California’s statutes governing LLCs and general partnerships include “safe harbor” provisions making it easier for third parties to rely on the apparent authority of an LLC’s manager or a partnership’s partner. The statutes also make it more difficult for other LLC members or partners to unwind the entity’s transactions with third parties who relied on that apparent authority.
Here is a quick summary:
The LLC Authority Safe Harbor — Corporations Code section 17703.01
A prior post — LLC Managerial Authority and Dealings with Third Parties — explored the LLC safe harbor statute.
Under Corporations Code section 17703.01, an LLC’s manager acts as an agent on behalf of the LLC for the purpose of its 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.”
As such, “any note, mortgage, evidence of indebtedness, contract, certificate, statement, conveyance, or other instrument in writing, and any assignment of endorsement thereof, executed or entered into between any limited liability company and any other person, when signed by [the 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.”
The Partnership Authority Safe Harbor — Corporations Code section 16303
A similar statutory concept exists for general partnerships, as set forth in Corporations Code section 16303.
Under that statute, a partnership can file a “Statement of Partnership Authority,” setting forth partnership information including “the names of the partners authorized to execute an instrument transferring real property held in the name of the partnership.” The Statement can also specify “the authority, or limitations on authority, of some or all of the partners to enter into other transactions on behalf of the partnership….”
The authority described in the Statement of Partnership Authority provides a safe harbor for third parties. The statute provides that a grant of authority in any filed Statement “is conclusive in favor of a person who gives value without knowledge to the contrary” for transactions not involving real property. And if the Statement is also recorded with the County Recorder, then its grant of authority to transfer the partnership’s real property is conclusive — again, unless the third party had knowledge to the contrary.
Navigating the Safe Harbors
Safe harbors serve to protect third parties dealing with the LLC or partnership. Instead of playing the “guessing game” as to who has proper authority and getting dragged into intra-entity disputes regarding authority, third parties can rely on the safe harbor statutes and deal with the designated person as an agent of the entity. As long as the third party has no knowledge of that person’s actual lack of authority, the transaction with the entity will likely stand.
But this can have brutal consequences for LLC members and partners whose designated agent goes rogue.
Even if a manager/partner goes way beyond his or her legitimate internal authority in binding the entity to a contractual duty or other obligation to a third party, the entity will have a difficult time escaping the deal unless it can show that the third party had knowledge of a lack of authority. A prior post on the Money and Dirt blog — Just How Much Power Does Your LLC’s Manager Have? — covered one alarming case where an LLC’s manager went well beyond his internal authoring in binding the LLC to an indemnity obligation that had no benefit to the LLC whatsoever, but the LLC members could not unwind the transaction because they had no proof that the third party had actual knowledge of the manager’s lack of authority.
In those situations, while the statutory safe harbor might prevent unwinding the transaction, the LLC members or partners might still have a remedy against the rogue manager/partner for breach of fiduciary duty.