Last week the Iowa Court of Appeals in Three Minnows, LLC v. Cream LLC, held that a non-managing member did not have the authority to bind an LLC to a contract the member signed on behalf of the limited liability company. This case is a good reminder of some of the basic, but fundamental principles of agency.
First, an ownership interest in an LLC does not create agency. Unless a member is authorized by a manager acting as a principal, that member cannot bind an LLC.
Second, a party asserting an agency relationship has the burden of proving an agency relationship exists. See Chariton Feed & Grain v. Harder, 369 N.W.2d 777, 789 (Iowa 1985). They must show that an agent had actual or apparent authority to act on behalf of a principal. Actual authority
could be expressed or implied and apparent authority looks to communications between the principal and a third party.
Third, a limitation of authority in an LLC’s articles of organization or a statement of authority filed with the secretary of state can show that a person does not have the express authority to bind an LLC. In Three Minnows, the court noted that articles of organization are public records and the plaintiff could have accessed the articles to find the scope of the member’s authority. The court held that because the plaintiff made no effort to inquire into who had the authority to bind the LLC, the plaintiff could not assert that the member who signed the contract had actual authority.
Finally, authorization from a principal to sign an agreement on behalf of the LLC, is not the same as authorization to sign all documents on behalf of the LLC. Although they did not discuss the issue
at length, the court in Three Minnows was very clear that apparent authority is not created when a member is allowed to act on behalf of an LLC to execute one document for a specific purpose. The court held that the member’s scope of authority was clearly limited by the language in the document
he was expressly authorized to sign and there was no representation from the principal that the member had the authority to sign future documents.
- Colleen R. MacRae