InreCornerstone Therapeutics Inc.Stockholder Litigation
26 P.3d 885 (2002)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
When a specific statute governing the validity of documents that mortgage or dispose of a limited liability company's (LLC) property conflicts with a general statute concerning a manager's authority, the more specific statute controls. Third parties can rely on a manager's execution of such documents, and the documents will be binding on the LLC, regardless of contrary limitations in the LLC's internal operating agreement.
Facts:
- Namvar Taghipour, Danesh Rahemi, and Edgar Jerez formed a limited liability company (LLC) to purchase and develop real estate.
- The LLC's articles of organization designated Jerez as the manager.
- The LLC's operating agreement explicitly prohibited any loans from being contracted on behalf of the LLC unless authorized by a resolution of the members.
- The LLC acquired a parcel of real estate.
- Jerez, without the knowledge or authorization of the other members, entered into a $25,000 loan agreement on behalf of the LLC with Mount Olympus Financial, L.C. ('Mt. Olympus').
- As security for the loan, Jerez executed a trust deed, conveying the LLC's real property to a trustee.
- Mt. Olympus, after verifying only that Jerez was the LLC's manager, disbursed the loan funds to Jerez, who then misappropriated the money and absconded.
- The loan went into default, and Mt. Olympus initiated foreclosure proceedings on the LLC's property.
Procedural Posture:
- Namvar Taghipour, Danesh Rahemi, and the LLC (collectively, 'Taghipour') sued Mt. Olympus and Jerez in a Utah state trial court.
- Mt. Olympus filed a motion to dismiss Taghipour's claims, arguing the loan documents were valid under Utah statute.
- The trial court granted Mt. Olympus's motion and dismissed the claims against it.
- Taghipour, as appellant, appealed the dismissal to the Utah Court of Appeals, with Mt. Olympus as appellee.
- The Utah Court of Appeals affirmed the trial court's decision.
- Taghipour petitioned the Supreme Court of Utah for a writ of certiorari, which the court granted.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a specific Utah statute, which provides that instruments mortgaging LLC property are valid and binding if executed by a manager, control over a more general statute that allows an operating agreement to limit a manager's authority to bind the LLC?
Opinions:
Majority - Russon, Justice
Yes, the specific statute providing that instruments mortgaging LLC property are valid and binding if executed by a manager controls over the general statute. When two statutory provisions conflict, the rule of statutory construction dictates that the more specific provision governs the more general one. Utah Code section 48-2b-127(2) is more specific because it applies only to a narrow category of documents—those for the 'acquisition, mortgage, or disposition of property.' In contrast, section 48-2b-125(2)(b) is a general provision covering any situation in which a manager has authority to bind the LLC. Because the trust deed executed by Jerez falls squarely within the specific statute's language, it is valid and binding on the LLC simply by virtue of his signature as manager. To allow the general provision to override the specific one would render section 48-2b-127(2) 'superfluous and inoperative,' which contravenes legislative intent. Therefore, Mt. Olympus was entitled to rely on the manager's execution of the loan documents without further inquiry into the operating agreement.
Analysis:
This decision solidifies a 'safe harbor' for third parties, particularly lenders, when engaging in real estate transactions with LLCs. It clarifies that external parties can rely on the statutory or apparent authority of an LLC manager for specified transactions, even if that manager is acting in violation of internal company agreements. The ruling shifts the risk of a 'faithless manager' from the third party to the LLC members who appointed the manager, thereby promoting transactional efficiency and certainty in commercial real estate finance. Future litigation in this area will likely focus on what constitutes an 'acquisition, mortgage, or disposition of property' to determine whether this specific statutory protection applies.
Unlock the full brief for InreCornerstone Therapeutics Inc.Stockholder Litigation