As part of every loan, it is essential to know that the correct party is signing to ensure the obligations are binding on the borrower. When the borrower is an individual, this is a piece of cake, lenders simply have the individual sign. But most borrowers are not individuals – they are LLCs, corporations, trusts, or LLPs. Ensuring the correct signor for each of these entities requires the lender or their counsel to review certain documents for signature authority on behalf of the entity. The types of documents are different for each entity type, but we will discuss below what to look for when reviewing for your borrower.
Limited Liability Companies
Limited liability companies, or LLCs, are the most common borrower type and the simplest entity type when it comes to determining signature authority. In general, the signors for an LLC will be either the manager or the managing member, depending on the structure the LLC chooses. There may be multiple managers or managing members, or LLCs can be nested entities – when another entity is the manager or managing member of the borrower. Lenders should be particularly cautious if either of these situations arise, as they typically require additional review.
When working with an LLC, lenders should generally start with the Operating Agreement. Every borrowing LLC should provide theirs, even for those formed in states that do not require an Operating Agreement to be drafted. Lenders should review the original agreement, as well as any amendments or resolutions that may exist. The main focus is to determine the management structure as either manager-managed or member-managed, and who the manager or managing member is. An LLC cannot be managed in both ways, so it is vital that the Operating Agreement clearly identifies which structure the LLC will utilize. In the Operating Agreement, it is also important to determine whether these signors actually have authority to borrow money and to encumber or mortgage property on behalf of the LLC on their own, or whether the members of the LLC will need to provide consent for the transaction.
It is equally important to review the LLCs state filings, including its formation documents and Secretary of State status. The Articles of Organization will identify important basic information about the LLC, such as the exact legal name of the entity, down to the punctuation to be used. It can also include information on management structure and signors, however not every filing includes this information. The Articles may also have amendments that lenders should review in addition to the original filing. Lenders should also compare the filing information to the Operating Agreement to ensure that the information remains consistent across the board. In addition to the Articles, lenders should also complete a search of the secretary of state website to confirm that the LLC is active, and if possible, a certificate of good standing from its state of formation.
There are many issues that can arise with LLCs, despite their simplicity. In general, the available solutions are simple – drafting a resolution or amendment to the Operating Agreement or filing an amendment to the Articles with the state. Should an issue arise that leaves the identity, authority, or powers of the signors in question, or there are other issues with the LLC, especially those that require more than a quick fix, lenders should consult with their counsel to determine the next steps.
Corporations
Corporations often come with a mountain of documents and there will likely be several individuals, or other entities, involved with the management of the corporation. Like most entities, corporations vary by state, but the general rule is to have the president and secretary sign on behalf of the corporation as authorized signors. The president and secretary are considered officers of the corporation and they will generally derive their power from the directors of the corporation. The president will often be named as the “Chief Executive Officer” or “CEO,” but their official title, provided in the bylaws of the corporation, will virtually always be “President.”
Primarily, a lender should collect these documents from a borrowing corporation:
- Articles of Incorporation
- Bylaws
- Documentation showing the officers being elected by the directors (usually meeting minutes)
In addition to these primary documents, a search of the appropriate secretary of state’s website should be conducted to confirm the proper spelling of the corporation’s name and to confirm whether the corporation maintains an active status. The secretary of state’s website may also reveal all the owners of the corporation, which may be helpful when determining the authorized signor. It may not always be practical to do so, but obtaining a certificate of good standing from the appropriate secretary of state’s office is generally considered good practice.
In a corporation, the officers will generally derive their management powers from the directors and the directors will generally derive their management powers from the shareholders. Because of this hierarchy of power, lenders should be aware of who the shareholders, directors, and officers are and make sure there is documentation showing how each of those groups have delegated their power or how their power was received. If this proper documentation is missing, a resolution can be prepared, in a pinch, to delegate the power. This is typically the most complicated part of reviewing corporation documents, and it is recommended that an attorney with entity experience be consulted to determine the different management groups and make sure proper documentation is prepared.
Trusts
Trusts are another common entity type for borrowers. Trusts can be extremely complex, and terms of the trust vary from trust to trust. This is especially true when there are several amendments to the trust or a party to the trust has passed away. When seeking to determine signature authority, lenders should review the Trust Agreement, and any amendments to the agreement. In general, the trustee of a trust will have signature authority on behalf of the trust. If there are multiple trustees, you will need to determine whether the Trust Agreement allows for one trustee to execute loan documents alone, or whether the trust requires the majority of or all trustees to execute. Just as in any other entity, it is essential to confirm the trustee has the power to borrow money and encumber or mortgage trust property. Unlike LLCs, corporations, and LLPs, trusts do not have state filings that can be relied on, so lenders should review the Trust Agreement carefully to ensure that there is no ambiguity or doubt when identifying the proper signor.
There are also significant considerations when a party to a trust has passed away. The impact of the death of a party to the trust can range from simply allowing a successor trustee to then sign on behalf of the trust, to the trust breaking into sub-trusts, or sometimes the trust is required to distribute its property amongst its beneficiaries and the trust essentially no longer exists. It is best to consult with an attorney if a trust involves the death of a party to make certain the trust is still a viable borrowing entity, and the proper person is signing on its behalf.
Limited Liability Partnerships
Limited Liability Partnerships, or “LLP’s,” are generally managed by the partners themselves, so there may not be much documentation to review. Often, the only documents available to review for LLP’s are partnership agreements and secretary of state filings. Sometimes, LLP’s will only provide a formation filing, filed with the secretary of state, and a lender will have to rely on state laws to determine who the authorized signor is. Even if a borrower provides their formation filing, it is a good practice to check the secretary of state’s website to check active status or get a certificate of good standing from the secretary of state. Fortunately, virtually every state has default LLP management provisions that determine who the authorized signors of the LLP are without a partnership agreement.
Despite the lack of documentation, LLP’s can often be quite simple to decipher when it comes to signing authority. If relying on state laws, a lender can nearly always have all the partners sign and rest easy knowing they have the proper signors. If relying on a partnership agreement, the partnership agreement should provide a management section that states who the managing partner is. If no management section exists in the partnership agreement, the lender can usually fall back on state law and have all the partners sign the loan documents. Attorneys should always be consulted along the way, especially when relying on state law to determine authorized signors.
Conclusion
Although these entities differ in their documentation and structures, it is equally important to ensure that the correct persons are signing, no matter the entity type. Failing to confirm proper signature authority can have serious and severe consequences for the lender’s investment, including the loan becoming unenforceable against the borrower. Lender should always consult with counsel, particularly when the entities are complex, multi-layered, or the documents are convoluted.
The Transactional team at Geraci LLP is well-versed to answer all of your loan doc questions. Contact us today.
