“Case Note-Limited Liability Company’s Apparent Authority to Borrow Money” by John M. Carnahan, III

A recent Appellate decision out of State of Kansas involving construction and financing of a motel at the Wichita Airport, gives rise to the importance of having background information on the entities with which you deal, and who is authorized to act on their behalf, both from a lending standpoint as well as doing business and execution of contracts.
In the Corporate arena, the actual authority of Board of Directors and Officers has been well established over the course of many years of Legislative action and Court interpretation.
Limited Liability Company’s, however, are the new kid on the block, having only been with us a little less than 20 years.
The Sunflower Bank, N.A. v. Airport Red Coach Inn of Wichita, L.L.C.* case, is an excellent example of not looking at the actual underlying documents, and instead relying on the “apparent authority”, to determine the authority or authorization of the party executing the loan documents. The original Operating Agreement of Airport Red Coach Inn of Wichita, L.L.C. required unanimous consent of members to borrow funds, and further required that “… all LLC members … execute instruments of indebtedness.” The parties decided to amend the Operating Agreement, so that the LLC manager could sign instruments of indebtedness without the signature of the other members, under the concern that the language would require each member to sign for individual liability on the loans and not in a representative capacity with the LLC being the borrowing entity and the only responsible party, unless there were independent guarantees entered into between the parties with the bank.
As always, the construction and opening of the motel process did not go well financially, giving rise to default on the loan and disputes between the parties as to the validity of the loan and the security interest in the real estate and personal property assets of the LLC.
The Kansas Appellate Court concluded that the bank had a copy of the LLC’s Operating Agreement before any money was advanced. It was therefore clearly given notice of the General Manager’s authority, and should have required resolution or written authorization of all members of the LLC, in order for it to be able to borrow money and grant security interest in its assets. While the loan documents themselves could be signed by a designated party, i.e., General Manager in this case, there is a distinction between the authority to execute loan documents and the authority to borrow money.
Problems like this are very simple to avoid, if up front, the lending entity, i.e., the bank, has a copy of the Operating Agreement, certificate that it is a true and correct copy, and there have been no amendments to the document, and there should be a clear line of authority or instructions, to borrow money and create security interests in assets, signed by all the members. The Court rejected the argument that a “General Manager”, has apparent authority on behalf of an LLC, to have executed the loan documents. The same line of analysis would also apply in the case you are dealing with a Limited Liability Company and entering into a major contract with long term financial significance, for example only, a lease agreement, construction contract, or other types of commitments in which both parties expect full performance. In those situations involving LLCs with large number of members where it might be impractical to have all the members sign all the authorization forms, then the better course of conduct might be to request legal opinion of counsel, confirming that they have reviewed the documents and are rendering a clean opinion that the party signing the documents, has full authority to act on behalf of and bind the LLC, or a resolution signed by all members confirming that the General Manager has the authority to sign and that the Operating Agreement expressly authorizes same and the General Manager is acting pursuant to that authority.
*175 P.3d 883 (Kan.App.Ct.2008)