LLC operating agreements generally contain limits on the LLC manager’s authority. Usually the manager has authority over the LLC’s day to day operations, but approval by the members of the LLC is required for extraordinary transactions, such as a sale of the LLC’s assets, voluntary encumberance of the LLC’s property and dissolving the LLC.
A frequent question asked by non-managing members of an LLC is what happens if it appears the LLC Manager has acted outside his or her authority and engaged in an unauthorized transaction in the name of the LLC?
Revised Uniform Limited Liability Company Act (“RULLCA”), section 17703.01 sets forth proscribes the manager’s as an “agent” for the LLC in the LLC’s dealings with third parties.
For manager-managed LLCs (as opposed to member-managed LLCs), the members are not agents of the LLC, and cannot “bind or execute any instrument on behalf of” the LLC. However, the manager is an agent of the LLC “for the purpose of its business or affairs,” the manager’s signature on any instrument on behalf of the LLC will bind the LLC “unless the manager so acting has, in fact, no authority to act for the limited liability company in the particular matter and the person with whom the manager is dealing has actual knowledge of the fact that the manager had no such authority.”
Unfortunately, a manager’s “unauthorized” acts cannot always be voided. Under the statute, if a manager engages in an “unauthorized” transaction the members cannot automatically invalidate it. Before the members can do so, they need to prove that the third party buyer had “actual
knowledge” that the manager lacked authority to enter into the transaction.
“Actual” knowledge or notice consists of “express information of a fact.” (Civil Code section 18.) It is notice given directly to, or received personally by, a party. Imputed knowledge is constructive, not actual knowledge.” However, there are splits in case authority as to whether imputed knowledge and constructive knowledge (such as available knowledge through a recorded document) will suffice. Proving “actual knowledge” by the third party may can be very difficult.
Even if the members cannot unwind the transaction, they may have remedies against the manager for breach of fiduciary duties. But victory on that claim will often be pyrrhic if the LLC’s main assets or other rights have already been transferred away.
If you are a member of a manager-managed LLC and believe the manager is exceeding his or her authority in entering into transactions on behalf of the LLC, contact your attorney immediately. Hesitation may limit your ability to undo the unauthorized transaction.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
