining a rejection. Remedy: the corporation may recover the opportunity or the profits (constructive trust).

What inspection rights do shareholders have to corporate records?

Shareholders may inspect records (e.g., minutes, accounting records, shareholder lists) upon written demand for a proper purpose reasonably related to their interest as a shareholder. Certain records (bylaws, articles, annual reports) are available with minimal showing.

Distinguish a direct shareholder suit from a derivative suit.

A direct suit enforces the shareholder's own rights (e.g., voting, dividends), and recovery goes to the shareholder. A derivative suit enforces the corporation's rights against wrongdoers; recovery goes to the corporation. Derivative suits require contemporaneous ownership, standing throughout, and a written demand on the board (excused only if futile in some states).

What is required for a quorum and approval at a shareholder meeting?

A quorum requires a majority of outstanding shares entitled to vote be represented (unless articles provide otherwise). Once a quorum is present, a matter is approved if votes cast in favor exceed votes against (for most matters); directors are elected by plurality.

What is cumulative voting and how is it calculated?

Cumulative voting lets shareholders multiply their shares by the number of directors being elected and cast all votes for one or distribute among candidates, helping minority shareholders elect a director. Shares needed to elect one director ≈ (total shares voting ÷ (directors to elect + 1)) + 1.

What is a shareholder voting agreement versus a voting trust?

A voting agreement (pooling agreement) is a written contract among shareholders to vote their shares a certain way—specifically enforceable. A voting trust transfers legal title of shares to a trustee who votes them per a written trust agreement, filed with the corporation, typically limited (often 10 years).

What is the standard approval process for fundamental corporate changes (merger, sale of substantially all assets, dissolution, charter amendment)?

Generally: (1) the board adopts a resolution, (2) notice is sent to shareholders, and (3) shareholders approve by the required vote (majority of shares entitled to vote under the RMBCA, sometimes two-thirds). Dissenting shareholders may have appraisal (dissenters') rights.

What are appraisal (dissenters') rights and when do they apply?

Appraisal rights let a dissenting shareholder force the corporation to buy their shares at fair value. They typically arise in mergers, share exchanges, sales of substantially all assets outside the ordinary course, and certain charter amendments. The shareholder must object before the vote, not vote in favor, and timely demand payment.

Which transactions are classified as a 'sale of substantially all assets' requiring shareholder approval, and whose shareholders must approve?

A sale, lease, or exchange of all or substantially all of the corporation's assets outside the ordinary course of business requires approval of the selling corporation's shareholders. The buying corporation's shareholders generally need not approve. 'Substantially all' typically means leaving the seller without a significant continuing business.

Under UCC Article 9, what is the difference between tangible goods categories: consumer goods, equipment, inventory, and farm products?

Classification depends on the debtor's use: Consumer goods—used for personal/family/household purposes; Equipment—used or bought for use in a business (default catch-all for goods); Inventory—held for sale or lease, or materials used/consumed in business; Farm products—crops/livestock/products in a farming operation in the debtor's possession.

List the main categories of intangible and quasi-intangible Article 9 collateral.

Accounts (right to payment for goods/services), chattel paper (record(s) evidencing a monetary obligation plus a security interest/lease), instruments (negotiable instruments/notes), documents (e.g., bills of lading, warehouse receipts), investment property (securities/accounts), deposit accounts, general intangibles (catch-all, e.g., IP, goodwill, payment intangibles), and money.

What three elements are required for a security interest to attach (become enforceable)?

(1) Value given by the secured party; (2) the debtor has rights in the collateral; and (3) either the debtor authenticates a security agreement describing the collateral, or the secured party takes possession or control of the collateral. Once all three coexist, the interest attaches.

What is a purchase-money security interest (PMSI)?

A PMSI arises when (1) a seller retains a security interest in goods to secure their price, or (2) a lender advances funds enabling the debtor to acquire the goods and the funds are so used. PMSIs receive special priority ('superpriority') if timely perfected.

What are the principal methods of perfecting a security interest?

(1) Filing a financing statement; (2) possession of the collateral (pledge); (3) control (deposit accounts, investment property, letter-of-credit rights, electronic chattel paper); (4) automatic perfection (e.g., PMSI in consumer goods); and (5) notation on a certificate of title (vehicles).

What must a valid financing statement contain, and where is it filed?

It must include the debtor's correct legal name, the secured party's name, and an indication of the collateral (a supergeneric 'all assets' description suffices for a financing statement, though not for the security agreement). It is filed centrally with the Secretary of State (real-property-related collateral like fixtures is filed locally).

When is a PMSI in consumer goods automatically perfected, and what is the exception?

A PMSI in consumer goods is perfected automatically upon attachment—no filing required. Exception: filing/perfection is needed to defeat a buyer of consumer goods who buys for value, for personal use, without knowledge of the security interest, before a filing (the 'garage sale' rule).

Why does perfection by control take priority for deposit accounts and investment property?

For deposit accounts (as original collateral), control is the ONLY method of perfection; for investment property, control beats filing. A secured party with control has priority over one who perfected by filing, because control gives the secured party the ability to dispose of the collateral without further debtor consent.

State the general priority rule among conflicting secured creditors and unperfected interests.

General rule: the first to file or perfect wins (whichever is earlier, provided there is no gap). A perfected security interest beats an unperfected one. Between two unperfected interests, the first to attach prevails. An unperfected secured party loses to a lien creditor.

What is the PMSI superpriority rule for inventory versus non-inventory collateral?

Non-inventory (e.g., equipment) PMSI: priority if perfected within 20 days after the debtor receives possession. Inventory PMSI: priority only if perfected BEFORE the debtor receives possession AND the PMSI holder sends authenticated notice to prior conflicting filed secured parties before delivery.

Who is a buyer in the ordinary course of business (BIOCB) and what protection do they receive?

A BIOCB is a person who buys goods in good faith, without knowledge that the sale violates another's rights, in the ordinary course from a seller in the business of selling goods of that kind. A BIOCB takes free of a security interest created by the buyer's seller, even if perfected and even if the buyer knows it exists.

What rights does a secured party have upon the debtor's default under Article 9?

The secured party may (1) take possession of the collateral by self-help repossession if it can be done without a breach of the peace (or via judicial action), and (2) dispose of the collateral by sale/lease, or in some cases retain it in full/partial satisfaction (strict foreclosure). The secured party may also sue on the underlying debt.

What are the requirements for disposition of collateral after default and how are proceeds applied?

Every aspect of the disposition must be commercially reasonable, and reasonable authenticated notice must be sent to the debtor and certain other parties. Proceeds are applied: (1) reasonable expenses of repossession/sale, (2) satisfaction of the secured debt, (3) subordinate security interests; any surplus goes to the debtor, and the debtor remains liable for any deficiency.

What is strict foreclosure and the consumer-goods limitation on it?

Strict foreclosure lets the secured party retain the collateral in full or partial satisfaction of the debt after sending notice and receiving no timely objection. Limitation: it is barred (mandatory disposition) for consumer goods where the debtor has paid 60% or more of the cash price (PMSI) or obligation—the secured party must sell within 90 days or face liability.