The Northern District of Illinois recently examined the nature of apparent agency liability in the context of a breach of guaranty dispute involving related limited liability companies (LLCs). The plaintiff in Hepp v. Ultra Green Energy Services, LLC, 2015 WL 1952685 (N.D.Ill. 2015) sued to enforce a written guaranty signed by the defendant company in connection with a $250K-plus promissory note signed by a company owned by the defendant’s managing member.
The court denied the plaintiff’s summary judgment motion. It found there were material and triable fact issues as to whether the person signing the guaranty had legal authority to do so.
The court first addressed whether the guaranty was supported by consideration. Consideration is “bargained-for exchange” where the promisor receives something of benefit (or the promisee suffers detriment) in exchange for the promise. A guaranty’s boiler-plate provision that says “For Value Received” creates a presumption (but one that can be rebutted) of valid consideration.
Where the guaranty is signed at the same time as the underlying note, the consideration for the note transfers to the guaranty. But where the guaranty is signed after the note, additional consideration (beyond the underlying loan) needs to flow to the guarantor. A payee’s agreement to forbear from suing can be sufficient consideration.
Here, the plaintiff agreed to extend the deadline for repayment of the note by thirty days. According to the court, this was sufficient consideration for the plaintiff to enforce the guaranty. **3-4.
Next, the court shifted to its agency analysis and considered whether the LLC manager who signed the guaranty had authority to bind the LLC. Answer – maybe not.
Apparent agency arises where (1) the principal or agent acts in a manner that would lead a reasonable person to believe the actor is an agent of the principal, (2) the principal knowingly acquiesces to the acts of the agent, and (3) the plaintiff reasonably relies on the acts of the purported agent.
When considering whether a plaintiff has shown apparent agency, the focus is on the acts of the principal (here, the LLC), and whether the principal took actions that could reasonably lead a third party to believe the agent is authorized to perform the act in question (here, signing the guaranty on the LLC’s behalf).
The scope of an apparent agent’s authority is determined by the authority that a reasonable person might believe the agent has based on the principal’s actions. Also, a third party dealing with an agent has an obligation to verify the fact and extent of an agent’s authority. **5-6.
The court found there material questions of disputed fact as to whether the plaintiff reasonably relied on the LLC manager’s representation that he had authority to sign the guaranty for the LLC. The court noted that this was an unusual transaction that was beyond the ordinary course of the LLC’s business (since it implicated a possible conflict of interest (the manager who signed the guaranty was an officer of the corporate borrower) and it resulted in a pledge of the LLC’s assets), and culminated in the LLC taking on another $125,000 in debt in exchange for a short repayment time extension. * 7.
The anomalous nature of the transaction coupled with the affidavit testimony of several LLC members who said they had no knowledge of the manager signing the guaranty, created too many unresolved facts to be decided on summary judgment.
Take-aways:
1/ A guaranty signed after the underlying note requires additional consideration running to the guarantor;
2/ Great care should go into drafting an Operating Agreement (OA). Here, because the OA specifically catalogued numerous actions that required unanimous written consent of all members, the LLC defendant had ammunition to avoid the plaintiff’s summary judgment motion.