New York LLC Manager’s Apparent Authority Makes LLC’s Real Estate Contract Enforceable in the Absence of Manager’s Actual Authority

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New York LLC Manager’s Apparent Authority Makes LLC’s Real Estate Contract Enforceable in the Absence of Manager’s Actual Authority

A New York LLC entered into a contract to sell real estate and accepted a cash deposit. But shortly before closing the LLC asserted that its manager had no authority to sign the sale contract, tendered back the deposit, and refused to sign the closing documents. The buyers sued to enforce the contract, and the court ruled that the manager had sufficient apparent authority that his signature bound the LLC. Pasquarella v. 1525 William St., LLC, 120 A.D.3d 982 (N.Y. App. Div. Aug. 8, 2014).

Background.  The parties negotiated off and on for two years over the plaintiffs’ purchase of real estate from 1525 William Street, LLC, a New York LLC. The LLC was represented in the negotiations by Zvi Sultan, who indicated he was the sole member and President of the LLC. The LLC was also represented by legal counsel, who acted throughout the negotiations as if Sultan had authority to negotiate on behalf of the LLC. Eventually the sale contract was executed, with Sultan signing on behalf of the LLC as its manager. The LLC’s attorney accepted the plaintiffs’ deposit.

Later the LLC refused to sign the closing documents and attempted to return the deposit, on grounds that Sultan had no authority to sign the sale contract on its behalf. The LLC contended that Sultan sold a controlling interest in the LLC to his son shortly before the sale contract was signed, and that the LLC’s operating agreement provided that a sale of corporate property must be approved by all members. The son had not approved the sale.

The plaintiffs sued to enforce the sale contract and the trial court granted their motion for summary judgment. The LLC appealed on grounds that there was a triable issue of fact whether Sultan lacked apparent authority to contractually bind the LLC. Id. at 983.

Apparent authority exists when (a) a third party reasonably believes, based on the principal’s actions, that the supposed agent has authority to act on the principal’s behalf, (b) the third party relies on the appearance of authority, and (c) the third party will suffer loss if an agency relationship is not found. E.g., Zions Gate R.V. Resort, LLC v. Oliphant, 326 P.3d 118, 122 (Utah Ct. App. 2014).

Appellate Division.  The court emphasized that apparent authority can only be created by words or deeds of the principal. “The agent cannot by his own acts imbue himself with apparent authority.” Pasquarella, 120 A.D.3d at 983 (quoting Hallock v. State, 474 N.E.2d 1178, 1181 (N.Y. 1984)).

Examining the history of the parties’ interactions, the court concluded that the plaintiffs reasonably relied on sufficient actions of the LLC and its authorized agents to establish Sultan’s apparent authority:

  • the prior course of dealing with Sultan in his capacity as President of the LLC,
  • the fact that the LLC’s authorized attorney acted in a manner consistent with Sultan’s authority, and
  • the LLC’s acceptance of the plaintiffs’ deposit.

Id. at 984.

The court found an alternative basis to support Sultan’s statutory apparent authority, under the New York Limited Liability Company Law:

Unless the articles of organization of a limited liability company provide that management shall be vested in a manager or managers, every member is an agent of the limited liability company for the purpose of its business, and the act of every member, including the execution in the name of the limited liability company of any instrument, for apparently carrying on in the usual way the business of the limited liability company, binds the limited liability company, unless (i) the member so acting has in fact no authority to act for the limited liability company in the particular matter and (ii) the person with whom he or she is dealing has knowledge of the fact that the member has no such authority.

N.Y. Ltd. Liab. Co. Law § 412(a) (emphasis added). Section 412(b) has a similar provision governing manager-managed LLCs, so the court found that under Section 412, Sultan had apparent authority whether he was acting as a member or as a manager.

The LLC failed to offer any evidence that plaintiffs had any knowledge of the limitation on Sultan’s authority resulting from the transfer of his member interest, so the court found that there was no issue of triable fact whether Sultan lacked apparent authority to enter into the sale contract, and affirmed the trial court’s ruling.

Comment.  The legal doctrine of apparent authority is hugely important in the world of business. Consumers and businesses routinely rely on the apparent authority of the other party to a contract, without inquiring into the details of the actual authority of the agent signing the contract.

It would be difficult to function in a modern economy for more than a few hours without interacting with an agent of some kind. The atmosphere is so thick with agents that most people rarely think about them; I willingly hand money to a stranger I meet in a store and carry away goods without questioning whether a sale has occurred.

Paula J. Dalley, A Theory of Agency Law, 72 U. Pitt. L. Rev. 495, 497 (2011).

Pasquarella is an example of a fairly routine application of apparent authority, so much so that it’s a little surprising that the LLC asserted Sultan’s lack of actual authority as a reason for not enforcing the sale contract. The doctrine of apparent authority is by its nature always fact-specific, but the facts here seemed to fairly clearly support Sultan’s apparent authority.

The court also relied on Sultan’s statutory apparent authority under Section 412 of the New York Limited Liability Company Law. If that section applies in a particular case, the court in theory need not even examine the facts supporting apparent authority, other than (a) was the purported agent a member or manager of the LLC, (b) was the action by the purported agent taken “for apparently carrying on in the usual way the business of the limited liability company,” and (c) did the other party have any knowledge that the member or manager in fact had no authority.

In one respect the Pasquarella court’s analysis was deficient, because it did not address whether the real estate sale contract was for the purpose of “apparently carrying on in the usual way” the business of the LLC. The LLC’s business is not described in the opinion, but a sale contract for a parcel of real property would usually be considered outside the ordinary course, unless the LLC routinely sold real estate.

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