BUSINESS ENTITIES & NEGOTIABLE INSTRUMENTS OUTLINE

I. PARTNERSHIPS
A. Defined
1. A juridical person distinct from its partners created by written or oral contract between two or
more “legal persons” to combine efforts and/or resources in agreed-upon proportions, and to
collaborate at mutual risk for common profit or commercial benefits.
2. A partnership is a nominate contract.
B. Requirements
1. Elements
a. Consent and intent  these can be inferred if the elements of a partnership are there, even
if the partners did not consciously intend to create a partnership.
b. Contribution of something of economic value by each partner
i. There is no restriction on the type of property or services that can be contributed.
ii. Each partner owes the partnership what he has agreed to contribute.
iii. If a partner fails to make the contribution, a third party creditor of the partnership
may sue to enforce the obligation to contribute.
c. Sharing of risk by all partners
2. If written and filed, the document must contain:
a. Name of partnership,
b. Address of partnership,
c. Each partner’s name and address (including limited partners), and
d. Each limited partner’s contribution.
3. Joint venture  similar to a partnership, but arise only when the partners intended the relationship
to exist AND are predicated upon either an express or implied contract.
C. Name
1. Partnership may adopt a name with or without the names of any of the partners
2. If they do not expressly adopt a name, must do business in the name of all of the partners.
D. Modification by Contract
1. Partnership rules are generally suppletive and may be modified by contract.
2. Exceptions:
a. Elements of a partnersip
b. Rules governing ownership of immovables
c. Rules involving the rights of third persons
E. Participation of Partners
1. Unless otherwise agreed, partners share equally in losses, profits, and distribution of assets.
2. Contribution of assets, however, is restored to each partner in the ratio of unrestored contributions
made (unless otherwise agreed).
3. If the partnership agreement states the extent of partner participation for losses, profits, or assets,
it is presumed that the rule will apply to the other categories, unless explicitly stated.
F. Decisions affecting the partnership
1. Unless otherwise agreed, unanimity is required to:
a. Amend the partnership agreement
b. Admit new partners
c. Terminate the partnership
2. Management decisions will require a majority vote, unless otherwise agreed (i.e. by naming a
managing partner).
G. Ownership of Immovables
1. General rule: partnership can only own immovables if the partnership agreement is in writing at
the time of acquisition. If it isn’t, the property is owned in indivision (jointly) by the partners.
 2. To affect the rights of third parties, the partnership agreement must be filed w/ the Sec. of State in
Baton Rouge  otherwise, third parties can treat partnership immovables as the partners’ individual
property.
3. Existence of a newly-created partnership that is in writing and filed will be retroactive to the date
of ownership of property acquired by the partnership, but this will not prejudice the rights of any
thing parties who validly acquired title to the property.

II. OBLIGATIONS OF THE PARTNERS

A. Towards Each Other and the Partnership
1. Fiduciary duty of loyalty to partnership and other partners
a. Partner cannot appropriate any partnership asset, including a prospective business
opportunity, for himself.
b. Partner cannot act in a manner contrary to the best interests of the partnership.
c. Partner may not conduct any activity contrary to the fiduciary duty and prejudicial to the
partnership.
d. Effects of violation:
i. Partnership may recover damages.
ii. Partnership may recover any profits obtained by the breaching partner from the
breach of duty.
2. Partner may share his partnership interest w/ a third person
a. The third person will not become a member of the partnership
b. Partner will be liable for any damages the third person causes.
3. Right to inform self of the partnership business and consult any records that are being kept.
a. A contrary agreement is null.
4. Partner who acts in good faith can be a creditor for sums he disburses, obligations he incurs, and
losses he sustains thereby.
5. There is no duty of care.
B. Towards Third Persons
1. Each partner is a mandatary of the partnership
a. Extends to all manners in the ordinary course of partnership business
b. Excludes LAE of the partnership’s immovables
c. The partnership can exclude a partner from being a mandatary, but this does not affect the
rights of third parties who transact business with him in good faith.
d. When a partner exceeds his mandatary authority, the other partners can recover any
damages from that partner.
2. A provision stating that a partner does not share in losses does not affect third persons (but is
binding on the partners).
3. Liability for debts
a. Each partner is secondarily liable for his virile share of the debts of the partnership  may
plead “discussion” of the partnership’s assets if sued individually (this means that the partner
can require the creditor to seize specifically identified partnership assets before seizing the
partner’s personal assets).
b. Joint, not solidary, liability
c. If new partner joins partnership after debt incurred, it is unclear under LA law whether he
will be liable for the pre-existing debt  but the law of the other 49 states and the UP says
no.
4. Partner sued in his capacity as partner
a. Not entitled to any indemnification for litigation expenses, even if he’s successful.
b. May be entitled to indemnification if the costs of defending the suit could be characterized
as a loss suffered by the partner, without his own fault, as a mandate of the partnership
(mandatary law).
 III. CESSATION OF MEMBERSHIP
A. Methods
1. Death
2. Interdiction
3. Bankruptcy
4. Seizure of his interest
a. Seizure is effected under a writ of execution  P has 30 days to cure and have the writ
lifted
5. Expulsion
a. Done for just cause  P’s involvement in the partnership is a significant burden on the
partnership
i. Disagreement w/ Ps
ii. Acting in a way that is inconsistent, contrary, etc.
b. Unless otherwise agreed, a majority of the partners must agree on an expulsion (P who
may be expelled has a right to vote)
6. Withdrawal
a. If partnership is constituted for a term: may only withdraw without consent of partners if
another partner fails to perform a material obligation.
b. If no term: partner may withdraw at any time provided he gives notice in good faith at a
time that is not unfavorable to the partnership
i. It might not be allowed to withdraw at peak business time (i.e. busy season for a tax
partnership)
c. Statute is silent on the effect of a wrongful withdrawal  implies there is no such thing
and it will simply be ineffective
7. In accordance w/ partnership agreement
B. Effects of Cessation
1. Upon proper cessation, P is entitled to the value of his partnership interest. If the partnership
continues to exist, this amount must be paid in money unless otherwise agreed.
a. There is no set method of valuation for interest  courts say the most fair way is the
market value of the underlying partnership assets
2. If there is no agreement (either before or after cessation of membership) of the amount to be paid,
any party may seek judicial determination.
C. Termination of the Partnership itself
1. Cessation of membership by the above methods does not terminate the partnership itself unless
only one member is left.
2. Methods:
a. Unanimous consent
b. Judgment of termination
c. Bankruptcy of the partnership
d. Reduction of membership to only one person
e. Expiration of term
f. Attaining or impossibility of attaining the object of the partnership
g. In accordance with the provisions of the partnership agreement
3. Continuation  a partnership may be expressly or tacitly continued after
a. Term expires
b. Object is attained
c. Parties agree to terminate
d. Object becomes impossible (must continue for a different object)
4. Effects
a. Parties no longer have authority to act as mandataries, except for acts necessary for
liquidation.
b. P who has no knowledge of the termination may still bind the partnership.
 c. Does not affect the rights of third parties who in good faith (w/out knowledge of
termination) transact business with the partnership  partnership will be able to recover
damages for that P’s actions.

IV. DISSOLUTION AND LIQUIDATION

A. Order of Payment of Creditors
1. Creditors of partnership
a. Secured creditors (both Ps and nonPs)
b. Unsecured creditors who are not Ps
c. Unsecured creditors who are Ps
d. Capital contributions are restored
e. Surplus, if any, is divided proportionately
2. Creditors of individual Ps

V. COMMENDAM/LIMITED PARTNERSHIP
A. Defined
1. A partnership with one or more commendam partners who have limited powers, rights, and
liability (liable only to extent of their contribution in the partnership) and one or more general
partners.
a. Partnership agreement must describe the value of the partner’s contribution or how it is to
be valued.
b. If the partnership agreement does not do this and the requirements for a partnership
contract are satisfied, the commendam partner will be liable as a general partner.
B. Rules
1. General partnership rules apply when they are consistent.
2. Difference: commendam Ps are not personally liable for partnership debts and are liable only to
the extent of their contribution.
3. No authority to bind the partnership in dealings w/ third parties
C. Form Requirements
1. In writing and filed with Sec. of State.
2. Partnership name must clearly reflect that it is a limited or commendam partnership and must not
suggest that any CP is a general P  if these requirements are not met, the CP will be liable as a
general P.
D. When Commendam Partners Can Be Liable as General Partners
1. Permits name to be used in partnership’s business dealings
2. Participates in management or administration of the partnership
3. Conducts business w/ third parties on behalf of the partnership  will be liable only to people
who transacted business with the partnership reasonably believing, based upon CP’s conduct, that he
was a general P.
4. Exceptions:
a. Consulting with and advising partners on business matters of the partnership
b. Acting as surety
c. Approving or disapproving amendments to the agreement
d. Voting on important matters such as alienation or encumberance of substantial assets,
changing the nature of the business of the partnership, admitting or expelling partners, etc.
e. Having the same name as a general partner
f. Serving as an officer or director of a corporate general partner.

VI. REGISTERED LLP

A. General
1. Combines beneficial aspects of partnerships and corporations.
 2. Partners in an RLLP are not personally liable for debts or obligations arising from errors,
omissions, negligence, incompetence, or malfeasance committed in the course of the partnership by
another partner or a partnership representative. Will also protect him from being sued to enforce
such debts.
a. This does not extend to the partnership’s assets.
b. Individual partner will still be personally liable for:
i. Virile share of other partnership debts and obligations (i.e. contracts)
ii. Partnership debts resulting from that P’s own actions
B. Formation
1. Must convert from a previous partnership
2. Process
a. File application w/ Sec. of State
i. Name of partnership
ii. Address of principal office
iii. Number of partners (names not required)
iv. Brief statement of the business in which it engages
b. Application must be signed by a majority in interest of the partners
c. Pay $100 registration fee
3. Registration is effective for one year from filing date or until voluntary w/drawal by a majority of
the partnership interest, whichevery comes first.
4. After one year, the RLLP must renew its registration.
C. Timing
1. If there is a discrepancy between organization’s status on the date an event occurs and the date a
suit is filed (i.e. a tort), LA law is unclear, but other states base the status on the date of occurrence.
D. Conflict of Laws
1. If an LA RLLP conducts business in another state, the state should recognize its existence and use
LA law for liability under the Full Faith & Credit Clause.
2. This is an unsettled issue.
3. LA gives foreign RLLPs and LLCs the protection of their home states laws, and presumably other
states with these types of entities have similar laws  doubt lies in states without RLLPs or LLCs
E. Professional RLLPs
1. LA allows the practice of professions (doctor, lawyer, accountant) by RLLPs and LLCs.
2. Permitted only to the extent that the practice of that profession in this form is permitted by other
laws and the appropriate regulatory agency.

VII. CORPORATIONS
A. Formation
1. One or more natural or artificial persons capable of contracting may form a corporation.
2. Name
a. Application to reserve a name is filed w/ Sec of State  reserved for 60 days w/ 2 30-day
extensions allowed.
b. Requirements:
i. Must be unique  distinguishable from every other previously registered
corporation or trade name
ii. Must contain “corporation,” “incorporated,” “limited” or the abbrev of any of those
words (except for railroad, telephone, and phone corporations)  “and Co” or “&
Co” is not allowed
ii. Cannot contain words or wording that makes suggests it’s a bank, insurance
company, or charity/nonprofit.
c. Effect of improper name: won’t be dissolved, but may be enjoined from doing business or
Sec of State may refuse to accept the articles until it’s corrected
3. Articles of Incorporation
 a. Must be in English and signed by each incorporator or an agent for each incorporation (the
incorporators can be mere functionaries, not anyone important)
b. Required for the Articles to state:
i. Name
ii. Purpose (can say that it’s to engage in any lawful activity; cannot say the purpose
is to make money)
iii. Aggregate number of shares that the corporation will have authority to issue
iv. If only one class of stock: par value (minimum price) of each share or state that the
shares are w/out par value
v. If multiple classes of stock:
a. Number of shares in each class
b. Whether the shares are par or no par
c. Preferences and rights of each class
vi. If there is a duration: state the triggering event to end it (can’t be an uncertain
event or someone’s death) or the date it ends.
vii. Full name and address of each incorporator
4. Sec of State may refuse to accept flawed articles, but may also accept them and ask for a
correction later
5. Filing
a. Filed with initial report w/ Sec of State. File certified copy in mortgage office of the parish
in which the corporation’s registered office is located
b. Initial report must state
i. Signed by each incorporate or his agent
ii. Location and municipal street address of the corporation’s registered office
iii. Full name and municipal street address of each registered agent
iv. Names and municipal street address of each of the initial directors (if selected at
this point)
6. Commencement of legal existence  retroactive to the date the articles were filed
7. Annual report must be filed with Sec of State. If corp. fails to do so
a. Has 15 days after notice to file one
b. After 15 days, filed $50/day
c. Articles and franchise will be revoked if they’re not filed for three consecutive years
8. By-laws: govern day-to-day aspects of the corporations, usually don’t need to have stockholder
approval to amend, don’t even need to have by-laws
B. Issuance of Shares
1. Before anyone can own/buy stock
a. Articles of incorporation must authorize the shares.
b. First shares are either issued to the corporation promoters at the time its formed or issued
after incorporation by the board of directors.
2. Consideration
a. Permitted
i. Cash (including certified checks or regular checks that have cleared the bank)
ii. Any kind of property
iii. Services already rendered to the corporation
b. Not permitted
i. Unexecuted promises or promises to perform services/transfer property/pay money
in the future  even if promise to pay is given in a negotiable instrument and is
secured
ii. Stock issued for invalid consideration is void and must be cancelled by the corp.
c. Amount
i. Par value stock: can be sold for any fair value price higher or equal to par that the
Board sets
 ii. No par stock: can be sold for any fair price that the Board sets
iii. Stock sold for property: Board’s determination of the value will be upheld if it was
made in good faith w/out any conflict of interest.
iv. If Board sells stock at different prices without a valid reason, they will be liable to
the shareholder whose stock was diluted.
3. Stock Certificates
a. All stock must be represented by a certificate, unless the corporation participates in the
Direct Registration System or Depositary Trust & Clearing Corporation  online registration
where you can issue certificate electronically.
b. Stock certificates must state:
i. Name of issuing corp and that it’s organized in LA
ii. Name of person to whom the stock was issued
iii. Number and class and series of shares
iv. Rights, preferences, and limitations of the class and series of shares, if the
corporation has different classes/series of shares
c. If online certificate is issued, corp. must issue a statement with the above information as
well as any restriction on transferability of the stock.
4. Stock subscriptions: written agreement to buy stock, generally irrevocable.
C. Promoters
1. People who start/initially invest in a corporation.
2. Duties
a. Fiduciary duty of fair dealing and disclosure – disclose to the board any self-interest in
dealings between the promoter and corporation and any material facts that might affect a
decision to deal w/ the promoter.
i. Corp’s remedy for breach: suit for recission or damages
ii. Creditors and innocent SHs can sue as well
b. Liability for pre-incorporation dealings w/ third parties
i. Promoter liable if he knew the corporation had not come into existence.
ii. Corporation liable if they ratified or adopted the contract after coming into
existence. Promoter will still be liable unless the other party discharges him.
c. Liability on behalf of a corporation that the promoter believed to exist  promoter will not
be personally liable if
i. Made a good faith effort to incorporate and exercised only corporate authornity (de
facto corporation doctrine)
ii. Other party relied on corp’s name and assets, not promoter’s, when signing the
contract (corporation by estoppel doctrine)
D. Piercing the Corporate Veil (Alter Ego doctrine)
1. Generally: shareholders are only liable for the corp’s debts up to the limit of their investment;
cannot take their personal assets to satisfy the corp’s debts. However, there are exceptions where the
court will not allow the separate corporate entity to shield the SHs:
a. When it would cause injustice, or
b. Reward fraud.
2. Grounds for veil-piercing
a. Business not conducted in proper corporate form (no SH or board meetings, no minutes,
officers acting outside the scope of their duties, etc)
b. SH has treated the corporate assets as his own or commingled them w/ his own
c. Corporation is undercapitalized (never capitalized w/ sufficient funds to do business and
meet its reasonably expected risks)  taxi cab hypo
d. Corporation is thinly capitalized (most of the money that the SHs paid into the corp have
been characterized as debt rather than equity)

VIII. CAPITAL STOCK STRUCTURE

A. Definitions
1. Stated capital: at least the aggregate par value for all the authorized, issued, and outstanding
shares (if no par value, the BOD will arbitrarily set this amount).
2. Capital surplus: amount received for the initial shares of stock that exceeds the par value of the
arbitrarily set value.
3. Earned surplus: total accumulated profits of the corp. Assets minus liabilities, stated capital, and
capital surplus.
B. Dividends
1. Payment of dividends is w/in the discretion of the Board of Directors. Their reason for not paying
dividends will virtually always be found under the Business Judgment Rule.
2. Calculation of the limits on paying dividends (use whichever formula allows for a greater amount)
a. Pay out of surplus  first earned surplus, then capital surplus
i. Cannot pay out of surplus if the corp is insolvent or if it would make the corp
insolvent.
b. Pay out of net profits  for the current or preceding fiscal year or both
i. Cannot pay if it would make the corp insolvent
3. Director who votes for an unlawful dividend will be liable to the corporation and/or to its creditors
when the devidend is paid  exception if the directors relied on financial statements prepared by
qualified accountants or internal corporation records.
4. SH will be liable for any illegal dividend he receives  lack of knowledge of the illegality is not a
defense
C. Redemption or Repurchase of Shares
1. Redemption = when the corporation exercises a unilateral right stated in the stock certificate to
buy back its shares from its SHs  SH may not refuse if proper value is offered
2. Repurchase = when corp and one or more SHs mutually negotiate a murchase by the corp of its
stock owned by the SHs
3. Limitations
a. Corp may never repurchase or redeem shares when it is insolvent or when the
purchase/redemption would render it insolvent
b. Corp may never repurchase or redeem shares when doing so would reduce its net assets
below the amount needed to pay the liquidation preferences of outstanding preferred stock.
4. Directors who vote in favor of a stock redemption/repurchase will be liable to the corp and/or to
creditors if it is paid for with funds not legally available  exception if the directors relied on
financial statements prepared by qualified accountants or internal corporation records.

IX. CORPORATE PURPOSES AND POWERS

A. Scope
1. Any lawful purpose except for banking and insurance.
2. The corporation then has the power “to perform any acts which are necessary or proper to achieve
its purpose.”
B. Liability for Ultra Vires Acts
1. Ultra vires act = when a corp. exceeds its power as stated in the articles
2. UV doctrine may be raised in a suit by or against a corporation:
a. For injunction before the corp. commits any act,
b. For damages by the corp. against the offending directors or officers,
c. By the state in a suit to dissolve the corporation.
C. Agency Principles
1. When an employee or officer exceeds his authority (whether or not he goes beyond the scope of
the corporation’s powers), normal agency rules apply. An employee/officer has the power to bind the
corp under the following principles:
a. Actual authority: actually having the lawful power to act for the corporation
i. Express: authority granted by articles, by-laws, or board
 ii. Implied: the authority is a natural part of the person’s office and has not been
expressly revoked
b. Apparent authority: person w/out actual authority does an act that a third party reasonably
believes is done w/ actual authority
c. Ratification: corp will be bound if they expressly ratify or accept the benefits of an act by
someone without actual authority.

X. THE BOARD OF DIRECTORS AND OFFICERS

A. General
1. Sized is fixed or defined in the articles or by-laws or in initial or supplemental report.
2. First directors are named in the initial/supp report, then elected by SHs.
3. Don’t have to get paid.
4. Role: the corporate powers are vested in the directors, and they manage the business affairs.
5. SHs can be on the board of directors.
6. Minimum qualifications: competence.
7. Length of term: one year unless the articles or by-laws extend the term up to 5 years.
B. Termination
1. Director’s office becomes vacant if he dies or resigns.
2. BOD may declare a seat vacant when:
a. D is adjudicated a bankrupt
b. D is interdicted or adjudicated an incompetent
c. D becomes incapacitated by illness or infirmity to perform duties for 6 months or longer.
c. D ceases to have the qualifications required by the articles or by-laws.
3. BOD can dismiss a director with or without cause by a majority vote of the total voting power at
any special meeting called for the purpose  majority of all the outstanding shares whether or not
they are represented at the meeting or actually voted.
4. Procedure for removal
a. Can only be done at a special meeting called for that purpose
b. If D was elected by a special class of stock  can only be removed by a majority of the
shares of that class.
c. If D elected by cumulative voting  may not be removed if the votes cast against removal
would be enough to elect him (even if it’s a majority).
C. Filling Board Vacancies
1. Vacancy can be filled for the remainder of the term by a majority vote of the remaining directors,
even if they don’t constitute a quorum.
2. Can be filled at a special meeting, including a meeting for removal.
3. Either BOD or SHs can fill a vacancy, whoever acts first  if BOD acts first, SHs may remove
the director using the procedure discussed above.
D. Board Action  Meetings and Quorum
1. BOD may only act at a regular or special meeting called with adequate notice to each director.
a. Voting: D must be present to vote, and cannot vote by proxy unless:
i. The articles so provide; and
ii. The proxy is held by another director or SH.
b. Teleconference meetings are also allowed as long as all Ds can simultaneously participate.
c. BOD may delegate any specified powers to a committee made up of one or more Ds, who
may then act upon those powers  must do so at meetings.
d. Exception: can take action w/out a meeting with unanimous written consent of all board
members.
2. Quorum requirement: a majority of the BOD must be present at the meeting for any action to take
place  may leave afterwards and action can still take place.
3. Majority vote requirement for the BOD to act  abstention = voting no
4. Improper action because of lack of notice = voidable, may later be ratified by the BOD.
 5. Chairperson presides over meetings and cannot break ties if he has already voted.
E. Duties and Liabilities
1. Duties
a. Reasonable care
i. One year PP for a lawsuit against an officer or director for the breach of the duty
of care.
ii. Serving w/out compensation is not a defense.
b. Loyalty (2-year PP)  avoid self-dealing and conflicts of interest. An action entered into
where there is a conflict of interest is presumed to be tainted and may be voidable, unless:
i. Full disclosure was made to the BOD before it voted and the vote of the interested
D did not count towards the passage of the motion; or
ii. Full disclosure was made to the Shs who approved or ratified the action; or
iii. Transaction was fair to the corp at the time it was authorized, approved, or ratified
(determined by court).
c. Stay informed/make reasonable inquiry when the facts require it
d. Duty to avoid self-dealing: D may not take any business opportunity that properly belongs
to the corporation  unless he first fully informs the BOD of the opportunity and they decide
not to pursue it.
i. Remedies: constructive trust to require the property to be transferred to the
corporation, accounting for profits and earnings, or damages.
e. Avoid intentional misconduct (2-year PP)
2. BJ Rule: when D is sued for lack of due care (gross negligence), his defense will be the BJ Rule
 claim that his decision was a reasonable one that turned out badly. D will not be liable for the
breach if:
a. There is no conflict of interest,
b. D reasonably believed that he had informed himself of the matter in question, and
c. D reasonably believed that he acted in the best interests of the corp and its SHs, unless the
conduct constituted gross negligence.
3. LA Rule for Liability
a. Articles may eliminate or limit liability for a breach of the duty of care  cannot protect D
against suits for breach of the duty of loyalty, bad faith acts, or improper payment of
dividends or stock repurchases.
b. BOD can indemnify or insure directors, officers, and corporate agents involved in
criminal, civil, administrative, or investigative proceeding for their conduct engaged in on
behalf of the corp in good faith  for a SH derivative suit where the person is liable to the
corporation itself, can only indemnify their expenses (incl. attorney’s fees).
4. D or SH will not be liable for unlawful acts if he was absent from the meeting where the act was
authorized, or if he was present but clearly recorded a dissent to the action in the meeting minutes or
in a writing filed promptly thereafter with the corporation agent.
F. Limitations on Directors’ Powers  they cannot:
1. Amend the articles
2. Sell all or substantially all of the corp’s assets (liquidate)
3. Dissolve the corporation
4. Merge with another entity (unless its more than 90% owned by the first corp)
(SHs do all these things)
G. Officers
1. Required to have a president, secretary and treasurer  two offices can be combined in the same
person
2. Removal: BOD may remove at any time, with or w/out cause, but this power can be limited by the
officer’s employment contract.
3. Binding the corporation: use same agency principles as above (actual authority, apparent
authority, and ratification).
 XI. SHAREHOLDERS
A. Rights
1. Inspect corporate books and records
a. With at least 5 days notice, any SH who is the holder of record for at least 5% of all
outstanding shares for at least 6 months and who is not a competitor may inspect all records
and accounts
b. For competitor or representative of competitor  need at least 25% of shares
c. Aggregation is permitted
d. Must have a proper reason to inspect
e. This right cannot be limited by the articles or by-laws
2. Dissenter’s rights
a. SH who voted against an action that got less than 80% of votes of all authorized voting
shares has “dissenter’s rights”  right to demand repurchase of stock by corp at FMV
(determined by agreement or judicial proceeding).
3. Preempive rights
a. Right to purchase the same percentage of newly issued stock as the SH currently holds of
the total outstanding voting shares  avoid dilution of vote
b. Preemption right must be explicitly stated in articles.
4. Limitations may be stated in the articles. If the articles just generally state that preemption rights
exist, SHs will have no right with respect to shares:
a. That are issued for consideration other than cash
b. That are issued to satisfy a right to convert bonds into stock or exercise a stock option
c. That are treasury shares
d. That are issued as compensation under an employment contract with an officer or agent
e. That are nonvoting (usually preferred) shares.
B. SH Meetings
1. Annual meeting is only required when directors are up for election. Meeting may be held
anywhere.
2. La. has a unique provision that allows any single SH to call a regular SH meeting at the
corporation’s registered office if the corporation has not held a regular annual meeting for 18
months.
3. Special meetings: may be called by BOD, president, or by SH holding at least 1/5 of the voting
shares, or anyone else who the articles extend the right to. Articles may also lower the amount of
voting shares needed, but may not deprive the above people of the right.
4. Procedure
a. Notice must be sent to all SHs between 60 and 10 days prior to the meeting.
b. Meeting may then be adjourned and reconvened on a specified date without new notice
being sent to SHs.
c. Teleconference meetings are presumable not permitted.
d. Action may be taken w/out a meeting if there is unanimous consent in writing of all SHs
who have a vote on the matter  articles can lower the amount needed for consent.
e. Voting eligibility: all SHs of record on a specific date are permitted to vote.
f. Voting by proxy is allowed
g. Quorum required at beginning of meeting: majority of total voting power, but articles can
change it to as low as one half.
i. Shares that don’t count toward quorum
a. Treasury shares
b. Inissued shares
c. Shares owned by corp’s subsidiary
C. Voting
1. Generally, one share is one vote, unless the articles provide otherwise. The following shares are
not entitled to vote:
 a. Treasury shares
b. Inissued shares
c. Shares owned by a subsidiary (more than 50% of shares owned by the parent)
d. Fractional shares (unless articles say otherwise)
2. Unless the articles or by-laws provide otherwise, a majority of votes actually cast at the SH
meeting are needed to act. Exceptions:
a. Amend articles  2/3 vote
i. Articles can change this but it can’t be less than one-half
b. Authorize mergers  2/3 vote
i. Articles can change this but it can’t be less than one-half
c. Sale of corporate assets  2/3 vote
i. Articles can change this but it can’t be less than one-half
d. Dissolution  affirmative vote of a majority of the voting power present
e. Elect directors
i. Straight voting: vote seat by seat and candidate for each seat that receives a
plurality of the votes wins the seat.
ii. Cumulative voting: vote for all seats in one election, each share is entitled to as
many votes as there are seats, the directors who get the most votes win the open seats.
3. Proxy voting: SH may assign their voting power to a proxy  the assignment must be in writing
and filed with the corporate secretary.
a. Irrevocable: proxy can be irrevocable if this is provided for in the agreement or in the
proxy and if the proxy is “coupled with an interest” (i.e. buyer of stock after closing date gets
a proxy from former SH, creditor gets a proxy on shares held as collateral, arbitrator named
in a SH voting agreement gets a proxy).
b. Otherwise, proxies are revocable if the corporation has written notice of:
i. A revocation,
ii. A subsequent superceding proxy, or
iii. The SH’s death.
c. Valid for 11 months, can be extended but not past 3 years.
D. SH Agreements
1. Voting trust
a. Shares can be placed into a trust by one or more SHs. The shares are transferred to a
trustee who votes the shares and distributes the dividends in accordance with the trust
document  legal and beneficial ownership of the shares are separated
b. Trustee will then hold all the voting and other rights pertaining to the shares (i.e. all
normal SH rights), unless the trust agreement states otherwise.
c. Duration:
i. Normal: 15 years
ii. Less by agreement
iii. Can be extended for up to a 10 year period
d. Voting trust is a public document and must be deposited w/ the corporation
2. Vote Pooling agreements: written agreement by SHs in which they agree to cast their votes
together in a block in a manner determined by some procedure specified in the agreement.
a. Agreements to vote in a block as directors is prohibited.
3. Stock transfer restrictions
a. Generally, stock can always be transferred unless its alienability is expressly limited.
i. Publicly traded corporations never have this restriction.
ii. Close corporations may write these restriction into the articles or the by-laws
iii. SHs may also privately agree in writing to restrict alienability
b. Shares affected: unless holders of the shares voted in favor of the restriction or were
parties to the private SH agreement, a restriction on alienability will not affect shares issued
before it was adopted.
 c. Any restriction on alienation must be conspicuously noted on the from or back of the stock
certificate (or, if no certificate is provided, in the statement mailed to the SH)  if not noted,
the restriction will not be enforceable against an acquirer who had no knowledge of it
d. Examples of restrictions:
i. Mandatory buy and sell clause  in event of death or withdrawal of SH
ii. First refusal clause  SH required to notify corporation of intention to sell shares
and the intended price. Corp and other SHs then have a right of first refusal to buy the
shares at that price or another predetermined price.
iii. Restriction of sales to certain types of persons  cannot contradict public policy
iv. Approval clauses  stock transfer to anyone other than an existing SH must be
approved by board or some percentage of the other SHs  this clause must state that
approval cannot be unreasonably w/held
e. Restrictions must be reasonable or the courts will not uphold them
f. Effect of violative transfer: may be ineffective, corp may refuse to register the stock or let
the transferee vote the shares, receive dividends, or enjoy other SH benefits.
g. SH cannot require a corporation to buy back its stock from him unless the articles
expressly provide for it.
h. SH cannot be expelled by the corporation (either by BOD or other SHs)  corp cannot
force a shareholder to sell his shares back unless they have a right of redemption
E. SH Derivative Suits
1. Defined: a suit in equity brought by a shareholder or shareholders on behalf of the corporation
against any party against whom the corporation has a legitimate cause of action  i.e. current or
former shareholders, officers, and directors  by asserting that the corporation itself is unwilling to
bring the suit.
2. Corporation is a nominal defendant and indispensable party.
3. Pl’s duties
a. Must be a shareholder or have a beneficial interest in shares at the time the suit is filed (i.e.
trustee, creditor)
b. Must own the shares or hold the interest throughout the litigation
c. Must have owned the shares at the time of the alleged wrong, unless
i. The wrong is a continuing one,
ii. Pl. acquired shares by will or inheritance
iii. By operation of law
d. Must not have participated in or ratified the wrong.
4. Demand requirement:
a. Plaintiff must first make a demand on the BOD that it bring suit to enforce the right. If the
directors make a reasonable, good-faith decision not to bring the suit, the SH derivative
action will be barred.
b. Demand is excused when
i. It would be futile
ii. Defendant controls a majority of the defendants
c. Requirement of further demand: further demand must be made upon a corporation’s
shareholders before the suit can be brought, unless
i. The conduct could not be ratified by a shareholder majority (i.e. fraud, waste,
breach of duty of loyalty)
ii. Demand would be too time-consuming and costly
iii. Proposed Defendant owns or controls so many shares that demand would be futile.
5. Remedies
a. Recovery to the corporation (not to plaintiff shareholder)
b. Plaintiff shareholder who prevails will recover costs
c. There can be no voluntary dismissal or settlement w/out court approval
 XII. DISSOLUTION
A. Process
1. All corporate assets are liquidated
2. All corporate liabilities are paid off
3. Any remaining cash or other assets is distributed to the shareholders
4. Secretary of State is notified
5. Corporation ceases to exist
B. Voluntary Dissolution
1. May be commenced upon authorization of SHs (majority of voting power present or larger
number mandated by articles) or by the incorporators if no shares have yet been issued.
2. Must be initially proposed for consider at an annual or special SH meeting  by board or by
anyone else authorized to call a special meeting
C. Involuntary Dissolution  by court
1. Parties who may bright suit to dissolve
a. SHs controlling 20% of voting shares
b. Majority of the BOD
c. Frustrated creditor with a judgment against the corporation
d. Corporate received previously appointed by a court to take charge of the corporation’s
property
2. Grounds for judicial dissolution
a. Corporate assets are insufficient to pay all just demands for which the corporation is liable
b. Object of the corporation has wholly failed, been entirely abandoned, or can no longer be
accomplished
c. Beneficial to interests of SHs
d. Directors are deadlocked in the management of the affairs and the SHs are unable to break
the deadlock
e. SHs are deadlocked in voting power and have failed for at least two consecutive annual
meetings to elect directors
f. Corporation has failed to commence business for one year from date of incorporation or
has suspended business for at least one year w/ no intention to resume.
g. Corporation has been guilty of gross or persistent ultra vires acts

XIII. MERGERS, CONSOLIDATIONS, AND TAKEOVERS

A. Merger & considation
1. Definitions
a. Merger: One corporation absorbed into another and SHs of first corporation exchange their
shares for shares of the surviving corporation.
i. Cash merger/freeze-out: acquiring corporation may force some SHs to take cash
instead of getting new shares  subject to court attack for fairness
b. Consolidation: Two corporations combine to form a new one and SHs of both corporations
exchange their shares for shares of the new corporation
2. SH approval requirements:
a. Only BOD can negotiate and propose it.
b. Must approve at an annual or special meting  LA corporation (or both if both from LA)
must have 2/3 approval of total voting power present, or whatever percentage not less than ½
is required by the articles)
c. Non-LA corporation must have whatever percentage is required under that state’s laws
d. Dissenting shareholders have right to sell their shares back at an appraised fair market
price
3. Role of new corporation:
a. Acquires all rights
b. Owns all property/assets
 c. Responsible for all liabilities
B. Hostile Takeovers and Tender Offers
1. Hostile takeover: corporation trying to purchase enough shares of a second corporation so that it
may elect enough directors to agree to a merger that has previously been opposed.
2. Tender offer: public offer to the SHs of the target corporation to buy a stated number of their
shares for a stated price, usually higher than the going market price  vehicle for accepting a hostile
takeover

XIV. FOREIGN & PROFESSIONAL CORPORATIONS

A. Foreign corporations
1. A corporation that is incorporated in another jurisdiction  not governed by LA corporate statutes
2. Cannot sue in LA state courts unless qualified and authorized to do business in the state  must
register with and pay a fee to the secretary of state
3. Can still be sued as a defendant
4. Any contracts entered into by the foreign corp. will still be valid and they will have the right to
enforce it, regardless of the above rules
B. Professional Corporation
1. Corporations for practicing a profession  each profession is governed by their own set of special
statutes
2. Name: must be one or more of the last names of current or former shareholders (i.e. partners) of
the firm or a predecessor firm
3. Permitted business: engage only in the business of the profession, not other business
4. Stock: can only be one class of common stock, and the shareholders must be practicing licensed
professionals in the corporation  anyone else who becomes a shareholder has no rights as one
except to sell the shares
5. Directors and officers: must be voting SHs.
6. SHs are insulated from personal liability for corporation misconduct.

XV. LIMITED LIABILITY COMPANIES

A. Attributes
1. No liability for debts by managers or owners
2. Income is not subject to federal or LA income tax at the entity level
B. Characteristics
1. Legal status: capable of owning property, being sued, etc.
2. No profit motive is required
3. Does not need to keep stated capital or surplus accounts  but there are restrictions on
distributions
4. There are no operational formalities  i.e. member meetings, etc.
C. Formation
1. Can be formed by “one or more persons capable of contracting”
2. Naming
a. Name must be distinguishable from every foreign and domestic LLC registered or
qualified to do business in LA
b. Must contain “limited liability company” or “LLC” or “LC”  for low-profit limited
liability companies, must contain “low-profit limited liability company” or “L3C” or “l3c”
c. Cannot contain words that suggest an unlawful purpose, purpose contrary to its articles, or
that falsely suggest a charitable or nonprofit nature.
3. Purpose and powers:
a. May conduct business for any lawful purpose except insurance underwriting.
b. Has same powers as a corporation or partnership
4. Articles of organization (analogous to articles of incorporation)
a. In English, signed by at least one person (does not have to be a member or a manager)
 b. Must state
i. Name
ii. Purpose
iii. Whether it’s an L3C
c. Sec. of State may refuse to accept or accept and ask for a correction
5. Filing
a. Must file articles and initial report w/ Sec of State  no parish filing required
b. Legal existence commences upon issuance of certificate and is retroactive to the date of
filing  ownership of immovable property will also be retroactive
c. Must file annual report  Sec of state must give the LLC 30 days note and opportunity to
cure  Sec of State shall then revoke the articles of any LLC that fails to file an annual
report for 3 consecutive years
d. To amend articles: file “articles of amendment”
e. To correct deficient or inaccurate document: file certificate of correction
6. Initial report
a. Must be signed by each person (or agent) who signed the articles
b. State name, location, municipal address of the LLC, each registered agent, and person
vested with power to manage the LLC
7. Operating agreement
a. Written or oral agreement of the members as to the affairs of LLC and conduct of business
D. Members
1. No restrictions as to who may be a member
2. There may be multiple classes of members, with different rights and voting powers
3. Delegation of management
a. Member-managed LLC: managed by members  all members manage the business,
subject to any provision in the articles or written operating agreement restricting or enlarging
the rights and duties or certain members or classes of members. Members who manage will
not be personally at risk
b. Manager-managed LLC: articles must specifically state that the business will be managed
by LLC (the managers may also be members).
i. Managers are selected by straight voting unless otherwise provided in the articles
ii. Managers are removed by majority vote of the members, with or without cause.
E. Management and Operation
1. Operational requirements
a. Maintain a registered office
b. Have at least one registered agent in the state
2. Duties
a. Fiduciary duty: good faith, diligence, care, judgment and skill that an ordinary prudent
person in a like position would exercise in the manner he reasonably believes to be in the
best interests of the LLC  reliance in good faith on experts and advisors meets this
standard.
3. Liability:
a. Any person who fulfills the above duties in good faith will not be liable for actions taken
on behalf of the LLC
b. Limits
i. Written operating agreement or articles may limit monetary liability for breach of
duty. CANNOT eliminate liability for receipt of improper benefit or intentional
violation of criminal law.
ii. Written operating agreement or articles may also provide for indemnification or
insurance for a member/manager for any judgments, settlements, penalties, fines, or
expenses incurred as a manager/member
 4. No possibility of LLC veil piercing if formalities are not followed, but courts will likely do it and
find the member liable for fraud, commingling funds, inadequate capitalization, or failure to
maintain a separate entity identity.
F. Manager/Member Authority
1. Mandatary for all matters except LAE of the LLC’s immovable property, unless
a. Articles provide otherwise
b. Written operating agreement provides otherwise and articles state that such restrictions
exist
c. Operating or other member resolution provides otherwise and third party has knowledge of
the limitation
d. LAE
G. Voting Requirements
1. Unless articles or operating agreement provides otherwise, all manager/members get one vote and
all decisions must be made by majority vote
H. Authority of Members Qua Members
1. Unless articles or written operating agreement provide otherwise, majority vote of members will
be required to approve the following matters (even if management is vested in managers or less than
all of the members):
a. Dissolution and winding up of LLC
b. Disposal or encumberance of all or substantially all assets
c. Merger
d. Consolidation
e. Incurrence of debt other than in the ordinary course of business
f. LAE of immovables
g. Amendment to articles or operating agreement
I. Conflict of Interest Transactions
1. Transaction voted on by a manager/member having a financial interest is not void or voidable
solely because he participated in the meeting or contributed to quorum, provided that
a. Interested member/manager’s interest was disclosed to other voters and a disinterested
majority approved the transaction; or
b. The transaction was fair to the LLC at the time it was approved.

XVI. LLC’S FINANCIAL STRUCTURE

A. Profits and Lossess
1. Allocated equally among the members, unless the articles or a written operating agreement
provide otherwise
B. Contributions
1. May be in the form of cash, property, services rendered, or a promissory note or other binding
obligation to contribute cash/property/services.
2. Unenforceable if:
a. Not in a writing signed by the member
b. Member is unable to perform because of “death, disability, or other reason” unless the
articles or written operating agreement provide otherwise.
C. Distributions
1. Are not allowed if, after they are paid:
a. LLC would be unable to pay debts as they come due, or
b. LLC’s total assets are less than total liabilities plus any preferential rights of members
upon dissolution superior to the dissolution rights of the recipients (unless the articles or a
written operating agreement subordinate those rights), or
c. The distribution violates a provision in the articles or a written operating agreement
2. Distributions will generally be made equally to all members unless a written operating agreement
provides otherwise
 3. Liability for wrongful distributions:
a. All managers/members who knowingly or w/out exercising reasonable inquiry vote for a
wrongful distribution are jointly and severally liable to the LLC for the amount that the
distribution exceeded what was proper
b. Recipients will also be liable for the amount received in violation of the rule, even if they
had no knowledge that the distribution wasn’t proper.
c. 2-year PP to enforce

XVII. ASSIGNMENT OF LLC MEMBERSHIP INTERESTS

A. Nature
1. Membership interest = incorporeal movable
2. No interest in the LLC’s property
B. Assignability
1. Assignable in whole or in part unless the articles or operating agreement provide otherwise 
only entitles the assignee to receive distributions that the assignor would have been entitled to
receive.
2. Assignee will be entitled to exercise other rights or powers until the other members unanimously
approve the assignee to do so, or a lesser vote approves them as provided in the articles or written
operating agreement.
3. Liability: unless articles or written operating agreement provides otherwise, assignee who
becomes a member assumes all rights and obligations of the assignor, except those unknown to her
at the time he became a member.
C. Effect of Death or Incompetency of Member
1. Membership ceases and executor, guardian, or other legal representative is treated as assignee.
2. If dead member’s heir is not admitted as a member, LCC must “buy out” his interest w/in a
reasonable time by paying the heir the FMV of the interest at the time of the member’s death.

XVIII. WITHDRAWAL FROM LLC

A. LLC Constituted for Term  member may only withdraw
1. If he gets consent of other members
2. There is just cause for withdrawal arising out of another member’s failure to perform a material
obligation
B. If LLC Not Constituted for a Term  member may withdraw
1. Immediately upon the occurrence of an event specified in a written operating agreement
2. For any reason if the member gives the LLC and other members 30 days written notice
C. Entitlements upon withdrawal
1. Withdrawing member is entitled to continue receiving his share of the profits until the LLC pay
the fair market value of the membership interest as of the date of withdrawl, which much be done
w/in a reasonable time  law is unclear about whether or not he will also shares the losses
D. Removable of a Member
1. LLC statute does not provide a procedure  this implies that it’s not allowed

XIX. DISSOLUTION OF LLC

A. Voluntary
1. Event specified in the articles or in an operating agreement; or
2. Consent of all of the members
B. Judicial
1. Entry of a judicial decree of dissolution upon application of a member when it is no longer
reasonably practicable to carry on the business of the LLC.
C. Winding Up
 1. Upon giving notice of the authorization of dissolution and filing the articles of dissolution with the
Secretary of State, the LLC will then wind up its business unless the articles or a written operating
agreement provide otherwise.
D. Priority of Distribution of Assets Upon Dissolution
1. All creditors of the LLC (secured creditors are first as to the secured assets), then to the following
(unless the articles or a written operating agreement provide otherwise):
2. Members owed already approved distributions,
3. Members for return of their capital contributions, and
4. Members in the proportion they share in distributions.

XX. L3Cs
A. Defined
1. An LLC whose primary goal is to further charitable or educational goals.
B. Articles of Organization Requirements
1. Name of the L3C
2. That it is an L3C
3. The charitable or educational purposes as defined by the Federal Internal Revenue Code for which
the L3C has been established
4. The fact that no significant purpose is to make a profit or is political or legislative

XXI. CONVERSIONS
A. General Rule
1. Any LA business entity (partnership, corporation, commendam partnership, LLC) may convert to
another type of business entity by submitted a conversion application and initial report if required by
the type of entity being converted into (corp and LLC, not partnership)
2. Application must be signed by one person who has mandatary/agency authority in the converting
entity (i.e. general partner, officer, member/manager).
B. Filing
1. Application and initial report (if required) may be delivered to the Sec of State up to 30 days in
advance of the official filing date.
2. Effective date
a. If everything is in order and all fees are paid, Sec of State will record the application (and
initial report) and issue a certificate of conversion  effective as of the date of the
recordation
b. If application was filed within 5 days of being signed, it will be effective as of the date of
signing, unless it states that the recording date will be the effective date.
C. Effect of Conversion
1. Does not constitute a dissolution  converting entity continues to exist but in a new form of
organization
2. All property and other ownership rights of converting entity will be held by new entity  must
file duplicate certificate of conversion for recording in the appropriate conveyance office of each
parish in the state where the converting entity owns immovable property.
3. All liabilities and obligations of the converting entity will continue as such for the new entity
without any impairment or dissolution.

XXII. NEGOTIABLE INSTRUMENTS

A. Commercial Paper
1. Defined: piece of paper that directs money from one person to another.
2. Types
a. Order = check (draft): bank account holder (drawer) orders the bank (payor bank/drawee)
to pay out money from deposit account to a third person (payee)
 i. Cashier’s check: drawer and drawee are the same bank (bank orders itself to pay)
 customer who buys the check is called the remitter. Remitter delivers the check to
payee.
b. Promise = promissory note
i. Certificate of deposit: promise by bank to pay back money on deposit.
B. What is Required for Commercial Paper to be a Negotiable Instrument?
1. To be a negotiable instrument, the commercial paper must have all seven of these requirements:
a. Written and signed promise or order to pay
b. Unconditional
i. Cannot explicitly make the payment subject to the terms of another referenced
document.
ii. Unstated terms between maker and payee might be enforceable.
iii. Limiting payment to a particular source or referring to an accompanying loan or
security agreement is okay.
c. Transfer of money (not a non-monetary thing)
d. Fixed amount (perhaps pursuant to a formula, maybe with a floating interest rate)
i. If there are contradictory terms (i.e. “$250” and “two hundred dollars”)
a. Words prevail over numbers
b. Handwritten terms prevail over typed or printed words
e. Payment either “to bearer” or “to order”
i. Bearer paper: To bearer: pay bearer (any possessor) or blank payee line or pay to
“cash” (check made out to “cash”)
ii. Order paper: To order:
a. Pay “to the order of” a particular identified person
b. Pay to a particular identified person “or order”
f. Definite time for payment
i. By default, if no time is stated, payable upon demand
ii. Prepayment and acceleration are okay
g. No extraneous undertakings  no promises or orders to do anything other than paying
money, except promises to:
i. Give, maintain, or protect collateral securing payment of the note,
ii. Allow the holder to confess juddgment or dispose of collateral
iii. Waive protection for the maker/indorser (e.g. right of notice to dishonor)

XXIII. ISSUANCE AND NEGOTIATION OF NEGOTIABLE INSTRUMENTS

A. Issuance
1. When the drawer of a check or maker of a note turns it over for the first time.
2. Two main effects of issuance on the underlying obligation:
a. Payee accepts instrument, underlying obligation is suspended until instrument is paid
(discharge) or dishonored (reinstatement).
i. If payee accepts cashier’s check, obligation is discharged immediately  even if
bank goes under, etc.
b. Accord and satisfaction: using a discounted full payment instrument works to finalize
settlement of obligation if the following three factors are present:
i. Drawer must act in good faith to settle a bone fide dispute with respect to the
existence or amount of debt (need a legal basis for the dispute; can’t just not want to
pay  example: withhold part of the rent because your landlord won’t fix your roof);
ii. The “full payment” legend appears conspicuously on the instrument; and
iii. Payee obtains payment and doesn’t refund that payment within 90 days.
a. Crossing off the “full payment” legend, reserving rights, or accepting the
money under protect will have no effect  can’t refuse the settlement but
accept the money.
B. Negotiation
1. Payee and people after him can “negotiate” the instrument and pass all the rights to payment
under the instrument to other people, just like cash. Only a holder can negotiate an instrument to
someone else
2. Who is a holder?  the person originally entitled to payment when the instrument is first issued.
a. Bearer paper: anyone in possession is a holder
b. Order paper: need to have possession and to be the person identified on it (“pay to the
order of ______”)
3. How to make someone else a holder  negotiate the instrument
a. Bearer paper: pass possession (even involuntarily)
b. Order paper: pass possession and endorse the instrument (sign on the back)
4. Types of endorsements
a. Blank endorsement  simple signature
i. Makes order paper into bearer paper
ii. Anyone, including a thief, can be the next holder
b. Special endorsement  signature under an instruction directing payment to a specified
third person (“pay to John Smith” with signature under it)
i. Instrument either continues as order paper (now payable to John Smith);
ii. Or turns into order paper (if it was bearer paper before)
c. Restrictive endorsement  signature under the restriction “for deposit only”
i. Requires money from payment for the instrument to go into the endorser’s deposit
account
d. Anomalous endorsement  introduces suretyship (guarantees)
i. Endorser is not holder
ii. Presumption that the endorser signed as a surety (guarantor) of payment of the
instrument to anyone who later becomes a holder  guarantor promises to pay as
soon as primary obligor defaults (so no need to pursue collection against primary
obligor first)
C. Enforcement When Something Goes Wrong
1. Enforcing against maker
a. Maker is primarily liable, but can assert defenses, such as:
i. Failure to deliver services
ii. Failure of consideration
iii. Fraud
iv. Payment to an earlier holder of the note
b. Holder in due course  can enforce the instrument free of claims and all but a few
defenses. Four-part test:
i. Must be holder of the instrument (proper negotiation),
ii. Must have acquired the instrument for value
a. Anything of past or present value
b. Future promises are not “value” until performed
iii. Must have taken the instrument in good faith
a. Honesty in fact
b. Observance of reasonable standards of commercial fair dealing
iv. Must have acquired the instrument without notice of any of the following
problems:
a. Instrument is overdue, dishonored, or in principal payment default (being
late on making interest payment is okay)
b. Instrument contains an unauthorized (forged) signature or has been altered
 instrument must appear to be in order, with no obvious signs of tampering
or forgery
 c. Someone has a claim to the instrument (property right to get the
instrument back, e.g. from a thief), and
d. Any drawer or maker of the instrument has a defense to payment or a claim
in recoupment (like failure of consideration, payment, or any other contract
defense)
c. If someone fails the above HIDC test, that person might still “inherit” the rights of an
HIDC if that person acquired the instrument from a holder in due course
i. Shelter principle: gives purchaser of property all the transferor’s rights
ii. E.g. if holder acquired instrument from a holder in due course not for value (as a
donation), holder doesn’t qualify as an HIDC in their own right, but can exercise the
transferror’s rights (rights of HIDC)
d. Real defenses that may be asserted against payment to an HIDC:
i. Infancy of maker/drawer (under age of majority)
ii. Illegality of the debt underlying the instrument (duress)
iii. Fraud in the factum (maker did not know or have any reasonable way of knowing
that the signed paper was an instrument)
a. This is rare
b. Fraud in the inducement, which is more common, is not a real defense 
maker was tricked into signing an instrument in relation to a fraudulent
scheme (i.e. fake charity, fake goods, etc)
iv. Discharge in bankruptcy of the debt (federal law)
2. Enforcing against indorser  indorsers are secondarily liable to pay on dishonored instruments.
a. 2 additional elements:
i. Dishonor by maker’s or drawee bank’s refusal to pay a note or check when due and
presented (drawer on check also becomes liable)
ii. Timely notice of dishonor given to indorser
b. Indorsers, unlike makers and drawers, can waive liability to pay dishonored checks
(signing “without recourse”)
c. Indorsers and transferrors are also liable on transfer warranties:
i. Any person who transfers an instrument in exchange for value warrants 5 things to
the transferee (if they indorse, they warrant these things to any subsequent transferee
as well)
a. Transferor is entitled to enforce the instrument (proper negotiation)
b. All signatures on the instrument are authentic and authorized
c. The instrument has not been altered (to change numbers or names)
d. Instrument is not subject to any defense or claim that can be asserted
against the transferor (like failure of consideration, duress, infancy, etc)
e. Transferor doesn’t know that the maker/drawer has initiated bankruptcy
ii. Warranties provide added protection for those who have agreed to take a
negotiable instrument for value  if someone accepts an instrument for value and
later learns about one of the five problems above, the holder can enforce a dishonored
instrument either on indorser liability against any indorser (if not waived) or the
transfer warranty against the transferor and any previous indorser.
D. Fraud and Forgery
1. Forged signature
a. Drawer’s or Maker’s signature: only someone who signs an instrument is liable.
i. Writing another person’s signature counts as your signature, not theirs.
ii. Payor bank can’t charge drawer’s account for forged checks (not properly payable)
 payor bank is obligated to give the drawer his money back.
b. Indorsement  improper negotiation over forged indorsement
i. Possessor is not a holder and the instrument is not properly payable to that person
 ii. For checks, the proper payee of a stolen check has a cause of action for conversion
against the depositary bank or payor bank who gave payee’s money to the thief
because of a forged indorsement
c. Negligence  if maker’s, drawer’s, or payee’s failure to exercise ordinary care
substantially contributed to (facilitated) the forgery (or alteration) the maker/drawer/payee
will be precluded from asserting the forgery or alteration against anyone who gave value for
the instrument in good faith. If the person asserting preclusion based on the maker’s,
drawer’s, or payee’s negligence also failed to exercise ordinary care in paying the item, the
loss will distributed in proportion to each party’s negligence (comparative negligence).
2. Statement review rule: drawer must review their bank account statements “reasonably promptly”
(one month), discover and report fraud/unauthorized payments  drawer who does not do so can be
precluded from asserting fraud to recover payments from bank
a. The first forgery will likely remain challengeable if caught within one year.
b. If the drawer fails to find and report the first forgery w/in the 30-day review period, he
will be precluded from asserting any subsequent forgery by the same wrongdoer if the
bank later pays forged items in good faith before receiving notice from the customer of the
first forgery(ies).
c. General rule: forgeries on the first two statements will be challengeable, from the third
statement onward, they will not be
d. One-year prescriptive period.
3. Cases where forged instruments are presumed valid and effective:
a. Fictitious payee: any indorsement in the fictitious name is effective (check made out to
supplier who doesn’t exist  embezzlement scheme)
b. Impostor: impostor can effectively negotiate by indorsing in the named payee’s name
c. Responsible employee: employee charged with check processing duties who fraudulently
indorses the employer’s instrument (i.e. by endorsing the employer’s name on a stolen check
payable to the employer or by indorsing a supplier’s name on a stolen employer’s check
payable to a supplier)  forged instrument is effective to negotiate the instrument
i. DOES NOT apply to forged drawer signatures
4. Fraudulent alteration or completion
a. General rule: alteration discharges maker/drawer liability, BUT…
i. Issued instruments fraudulently changed from its original terms can be enforced
according to its original terms, but only by someone who acquired the instrument for
value, in good faith, and without notice of the alteration.
a. Negligence rule may preclude drawer from asserting an alteration in
defense to paying the instrument as altered
ii. A signed but incomplete instrument (i.e. amount left blank) later fraudulently
completed can be enforced according to its terms as completed, but again only by
someone who acquired the instrument for value, in good faith, and without notice of
the completion.
a. I.e. parent gives son blank check and tells him to fill in “about” $100 and he
fills in $900 and pays it to a store  bank may enforce the instrument as
completed.