from Abdulaziz, Grossbart & Rudman
Limited liability companies, more commonly referred to as LLCs, are becoming the business structure of choice, especially for developers and property owners. "A limited liability company (LLC) is a hybrid business entity formed under the Corporations Code and consisting of at least two "members" who own membership interests...the company has a legal existence separate from its members. Its form provides members with limited liability to the same extent enjoyed by corporate shareholders."
In Western Surety Company v. La Cumbre Office Partners, LLC, the Court of Appeals affirmed the lower court holding that a contract that misstated the role of the manager who signed on the LLC's behalf was nonetheless binding on the LLC. Mark Melchiori was the managing member of Melchiori Investment Companies, LLC ("MIC"). MIC was the sole manager of La Cumbre Office Partners, LLC ("La Cumbre"), the appellant in the case. Melchiori, personally, was not a member of La Cumbre. La Cumbre was formed to "acquire, hold, operate and perhaps, redevelop the real property at 200 N. La Cumbre Road" in Santa Barbara, California.
Western Surety Company, the respondent in the case, filed a lawsuit against La Cumbre for breach of an indemnity agreement. Melchiori had signed the agreement with Western Surety on La Cumbre's behalf as its managing member. However, he was actually the managing member of MIC, and MIC did not have actual authority to execute the indemnity agreement on La Cumbre's behalf. The surety bonds were issued for a construction company owned by Melchiori, known as Melchiori Construction Company, Inc. ("MCC"). Melchiori did not notice the La Cumbre was even listed as an indemnitor. Indeed, La Cumbre had nothing to do with the project for which the bonds were issued.
Section 17150 of the Corporations Code provided that every member of an LLC is an agent of the LLC for purposes of its business or affairs. The act of any member binds the limited liability company, unless the member has no authority to act for the LLC in that matter, and the other person has actual knowledge of the fact that the member has no authority. Western Surety did not know that Melchiori was without authority to bind La Cumbre. The Court found that Melchiori's signature bound MIC and therefore also bound La Cumbre. It held that although the indemnity agreement mistakenly designated Melchiori as La Cumbre's managing member, "this is a distinction without a difference." What mattered was whether the signer (Melchiori) was the person he is statutorily required to be (the managing member of La Cumbre's manager, MIC).
The moral of the story is that managers of an LLC hold a lot of power and relying on technical errors in a contract will not protect an LLC against liability.
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