Caution: LLC Members and Managers Should Be Careful When Executing Documents In A Representative Capacity
Note: The following is posted by guest blogger Janet Jacobs.
Like most other entities, LLCs can act only through their representatives, and LLC members are often called on to act and execute documents on behalf of the LLC. Generally, LLC members and managers are not held personally liable for the debts and liabilities of the LLC, provided the acting member or manager indicates that he or she is signing on behalf of the LLC. Usually, the simplest way to demonstrate that the signatory is not accountable personally is to add his or her title to the signature line on the document. Example: Mary Smith, Managing Member of XYC, LLC. However, as pointed out in a recent Maryland case, adding a title to a signature block will not remove personal liability if the text of the document clearly indicates an intention to hold the signatory personally liable.
In Ubom v. Suntrust Bank, No. 2862 (Md. Ct. Spec. App. Apr. 4, 2011), Mr. Ubom applied for a line of credit in the name of his law firm, Ubom Law Group (“ULG”). Mr. Ubom was the sole member and the managing attorney of ULG. The credit agreement form requested information about the applicant (ULG) and the guarantor. Mr. Udom duly completed the applicant LLC’s information. On the page of guarantor information, he provided his driver’s license and social security numbers, date of birth, address, personal financial information and employment information. The only detail that Mr. Udom did NOT provide on the guarantor information page was his legal name. On the signature page of the credit agreement, Mr. Ubom signed twice: once on the applicant line and once on the guarantor line. Both signature lines allowed the signatory to add a title – Mr. Udom added the words “Managing Partner” after each of his signatures.
The credit agreement contained the following language: “To induce Bank to open the Account and extend credit to the applicant, or to renew or extend such other credit, each of the individuals signing this Application as a ‘Guarantor’ … hereby jointly and severally guarantee payment to the Bank of all obligations and liabilities of the applicant of any nature whatsoever….” Mr. Udom asserted that he had questioned the bank’s representative specifically about his personal liability based on this language, and that person had assured him that so long as Mr. Udom (a) left the “Legal Name of Guarantor” blank and (b) inserted his title on the signature lines, he would not be personally obligated to repay UGL’s debt to the bank.
Three years later, the loan was in default and Suntrust filed a complaint against ULG as the primary obligor and Mr. Udom as guarantor. Mr. Udom did not deny that ULG was liable, but he did contest the allegation that he was personally liable as guarantor, on the grounds that he signed only in a representative capacity, as should have been evident from the addition of the words “Managing Partner.”
Not so, said the lower court. Citing the fact that Mr. Udom was “a sophisticated gentlemen … an attorney,” it granted summary judgment in favor of the bank. While it is beyond the scope of this blog to delve into whether attorneys are automatically mavens in all aspects of business dealings, the lyrics of a song written by the immortal George Gershwin come to mind: “It ain’t necessarily so.”
The court of appeals agreed with the lower court. It turned down Mr. Udom’s request to introduce testimony concerning the bank’s assurances regarding his personal liability, on the grounds that Maryland followed the principle of “objective interpretation” of a contract. In other words, a court should look only at the contract, except in cases of ambiguity, fraud, duress or mistake. In the court’s eyes, the language of the contract was unambiguous. (The court did not discuss whether there was any fraud, duress or mistake involved in the execution of the contract.)
The Udom court explained away Mr. Ubom’s careful addition of the words “Managing Partner” as being only a "descriptive phrase". It pointed out quite correctly that there would be no value in having the primary obligor (the LLC) also act as guarantor of the same obligation, a common sense approach that would be quite persuasive were it not for a conflicting ruling made by the same court in an earlier but strikingly similar case.
In L & H Enterprises Inc. v. Allied Building Products Corp., 88 MdApp. 644 (1991), the credit agreement signed by two officers of the debtor entity provided as follows: “In consideration of [the creditor’s] extending credit I/we jointly and severally do guarantee unconditionally at all times … the payment of indebtedness … of the [debtor]….” The signing officers had provided some personal information but wrote “N/A” in the section calling for information about their respective spouses. The court found the insertion of “N/A” to be compelling evidence of the officers' intention not to be held personally liable, because the spouse’s signature would be a prerequisite for the creditor to reach marital assets. (It would have been helpful if the opinion had confirmed that the officers were, in fact, married, and that the inclusion of “N/A” didn’t simply mean that the officers were single.) The court also found it very significant that there was only one signature line for the applicant; there was no place where a guarantor could sign. As the officers clearly signed the agreement on behalf of the applicant entity, despite the clarity of the italicized language, sufficient ambiguity was created by these other factors to relieve the officers of personal liability.
The opinion issued by the Udom court contains one snippet of information that lends some credence to Mr. Udom’s allegation that he had been told he would nto be held personally liable for ULG's debt: Suntrust Bank held the mortgage on Mr. Udom’s house. Even if one discounts Mr. Udom’s assertion that the bank manager talked him into taking out a business loan, there was a pre-existing relationship between the parties that could have led Mr. Udom to rely on the word of a trusted bank manager rather than the language of the contract.
The Udom case provides some useful takeaways:
- First, for LLC members and managers who execute documents in the name of the LLC and who wish to avoid being held personally liable for the LLC's debts:
- Trust but verify: if the language of the agreement does not align with oral statements made by the other contracting party, consult an attorney before you sign.
- Remember, there is a reason documents require more than one signature. Each signature line generally supports different promises, obligations, covenants, representations or acknowledgments. Be sure you understand what each signature line is supporting. If one signature line is for the entity, the presence of a second signature line should be a red flag.
- Don’t rely on the insertion of a title to protect you from personal liability. If the text of the document indicates an intent to bind anyone other than the LLC, you can expect that if your LLC defaults, the other party to the agreement may try and enforce personal liability. Signing while crossing your fingers and hoping for the best will not change the objective interpretation of the promises, obligations, covenants, representations or acknoweldgements in the text of the document.
- Second, for attorneys reading this blog: irrespective of your practice area, you are assumed to be a sophisticated business person. At a minimum, you will be expected to have read and understood any document you signed. You will not get the benefit of the customary judicial flexibility extended to ordinary consumers in their dealings with banks and other institutions.
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.