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Business Associations

Exam 9
30 minutes

Fact Pattern

Two siblings, a brother and a sister, decided to start a bike shop with their cousin. They filed a certificate of organization to form a limited liability company. The brother and the sister paid for their LLC member interests by each contributing $100,000 in cash to the LLC. Their cousin paid for his LLC member interest by conveying to the LLC five acres of farmland valued at $100,000; the LLC then recorded the deed.

Neither the certificate of organization nor the members’ operating agreement specifies whether the LLC is member-managed or manager-managed. However, the operating agreement provides that the LLC’s farmland may not be sold without the approval of all three members.

Following formation of the LLC, the company rented a storefront commercial space for the bike shop and opened for business.

Three months ago, purporting to act on behalf of the LLC, the brother entered into a written and signed contract to purchase 100 bike tires for $6,000 from a tire manufacturer. When the tires were delivered, the sister said that they were too expensive and told her brother to return the tires. The brother was surprised by his sister’s objection because twice before he had purchased tires for the LLC at the same price from this manufacturer, and neither his sister nor their cousin had objected. The brother refused to return the tires, pointing out that the tires “are perfect for the bikes we sell.” The sister responded, “Well, pay the bill with your own money; you bought them without my permission.” The brother responded, “No way. I bought these for the store, I didn’t need your permission, and the company will pay for them.” To date, however, the $6,000 has not been paid.

One month ago, purporting to act on behalf of the LLC, the cousin sold the LLC’s farmland to a third-party buyer. The buyer paid $120,000, which was well above the land’s fair market value. Only after the cousin deposited the sale proceeds into the LLC bank account did the brother and sister learn of the sale. Both of them objected.

One week ago, the brother wrote in an email to his sister, “I want out of our business. I don’t want to have anything to do with the bike shop anymore. Please send me a check for my share.”


Questions

  1. 1. What type of LLC was created—member-managed or manager-managed? Explain. 

    2. Is the LLC bound under the tire contract? Explain. 

    3. Is the LLC bound by the sale of the farmland? Explain. 

    4. What is the legal effect of the brother’s email? Explain.

Question 1

1. What type of LLC was created—member-managed or manager-managed? Explain. 

2. Is the LLC bound under the tire contract? Explain. 

3. Is the LLC bound by the sale of the farmland? Explain. 

4. What is the legal effect of the brother’s email? Explain.

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