In Pasquarella v. 1525 William St., LLC, 120 A.D.3d 982 (N.Y. App. Div. Aug. 8, 2014), the New York Appellate Division upheld a trial court decision holding that the manager of an LLC has sufficient apparent authority to bind the LLC to contracts, regardless of whether his actions are, in fact, actually authorized. LLC Law Monitor has detailed analysis of the decision:
Apparent authority exists when (a) a third party reasonably believes, based on the principal’s actions, that the supposed agent has authority to act on the principal’s behalf, (b) the third party relies on the appearance of authority, and (c) the third party will suffer loss if an agency relationship is not found. E.g., Zions Gate R.V. Resort, LLC v. Oliphant, 326 P.3d 118, 122 (Utah Ct. App. 2014).
Appellate Division. The court emphasized that apparent authority can only be created by words or deeds of the principal. “The agent cannot by his own acts imbue himself with apparent authority.” Pasquarella, 120 A.D.3d at 983 (quoting Hallock v. State, 474 N.E.2d 1178, 1181 (N.Y. 1984)).
Examining the history of the parties’ interactions, the court concluded that the plaintiffs reasonably relied on sufficient actions of the LLC and its authorized agents to establish Sultan’s apparent authority:
the prior course of dealing with Sultan in his capacity as President of the LLC,
the fact that the LLC’s authorized attorney acted in a manner consistent with Sultan’s authority, and
the LLC’s acceptance of the plaintiffs’ deposit.
Id. at 984.
The court found an alternative basis to support Sultan’s statutory apparent authority, under the New York Limited Liability Company Law:
Unless the articles of organization of a limited liability company provide that management shall be vested in a manager or managers, every member is an agent of the limited liability company for the purpose of its business, and the act of every member, including the execution in the name of the limited liability company of any instrument, for apparently carrying on in the usual way the business of the limited liability company, binds the limited liability company, unless (i) the member so acting has in fact no authority to act for the limited liability company in the particular matter and (ii) the person with whom he or she is dealing has knowledge of the fact that the member has no such authority.
N.Y. Ltd. Liab. Co. Law § 412(a) (emphasis added). Section 412(b) has a similar provision governing manager-managed LLCs, so the court found that under Section 412, Sultan had apparent authority whether he was acting as a member or as a manager.
The LLC failed to offer any evidence that plaintiffs had any knowledge of the limitation on Sultan’s authority resulting from the transfer of his member interest, so the court found that there was no issue of triable fact whether Sultan lacked apparent authority to enter into the sale contract, and affirmed the trial court’s ruling.
This last point is key. Apparent authority (which is discussed in Chapter 20 of Business Law Basics) can be extinguished if the relying party is advised of a limitation or exception to that authority. An agent who exceeds his or her authority in agreeing to a contract with a third party may be answerable to his principal for damages resulting from such an agreement, but that does not affect the contractual rights of the third party. It is critical for businesses involved in contract negotiations to understand the possible apparent authority held by their employees, officers or other agents, and to act with appropriate forthrightness (where practical) to expressly identify the scope of authority.