The following is the text of an e-bulletin that I authored on apparent authority and that was published by the Corporations Committee of the Business Law Section of the State Bar of California.
In Western Surety Co. v. La Cumbre Office Partners, LLC (February 2, 2017), a California Court of Appeal held that a California limited liability company was bound by an indemnity agreement that was outside its business purpose and that benefitted only an affiliate of its sole manager. The court relied on a statutory presumption in the LLC Act that contracts signed by a sole manager are conclusively deemed authorized by the limited liability company.
The court reached this conclusion even though the signature block for the person who signed as manager identified him as an individual when he was not individually the manager but was instead the managing member of an entity that was the sole manager of the LLC.
La Cumbre Office Partners, LLC (“La Cumbre”), was a California limited liability company, whose purpose was to acquire and operate, and perhaps redevelop, a medical office building at 200 N. La Cumbre Road, Santa Barbara. Its articles of organization, filed in 2006, provided that the company would be managed by one manager. The sole manager was Melchiori Investment Companies, LLC (“MIC”), which owned about 9.6% of La Cumbre.
The managing member of MIC was Mark J. Melchiori (“Melchiori”), and he owned half of MIC. Melchiori was also part owner of another LLC that owned about 17.8% of La Cumbre. Melchiori personally was not a member of La Cumbre. Melchiori was also the president of Melchiori Construction Company, Inc. (“construction company”).
La Cumbre’s operating agreement stated that MIC, its sole manager, would have full and exclusive authority to manage and control the business of the company and to perform all acts incident to the management of the company’s business.
In February 2008, to obtain surety bonds from Western Surety Company for his construction company, Melchiori signed an agreement agreeing to indemnify Western Surety. Melchiori signed on his own behalf, his construction company, and seven other parties. One of the signatories was La Cumbre.
The only business La Cumbre had ever engaged in was the ownership of its office building. La Cumbre had no reason to enter into an agreement to indemnify a surety company for a bond issued for Melchiori’s construction company for projects that had nothing to do with La Cumbre’s business. La Cumbre had no business, economic, or other connection to the construction company. Entering into the indemnity agreement was never discussed or approved by members of the company before the agreement was signed.
In 2009 and 2010, the surety company issued bonds to guarantee the performance of the construction company’s contractual obligations in several construction projects, none of which had any relation to La Cumbre’s business. The construction company defaulted, and the surety company paid claims amounting to over $6 million.
La Cumbre refused to reimburse the surety, and the surety company sued La Cumbre on the indemnity agreement.
The complaint in this case was filed in November 2012, more than one year before the California Revised Uniform Limited Liability Company Act became effective, and so the BeverlyKillea Act governed the matter.
Authority to Sign
The underwriter for the surety company prepared the indemnity agreement, and he directed that La Cumbre be named as a party and he directed how the signature block for it would appear. The underwriter testified that Melchiori had said he was the managing member of La Cumbre and could “bind the company” but the underwriter took no steps to verify Melchiori’s authority.
Melchiori testified to the contrary, that he had never told the surety company that he was La Cumbre’s managing member and that he had no idea why La Cumbre was named as an indemnitor.
There was ample evidence to the effect that the indemnity agreement was not (and would not have been) authorized by La Cumbre.
Corporations Code § 17157(d) provides, in the case of a limited liability company whose articles of organization state that it is managed by only one manager, that “[A]ny . . . contract . . . or other instrument in writing . . . executed or entered into between any limited liability company and any other person, when signed by [a sole manager] is not invalidated as to the limited liability company by any lack of authority of the signing … manager in the absence of actual knowledge on the part of the other person that the signing … manager had no authority to execute the same.” (In the case of a limited liability company managed by more than one manager, the signature of at least two managers is sufficient to bind the company.)
The California Revised Uniform Limited Liability Company Act is to the same effect (Corporations Code § 17703.01(d)).
As La Cumbre did not claim that the surety company had actual knowledge that Melchiori lacked authority to sign the indemnity agreement on La Cumbre’s behalf, the court held that Corporations Code § 17157(d) bound La Cumbre to the agreement provided it was signed by La Cumbre’s manager, MIC.
Incorrect Designation of Manager
When Melchiori signed on behalf of La Cumbre, he signed as “Mark J. Melchiori, Managing Member.” But Melchiori, as an individual, was not La Cumbre’s manager. MIC (of which Melchiori was the managing member) was the manager of La Cumbre.
The signature block for La Cumbre on the indemnity agreement apparently read:
La Cumbre Office Partners, LLC
Mark J. Melchiori, Managing Member
The signature block for La Cumbre should have read:
La Cumbre Office Partners, LLC
By: Melchiori Investment Companies, LLC,
Mark J. Melchiori, managing member,
. Melchiori Investment Companies, LLC
The signature block that was used to sign the indemnity agreement was incorrect because Melchiori, as an individual, was not the managing member of La Cumbre, and as an individual, he had no authority to act for La Cumbre.
La Cumbre argued that, as a result of the designation of Melchiori (as an individual) as La Cumbre’s managing member, the manager that the statute designates as having the power to bind the company by virtue of apparent authority (MIC (of which Melchiori was the sole manager)) did not sign the agreement on La Cumbre’s behalf. La Cumbre argued that Melchiori, as an individual, did not benefit from the statute’s conclusive presumption of authority, only MIC would, and therefore Melchiori’s signature in his individual capacity did not, and could not, bind the company.
Incorrect Designation of Authority
A similar issue had arisen in the corporate context. In Snukal v. Flightways Manufacturing, Inc. (2000) 23 Cal.4th 754, the California Supreme Court held that Corporations Code § 313 “applies even when the other party should have, but does not have, actual knowledge of the officers’ lack of authority, that party is relieved of the burden of establishing justifiable reliance upon the authority of the executing officers.” Id. at 783.
Corporations Code § 313 provides that:
any … contract … or other instrument in writing … executed or entered into between any corporation and any other person, when signed by [two of the officers specified in the section] is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same.
In Snukal, Lyle executed a lease on behalf of the corporation, Flightways. Lyle was president, chief financial officer, and secretary of Flightways, but he signed the lease showing his office only as president. For a party dealing with the corporation to take advantage of Corporations Code § 313, a contract or other written instrument must be signed by a person holding at least one corporate office in each of two separate categories of offices specified in the statute. The office of president is in one category, while the offices of chief financial officer and secretary are in another category. Thus, for Flightways to have been bound by the apparent authority of Lyle under Corporations Code § 313, both the president and the chief financial officer (or both the president and the secretary) had to have signed the lease.
The Snukal court rejected Flightways’s claim that the statute applies only when two officers holding the offices specified in the statute execute an instrument and name the corporate offices held (whether the requisite offices are held by the same person or held by two persons). The court held that Corporations Code § 313 does not contain any language requiring the signing officers to be separate individuals or requiring the signing officers to specify the office or offices they hold.
In Snukal, id. at 780, fn. 8, the court stated that “when the corporate officer’s actual authority to execute the agreement has been established or is not in doubt, the circumstance that he or she does not specify the office held does not invalidate the agreement as to the corporation,” citing Greve v. Taft Realty Co. (1929) 101 Cal.App. 343 and other cases. The Snukal court held that Corporations Code § 313 “provides a conclusive, rather than a merely rebuttable, evidentiary presumption of authority to enter into the agreement on the part of the specified . . . officers.” Id. at 782.
Under this reasoning, La Cumbre would have been bound by the indemnity agreement if Melchiori had simply signed his name without indicating any official position. The court of appeal in this case stated that the fact that the indemnity agreement mistakenly designated Melchiori as the managing member was a distinction without a difference. MIC was a legal entity and therefore could sign the indemnity agreement only through the signature of a natural person (and Melchiori was “the only living person in the world” who could sign on MIC’s behalf). The natural person authorized to sign on MIC’s behalf was its managing member, Melchiori, and Melchiori signed the indemnity agreement.
It followed, therefore, that La Cumbre was bound even though the indemnity agreement’s signature page mistakenly identified Melchiori individually as its sole manager (instead of as the managing member of MIC, the sole manager of La Cumbre).
The failure of the surety company to exercise due diligence to assure that Melchiori was in fact La Cumbre’s managing member was irrelevant according to the court of appeal because Corporations Code § 17157(d) does not require the third party to be diligent.
Melchiori testified that he had never told the surety company that he was La Cumbre’s managing member and that when he signed the indemnity agreement, he did not even notice that La Cumbre was listed as an indemnitor. As noted above, La Cumbre had nothing to do with the surety bonds, and a person signing an agreement for a project might well believe that the agreement did not involve an entity that had nothing to do with the project.
While the foregoing facts were insufficient in light of Corporations Code § 17157(d) to establish that the signature of Melchiori did not bind La Cumbre, they might be sufficient to establish a defense of mistake.
If a natural person mistakenly signs a contract or other written instrument, there is no question of authority (as there could be in the case of a signature on behalf of an entity), but the fact that the person did not know that what he was signing was a contract or that he was under a misapprehension as to the subject of the contract might provide a defense on the basis of mistake. An entity is entitled to the defense of mistake as well.
But the apparent failure of Melchiori to read the signature blocks on the contract that he was signing could be fatal, however, to the defense of mistake. The opinion is silent on the defense of mistake, and it is not apparent whether the issue was litigated in the trial court.