Money and Dirt: A blog on legal issues impacting California real estate investment, development, and secured lending

Just How Much Power Does Your LLC’s Manager Have?

A few prior posts have addressed the power dynamic between members and managers in LLCs.  For example, see:

In a recently published decision — Western Surety Co. v. La Cumbre Office Partners LLC — a California Court of Appeal tackled the issue of LLC managerial authority from a different angle.  The central issue in the case was whether the LLC manager’s signature, in a technically flawed signature block, was sufficient to bind the LLC.  The holding emphasizes the power LLC managers have to bind the entity to obligations that may not be in the LLC’s best interests.

The facts: LLC manager agrees to have LLC provide indemnity for obligations unrelated to the LLC; signature block was technically flawed

La Cumbre Office Partners, LLC (“LCOP”) was a nine-member limited liability company formed in 2006 for the purpose of acquiring, operating, and potentially redeveloping property containing medical office buildings and surface parking in the City of Santa Barbara.  The members’ capital contributions totaled $3.65 million.

One of LCOP’s members, Melchiori Investment Companies, LLC (“MIC”), owned a 9.5% interest and also served as LCOP’s manager.  Mark Melchiori owned half of MIC, and was MIC’s managing member.

LCOP’s operating agreement gave MIC, as manager, “full, complete and exclusive authority, power, and discretion to manage and control the business, property and affairs of the Company” and required majority member consent only for actions “which would make it impossible to carry on the ordinary business of the Company.”

Melchiori also had a side business — Melchiori Construction Company, Inc. (“MCC”).  In February 2008, Melchiori signed an Indemnity Agreement on behalf of several entities, including MCC, MIC, and LCOP.  The Indemnity Agreement required the signers to indemnify Western Surety Company against liability incurred as a result of surety bonds to be issued for construction projects that were related to MCC, but had nothing to do with LCOP.  The bonds were not issued for any LCOP project, and LCOP did not engage in any business requiring bonds.

Western Surety issued the bonds to guarantee the performance of MCC’s contractual obligations on several construction projects.  MCC defaulted on the contracts.  Western Surety paid claims guaranteed under the bonds in the amount of over $6 million, and then sued LCOP under the Indemnity Agreement.

The lawsuit and the trial court’s ruling

At trial, LCOP argued that it had minimal connections to MCC and was not involved with MCC’s construction projects for which Western Surety issued the bonds.

LCOP also pointed out a technical flaw in the Indemnity Agreement’s signature block for LCOP.  The signature block incorrectly identified Melchiori as the manager of LCOP.  In reality, MIC (of which Melchiori was manager) was LCOP’s manager.

Melchiori testified that he had no idea why LCOP was named as an indemnitor on the Indemnity Agreement, and he did not notice that he was signing the Indemnity Agreement on behalf of LCOP.

The trial court granted summary judgment in favor of Western Surety, concluding that LCOP was bound by Melchiori’s signature on the Indemnity Agreement.

The Court of Appeal’s Opinion: the manager’s signature bound the LLC

The Court of Appeal affirmed the trial court’s judgment.

The court focused on the language of Corporations Code section 17157(d) from the Beverly-Killea Limited Liability Company Act, which applied because the complaint was filed in November 2012, more than a year before the California Revised Uniform Limited Liability Company Act became effective.

Section 17157(d) provides that any contract entered into between an LLC and any other party, when signed by the manager, is not invalidated “by any lack of authority of the signing managers or manager in the absence of actual knowledge on the part of the other person that the signing managers or manager had no authority to execute the same.”  (The Revised Uniform LLC Act has identical language at Corporations Code section 17703.01(d), and the same rule applies to Corporations — see Corporations Code section 313.)

That statute, the court held, provides a conclusive evidentiary presumption of authority for an entity to enter into an agreement through its specified representatives.  When the appropriate representative signs, it is not necessary for the representative’s official designation or title to be identified.  And if the other party to the agreement lacks “actual knowledge” of the representative’s lack of authority, the other party need not prove actual or ostensible authority, or justifiable reliance.

The court therefore concluded that LCOP was bound by Melchiori’s signature on the Indemnity Agreement.  MIC, LCOP’s manager, “was a legal entity and therefore could sign the Indemnity Agreement only through the signature of a natural person.  The natural person authorized to sign on MIC’s behalf was its managing member, Melchiori.”

Lesson

Unless expressly curtailed in the LLC Operating Agreement, a manager generally holds a lot of power over the LLC, and can even bind the LLC to obligations that the LLC members feel is unfair.

Technical flaws in a signature block, without anything more, will not invalidate an agreement signed by an LLC’s manager.

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