A recent Georgia case (The Guarantee Co. of North America v. Gary’s Grading and Pipeline Co., Inc., 2016 WL 1181698 (M.D. Ga. Mar 25, 2016)) highlights the limited ability of members to shield an LLC from liability to a third party through an operating agreement when a manager exercises authority he does not have under the terms of the operating agreement.
In the case, The Guaranty Co., a surety company, sought to enforce an indemnification agreement against Pine Plantation, one of the defendants, relating to The Guarantee Co.’s issuance of payment and performance bonds for several Georgia construction projects being performed by Gary’s Grading. Pine Plantation was owned and co-managed by three brothers, one of whom primarily operated Gary’s Grading. Pine Plantation was a signatory to the indemnification agreement through the signature of one of the three brothers.
Pine Plantation’s operating agreement contained a provision that “…no one Manager may take any action permitted to be taken by the Managers without agreement of the other Manager or Managers, or unless other approval requirements of the Managers are expressly set forth elsewhere in this Operating Agreement or the Georgia [LLC] Act.” Pine Plantation argued in the case that the indemnification agreement could not be enforced against Pine Plantation because not all of the managers had consented to the LLC entering into the indemnification agreement in violation of Pine Plantation’s operating agreement.
The court rejected Pine Plantation’s argument by determining that the Operating Agreement language quoted above incorporated OCGA Section 14-11-301(b)(2) into the agreement, which provides that every manager is an agent of a limited liability company for purposes of its business and affairs and that the execution in the name of a limited liability company of any instrument for the carrying on in the usual way the business and affairs of the limited liability company binds the limited liability company unless (i) the manager has no authority to act for the limited liability company in a particular matter, and (ii) the person with whom the manager is dealing has knowledge of the manager’s lack of authority. In the case, no evidence was presented as to The Guaranty Co.’s knowledge that the signing brother lacked the proper consent to bind the LLC. Also, the court rejected an argument that The Guaranty Co. should have done more to verify the signing brother’s authority.
Much of the court’s rationale in the case is focused on the fact that the Operating Agreement language incorporated thee Georgia LLC Act (specifically, OCGA 14-11-301(b)(2)) into the agreement by referencing other approval requirements specified by the Georgia LLC Act. We can only speculate as to how the court might have ruled had this language not been in the Operating Agreement, but a plain reading of the Georgia LLC Act would seem to indicate the court would have ruled the same without that specific reference.
When putting together operating agreements for clients, we are oftentimes asked to create provisions which set forth in great detail the roles and responsibilities of the various managers or members. While this exercise may be useful in setting the managers or members expectations as to participation in management of the LLC, The Guarantee Co. case shows that this exercise very likely does not limit the LLC’s liability to third parties in instances where a member or manager goes beyond the authority granted to him. The Georgia LLC Act binds LLC’s to instruments executed by a member (except in LLC’s where manager-managed status is elected through the LLC’s articles of organization) and manager, unless the member or manager in fact has no authority to bind the LLC and the third party knows this. Given that The Guarantee Co. case seems to indicate a third party has no obligation to inquire into a manager’s authority without a reason to suspect proper authority does not exist, it’s hard to come up with a realistic set of facts where an instrument signed by a member (except in LLC’s where manager-managed status is elected through the LLC’s articles of organization) or manager on behalf of an LLC would be deemed unenforceable due to lack of authority.
One thing to note, when making an election to be manager managed, an LLC would be wise to make the election in its articles of organization. Under the Georgia LLC Act, a company can elect to be manager managed through a statement in its articles of organization or through a written operating agreement. By electing manager managed status through the articles of organization, an LLC would protect against a non-manager member being able to bind the LLC (i.e., if an LLC elects to be manager managed through its articles, as opposed to through an operating agreement, OCGA 14-11-301(b) would seem to indicate that a non-manager member is not an agent of the LLC and therefore cannot bind the LLC).