Contract of Sale Signed by One Member of Three-Party LLC: Apparent Authority Meets Actual Authority at E.N.Y Plaza

This was originally posted on the SGR Blog.

A contract for the sale of entity-owned real property may contain a representation that the signatory on behalf of the seller has the authority to bind the titleholder. But what happens if that authority is challenged after the agreement is signed? As a recent case illustrates, apparent authority may not suffice where actual authority does not exist.

On July 12, 2004, Samuel Fleischman, Avi Shriki, and Mordechai Danino executed an operating agreement when they formed E.N.Y Plaza, L.L.C., a limited liability company. Fleischman, Shriki, and Mordechai Danino each held a one-third interest in Plaza, the sole asset of which is a building located in Brooklyn.

Paragraph 12 of the operating agreement provided that all decisions respecting the management, operation, and control of Plaza “shall be made by the unanimous vote or consent of the [m]embers.” And Paragraph 13 expressly prohibited any member of Plaza from transferring or disposing of all or any part of his interest in the company “without the prior written consent of the other [m]embers in each instance.” In a written agreement dated January 5, 2012, the members consented to the transfer of Mordechai Danino’s interest in Plaza to Alad Danino, thus making Alad Danino a member along with Fleischman and Shriki.In April 2014, Fleischman negotiated a contract of sale on behalf of Plaza to sell the property to The Edge Realty Group, L.L.C. In November 2014, Edge assigned all of its rights under the contract of sale to Shefa Trading III, L.L.C.

Section 10.01(e) of the contract of sale required the written consent of the members as one of Plaza’s closing obligations “to the extent required by the . . . operating agreement.”

In March 2015, Shefa sued Plaza, alleging failure to perform its contractual obligations. After completion of discovery, Plaza moved for summary judgment dismissing the complaint and to discharge the notice of pendency that had been filed by Shefa against the property. And argued that the contract of sale could not be enforced because Fleischman did not have either actual or apparent authority to unilaterally enter into the contract on Plaza’s behalf. Supreme Court granted the motion for summary judgment, dismissed the complaint, and discharged and cancelled the notice of pendency. Shefa appealed…

The Court found that Plaza established its prima facie entitlement to judgment as a matter of law, dismissing the complaint by demonstrating that Danino, Shriki, and Fleischman were the three members of Plaza; the operating agreement required unanimous consent of the members to transfer or dispose of any member’s interest; Fleischman had no authority to unilaterally enter into the contract of sale on Plaza’s behalf, and the contract of sale expressly required proof of compliance with the operating agreement as a condition of closing. The contract of sale violated the express provisions of the operating agreement and thus failed to satisfy a condition of closing.

Even in the absence of any provision in the operating agreement requiring the unanimous prior consent of all the members, the contract of sale violated Limited Liability Company Law § 402 requiring the vote of a majority of the members to approve the sale of “all or substantially all of the assets of the limited liability company.”

Shefa contended that Fleischman possessed apparent authority to enter into the contract of sale on Plaza’s behalf. But the Court found that contention to be without merit. Essential to the creation of apparent authority are words or conduct of the principal, communicated to a third party, that gave rise to the appearance and belief that the agent possessed the authority to enter into a transaction. The agent cannot by his own acts imbue himself with apparent authority. Here, the evidence demonstrated, at best, that Shefa relied upon conversations with Fleischman and Plaza’s attorney and communicated with the other members but failed to make reasonable inquiries into Fleischman’s actual authority.

Shefa failed to raise a triable issue of fact.

Plaza was entitled to summary judgment dismissing the complaint. And Supreme Court properly discharged and cancelled the notice of pendency filed against the property.

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