W. Sur. Co. v. LA Cumbre Office Partners, LLC

Filed 2/2/17
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SIX
WESTERN SURETY COMPANY, 2d Civil No. B269276
(Super. Ct. No. 1414261)
Plaintiff and Respondent, (Santa Barbara County)
v.
LA CUMBRE OFFICE
PARTNERS, LLC,
Defendant and Appellant.
A natural person is the managing member of a
limited liability company (LLC 1) that is the sole manager of
another limited liability company (LLC 2). The person signs an
agreement on behalf of LLC 2, but misstates his position as the
managing member of LLC 2 instead of the managing member of
LLC 1, LLC 2’s manager. LLC 1 does not have actual authority
to execute the agreement on behalf of LLC 2. In these
circumstances, does the person’s signature bind LLC 2? We
conclude that it does pursuant to former Corporations Code
section 17157, subdivision (d) (now section 17703.01, subdivision
(d)), provided that the other party to the agreement does not have
actual knowledge of the person’s lack of authority to execute the
agreement on behalf of LLC 2.
Western Surety Company (respondent) filed an action
against La Cumbre Office Partners, LLC, (appellant) for breach
of an indemnity agreement. Mark J. Melchiori (Melchiori) signed
the agreement on appellant’s behalf as its managing member.
But he was actually the managing member of appellant’s
manager, Melchiori Investment Companies, LLC (MIC). MIC did
not have actual authority to execute the indemnity agreement on
appellant’s behalf.
Appellant contends that the trial court erroneously
granted respondent’s motion for summary judgment requiring it
to pay respondent approximately $6.07 million pursuant to the
indemnity agreement. Appellant contends, as a matter of law,
that it is not bound by the agreement because its actual manager,
MIC, did not sign the agreement on its behalf. We affirm.
Factual and Procedural Background
Appellant was a limited liability company with nine
members. The members’ capital contributions totaled $3.65
million. Appellant’s articles of organization were filed in 2006.
They provide that the company will be managed by “one
manager.” MIC, the sole manager, was a member of appellant
with an ownership interest of 9.5891 percent. Melchiori was the
managing member of MIC and owned half of that company.
Melchiori was also part owner of Crespano del Grappa, LLC, a
member of appellant with an ownership interest of 17.8082
percent. Melchiori personally was not a member of appellant.
Appellant’s articles of organization provide that “the
purpose of the limited liability company is to engage in any
lawful act or activity for which a limited liability company may be
2
organized under the Beverly-Killea Limited Liability Act.” But
appellant’s operating agreement provides that “the initial
purpose of the Company shall be to acquire, hold, operate and,
perhaps, redevelop” the real property at 200 N. La Cumbre Road
in the City of Santa Barbara (the property). The property
consists of a medical office building with surface parking. The
operating agreement states that appellant’s manager, MIC, “shall
have full, complete and exclusive authority, power, and discretion
to manage and control the business, property and affairs of the
Company, to make all decisions regarding those matters and to
perform any and all other acts or activities customary or incident
to the management of the Company’s business, property and
affairs.” But without the “vote or written consent of a Majority
Interest of the Members,” the manager shall not engage in “[a]ny
act which would make it impossible to carry on the ordinary
business of the Company.”
Melchiori was the president of Melchiori
Construction Company, Inc. (MCC). In 2008 he had been in the
construction business for 22 years. In February 2008 Melchiori
signed a “General Agreement of Indemnity” (Indemnity
Agreement) on his own behalf and on behalf of appellant, MCC,
and MIC. Seven other individuals or entities also signed. The
Indemnity Agreement required the signers, referred to as
“indemnitors,” to indemnify respondent against liability incurred
as a result of surety bonds to be issued by respondent on behalf of
any of the indemnitors. The agreement stated that the
indemnitors “do hereby affirm to have a substantial material or
beneficial interest” in the bonds.
On behalf of indemnitor MIC, Melchiori correctly
signed the Indemnity Agreement as MIC’s “Managing Member.”
3
On behalf of appellant, Melchiori wrongly signed, “La Cumbre
Office Partners, LLC [by] Mark J. Melchiori, Managing Member.”
MIC, not Melchiori, was appellant’s manager. Melchiori was not
a member of appellant, although MIC was a member.1
Daniel Z. Majam, Jr., was an underwriter manager
for respondent’s parent company, CNA Insurance. He prepared
the Indemnity Agreement. On the signature pages, he directed
his assistant to type, “La Cumbre Office Partners, LLC [by] Mark
J. Melchiori, Managing Member.” Majam testified that Melchiori
had said he was the managing member of appellant and could
“bind the company.” He “indicated he had controlling interests”
in appellant. Majam did not verify Melchiori’s representations
with the California Secretary of State because he “believe[d]
Mark Melchiori.” Respondent did not “do any due diligence to
determine whether or not Mr. Melchiori was authorized by
[appellant] to sign the indemnity agreement.”
Melchiori, on the other hand, testified that he had
never told anyone that he was appellant’s managing member. No
one connected to respondent had inquired about the identity of
appellant’s manager. When Melchiori signed the agreement, he
did not notice that he was signing on behalf of appellant as its
1 Melchiori should have signed as follows:
La Cumbre Office Partners, LLC
by Melchiori Investment Companies, LLC, Manager
by Mark J. Melchiori, Managing Member of Melchiori
Investment Companies, LLC
During appellate oral argument, appellant’s counsel conceded
that his client would have been “on the hook” if Melchiori had
signed the Indemnity Agreement in this manner.
4
managing member. He did not even “notice that [appellant] was
listed as an indemnitor.”
Melchiori further testified that he had no idea why
appellant was named as an indemnitor or who had put its name
on the Indemnity Agreement. He did not know how respondent
had learned that appellant “even existed.” But pursuant to
appellant’s statement of additional material facts and
respondent’s responses thereto, it is undisputed that Majam “first
learned of [appellant’s] existence in or around April 2007 when
he reviewed an April 2007 personal financial statement of Mark
Melchiori that identified [appellant] as an asset valued at $5.6
million.”
C. Norman Borgatello was a member of appellant
with a 52.0548 percent ownership interest. He declared: “The
only business [appellant] has ever engaged in has been the
ownership of an office building located at 200 N. La Cumbre
Road, Santa Barbara.” Six of appellant’s nine members “had no
ownership, economic, beneficial or other interest in [MCC].”
Appellant “has no business, economic or other connection to
[MCC].”2 “No affirmative vote or written consent of a majority
interest of [appellant’s] members was obtained before the
Indemnity Agreement . . . was signed. In fact the issue was never
raised.” “[N]o manager of [appellant] was ever authorized to sign
the Indemnity Agreement.” Borgatello did not know that
respondent “was claiming [appellant] signed the Indemnity
Agreement until [appellant] was served the complaint in this
matter.”
2However, Melchiori testified that appellant had hired
MCC to make “fixes and improvements that needed to be made
post purchase” of the property.
5
In 2009 and 2010, respondent issued bonds to
guarantee the performance of MCC’s contractual obligations in
several construction projects. MCC defaulted on the contracts,
and respondent paid claims guaranteed under the bonds.
Respondent alleged that “the net amount of [its] losses and
expenses” was $6,069,998.50. Appellant refused to reimburse
respondent for any of its losses or expenses.
In November 2012 respondent filed a complaint
against appellant for breach of the Indemnity Agreement. It is
undisputed that “[n]ot one of the bonds [respondent] lists in its
complaint had any relation to [appellant’s] business of operating
the [p]roperty.” It is also undisputed that appellant “did not
engage in any business requiring bonds.”
The trial court issued a five-page ruling granting
respondent’s motion for summary judgment. Based on two
appellate opinions, it concluded that appellant was bound by
Melchiori’s signature on the Indemnity Agreement. The opinions
are Greve v. Taft Realty Co. (1929) 101 Cal. App. 343 (Greve), and
Snukal v. Flightways Manufacturing, Inc. (2000) 23 Cal. 4th 754
(Snukal). 3
Controlling Legislative Act
Both parties agree that the instant case is governed
by the Beverly-Killea Limited Liability Company Act (Beverly-
Killea Act), former Corporations Code section 17000 et seq.
Effective January 1, 2014, the Beverly-Killea Act was repealed
and replaced by the California Revised Uniform Limited Liability
3 The standard of review on appeal from the granting of
summary judgment is well known and need not be repeated. (See
Aguilar v. Atlantic Richfield Co. (2001) 25 Cal. 4th 826, 843;
Martinez v. Combs (2010) 49 Cal. 4th 35, 68.)
6
Company Act (Revised Act), Corporations Code section 17701.01
et seq. (Stats. 2012, ch. 419, §§ 19-20; see Kennedy v. Kennedy
(2015) 235 Cal. App. 4th 1474, 1490-1491.)
Section 17713.03 of the Revised Act provides, “This
title does not affect an action commenced, proceeding brought, or
right accrued or accruing before this title takes effect.” The
complaint in the instant case was filed in November 2012, more
than one year before the Revised Act became effective. Thus, the
Beverly-Killea Act applies here. (Kennedy v. Kennedy, supra, 235
Cal.App.4th at p. 1491 [Revised Act does not apply to complaint
filed prior to January 1, 2014].)
Unless otherwise stated, all further statutory
references concerning limited liability companies are to former
Corporations Code sections of the Beverly-Killea Act.
Management of Limited Liability Companies
“‘A limited liability company is a hybrid business
entity formed under the Corporations Code and consisting of at
least two “members” [citation] who own membership interests
[citation]. The company has a legal existence separate from its
members. Its form provides members with limited liability to the
same extent enjoyed by corporate shareholders [citation] . . . .’
[Citation.]” (PacLink Communications International, Inc. v.
Superior Court (2001) 90 Cal. App. 4th 958, 963.)
The management of a limited liability company may
be vested in the company’s members. (§ 17150.) Where such
vesting occurs, “every member is an agent of the limited liability
company for the purpose of its business or affairs, and the act of
any 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
7
whom the member is dealing has actual knowledge of the fact
that the member has no such authority.” (§ 17157, subd. (a).)
On the other hand, “[t]he articles of organization
may provide [and do provide in appellant’s situation] that the
business and affairs of the limited liability company shall be
managed by or under the authority of one or more managers who
may, but need not, be members.” (§ 17151, subd. (a).) Where, as
here, the articles of organization so provide, “[n]o member, acting
solely in the capacity of a member, is an agent of the limited
liability company nor can any member bind, nor execute any
instrument on behalf of, the limited liability company.” (§ 17157,
subd. (b)(1).)
The key statute here is section 17157, subdivision (d)
(section 17157(d)). It provides: “[A]ny . . . 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 here] 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 manager 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.” Current
Corporations Code section 17703.01, subdivision (d) of the
Revised Act contains the identical language.
Discussion
In its opening brief, appellant correctly states the
rule of section 17157(d): “Third parties who enter into a written
agreement signed by the manager of an LLC [limited liability
company] enjoy a statutory ‘safe harbor’: the agreement is
8
binding on the LLC even if the manager had no authority to sign,
as long as the third party was without actual knowledge of the
manager’s lack of authority.” “The words of former § 17157(d)
are plain and clear: a written contract signed by an LLC’s
manager is valid even if the manager - without the knowledge of
the third party - was without authority.”
A similar rule applies to corporations. Corporations
Code section 313 (section 313) provides “that an instrument
entered into by a corporation is not invalidated by any lack of
authority on the part of the officers executing the instrument if
(1) it has been executed by the [statutorily] designated officers,
and (2) the other party does not have actual knowledge that the
signing officers lacked authority to execute the instrument.”
(Snukal, supra, 23 Cal.4th at p. 782.)4 In Snukal our Supreme
Court concluded that, if the statutory criteria are met, “section
313 precludes the invalidation of an instrument entered into by a
corporation, despite the presentation of evidence demonstrating
that the signing officers lacked authority to execute the
instrument on its behalf. Thus, the statute provides a conclusive,
4 When Snukal was decided, the text of section 313 was as
follows: “[A]ny . . . contract . . . or other instrument in writing . . .
executed or entered into between any corporation and any other
person, when signed by the chairman of the board, the president
or any vice president and the secretary, any assistant secretary,
the chief financial officer or any assistant treasurer of such
corporation, is not invalidated as to the corporation by any lack of
authority of the signing officers in the absence of actual
knowledge on the part of the other person that the signing
officers had no authority to execute the same.” Effective January
1, 2016, section 313 was amended to substitute “chairperson” for
“chairman.” (Stats. 2015, ch. 98, § 6.)
9
rather than a merely rebuttable, evidentiary presumption of
authority to enter into the agreement on the part of the
specified . . . officers.” (Ibid.) The court continued, “Because the
statute applies even when the other party should have, but does
not have, actual knowledge of the officers’ lack of authority, that
party is relieved of the burden of establishing justifiable reliance
upon the authority of the executing officers.” (Id., at p. 783.)
Appellant does not claim that respondent had actual
knowledge that Melchiori lacked authority to sign the Indemnity
Agreement on appellant’s behalf.5 Thus, pursuant to section
17157(d), appellant is bound by the agreement if it is deemed to
have been signed by appellant’s manager, MIC. Appellant argues
that, as a result of the mistaken designation of Melchiori’s
position as appellant’s managing member, MIC did not sign the
agreement on appellant’s behalf.6 We are guided by the two cases
relied upon by the trial court: Greve and Snukal.
In Greve the defendant was a corporation that had
entered into a commission agreement. Various officers of the
corporation signed the agreement “without any designation as to
their official characters [i.e., positions].” (Greve, supra, 101
Cal.App. at p. 349.) The corporation contended “that the affixing
of [its] name . . . to the commission agreement by the officers
without setting forth their official designation is insufficient to
5 During appellate oral argument, appellant’s counsel
stated that “actual knowledge of the lack of authority [is] a
defense that is not really at issue here.”
6MIC signed the Indemnity Agreement on its own behalf.
The signature page lists MIC as a separate indemnitor. Under
MIC’s name, Melchiori correctly signed as its “Managing
Member.”
10
constitute the agreement an obligation of the corporation.” (Ibid.)
The appellate court held to the contrary: “[W]hen the name of a
corporation is attached to an agreement by its proper officers, it
is unnecessary to attach to the names of the persons executing
the agreement for the corporation the official designation of the
one who signs his name, but . . . such official designation may be
otherwise established.” (Id., at p. 350; see also Snukal, supra, 23
Cal.4th at p. 780, fn. 8 [citing Greve as supporting authority,
Supreme Court noted, “At common law, when the corporate
officer’s actual authority to execute the agreement has been
established or is not in doubt, the circumstance that he or she
does not specify the office held does not invalidate the agreement
as to the corporation”].)
Pursuant to the reasoning of Greve, appellant would
have been bound by the Indemnity Agreement if Melchiori had
signed his name without indicating his official position -
managing member of appellant’s manager, MIC. It follows that
appellant is bound even though the agreement’s signature page
mistakenly showed that Melchiori was appellant’s managing
member. Appellant’s signature bound MIC and, therefore, also
bound appellant.
In Snukal a corporate official, Lyle, executed a lease
on behalf of the corporation, Flightways. Lyle was president,
chief financial officer, and secretary of Flightways. He signed the
lease only as president. To fall within the safe harbor of section
313, the statute required that the lease be signed by a person
holding at least one corporate office in each of two separate
categories of offices. (See fn. 4, ante.) The office of president is in
one category, while the offices of chief financial officer and
secretary are in another category. Thus, for Flightways to be
11
bound under section 313, both the president and chief financial
officer or secretary, were required to sign the lease.
Our Supreme Court rejected Flightways’s claim that
section 313 “applies only when two officers holding the offices
specified in the statute execute an instrument and name the
corporate offices held - whether the requisite offices are held by
the same person or by two persons.” (Snukal, supra, 23 Cal.4th
at p. 777.) The court held: “Corporations Code section 313 does
not contain any language directing that the signing officers be
separate individuals, or that the signing officers specify the office
or offices they hold. Accordingly, although Corporations Code
section 313 applies only where corporate officers in each of the
two designated series or categories execute the instrument, that
statute . . . is satisfied when one individual who in fact holds two
of the specified corporate offices executes the instrument.
[Citation.]” (Id., at p. 786, fn. omitted, italics added.) “In the
present case, therefore, because Lyle served both as Flightways’s
president and as its chief financial officer (and secretary), and
because plaintiff did not have actual knowledge of any lack of
authority on Lyle’s part, the lease agreement was not invalidated
by Lyle’s lack of authority to enter into such an agreement on
behalf of Flightways.” (Id., at p. 787, fn. omitted.)
In Snukal the lease correctly designated Lyle as the
corporation’s president. Here, on the other hand, the Indemnity
Agreement mistakenly designated Melchiori as appellant’s
managing member. But this is a distinction without a difference.
Snukal makes clear that, to bind the corporation under section
313, the signer’s offices need not be set forth in the instrument
signed. What matters is whether the signer is the person he is
statutorily required to be: in Snukal the president and chief
12
financial officer or secretary of the corporation; in the instant
case the managing member of appellant’s manager, MIC. Like
section 313, section 17157(d) “does not contain any language
directing that the signing [manager] . . . specify the [position he]
hold[s].” (Snukal, supra, 23 Cal.4th at p. 786.) Thus, pursuant to
the reasoning of Snukal, Melchiori’s signature bound appellant
under section 17157(d).
Appellant argues that Snukal “requires that
[respondent] prove liability based on common law theories
instead of a statutory safe harbor” pursuant to section 17157(d).
Snukal concluded, “If . . . an agreement is not entered into on
behalf of the corporation by the [statutorily] specified officers, the
third party still may seek its validation by invoking traditional
common law theories, thereby incurring an increased burden of
proof.” (Snukal, supra, 23 Cal.4th at p. 784.) Because the
Indemnity Agreement was entered into on behalf of appellant by
the statutorily specified person - the managing member of
appellant’s manager, MIC - respondent need not invoke
traditional common law theories. Like section 313, section
17157(d) “absolves [respondent] of having to prove, as [it] would
be required to at common law, that [Melchiori] had actual or
ostensible authority to bind [appellant] to the instrument at
issue . . . .” (Id., at p. 785.)
Appellant claims: “The statutory scheme . . . does
not . . . protect a third party when the person signing the contract
[Melchiori] is not actually the manager [MIC]” of the LLC. “The
statute does not provide a safe harbor to the third party if the
contract is signed by . . . the manager [Melchiori] of the LLC’s
manager [MIC].” Appellant’s claims are untenable because MIC
was a legal entity and therefore could sign the Indemnity
13
Agreement only through the signature of a natural person. The
natural person authorized to sign on MIC’s behalf was its
managing member, Melchiori. During appellate oral argument,
appellant’s counsel conceded that Melchiori was “the only living
person in the world” who could sign on MIC’s behalf.
We reject appellant’s argument that it is not bound
by the Indemnity Agreement because respondent failed to
exercise due diligence to assure that Melchiori was in fact
appellant’s managing member. Irrespective of whether
respondent exercised due diligence, Melchiori’s signature bound
appellant under section 17157(d).
Disposition
The judgment is affirmed. Respondent shall recover
its costs on appeal.
CERTIFIED FOR PUBLICATION.
YEGAN, J.
We concur:
GILBERT, P. J.
TANGEMAN, J.
14
Donna D. Geck, Judge
Superior Court County of Santa Barbara
______________________________
Law Offices of Herb Fox, Herb Fox; Reicker, Pfau,
Pyle & McRoy, Timothy J. Trager, for Defendant and Appellant.
Solan, Park & Robello, Kevin M. Solan; Rosenbaum
& Associates, Neil Rosenbaum, for Plaintiff and Respondent.