Authority to Sign: Actual & Apparent, by James D. Fullerton, Fullerton & Knowles, P.C.

 

Authority to Sign: Actual & Apparent, by James D. Fullerton, Fullerton & Knowles, P.C.

Authority to Sign: Actual & Apparent

James D. Fullerton Fullerton & Knowles, P.C.

JFullerton@FullertonLaw.com

 

Recently, clients have asked questions about what titles to accept for signatures on contracts for limited liability entities, such as a Corporation or LLC (each herein referred to as the "Company").  Should you only accept the signature and title of "Managing Member" for an LLC?  Should you automatically accept the signature of the "President" of a corporation?  What is the power of a Member, Managing Member, President, Vice President, or CEOfor an LLC or a corporation?  We all want to avoid any legal or financial issue(s) that may arise if a contract is not completed and signed correctly or is not binding on the Company with which we think we are doing business.

 

Any "authorized agent" can bind a corporation or a limited liability company. In other words, the Company could "authorize" any person to sign a contract for the Company and the contract would be binding.  The real issue is whether you can be confident that the Company has made that signing person an "authorized agent."  For that reason, a bank providing a mortgage loan would typically want a "resolution" signed by all the members or shareholders of the Company, stating that a particular person is authorized to sign the mortgage documents for the Company.    You can consider requiring such a resolution. The operating agreement for a limited liability company or the bylaws of a corporation are the governing documents of these limited liability entities. A partnership agreement has the same role in a partnership, although partnerships are less common than they used to be.  These governing documents typically state what titled officers are authorized for certain decisions.  A bank would want to see those governing documents. 

 

The president usually has general authority to bind the corporation and the manager usually has general authority to bind the LLC, but you cannot be positive without seeing the bylaws and/or a resolution for the corporation.[i]  An analogy to the United States federal government is helpful.  The President of the United States has the greatest authority of any single person in government.  But even the President might take action that is "unconstitutional" and therefore not binding.  You would have to review the constitution and the perhaps prior acts of Congress to know for sure.  Even then, there is room for argument and uncertainty.  You may need a decision of the Supreme Court.  The operating agreement or bylaws are comparable to the constitution.  Resolutions are comparable to acts of Congress.   In the event of a dispute, you may need a decision by a court to interpret the operating agreement or bylaws of a limited liability entity.

 

Though a president or manager of a Company usually has the general authority to bind their corporation, their power has its limits.   For example, the general authority to conduct a business does not include authority to sell the primary assets of the Company necessary for the operation of the business.[ii]  The inherent or apparent authority of a corporate president is limited to acts within the ordinary course of its business and does not extend to extraordinary and unusual transactions.[iii] If you are doing business with a limited liability entity, you must use some common sense about the ordinary course of a business and the realistic authority of the agents with whom you are dealing.

 

The concept of "apparent authority" is also important.[iv]  If you deal with someone that has the "apparent authority" to bind the Company, then the Company is bound, whether the agent had "actual authority" or not.[v]  General employment in a specific capacity, such as factor, broker, or attorney, may bind the Company by all acts within the scope of that employment.  That power cannot be limited by any private order or direction not known to the party dealing with the agent. The Company would be responsible if the agent is acting within the scope of their usual employment.  The Company would also be responsible if the agent is held out to the public, or to the other party, as having authority, even if the agent has in fact exceeded their instructions and acted without authority.[vi]  The crucial factor is reasonable reliance. The Company is responsible for the agent's actions when the affirmative acts of the Company orthe failure to take corrective steps, has clothed the agentwith apparent authority and induces a third party to rely on that authority to their detriment.[vii]  It is up to the Company to make sure others do not have the impression that its agents have authority beyond what they actually have.[viii] 

 

Certain titled agents are generally accepted as authorized. Historically the strongest title for a limited liability company was manager or managing member. The manager is usually an "authorized agent" for an LLC, even if they are not a member. Similarly, a president usually has the broadest single power to bind a corporation. You would have to see the operating agreement or a resolution to know for sure.  Even a member may not be authorized to bind the Company, just like one shareholder of General Motors is not authorized to bind General Motors. You would have to see the operating agreement or a resolution to know for sure.  In recent years, it has become more common for limited liability company managers to take titles that used to be only for corporations, such as "president" or "vice president."  These titles do indicate some broad power to bind the LLC.   

 

When considering which signatures to accept, it is important to be cautious. Although titles can be a reliable indicator of an individual's authority, you must still do your due diligence and verify a potential signatory's authority to sign or bind their Company to an agreement. Courts are not sympathetic to individuals who decide to transact with an agent without further inquiring into whether that person has the actual authority to do so.[ix]  You should also remember to inquire as to the actual authority of a purported agent.

 

Most business people accept the signature of the president, even though the president may not have the actually authority to bind the Company on any particular issue. The law of "apparent authority" explains why a trade creditor is usually satisfied with a signature from the manager or managing member or president and explains why most people would probably accept just "member" or just "vice president."  But you cannot be certain without seeing the operating agreement or bylaws and a resolution.

 

The most difficult decisions for business people will usually be with marginal titles. For example, whether the vice president is authorized to bind the corporation or a member is authorized to bind an LLC.  The only certain answer is to see the operating agreement of the Company and require all members or shareholders to sign a resolution authorizing the signing person to bind the Company. 

 

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James D. Fullerton Fullerton & Knowles, P.C.

12642 Chapel Rd. Clifton, VA   20124 (703) 818-2600, Ext. # 205 

JFullerton@FullertonLaw.com

 

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[i] See Mosell Realty Corp. v. Schofield, 183 Va. 782, 790, 33 S.E.2d 774, 777 (1945)[The inherent or implied authority of a corporate president is limited to acts within the ordinary course of its business and does not extend to extraordinary and unusual transactions such as the sale and purchase of real estate that is the major or only asset of the Company.]  Authors note:  This is an interesting, but questionable, decision based on the facts of this case. The Supreme Court opinion had not one, but two different dissenting opinions.  

[ii] Mosell Realty Corp. v. Schofield, 183 Va. 782, 791, 33 S.E.2d 774, 778 (1945)[Thus, if the premises upon which a business is conducted is owned by the principal, it is inferred that a manager of the business has no authority to sell that property].

[iii] Mosell Realty Corp. v. Schofield, 183 Va. 782, 790, 33 S.E.2d 774, 777 (1945), citing Sterling v. Tr. Co. of Norfolk, 149 Va. 867, 141 S.E. 856 (1928)[The secretary and treasurer of a corporation engaged in the automobile and garage business did not have the authority to bind the corporation for the purchase of an expensive piece of real estate for the purpose of enlarging its business, even though such officer held approximately fifty per cent of the capital stock of the corporation, was one of its three stockholders, and one of its four directors.  That authority is lodged in the Board of Directors.] It is often advisable to get all shareholders, the president and the board of directors to sign a resolution for an extraordinary transaction by a corporation. 

[iv] Progressive Cas. Ins. Co. v. Ehrhardt, 69 Md. App. 431, 440, 518 A.2d 151, 155 (1986), citing3 Am.Jur.2d Agency § 71, at 575 (1986)[An agent's authority to act must come from the principal (Company).  It is well established that the authority conferred upon the agent by the principal can take two forms: actual authority or apparent authority. Actual authority is that which is actually granted, and it may be express or implied.  Apparent, also called ostensible authority, is not actually granted.  However, the principal (Company) knowingly permits the agent to exercise or which himself holds out as possessing (footnotes omitted)].

[v] The extent of the apparent authority is limited to "that authority which the principal has held the agent out as possessing, or which he has permitted the agent to represent that he possesses." To the extent the principal has so cloaked the agent, he "is estopped to deny that the agent possessed the authority which he exercised." Wright v. Shortridge, 194 Va. 346, 73 S.E.2d 360, 364 (1952); see also Progressive Cas. Ins. Co. v. Ehrhardt, 69 Md. App. 431, 440-441, 518 A.2d 151, 155 (1986).  However, anytime a third party deals with an agent without further inquiring as to the actual authority, they do so at their own peril. If no agency relationship exists or the agent's authority is exceeded, the sole recourse of a third party is against the agent.  The principal is not bound. See Kern v. J. L. Barksdale Furniture Corp., 224 Va. 682, 685, 299 S.E.2d 365 (1983); See also Scotsman v. Crawford, 53 Va. Cir. 183 (Cir. Ct. 2000).

[vi] Brager v. Levy, 122 Md. 554, 559, 90 A. 102, 104 (1914), citing Lister v. Allen, 31 Md. 543 (1869).

[vii] Progressive Cas. Ins. Co. v. Ehrhardt, 69 Md. App. 431, 441, 518 A.2d 151, 156 (1986). 

[viii] For example, the Company could not allow an agent to continually agree to transactions, perform those agreements, then later deny the Company is bound to a subsequent agreement.  The Company is probably "estopped" from denying in a later transaction that the agent had authority to bind the Company.  See Southern Amusement Co.  125 Va. 429, 99 S.E. 716 (1919)[The Company  continually allowed the manager of one of its theaters to purchase furnishings and other large purchases on its behalf. The Company consistently paid the bills for all purchases the manager made. These facts were well known to plaintiff who held an open account for the theater. The manager made extensive purchases from the plaintiff for the purpose of renovating the theater, and the theater company subsequently refused to pay the bill. In that case, the court held the theater liable under the theory of apparent authority because the theater cloaked the manager in the robe of apparent authority and made no limitation as to the extent of his authority known to the plaintiff or the public in general.] It is also an important factor whether the Company kept the benefits of the transaction it later wants to deny. The Company also should not receive the benefit of the furnishings without paying compensation. Court state that if the Company accepts the benefits, "it must assume its burdens." Where the Company retains the benefits of a contract made by his agent without authority this may act as ratification of the contract. See Southern Amusement Co.  125 Va. 429, 99 S.E. 716 (1919), citing Planters Bank v. Loe, 193 Va. 411, 69 S.E.2d 455 (1952); and also seeKern, 224 Va. at 685, quoting Restatement (Second) of Agency § 99 (1958); see also Scotsman v. Crawford, 53 Va. Cir. 183 (Cir. Ct. 2000).

[ix] See Kern v. J. L. Barksdale Furniture Corp., 224 Va. 682, 685, 299 S.E.2d 365 (1983)[Anytime a third party deals with an agent without further inquiring as to the actual authority, they do so at their own peril. If no agency relationship exists or the agent's authority is exceeded, the sole recourse of a third party is against the agent.  The principal is not bound].

 

James D. Fullerton Fullerton & Knowles, P.C.

12642 Chapel Rd. Clifton, VA   20124 (703) 818-2600, Ext. # 205 fax (703) 818-2602

JFullerton@FullertonLaw.com 

Cell Phone 703-517-0457 Ext. #205

 

 

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