Who’s On First? Keeping Track Of Basic Facts

Print
Print Friendly

Please don’t ask for the central theme of today’s blog posting. We’ve done so already and came up empty-headed. The closest we’ve come is that we’re writing about how a stitch in time saves nine.

The genesis of today’s subject is a very simple case that reached a California appellate court. It probably isn’t worth looking at, but for those compelled to do so, the February 2, 2017 decision can be seen by clicking: HERE.] The court was confronted with a situation where, on its face, the signatory to an indemnification agreement was not authorized to sign the agreement on behalf of the indemnitor (the one who would have to pay). There was no indication that the document was signed with the intention of fooling anyone. It appears that the person signing the agreement was confused or ignorant as to “who” should have done the signing. We’ll explain.

There were two limited liability companies. One was the sole manager of the second. We’ll call the first company, the parent, and the second, the child. The parent had a managing member. He was the kind of person who breathes, unlike, say, Citizens United. He could sign on behalf of the parent, but when signing for the child, the “proper” signatory would be “by parent, as sole member of child, by breathing person, as managing member of parent.” Get it? If not, then realize that the “person” who could sign for the child was the parent. But, because the parent was an entity who could not hold a pen, a “real” person needs to sign on behalf of the parent.

So, as readers already expect, the breathing person directly signed the indemnity agreement on behalf of the child. In doing so, he wrote that he was the child’s managing member even though he wasn’t. The parent company was.

What’s the big deal? First, as background, the economic interests in the parent were not the same as those in the child. They overlapped, but were not identical. Second, the child had no economic interest in the “deal” for which it was asked to indemnify. It was the parent company’s deal, not the child’s deal. So, on behalf of those members of the child who really had no economic interest in the “deal,” the child argued that the indemnity agreement was not binding on it.

The child lost. The details are in a 14 page court decision, but the basics are as follows. The party being indemnified did not know that the person signing as “managing member” was not, in fact, the managing member. The signature would have been the appropriate signature had his proper relationship to the child (through its parent) been shown next to his signature. And, most importantly, “When the name of [an entity] is attached to an agreement by [the proper people], it is unnecessary to attach to the names of the persons executing the agreement for the [entity] the official designation of the one who signs his name, but … such official designation may be otherwise established.”

So, the child was on the hook. We know that, in this case, the individual signatory would not be personally liable as an indemnitor, at least for the reason that he appended “managing member” to his signature. We’re not sure that there isn’t any court that would have found him personally liable had he not added that title. We’re also not sure if any court would have held both him and the child liable. So, readers, don’t jump to any conclusions. Bad facts make bad law.

All of that is interesting, but not earth-shattering. Given the size of the liability, it made sense for the (truly) uninvolved members of the child to try to avoid liability (not personal liability, but loss of their investment in the child). Nonetheless, “forgetting” who could sign for the child resulted in the waste of a great deal of money, both legal fees on the part of the child and, almost certainly with the child paying the indemnified party’s legal costs as well.

That case made us think of similar situations, for example, failing to capture important information at the outset of a deal and then suffering the consequences at a later date. Here are a couple of examples.

Many leases define the first date of the lease term by reference to an event such as delivery of the premises to the tenant. Absent some affirmative effort to record or otherwise document that date, when the time comes to exercise a lease extension “x” months before the end of the lease’s initial term, no one knows the “deadline” for doing so. A lot of time is then lost reconstructing the facts and, even then, “certainty” is elusive.

Another example is where ownership transfers are not recorded (usually in “informal” record keeping entities such as limited liability companies) and the true owners aren’t really shown on documents. This often happens when a member of the older generation uses one or more estate planning devices to transfer ownership interests, but continues to run the company. In some cases, tax records may not match the actual ownership structure. [That isn’t always wrong because the owner for tax purposes may not be the “legal” owner of the entity.] Then, the company is up for sale or a loan is on the table. So, what happens is that everything about the sale or loan is fully above-board, but closing is delayed when someone finds a discrepancy in the company’s records or in a corollary document. The legal bill goes up (unnecessarily) and closing is delayed while credit searches and other due diligence is performed, let alone when there is a need to reach out to children or other needed parties who are on world cruises or climbing Mount Everest.

Most readers can add their own war stories about searching for non-existent records that should have existed and about formalities that have been overlooked, all resulting in delays, extra expense, and (sometimes) worse. So, we’ll just raise a single, parallel example in a single interrogatory – “Where did we put that tenant’s letter of credit?”

So, maybe one possible characterization of today’s blog posting is that if you don’t keep track of administrative details, the following old “saw” will rear its head: “You can pay me a little now or a lot later.”

If any reader suspects that she or he or her or his company may be guilty of indifferent record-keeping, there is never a time like the present to “fix” that. Be assured that you’ll thank yourself that you did so well in advance of when the last-minute crisis arises.

Print

Comments

  1. This article is short, sweet and brilliant! I cannot emphasize how often I stress this very message to clients. Thank you.

Leave a Reply