Rock Mountain/Western Update - Western Surety Co. v. La Cumbre Offices Partners, LLC

An Indemnity Agreement was not invalidated as to a limited liability company by either the lack of authority of the signing manager or the misstated capacity of the signing manager.  

Western Surety Co. v. La Cumbre Offices Partners, LLC, 2017 WL 445408 (Cal. Ct. App. 2017). 

Western Surety Company (“Western”) filed an action against La Cumbre Office Partners, LLC (“La Cumbre”) for breach of an indemnity agreement (the “Indemnity Agreement”).  Mark J. Melchiori (“Melchiori”) signed the Indemnity Agreement on La Cumbre’s behalf as its managing member.  The Indemnity Agreement required the various signers to indemnify Western against liability incurred as a result of surety bonds to be issued by Western on behalf of any of such signers.  On behalf of La Cumbre, Melchiori wrongly signed, “La Cumbre Office Partners, LLC [by] Mark J. Melchiori, Managing Member.”  Melchiori was actually the managing member of La Cumbre’s manager, Melchiori Investment Companies, LLC (“MIC”).  MIC did not have actual authority to execute the Indemnity Agreement on La Cumbre’s behalf. 

In 2009 and 2010, Western issued bonds to guarantee the performance of Melchiori Construction Company, Inc.’s (“MCC”) contractual obligations in several construction projects.  MCC defaulted on the contracts, and Western paid claims guaranteed under the bonds.  La Cumbre then refused to reimburse Western for any of its losses or expenses.  In November 2012, Western filed a complaint against La Cumbre for breach of the Indemnity Agreement.  Even though it was undisputed that not one of the bonds that Western listed in its complaint had any relation to La Cumbre’s business, the trial court granted Western’s motion for summary judgment, concluding that La Cumbre was bound by Melchiori’s signature on the Indemnity Agreement.

On appeal, La Cumbre contended that it was not bound by the Indemnity Agreement because its actual manager, MIC, did not sign the agreement on its behalf.  Western did not do any due diligence to determine whether or not Melchiori was authorized by La Cumbre to sign the Indemnity Agreement.  Moreover, no affirmative vote or written consent of a majority interest of La Cumbre’s members was obtained before the Indemnity Agreement was signed, and no manager was ever authorized to sign the Indemnity Agreement. 

Both parties agreed that the case was governed by California’s predecessor LLC statutory scheme, the Beverly-Killea Limited Liability Company Act (“LLC Act”), a key section of which provided that “any . . . contract . . . or other instrument in writing . . . executed or entered into between any limited liability company and any other person, when signed by at least two managers (or [as in this case] by one manager in the case of a limited liability company whose articles of organization state that it is managed by only one manager), is not invalidated as to the limited liability company by any lack of authority of the signing managers or manger in the absence of actual knowledge on the part of the other person that the signing managers or manager had no authority to execute the same.”

Here, La Cumbre did not claim that Western had actual knowledge that Melchiori lacked authority to sign the Indemnity Agreement on La Cumbre’s behalf.  Thus, the Court of Appeal (the “Court”) observed that, pursuant to the LLC Act, La Cumbre would bound by the agreement if it is deemed to have been signed by La Cumbre’s manager, MIC.  In order to make this determination the Court looked to two cases for guidance.

In the first case, it was held that when a corporate officer’s actual authority to execute an agreement has been established or is not in doubt, regardless of whether such officer specifies the office he or she holds does not invalidate the agreement as to the corporation.  Similarly in the instant case, the Court reasoned that even if Melchiori had signed his name without indicating his official position, La Cumbre would have still been bound by his signature.  In the second case, the California Supreme Court made it clear the key issue in determining whether a corporation would be bound by a signature was whether the signer was the person he or she was statutorily required to be.  The Court looked to this precedent to find that even though the Indemnity Agreement’s signature page mistakenly showed that Melchiori was La Cumbre’s managing member, Melchiori’s actual role as the managing member of the manager of La Cumbre bound La Cumbre under the relevant statute.  The Court also rejected La Cumbre’s argument that Western prove liability based on common law theories instead of a statutory safe harbor and ultimately affirmed the trial court’s granting of Western’s motion for summary judgment.