NCCUSL’s Struggle With ‘Apparent Authority’

Note: All articles on Utah’s New LLC Act are in the process of being updated to conform to the changes made before it was enacted in 2014. Please check back to see the revised articles.

Before 1990, to form a limited partnership in Utah, a ‘certificate of limited partnership’ had to be filed with the clerk of the county where the limited partnership had its place of business. That certificate required the name and address of each general partner to be included.

In 1990, the Utah legislature changed the law to centralize the place for filing all certificates of limited partnership–to change from county clerk offices to the office of the Secretary of State. The location for that filing function was later shifted to a state agency–the Division.

At that time and before the advent of the World Wide Web, for a person living in a remote area to check information on a Utah limited partnership, he/she had several choices. Either:

  • travel to the Division offices in Salt Lake City and personally examine the documents in the physical file for the limited partnership; or
  • hire someone in Salt Lake City to make that examination and report the results; or
  • send a request to the Division to copy the file and mail it to the requesting person.

Each of those choices took time and cost real money. There was no way back then to remotely check information or documents in the Division’s files.

The Internet age changed all of that. Today, anyone with Internet access can quickly query the database at the Division and see on the screen (and download) basic information on any Utah limited partnership, LLC or corporation and, by paying $1.00, see who are listed as control persons for such Utah entity and, by paying another $2.00 per document, see and download full images of all pages in each document for such entity in the Division’s file. Such payments may be by credit card or ‘on account’ over the Internet. Thus, easy and quick access to entity data and charter documents is now the name of the game in Utah.

Accordingly, a Utah LLC’s data and documents are now readily and easily available to anyone. Such data and documents will reveal:

  • whether the LLC is member-managed or manager-managed;
  • the identity and address of the LLC’s control persons (members or managers);
  • any limits on the authority of such control persons to bind the LLC; and
  • whether such authority may be delegated.

Bank Clerk at New Accounts Desk

Consider for a moment how the Existing LLC Act makes life simpler for a 19-year old bank clerk at the ‘new accounts’ desk: A new customer appears in the bank to set up a checking account for his newly-formed Utah LLC. The clerk asks for the name of the LLC and the customer produces a copy of the LLC’s filed Articles of Organization.

While at her computer keyboard, the clerk uses the Internet to query the entity database at the Utah Division of Corporations and keys in the name of the LLC. The initial ‘page’ on that LLC appears instantly on her computer screen. She <clicks> on ‘Details’ and her screen changes to give some basic data on that LLC. She then <clicks> on ‘View Management Team’ and, after paying $1.00 by credit card, a list instantly appears that shows the names and addresses of the LLC’s managers, since the LLC is manager-managed (if the LLC were member-managed, the list would instead show the names and addresses of the LLC’s members).

The clerk then asks the customer for his personal ID and compares the customer’s name and address on his personal ID with the name and address on the computer screen to confirm that his name is listed as a manager of the LLC.

To make sure there are no limits on the customer’s authority as the LLC’s manager, the clerk reviews the copy of the LLC’s filed Articles of Organization furnished by the customer. The clerk finds no such limits.

Thus, with only 1 data entry and and 2 <clicks>, the clerk confirmed what she needed to enable the account to be set up.

Or, if the customer did not furnish a copy of the Articles of Organization, the clerk could <back-click> one screen and <click> on ‘View Filed Documents.’ A new page would appear on her screen entitled “Scanned Images of Paper Filings for [LLC]” with a list of documents filed for the LLC. The clerk then <clicks> on ‘Application’ (the Division’s generic word for charter document), enters her email address, pays $2.00 by credit card and downloads a full-text image of the LLC’s Articles of Organization as filed. She quickly reviews that document to verify if there are any provisions for limiting the authority of the manager. She finds none.

That entire search and verification process takes about 2-3 minutes.

If the customer’s name and address on his personal ID matches the name and address of the LLC’s ‘manager’ in the database at the Division, the clerk then asks for the Tax ID number for the LLC, which the customer provides. The clerk this time queries the IRS database to see if the Tax ID number matches with the name of the LLC. If it does, the clerk then proceeds to fill out the new account application and sets up the account for the LLC.

That’s how simple it is under the rules established by the Existing LLC Act.

But how would this work under the New LLC Act? Not well.

First, the bank clerk could access the LLC’s Certificate of Organization in the same manner but would find no mention of manager or members since none was included in the filed Certificate (or needed to be included). Next, the clerk would ask for documentation that verifies that the customer is the LLC’s manager.

Suppose the customer has no such document. Or, the clerk asks to see a copy of the LLC’s Operating Agreement signed by all of the members but learns that no Operating Agreement has yet been prepared or signed.

The clerk then asks for a list of the names, addresses and Social Security numbers of the LLC’s members. The customer has no such list. The clerk asks for an ‘Incumbency Certificate’ signed by persons besides the customer. No such document is available.

What is the bank clerk to do now? How does the clerk obtain certainty as to who has authority to act for the LLC? There could be other variations on this scenario with the same inconclusive results. Thus, the absence of public disclosure of the identity of LLC managers or members, together with the introduction of oral and implied operating agreements, creates a “perfect storm” of uncertainty.

Thus, actual authority to bind the LLC can be easily verified. No need to guess who has authority or be left to rely only on apparent authority.

NCCUSL’s Prefatory Note to RULLCA

NCCUSL in its Prefatory Note to RULLCA, revealed its concerns over statutory apparent authority:

The Power of a Member or Manager to Bind the Limited Liability Company: In 1914, the original Uniform Partnership Act codified a particular type of apparent authority by position, providing that “[t]he act of every partner … for apparently carrying on in the usual way the business of the partnership binds the partnership…” This concept of “statutory apparent authority” applies by linkage in the 1916 Uniform Limited Partnership Act and the 1976/85 Revised Uniform Limited Partnership Act and appears in RUPA, ULLCA (1996), ULPA (2001), and almost every LLC statute in the United States.” [A concept that is so widely used seems to be already ‘uniform’. Why is a replacement concept needed?]

“The concept makes good sense for general and limited partnerships. A third party dealing with either type of partnership can know by the formal name of the entity and by a person’s status as general or limited partner [but how does a third party know if a person is a general or limited partner without checking the filed certificate of limited partnership?] whether the person has the power to bind the entity.”

“The concept does not make sense for modern LLC law, because: (i) an LLC’s status as member-managed or manager-managed is not apparent from the LLC’s name (creating traps for unwary third parties) [true – such status is not apparent from the LLC’s name but it doesn’t need to be; NCCUSL refuses to recognize that full images of LLC documents filed at the Division or at a Secretary of State office in other states are now instantly available 24/7 via any device with Internet access]; and (ii) although most LLC statutes provide templates for member-management and manager-management, variability of management structure is a key strength of the LLC as a form of business organization.”

“The new Act recognizes that “statutory apparent authority” is an attribute of partnership formality that does not belong in an LLC statute [this is based on a false assumption that LLC data and filed documents are not readily and easily available to the public]. Section 301(a) provides that “a member is not an agent of the limited liability company solely by reason of being a member.” Other law – most especially the law of agency – will handle power-to-bind questions. The moment is opportune for this reform. [The moment is more ripe to acknowledge the ubiquity of Internet access and availability of digital images of filed entity documents]. The newly-issued Restatement (Third) of Agency gives substantial attention to the power of an enterprise’s participants to bind the enterprise.”

“In addition, the new Act has ‘souped up’ RUPA’s statement of authority to permit an LLC to publicly file a statement of authority for a position (not merely a particular person). Statements of authority will enable LLCs to provide reliable documentation of authority to enter into transactions without having to disclose to third parties the entirety of the operating agreement. [But if the protocol works for one filed document, why not for all filed documents for all entities?] (The new Act also has eliminated prolix provisions that sought to restate agency law rules on notice and knowledge.)” [No – it added them. See §48-3-103]

Default Rules on Management Structure: The new Act retains the manager-managed and member-managed constructs as options for members to use in configuring their inter se relationship, and the operating agreement is the vehicle by which the members make and state their choice of management structure. Given the elimination of statutory apparent authority, it is unnecessary and could be confusing [to whom?] to require the articles of organization to state the members’ determination on this point.”

It seems RULLCA is a mixed bag. In some respects, its provisions seem to be a throw-back to 19th century concepts and, in other respects, its provisions try to embrace today’s electronic world. As to the former, it turns its back on the reality of easy remote access to filed LLC data and documents; yet as an example of the latter, it defines a ‘record’ as a document or other “. . . information inscribed on a tangible medium or that is stored in electronic or other medium and retrievable in perceivable form.” Thus, RULLCA plants one foot in the 19th century and the other in the 21st century.