Oregon Supreme Court Overrules Court of Appeals: LLC Manager with a Known Conflict of Interest Does Not Have Authority to Bind LLC
An LLC manager that causes its LLC to enter into a transaction where the manager has a conflict of interest can create havoc. Case in point: An Oregon LLC manager extended the term of a loan agreement between his LLCs and a borrower, but the manager was at the same time chairman of the board and treasurer of the borrower, as well as an investor in the borrower. When the LLCs’ members learned of it later, they attempted to reject the extension on grounds that, because of his conflict, the manager lacked authority to bind the LLCs to the extension.
The trial court dismissed the plaintiffs’ claims on summary judgment and the Court of Appeals affirmed. I wrote about the Court of Appeals’ decision and criticized part of its reasoning, here.
The Oregon Supreme Court reversed the Court of Appeals, holding that the manager’s conflict of interest invalidated the transaction unless the borrower could show at trial that the transaction was fair to the LLC. Synectic Ventures I, LLC v. EVI Corp., 2012 WL 6628093 (Or. Dec. 20, 2012).
The Loans. Three LLC investment funds (Synectic) loaned a total of $3 million to EVI Corporation in 2003. The written loan agreement required EVI to repay the loans by December 31, 2004, but EVI had the right to convert the loans into shares of EVI stock if it received additional financing of at least $1 million before the December 31 deadline.
The Conflict. The Synectic LLCs were managed by Craig Berkman, through entities he controlled. Berkman was involved with parties on both sides of the loans, because he was also the chairman, treasurer, and a shareholder of EVI.
The Amendment. In September 2004 Berkman executed an amendment to the loan agreement on behalf of Synectic that extended EVI’s repayment deadline one year, until December 31, 2005. He also executed a Unanimous Consent on behalf of EVI’s board of directors, which approved the amendment.
The Synectic members were not aware of the amendment at the time it was made and did not discover its existence until early 2005. Berkman was removed as manager in the meantime, in December 2004. In August 2005 the Synectic members notified EVI that the amendment was unauthorized and that EVI was in default on the loan.
EVI raised $1 million in additional investment before December 31, 2005, from another fund managed by Berkman, and purported to convert the loan into equity. The Synectic LLCs filed suit to recover on the loan agreement, based on EVI’s nonpayment as of the original due date. EVI defended on grounds that the loan amendment extended the maturity date, and that the loan had been properly converted into EVI stock.
Supreme Court. The Supreme Court began by reviewing Oregon’s LLC Act and the parties’ operating agreements. The LLCs were manager-managed, and the court concluded that Berkman was their manager and had authority under the statute and the operating agreements to cause the LLCs to enter into contracts such as the amendment to the loan agreement. The LLCs contended, however, that Berkman lacked authority to enter into this particular transaction, the amendment, because he had a conflict of interest.
The court agreed: “An agent ordinarily lacks authority to act on behalf of a principal in a transaction in which the agent has a conflict of interest.” Id. at *6. The court also observed that Berkman had a conflict of interest because as manager of the LLCs and chairman and treasurer of EVI he was acting as agent for two principals with conflicting interests. But the court then pointed out that Oregon’s LLC Act permits self-interested transactions so long as they are fair to the LLC. Id.; Or. Rev. Stat. §§ 63.155(6), 63.155(9)(b).
The court saw the fairness or lack of fairness of the amendment as a factual issue and held that “there was a genuine issue of material fact regarding whether Berkman had a conflict of interest that breached his duty of loyalty in a manner that deprived him of authority to enter into the amendment.” Id. at *7.
The defendants contended that the parties’ operating agreements permitted Berkman to act on behalf of the LLCs notwithstanding any conflict of interest. The agreements provided in Section 3.2 that “[a]ny Member … may engage independently or with others in other business and investment ventures of every nature and description and shall have no obligation to account to the Company for such business or investments or for business or investment opportunities.” Id. at *7. Berkman was referred to in the operating agreements as the “Managing Member,” and the defendants argued that he was therefore allowed by Section 3.2 to act despite his conflict of interest.
The argument that Section 3.2 exculpated Berkman from his conflict of interest was accepted by the Court of Appeals, but in my prior post I pointed out the illogic: Section 3.2 applied to members, but Berkman had a conflict while acting as a manager, not as a member. The Supreme Court likewise rejected the argument that Section 3.2 had any relevance to Berkman’s actions as a manager. Id. at *10.
The defendants also argued that under the operating agreements they were entitled to rely on Berkman’s apparent authority without making any further inquiry. The court disagreed, pointing out that because Berkman was chairman of the board and treasurer of EVI, everything he knew was imputed to EVI and it was therefore well aware of the conflict and Berkman’s resulting lack of authority. Id. at *11.
Bringing out the final arrow in their quiver, the defendants claimed that the LLCs’ seven-month delay in objecting to the amendment amounted to a ratification by silence of the unauthorized amendment. The court said that was an issue of fact, to be decided at trial. The court accordingly reversed the decision of the Court of Appeals and the trial court’s judgment, and remanded for trial.
Comment. Lack-of-authority cases often involve two innocent parties, one of whom will bear the loss resulting from the manager’s unauthorized activities. I have previously written about such cases from Missouri (members bore the loss when manager without authority caused LLC to borrow money and encumber LLC’s real estate, and then misappropriated the loan proceeds), and from Mississippi (bank bore the loss when manager without authority caused LLC to convey real estate to manager’s separate company, and then borrowed money from bank, secured by lien on the real estate).
Synectic was in some ways an easier case because it did not involve two innocent parties. The LLCs’ members were innocent because they had no knowledge of Berkman’s execution of the amendment until months afterward. But EVI was not an innocent party – Berkman’s knowledge of his conflict and lack of authority was imputed to EVI because of his role as EVI’s chairman and treasurer.
Mississippi -- Unauthorized Transfer and Deed of Trust in LLC Property Is Void, Lender Loses Its Security
A theme running through many apparent-authority cases is the question of who loses: for example, the LLC whose property was used to secure unauthorized, personal borrowings by a member or manager, or the bank that in good faith made the loan to the malefactor? Often the recipient of the funds has used the money for personal matters and is essentially judgment proof.
Such a fact pattern confronted the Mississippi Supreme Court in In re Northlake Development L.L.C. v. BankPlus, 60 So.3d 792, 2011 Miss. LEXIS 234 (Miss. May 5, 2011). George Kiniyalocts, along with his attorney and business partner Michael Earwood, formed Kinwood Capital Group, LLC, a Mississippi member-managed LLC.
Without authority, Earwood secretly signed a deed as Kinwood’s “Managing Member” that purported to transfer Kinwood’s real estate to Northlake Development, L.L.C., which was formed and owned by Earwood. Northlake then obtained a loan from BankPlus, secured by a deed of trust to the real estate. Earwood’s partner in his two-person law firm provided a title certificate to BankPlus.
The denouement was predictable. Earwood put most of the proceeds to his personal use and Northlake later filed for bankruptcy. Earwood signed Northlake’s bankruptcy petition and listed the real estate as Northlake’s property.
Kiniyalocts learned of the bankruptcy, appeared, and contested BankPlus’s deed of trust. The bankruptcy court invalidated both Kinwood’s deed to Northlake and Northlake’s deed of trust to BankPlus. BankPlus appealed to the District Court, lost, and appealed again to the Fifth Circuit. BankPlus argued on appeal that the Kinwood deed to Northlake was not void but rather was voidable, and that BankPlus’s deed of trust was enforceable because the bank had taken the deed of trust from Northlake in good faith and without notice that the Kinwood deed was unauthorized.
The Fifth Circuit found there was no controlling Mississippi precedent and certified to the Mississippi Supreme Court the question of whether the unauthorized deed to Northlake was “‘(i) voidable, such that it is subject to the intervening rights of a subsequent bonafide purchaser for value and without notice, or (ii) void ab initio, i.e., a legal nullity?’” Id. at *4 (citation omitted).
The Mississippi Supreme Court began by noting that under Kinwood’s Operating Agreement Earwood had no actual authority to transfer the property, and then turned to the question of Earwood’s apparent authority.
The court reasoned that Earwood knew he had no authority to convey the real estate to Northlake, that Earwood’s knowledge was imputed to Northlake, and that Northlake therefore took the property with knowledge that Earwood had no authority to sign the deed. Earwood therefore had no apparent authority to transfer the property to Northlake. Id. at *6-7.
The court thus arrived at the certified question, i.e., whether the unauthorized conveyance was voidable, which would mean that it was an effective transfer of title unless and until Kinwood repudiated it. If so, the BankPlus deed of trust would survive.
The court concluded that Earwood’s deed was not voidable, reasoning as follows:
- If an agent acts for its principal without legal authority, the agent’s action generally will not affect the legal relationship between the principal and third parties.
- A principal may, at its election, ratify an agent’s unauthorized act and thereby become bound by it. Absent such an election, there is no change to the legal relationship between the principal and the third party.
- The principal ratifies an agent’s act by taking action to show its assent that the agent’s act affects the principal’s legal relations.
- Kinwood took no action to ratify Earwood’s transfer of the property, and therefore the legal relationship between Kinwood and BankPlus was unchanged by Earwood’s purported transfer of the real estate.
“So where no actual or apparent authority exists to transfer a principal’s property, we decline to characterize the deed as voidable. Rather, it is void unless and until later ratified.” Id. at *10. Kinwood could have ratified Earwood’s deed to Northlake, but did not, and Kinwood’s rights in the property were therefore unaffected. Id.
So BankPlus loses. Northlake, its borrower, is bankrupt, and BankPlus cannot go after Kinwood’s real estate. BankPlus can presumably assert a fraud claim against Earwood and its law firm, but the value of that claim would depend on their net worth, which may be problematic.
BankPlus might have been able to avoid this problem if it had traced the title from Northlake back to Kinwood, and then inquired as to the authorization of Earwood’s deed. However, it likely relied on the certificate of title provided by Earwood’s law firm. It’s not clear whether BankPlus knew that Earwood was the sole owner of Northlake. If it knew, then its reliance on a title certificate from his law firm was questionable.
These apparent-authority cases are troubling because they involve two innocent parties, one of whom will be damaged by the unauthorized acts of the agent of one of the two. For an apparent-authority case where the LLC lost to the bank after its manager encumbered the LLC’s property, see my blog post, here, about Pitman Place Development, LLC v. Howard Investments, LLC, No. ED94456, 2010 Mo. App. LEXIS 1635 (Mo. Ct. App. Nov. 23, 2010).
When an LLC manager signs a contract on behalf of the LLC there is usually no question whether the LLC is bound by the manager’s signature. But consider – what’s the result when the manager is an investor and an officer of the other party to the contract, and the LLC members disapprove of the contract and attempt to reject it on grounds that the manager lacked authority to enter into the contract because of the manager’s conflict of interest? The Oregon Court of Appeals was faced with this scenario in Synectic Ventures I, LLC v. EVI Corp., No. A139879, 2011 Ore. App. LEXIS 337 (Or. Ct. App. Mar. 16, 2011).
The Loan. Three LLC investment funds (Synectic) loaned $3 million to EVI Corporation pursuant to a 2003 loan agreement. The loan agreement called for repayment by December 31, 2004, but EVI had the right to convert the debt into equity in the form of EVI stock if it received additional investments of at least $1 million before the December 31 deadline.
Conflict of Interest. The Synectic LLCs were managed by Craig Berkman, at first directly and later through management firms he controlled. Berkman was involved with both parties to the loan. In addition to being Synectic’s manager, Berkman was also the board chairman and treasurer of EVI, and held EVI warrants and stock options.
Amendment. In September 2004, as the year-end due date of the loan approached, Berkman executed an amendment to the loan agreement on behalf of Synectic that extended EVI’s repayment date one year, to December 31, 2005. Berkman also approved the amendment in his capacity as an EVI board member. The Synectic members were unaware of the amendment at the time it was made. Berkman was removed as manager in December 2004, and in 2005 Synectic learned of the amendment and notified EVI that the amendment was not authorized and that EVI was in default on the loan.
EVI raised $1 million in additional investment before December 31, 2005 and converted the loan into equity, thereby avoiding default (if the amendment was binding on Synectic).
Synectic sued EVI to collect on the loan, and EVI defended on grounds that it was not in default under the amended loan. The trial court concluded that the amendment was valid and binding on Synectic and that EVI was therefore not in default.
Authority. The Court of Appeals began with a look at Or. Rev. Stat. § 63.140(2)(a), which provides in part:
Each manager is an agent of the limited liability company for the purpose of its business, and an act of a manager, including the signing of an instrument in the limited liability company's name, for apparently carrying on in the ordinary course the business of the limited liability company, or business of the kind carried on by the limited liability company, binds the limited liability company unless the manager had no authority to act for the limited liability company in the particular matter and the person with whom the manager was dealing knew or had notice that the manager lacked authority.
This section provides for the manager’s apparent authority in the ordinary course of the LLC’s business. Many state LLC acts have similar provisions for managers and members (if the LLC is member managed), e.g., Washington, Utah, and New York. Both the Uniform Partnership Act and the Uniform Limited Partnership Act have similar provisions for the apparent authority of general partners.
Under Or. Rev. Stat. § 63.140(2)(a), if the manager has no authority and the third party has knowledge of the lack of authority, the principal will not be bound. The court therefore reviewed Synectic’s operating agreements to determine Berkman’s authority, and concluded that the agreements gave Berkman the exclusive authority to manage the business of the LLCs and to take action without the consent of the members. The operating agreements also provided that third parties could rely on Berkman’s authority to bind the LLCs without further inquiry. Synectic, 2011 Ore. App. LEXIS 337, at *12-13. Under these provisions it appeared to the court that the amendment was within the authority granted to Berkman in the operating agreements: “As such, at first blush it would appear that Berkman’s act of executing the amendment was within the express authority granted to him in the operating agreements.” Id.
Synectic argued that Berkman’s actual authority was limited by letter agreements Berkman had entered into with some of Synectic’s investors, and by his acts of self-dealing and breach of fiduciary duties. Id. at *13.
The court held that the letter agreements did not limit Berkman’s authority because they were between Berkman and some of the Synectic members, but not with Synectic. If the letter agreements obligated Berkman to those members, any breach was between him and them and did not affect his authority to act for Synectic. Id. at *17.
Fiduciary Duties. Synectic’s operating agreements obligated Berkman to carry out his duties in accordance with the standard of conduct specified for LLC managers in the Oregon LLC Act, which includes the duty of care and the duty of loyalty. Or. Rev. Stat. § 63.155. Synectic contended that Berkman’s breaches of those duties without member approval invalidated his execution of the amendment. But before the court considered whether Berkman had breached his fiduciary duties, it examined whether the remedy requested by Synectic would be available even if Berkman had breached his duty.
The court concluded that the language of Or. Rev. Stat. § 63.140(2)(a) controlled: the act of a manager binds the LLC “unless the manager had no authority to act for the limited liability company in the particular matter and the person with whom the manager was dealing knew or had notice that the manager lacked authority.” Berkman had the express authority under the operating agreements to enter into the amendment. Synectic took no action to limit his authority, and the loan extension was within the ordinary course of the LLC’s business. Even if knowledge of Berkman’s self-dealing were imputed to EVI, any inquiry by EVI would only have led to the conclusion that Berkman had authority to execute the amendment. Synectic, 2011 Ore. App. LEXIS 337, at *23-24.
In short, Berkman had actual, unqualified authority under the operating agreements, and his act of executing the amendment therefore was binding on Synectic even if it was a breach of his fiduciary duties.
Conflict of Interest. Synectic also pointed out that under Or. Rev. Stat. § 130(2)-(4), a transaction involving an actual or a potential conflict of interest between a member or a manager and the LLC requires the consent of a majority of the members, unless the operating agreement provides otherwise. The Synectic operating agreements clearly allowed members to have conflicts of interest, but said nothing about actual or potential manager conflicts.
Strangely enough, the court found that Berkman’s alleged conflict between his role as Synectic’s LLC manager and his role as EVI’s board member and treasurer was excused by the Synectic operating agreements. While it is correct that Berkman was a member, Synectic’s allegation was that Berkman had a conflict because of his status as a manager, not as a member.
The court’s opinion says not a word about why the operating agreements’ waivers of member conflicts should apply to Berkman in his capacity as manager. Berkman was acting as Synectic’s manager when he signed the amendment, not as a member. For an operating agreement to allow members to have a conflict of interest is a far cry from allowing a manager to have a conflict of interest – non-managing members are passive and don’t make the management decisions that could be affected by a conflict of interest. Synectic may still be trying to puzzle this one out.
The Washington legislature is currently considering a bill that would apparently require any contract that calls for the payment of money by an LLC or corporation, to include an extra signature by an authorized representative that would render the representative personally liable for any amounts due on the contract. HB 1535. In other words, under this bill any LLC or corporation making a contractual commitment that involves the payment of money would have to include a personal guarantee from a natural person.
This would be an extraordinary change to Washington law. No other state has anything comparable in its laws.
The Background. The bill would upend the familiar principle of the law that “when an agent makes a contract on behalf of a disclosed or partially disclosed principal whom he has power to bind, he does not thereby become liable for his principal’s nonperformance.” Griffiths & Sprague Stevedoring Co. v. Bayly, Martin & Fay, Inc., 71 Wn.2d 679 , 686, 430 P.2d 600 (1967). See Restatement (Second) of Agency § 320 (1958).
When an LLC manager (or a corporate officer) signs a contract on behalf of a company, the manager usually signs only as an agent of the company. The fact that the manager is signing as an agent is reflected in the typical signature block:
By: Wile E. Coyote
Vice President of Product Development
Under these well-accepted rules, LLC managers and corporate officers can sign contracts on behalf of their company without fear of becoming personally liable. If the rule were otherwise it would be exceedingly difficult to find a manager willing to sign for an LLC or corporation.
The Bill. The heart of the bill is a requirement that any “business payment contract” must contain an additional signature line, directly following and on the same page as any other signature line that the authorized business representative must sign. The additional signature line must be immediately preceded by the following legend in bold, 14-point or larger typeface:
By signing this contract you, the undersigned, agree to become PERSONALLY LIABLE for any sums due pursuant to this document, regardless of whether you are signing on behalf of a limited liability company, corporation, or nonprofit corporation.
This bill, if passed, will clearly make it difficult for LLCs to find managers willing to sign contracts for their LLC.
Drafting and Interpreting Statutes. The language of HB 1535 has some internal conflicts. I have described above the interpretation that I and other business lawyers that I have talked to have given to the bill. It is possible, however, that it was intended to simply require a warning legend on guarantee contracts, although that is a more difficult interpretation. In any event it needs to be clarified.
It is not an easy thing, to draft statutes so that they are clear, unambiguous and sufficiently detailed. This has repeatedly been driven home to me in my participation on a Bar committee that has reviewed proposed legislation.
HB 1535 is scheduled for public hearing in the Washington legislature’s House Committee on Business & Financial Services at 1:30 p.m. Tuesday, February 1, 2011, in Olympia, Washington. At the hearing I expect we will learn what is behind this bill and what the intent of its sponsors is. More information is available about the bill’s scheduled hearings here.
In the world of commerce, businesses routinely rely on the apparent authority of LLC managers to sign contracts on behalf of their LLCs. Generally that works well. But what happens if an LLC disavows an agreement, claiming the manager who signed the contract had neither actual nor apparent authority?
The Missouri Court of Appeals was recently faced with this scenario in Pitman Place Development, LLC v. Howard Investments, LLC, No. ED94456, 2010 Mo. App. LEXIS 1635 (Mo. Ct. App. Nov. 23, 2010).
Background. According to the court’s statement of the facts, the LLC was formed by three members, one of whom was the sole manager. The LLC’s operating agreement gave the manager authority to manage the LLC’s business, but the consent of the members was required for the manager to cause the LLC to encumber its property or to borrow more than $50,000. The manager, however, wanted to borrow $525,000, and at this point the facts get ugly.
The manager gave the bank a copy of the LLC’s operating agreement, but omitted the pages that limited his authority. On request of the bank’s loan processor, on the day of the loan closing the manager faxed the omitted pages to the bank, but only after fraudulently altering the key provisions. The alterations increased the limit of his authority from $50,000 to $750,000 and authorized him to encumber the LLC’s property. The $525,000 loan was closed, and portions of the loan proceeds were later used by the manager for his own purposes. When the other two members learned what had happened, the LLC sued the bank to set aside the loan and deed of trust.
The trial court found after a bench trial that the manager acted with apparent authority when he executed the loan documents, and enforced the note and deed of trust against the LLC. The LLC contended on appeal that apparent authority was lacking because neither of the other two LLC members took any action to create the appearance that the manager had authority.
Apparent Authority. The Missouri rule is that to establish apparent authority, it must be shown that a principal has either manifested consent to the agent’s exercise of authority or knowingly permitted the agent to assume the exercise of authority. Additionally, the party relying on the apparent authority must have known the facts and believed in good faith that the agent had authority, and must have changed its position in reliance on the appearance of authority. Id. at *12. The Missouri rule is consistent with the Restatement of Agency. Restatement (Second) of Agency § 27 (1958).
The court found that the lender relied on the express language of the LLC’s operating agreement. “Pitman cloaked Burghoff with apparent authority when it manifested its consent for Burghoff to act as ‘Manager’ of Pitman in the Operating Agreement, and gave the ‘Manager’ general authority to enter into transactions such as the Rockwood Bank loan transaction.” Pitman Place, 2010 Mo. App. LEXIS 1635, at *14. Although the manager lacked actual authority and acted to defraud the LLC, the court relied on prior rulings that the act of an agent with apparent authority, even if in furtherance of a fraud on the principal, will bind the principal. Id.
The LLC argued that the manager had no apparent authority here because he fraudulently created the appearance of authority. The court acknowledged that an agent cannot create its own authority and that it was troubled by the manager’s “fraudulent and dishonest conduct.” Id. at *11, 19. But in the end the court found that the LLC’s general statements of authority in the operating agreement vested the manager with the apparent authority to carry out the loan transaction. The LLC was therefore responsible for the manager’s acts and agreements with the bank as if the acts were the LLC’s own. Id. at *19.
The court glosses over the fact that by fraudulently deleting the operating agreement’s limits on his authority, the manager essentially was creating his own authority. The court implicitly treats the fraudulent pages of the operating agreement as a detail that does not impair the members’ broad grant of authority.
Statutory Defense. The LLC also contended that even if the manager did have apparent authority to bind the LLC under agency common law principles, the manager’s conduct did not bind the LLC because the execution of the loan documents was not apparently for carrying on in the usual way of business or affairs of the LLC, as required by the Missouri LLC Act. Id. at *20. The statute provides, in relevant part, that “the act of any manager for apparently carrying on in the usual way of the business or affairs of the limited liability company of which he is a manager binds the limited liability company,” and that an “act of a member or manager which is not apparently for the carrying on the usual way of the business or affairs of the limited liability company does not bind the limited liability company unless authorized in accordance with the terms of the operating agreement.” Mo. Rev. Stat. § 347.065.
The court did not address why the manager’s lack of authority under this statute, if it applied, would trump the manager’s apparent authority. Instead, the court found in the language of the operating agreement and in the LLC’s past practices sufficient evidence that the loan transaction was “carrying on in the usual way of business.” Pitman Place, 2010 Mo. App. LEXIS 1635, at *23-24. The court accordingly rejected the LLC’s argument, and after affirming the trial court’s other rulings, affirmed the lower court’s judgment. Id. at *42.
Protective Steps. What else could the Pitman members have done to prevent the manager from fraudulently having apparent authority in excess of the limits in the operating agreement? Perhaps they could have written their operating agreement so that the language granting broad authority to the manager had the limitations tightly woven into it. If the manager had provided altered versions of those pages, retaining only the broad granting language, what result? Or if the agreement had no broad grant of authority to the manager but instead simply granted certain enumerated, limited powers, what result if the altered pages added some additional powers?
In any event, there are other, practical steps that could be taken to forestall chicanery. For example, the Missouri LLC Act allows an LLC’s articles of organization, which must be filed to create the LLC, to optionally contain provisions from the LLC’s operating agreement. Mo. Rev. Stat. § 347.039.2. The organizers of an LLC could include in the articles of organization the limits on the manager’s authority. Articles of organization are publicly available, and banks and title companies can and often do obtain a copy from the Secretary of State prior to closing a real estate or loan transaction. That would make them aware of the limits on the manager’s authority expressed in the articles.
Alternatively, the LLC could file a memorandum with the county where its real estate is located, referencing the LLC’s real estate and describing the limits on the manager’s authority. Any transaction involving the LLC’s real estate would almost certainly involve a title company and a title search, which would then address the manager’s authority.
The LLC could also require signatures in addition to the manager’s on all checks, or all checks above a limit, in the banking resolutions when it sets up its bank accounts. Once in place, those resolutions would require additional signatures from members other than the manager to change the authorized account signatories. That would result in oversight of withdrawals from the LLC’s bank account.
A structural approach would be for the LLC to have two or more managers, and in their operating agreement’s grant of authority require that the managers act jointly.
These measures are often not adopted, frequently because they are inconsistent with the trust most LLC organizers have in their managers. LLC organizers won’t usually appoint someone to be their manager unless they have substantial trust in them. Lawyers, though, can’t assume that the other (non-client) parties will always act benevolently, and must write agreements to cover contingencies including bad acts. The Pitman Place case is a good example of why lawyers must try to anticipate unauthorized or improper acts by the other parties.