Suppose you enter into a signed contract with a limited liability company. The contract is signed by the LLC’s manager. Later the LLC’s other manager tells you that the manager that signed the lease was not authorized to do so. He tells you that the LLC is not bound by the contract and does not intend to honor it. Can the LLC get away with that?
Sometimes the answer is yes, it can. That scenario was before the Utah Court of Appeals last month in Zions Gate R. V. Resort, LLC v. Oliphant, 326 P.3d 118 (Utah Ct. App. May 1, 2014).
Darcy Sorpold, a member and manager of Zions Gate R. V. Resort, LLC, signed a 99-year lease on behalf of the LLC. The lease conveyed rights to a recreational-vehicle pad and lot to Michael Oliphant, as payment for work performed by Oliphant.
Eighteen months later Zions Gate brought suit to evict Oliphant, claiming that Oliphant was a tenant at will because the lease was invalid. Zions Gate argued that the lease was invalid because Sorpold had no authority to enter into the lease without the consent of the LLC’s other manager. Both parties moved for summary judgment, and the trial court granted summary judgment in favor of Oliphant to enforce the lease. Id. at 120.
No Actual Authority. Zions Gate argued that Sorpold had no actual authority to bind the LLC because of the interplay between the LLC’s articles of organization and Section 802 of the Utah Limited Liability Company Act. The LLC’s articles of organization plainly stated that the agreement, approval or consent of both managers was required to act on behalf of the LLC.
Section 802 states that the act of an LLC’s manager for “apparently carrying on in the ordinary course of the company business” binds the LLC “unless the manager had no authority to act for the company in the particular matter and the lack of authority was expressly described in the articles of organization.” Utah Code Ann. § 48-2c-802(2)(c). The court found that the LLC’s articles of organization expressly described Sorpold’s lack of authority to act unilaterally on behalf of the LLC, and that under Section 802 Sorpold therefore had no authority to bind Zions Gate to the lease. Zions Gate, 326 P.3d at 121-22.
No Apparent Authority. The court went on to consider Oliphant’s argument that Sorpold had apparent authority to enter into the lease on behalf of the LLC. Oliphant contended that he had reasonably believed that Sorpold had authority to enter into the lease, and that he had changed his position in reliance on that appearance of authority.
The court described the common-law agency rule of apparent authority: “Apparent authority exists where the conduct of the principal causes a third party to reasonably believe that someone has authority to act on the principal’s behalf, and the third party relies on this appearance of authority and will suffer loss if an agency relationship is not found.” Id. at 122 (quoting Hale v. Big H Constr., Inc., 288 P.3d 1046, 1061 (Utah Ct. App. 2012)).
Zions Gate argued that Oliphant had notice of the limitation on Sorpold’s authority because of Section 121 of the Utah LLC Act. Section 121 states that filed articles of organization constitute notice to third parties of all statements in the articles of organization that are expressly permitted to be set forth in articles of organization by Section 403(4) of the LLC Act. Utah Code Ann. § 48-2c-121(1). And Section 403(4) of the LLC Act provides that an LLC’s articles of organization may contain a statement of the limitations on the managers’ authority to bind the LLC. Utah Code Ann. § 48-2c-403(4)(b).
The court found that Oliphant was deemed to have had notice of the limitations on Sorpold’s authority under Sections 121 and 403 of the LLC Act, could not have reasonably believed that Sorpold had authority to act, and could not have reasonably relied on Sorpold’s authority. Sorpold therefore did not have the apparent authority to bind the LLC. Zions Gate, 326 P.3d at 122.
Oliphant argued that it was unreasonable and unrealistic to expect people entering into agreements with LLCs to acquire and read their articles of organization. But the court pointed out that the statute’s imputed notice provision is clear, and the state’s division of corporations is required to make all required filings available for inspection and copying by any member of the public upon the payment of a reasonable fee. The court also referred to the limits on its role: “And while Oliphant may believe the law imposes an unrealistic burden on those doing business with LLCs, it is not the prerogative of this court to question the wisdom of the statutory scheme enacted by the legislature.” Id. at 123.
Ratification. Oliphant argued that Zions Gate had ratified Sorpold’s execution of the lease by failing to timely object. The court acknowledged that a principal may impliedly or expressly ratify an agreement made by an unauthorized agent, but cautioned that the knowledge of Sorpold could not be imputed to Zions Gate to demonstrate the LLC’s knowledge of the facts. The record was not clear when Zions Gate learned that Sorpold had entered into the lease, so summary judgment could not be rendered on that issue. The court therefore reversed the trial court’s grant of summary judgment and remanded the case back to the trial court for trial on whether Zions Gate had ratified the lease.
Comment. Zions Gate is a nice illustration of the complexities that can be involved when the lack of authority of an LLC’s manager is raised as a defense to an agreement. The LLC’s agreement will be enforced if the manager had either actual or apparent authority. But even if there was no actual or apparent authority, the agreement may be enforceable if the LLC has ratified the agreement either expressly or impliedly by simply waiting too long to disaffirm it.
Zions Gate also shows the powerful ability of an LLC to put third parties on imputed notice of provisions in the LLC’s articles of organization that limit the authority of managers. Such provisions can protect the LLC in the event a manager exceeds his or her authority and purports to commit the LLC to an ill-advised contract.