Taghipour v. Perez

Brief Fact Summary.

Members of a limited liability company (LLC), and the LLC (collectively, Taghipour) (Plaintiff) argued that Mount Olympus Financial, L.C. (Mt. Olympus) (Defendant) negligently dispersed funds to the LLC’s managing partner, Jerez (Defendant), and that its loan agreement with the LLC, and its foreclosure, were invalid because the LLC’s operating agreement provided that no loans could be contracted on behalf of the LLC unless authorized by resolution of the members; Mt. Olympus (Defendant) claimed that the state’s LLC Act, which provided that loan and mortgage documents executed by an LLC’s manager were binding on the LLC, took precedence over the operating agreement.

Synopsis of Rule of Law.

When there is conflict in the operation of two provisions of an LLC Act, the provision more specific in application rules over the provision that is more general. 

Facts.

Jerez (Defendant) was the managing member of an LLC.  According to the LLC’s operating agreement, no loans could be contracted on behalf of the LLC unless the members authorized by resolution.  Without the members’ knowledge, Jerez (Defendant) entered into a loan agreement on behalf of the LLC with Mount Olympus Financial, L.C. (Mt. Olympus) (Defendant) in which Mt. Olympus (Defendant) loaned $25,000 to the LLC, the loan being secured by a deed of trust and trust note executed by Jerez (Defendant) permitting the trustee to sell LLC real property if default should occur.  Mt. Olympus (Defendant) dispensed the funds net of fees to Jerez (Defendant), who misappropriated and absconded with the funds.  Jerez (Defendant) never remitted payment on the loan, and because the other members did not know of the loan, the LLC eventually defaulted and Mt. Olympus (Defendant) foreclosed on the loan.  Other than Jerez (Defendant), the LLC members were never notified of the default or foreclosure proceedings or sale.  Before making the loan, Mt. Olympus (Defendant) had not investigated Jerez’s (Defendant) authority to enter the loan agreement, other than to establish that he was an LLC manager.  The LLC members and the LLC (collectively “Taghipourâ€) (Plaintiff) brought suit, claiming, inter alia, that Mt. Olympus (Defendant) had negligently dispersed the funds to Jerez (Defendant) because it had failed to conduct due diligence as to whether Jerez (Defendant) had authority to enter into the loan agreement on behalf of the LLC.  They also sought a declaratory judgment that the loan agreement with the LLC, and its foreclosure, were invalid, and sought partition of the property interests at issue.  Mt. Olympus (Defendant) moved to dismiss, asserting that under the state’s LLC Act, §48-2b-127(2), the loan agreement documents were valid and binding on the LLC because they were executed by an LLC manager.  That section provides that mortgages on LLC property are valid and binding on an LLC if executed by one or more LLC managers.  The trial court granted the motion to dismiss.  Taghipour (Defendant) appealed, arguing that the trial court’s interpretation of §48-2b-127(2) was incorrect because the court failed to read it in conjunction with §48-2b-125(2)(b), which provides that a manager’s authority to bind an LLC can be limited in its operating agreement.  The state’s intermediate appellate court rejected this argument and affirmed.  The state’s highest court granted review.

Issue.

When there is conflict in the operation of two provisions of an LLC Act, does the provision more specific in application rule over the provision that is more general?

Held.

(Russon, J.)  Yes.  When there is conflict in the operation of two provisions of an LLC Act, the provision more specific in application rules over the provision that is more general.  Resolution of the issue at bar comes down to which of the conflicting LLC Act provisions govern.  When two statutory provisions purport to cover the same subject, the legislature’s intent must be considered in determining which provision applies.  To determine that intent, rules of statutory construction provide that when two statutory provisions conflict in their operation, the provision more specific in application governs over the more general provision.  The appellate court determined the more specific provision is §48-2b-127(2).  That ruling was not erroneous because §48-2b-127(2) is the more specific statute as it applies only to documents explicitly enumerated in the statute, i.e., instruments and documents that provide for the acquisition, mortgage, or disposition of LLC property.  Therefore, this section is tailored precisely to address the documents and instruments Jerez (Defendant) executed, e.g., the trust deed and trust deed note.  Conversely, section 48-2b-125(2)(b) is more general as it addresses every situation in which a manager can bind the LLC.  Additionally, a statute is more specific according to its content, not according to how restrictive it is in application.  Finally, holding that §48-2b-127(2)(b) is the more specific provision would essentially render §48-2b-127(2) redundant and inoperative, because it would then simply restate §48-2b-127(2)(b), by which it would be included.  Because §48-2b-127(2) is the applicable statute, the loan documents, and their foreclosure, were valid and binding, and Mt. Olympus (Defendant) did all that was required by statute.  Affirmed.

Discussion.

The holding of the court produces a perverse result, but which is based on a flaw in the LLC Act itself.  As in this case, if there are restrictions in an LLC’s organic documents on its managers’ ability to unilaterally bind the company, those restrictions will be effective across the range of mundane and comparatively insignificant contracts supposedly entered into by the company, but the restrictions will be ineffective in the case of the company’s most important contracts.  Therefore, if the articles of organization or operating agreement provide that the managers will not enter into a contract without the approval of the company’s members, as memorialized in an appropriate resolution, the company can escape an unauthorized contract for something like janitorial services, coffee supplies, or photocopying, but is stuck with the sale of its property for less than fair value or a loan on unfavorable terms.  Such a result goes against the expectations of the business community.  In addition, financial institutions can protect themselves by demanding to see articles of incorporation, bylaws, and board resolutions—or the limited liability company equivalents—as part of the mortgage loan process.  A quick review of such documents in this case would have disclosed that Jerez (Defendant) lacked the authority to bind the company to the proposed loan agreement.  Section 48-2b-127(2) was then repealed, exactly because of the potential for causing the kind of inconsistent result reached by the court here.