Monday, June 16, 2014

Utah Court Considers Limitations on Actual Authority of LLC Manager, Reverses Summary Judgment as to Ratification

Utah Court Considers Limitations on Actual Authority of LLC Manager,
Reverses Summary Judgment as to Ratification
      A recent decision from Utah considered the statutory limits on actual and apparent authority to bind an LLC.  Zions Gate R.V. Resort, LLC v. Oliphant, __ P.3d __, 2014 WL 1717026 (Utah App. May 1, 2014).
      Purportedly on behalf of the LLC, Darcy Sorpold, one of its managers, executed a 99-year lease for a RV pad in favor of Oliphant, the lease purportedly being delivered in compensation for certain services rendered the LLC by Oliphant.  The LLC brought a forcible detainer action against Oliphant, alleging his rights under the purported lease to be invalid.  Oliphant, in turn, brought a quiet title action, and the trial court granted summary judgment in his favor.  This appeal followed.
      Initially, the LLC challenged the trial court’s determination that the lease was valid, noting that the LLC’s articles required the actions of both managers (the second manager being Jones) in order to bind the LLC.  Under the then applicable LLC Act (Utah adopted a new LLC act effective January 1, 2014), a manager had authority to bind the company in the ordinary course of business “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. § 48-2-c-802(2)(c).  The LLC’s articles, in addition to providing that it would be manager-managed, expressly provided that “It shall require the agreement, approval or consent of both Managers to act on behalf of or to constitute the act of [Zions Gate].”  Based thereon, the Court of Appeals determined that Sorpold did not have actual authority to bind the LLC to the lease with Oliphant. 
      Having lost the argument that Sorpold had actual authority to enter into the lease and thereby bind the LLC, Oliphant argued that he had apparent authority to bind the LLC.  The Court noted, however, that under Utah law, it being based on § 166 on the Restatement (Second) of Agency, a third party’s knowledge that the agent lacks authority defeats a claim for apparent authority.  Horrocks v. Westfalia Systemat, 892 P.2d 14, 16 n.1 (Utah Ct. App. 1995).  Atypically, the Utah LLC Act provides that any provision set forth in the LLC’s articles of organization is notice to third parties.  Utah Code Ann. § 48-2c-121(1).  In that the limitation on Sorpold’s authority to act unilaterally on behalf of the LLC was prescribed by the articles of organization, and in that Oliphant was deemed on notice of the limitations on Sorpold’s actual authority, he could not rely upon apparent authority.  In response to Oliphant’s argument:
that it is unreasonable and unrealistic to expect individuals or companies entering into an agreement with an LLC to acquire the articles of organization for that LLC to determine if the signatory to an agreement is authorized to enter into that agreement on behalf of the LLC

, the Court noted the rule that it is the responsibility of the third party to ascertain the agent’s actual authority and further that 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.  2014 WL 1717026, *3.

       Having determined that Sorpold lacked either apparent or actual authority to enter into the lease binding the LLC to Oliphant, the Court turned its attention to the argument that the LLC had ratified the lease.  Remanding the matter to the trial court, the Court of Appeals found there to be significant factual questions involved in the question of whether or not ratification (or repudiation) had taken place.  Perhaps, however, signaling to the trial court the proper outcome once the factual record is determined, the Court noted that Utah statute of frauds “requires that any agent executing an agreement conveying an interest in land on behalf of his principal must be authorized in writing” and that “w[here] the law requires the authority to be given in writing, the ratification must also generally be in writing,” citing Bradshaw v. McBride, 649 P.2d 74, 78, 79 (Utah 1982).
      It bears noting that under the Kentucky LLC Act the outcome of this case might be different.  Initially, as to the last point, the Kentucky Statute of Frauds, while certainly requiring that conveyance of an interest in real property be in writing, does not require that any delegation of authority to execute an instrument involving real property likewise be in writing.  Such may be typically required as a matter of good practice, but the failure to do so does not implicate the Statute of Frauds.  Second and of greater import, the Kentucky LLC Act contains a different rule than that of Utah with respect to the notice effect of the articles of organization.  Rather, under Kentucky law, the articles of organization are of themselves only notice that the LLC exists, of the four primary components set forth in KRS § 275.025(1) (i.e., the LLC’s name, registered office and agent, mailing address and the statement as to whether it is member- or manager-managed), if it is a professional LLC what professions are being practiced and, if it is a nonprofit LLC, that fact.  Hence, while it is possible in the articles of organization to recite limitations upon the actual authority of the members or managers, those limitations will not be deemed to be notice to and binding upon third parties merely by being filed with the Secretary of State and available on its website.

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