Authorization of a Loan to an LLC
Standard documentation for a loan to a corporation customarily includes the requirement that the corporation’s corporate secretary certify to the lender: (i) the accuracy of the corporation’s articles of incorporation and bylaws delivered to the lender; (ii) adoption by the corporation’s board of directors of resolutions authorizing the loan and authorizing one or more officers to sign loan documents; and (iii) the incumbency and signature of the person(s) authorized to sign.
When the borrower is a limited liability company (LLC), equivalent certifications are even more essential. Unlike corporations, which have a basic, well-understood power structure (officers, board of directors, shareholders), LLC’s may vary widely in structure. They may be member-managed (members can bind the LLC) or manager-managed (only managers can bind the LLC). LLC operating agreements, especially if the LLC is manager-managed, also tend to have more detailed statements of the scope and limitations on the power of the managers to take action on behalf of the LLC without member approval. Unlike corporations, LLC managers customarily serve somewhat as both a type of board of directors (authorizing actions) and officers (carrying out authorized actions).
When there is only a single manager, the potential for mischief exists, as the lender discovered in Pitman Place Development, LLC vs. Howard Investments, LLC, 330 S.W.3d 519 (Mo. App. E.D., 2010). In that case the three members of an LLC appointed one of the members the LLC’s sole manager. The Missouri LLC statute grants the managers of an LLC broad powers to bind the LLC by actions “. . .for apparently carrying on in the usual way of the business or affairs of the limited liability company of which he is a manager . . .unless the person with whom he is dealing has knowledge of the fact that the manager has no such authority . . . .” Section 347.065-2(2), R.S.Mo. In this case, the sole manager’s powers were limited in the operating agreement by a specific list of actions requiring the consent of all members, including encumbering any property of the LLC with a value in excess of $50,000 or creating any obligation in excess of $50,000.
The manager applied for a $525,000 loan to the Company and sent the lender a copy of the Company’s LLC operating agreement minus the pages limiting his authority to obligate the LLC to $50,000 without member consent. When the loan processor noticed the omission and asked for the missing pages, the manager waited until the morning of the loan closing to fax a copy of the missing pages. In fact, the manager had altered the copy of the missing pages to change the $50,000 limit to read $750,000. The $525,000 loan closed and only some time later did the other two members discover the loan, the major portion of the proceeds of which were utilized by the manager for non-business purposes.
The other two members sued the assignee of the lender seeking to void the loan as unauthorized. The court of appeals held, among other things, that the LLC members placed the manager in such a position of power that the manager was clothed with apparent authority to bind the LLC and therefore the loan was enforceable. The trial court had found as fact that the lender had no knowledge of the manager’s lack of actual authority, and the court of appeals held that such finding was supported by substantial evidence.
Winning – and Losing
The lender won the case but at the expense of a full-blown trial. The court of appeals acknowledged “the presence of troubling facts in the record” and that this was “a close case,” including the issue of whether the lender should have questioned or independently verified the manager’s authority, since the very pages limiting his authority were missing from the copy of the operating agreement first delivered to the lender and the missing pages seemingly miraculously appeared the morning of the closing. And what the lender “knew” was apparently hotly disputed at trial. The lender could have lost this suit, depending upon the trial court’s view of the credibility of conflicting testimony.
More importantly, the time and expense of a trial likely could have been avoided if the lender had required written certification from all the members or at least one member (other than the manager) certifying the manager’s authority to bind the LLC to the specific loan terms. Apparently, the manager simply signed any authorization certification himself. The opinion does not indicate what kind of certification, if any, the lender required.
Minimizing the Danger
To address the issue, some lenders making loans to LLC’s require a comprehensive written certification signed by all managers and all members certifying the accuracy of the LLC’s organizational documents, authorization of the loan, the authority of the person signing for the LLC and the authenticity of the signer’s signature. That blanket certification sometimes also recites that, if the matters listed in the certification are at variance with the LLC’s operating agreement, the terms of the certification will be deemed to amend the LLC’s operating agreement accordingly. In addition, depending upon the size or complexity of the loan arrangement, the lender should consider requiring the legal opinion from borrower’s legal counsel that the loan is duly authorized by and binding upon the LLC.
The authority of a representative of an LLC to bind the LLC to loan documents should be confirmed in writing by at least one manager or member other than the signer. Ideally, obtaining the signature of all members and managers on such a certification should minimize the risk of an unauthorized loan and potential protracted and expensive litigation.