Unincorporated Business Entities Law

Probably, every lawyer has used an ellipsis to show that a portion of the text was left out of a quotation. But what are the ethics of elision and inclusion?

Consider, if you will, the opinion in Ly v. Jimmy Carter Commons, LLC, 286 Ga. 831, 691 S.E.2d 852 (2010). A manager of an LLC (Byun) purported to borrow money on behalf of the LLC in connection with a real estate development. As part of the closing documents, the manager gave the lender a purported “Unanimous Consent of the Manager and Members” that authorized the manager to borrow the money, sign the promissory note, and the mortgage on the LLC’s land to secure payment of the note. As it turned out, one of the signatures was forged. When the LLC defaulted on the note, the LLC sued the lender to enjoin foreclosure, and to void the note and mortgage, on the grounds that the manager lacked the authority to borrow the money, or to sign the note and the mortgage. The trial court granted summary judgment in favor of the LLC. The Georgia Supreme Court reversed, holding that there was a question of fact.

What is interesting about the opinion is not the result; rather it is the reasoning of the opinion, and the way the opinion used the Georgia LLC statute.

* * * … there is still a genuine issue of material fact as to whether Appellants had knowledge that the unanimous consent documents were ineffective and did not give Byun the authority to act alone on behalf of Jimmy Carter Commons.

[T]he act of any manager [of a limited liability company] … binds the limited liability company, 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 he or she is dealing has knowledge of the fact that the manager has no such authority. (Emphasis supplied.)

OCGA § 14-11-301(b)(2). Thus, “[n]o act of a manager … in contravention of a restriction on authority shall bind the limited liability company to persons having knowledge of the restriction.” OCGA § 14-11-301(d).

Consequently, even if Byun acted beyond his authority as a manager of Jimmy Carter Commons, the limited liability company may still be bound by his actions if Appellants did not know that he lacked such authority. In its summary judgment order, the trial court did not cite, and Jimmy Carter Commons has not identified, undisputed evidence showing that Appellants knew that Choi’s signatures on the consent documents were forged. * * *

691 S.E.2d at 853.

Here is the complete text of Section 14-11-301:

§ 14-11-301. Powers, duties, and authority of members and managers

(a) Except as provided in subsection (b) of this Code section, every member is an agent of the limited liability company for the purpose of its business and affairs, and the act of any member, including, but not limited to, the execution in the name of the limited liability company of any instrument for apparently carrying on in the usual way the business and affairs of the limited liability company of which he or she is a member, binds the limited liability company, unless the member so acting has, in fact, no authority to act for the limited liability company in the particular matter, and the person with whom he or she is dealing has knowledge of the fact that the member has no such authority.

(b) If the articles of organization provide that management of the limited liability company is vested in a manager or managers:

(1) No member, acting solely in the capacity as a member, is an agent of the limited liability company; and

(2) Every manager is an agent of the limited liability company for the purpose of its business and affairs, and the act of any manager, including, but not limited to, the execution in the name of the limited liability company of any instrument for apparently carrying on in the usual way the business and affairs of the limited liability company of which he or she is a manager, binds the limited liability company, 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 he or she is dealing has knowledge of the fact that the manager has no such authority.

(c) An act of a manager or a member that is not apparently for the carrying on in the usual way the business or affairs of the limited liability company does not bind the limited liability company unless authorized in accordance with a written operating agreement at the time of the transaction or at any other time.

(d) No act of a manager or member in contravention of a restriction on authority shall bind the limited liability company to persons having knowledge of the restriction.

(emphasis added).

Any partnership lawyer will recognize subsections (a), (b)(2), and (d) as taken from section 9 of the Uniform Partnership Act, and adapted for member-managed and manager-managed LLCs. Any partnership lawyer will also recognize the centrality of the language omitted by the court, especially the portion in bold italics. As written, Section 14-11-301 conditions a manager’s power to bind the LLC by an unauthorized act to acts “apparently carrying on the the usual way the business and affairs of the LLC.” As subsection (c) makes clear, unauthorized acts that are not apparently carrying on in the usual way the business and affairs of the LLC do not bind the LLC. The result of the misquotation–the ellipsis–is a radical expansion of the apparent authority of LLC’s manager: not just usual acts, but any act, without regard to its nature.

This seems to me to be a particularly pernicious use of the ellipsis; one that changes the character of the quotation. Even non-lawyers recognize that intentionally omitting important information is unethical. Thanks to Seinfeld, we even have an expression that describes an elision made in bad faith: “yada, yada.”

The question here is whether the justices on the Court knew that a key part of the statute had been dropped out. One might attribute the misquotation to the not-uncommon phenomenon of unfamiliarity with agency principles, and unincorporated business entity law, or, instead, to an overcrowded docket. Still, it is hard to imagine that none of the justices read Section 14-11-301 closely, or that, on close reading, none noticed its limits on apparent authority.

That said, the result–overturning the summary judgment–is probably correct. Whether borrowing money is apparently carrying on in the usual way the LLC’s business is a question of fact that turns on the nature of the LLC’s business. Jimmy Carter Commons, LLC seems to have been a real estate development 0company. Such companies are more likely to be customary frequent borrowers than, say, a company selling advertising slots on a border radio station. See, Burns v. Gonzalez, 439 S.W.2d 128 (Tex Civ. App. 1969).

But, as I suggested in my earlier post, Conflating Tests for Agents and Servants, there is no such thing as a “harmless” misstatement of the law by a court. Given that the misstatement here is by the Georgia Supreme Court, only a later opinion of that court can put Georgia law back on the right course.

Gary Rosin