Your manager exceeded their authority? Is your company on the hook?
This year, the Second District Court of Appeals of California made it clear that you can't always escape the consequences of your manager exceeding their authority.
In Western Surety Company v. La Cumbre Office Partners, LLC, the court held that an LLC can be bound by the actions of its manager, even when the manager did not have authority to bind the LLC under the operating agreement.
Mark J. Melchiori was the manager of Melchiori Investment Companies, LLC (MIC). MIC was the manger of La Cumbre Office Partners, LLC (La Cumbre). La Cumbre was a multi-member LLC that managed an office building. But its articles provided for a single manager: MIC. Melchiori himself was neither a manager nor a member of La Cumbre.
Melchiori was also president of Melchiori Construction Company, Inc. (MCC). In 2008, he signed a "General Agreement of Indemnity" on behalf of La Cumbre, MCC, and MIC. The indemnity agreement required the three companies to indemnify Western Surety "against liability incurred as a result of surety bonds to be issued by respondent [Western Surety] on behalf of any of" them. In that agreement, "Melchiori wrongly signed, 'La Cumbre Office Partners, LLC [by] Mark J. Melchiori, Managing Member.'"
Western Surety then issued bonds to MCC to satisfy MCC"s "contractual obligations in several construction project." MCC defaulted and Western Surety paid the claims guaranteed by the bonds. Western Surety then sued La Cumbre for breach of the agreement after it refused to reimburse Western Surety.
There was no dispute that La Cumbre's business did not involve any of the bonds provided by Western Surety. And it was undisputed that La Cumbre's business did not require bonds. La Cumbre's operating agreement did not allow the manager to make decisions outside the ordinary business of La Cumbre without member approval.
Indeed, there did not seem to be a dispute that the action taken by Melchiori on behalf of La Cumbre was outside MIC's authority as manger. But there were no facts to show that Western Surety knew that. And the court held that Western Surety was under no obligation to investigate Melchiori's authority under the operating agreement. Because Western Surety did not know Melchiori was acting outside his authority, La Cumbre was bound by his signature under the Corporations Code Section 17157, subdivision (d) (now section 17703.01, subdivision (d)).
It also didn't matter that Melchiori signed the agreement as La Cumbre's manager even though MIC was the true manager. This is because MIC was the sole manager of MIC, and Melchiori was the sole manager of MIC. The only natural person who could sign on behalf of MIC was Melchiori. The court found that it was irrelevant that the correct titles were not used, because the right person signed.
Thus, La Cumbre was bound by Melchiori's signature, even though it was outside the scope of his authority and MIC's authority as manager.
There are different ways to protect yourself against a rogue manager, and an attorney can help you think through strategy on how to do that.