CEO Binds Limited Liability Company to Loans – J. F. Brewing, Inc. v. PaulMark Land Acquisition

In business, when we deal with a company’s employee we assume that the employee is acting on behalf of his company. This assumption underlies the basis of most business agreements. However, in the commercial lawsuit of J.F. Brewing v. PaulMark Land Acquisition, the defendant company denied that it was responsible for honoring an agreement its former CEO made with the plaintiff. The Illinois Appellate Court disagreed, instead holding that a company is bound by the actions of its members. Joseph Ferrel and J.F. Brewing, Inc. v. PaulMark Land Acquisition Company, LLC, 2012 IL App. (1st) 102582-U.

The defendant, PaulMark Land Acquisition Company, LLC, was formed in 2004 in an effort to establish a brewpub. However, by 2007 the LLC had exhausted all of its working capital and then turned to its members to make loans to the company. It was at this time that the plaintiff, Joseph Ferrel, wanted to become a member of PaulMark. After talks with the company’s CEO, it was decided that Ferrel would loan the company $11,000. Ferrel then formed his own corporate entity, J.F. Brewing, Inc., in order to make the loan to PaulMark. His initial check was accepted by the the PaulMark’s CEO, as was a second loan of $3,000.

However, at the time of his loans, Ferrel was not yet a member of PaulMark. Before becoming a member, Ferrel had requested changes to the operating agreement. These changes were being negotiated at the time of both of Ferrel’s payments to PaulMark. However, when it became apparent to Ferrel that those changes would likely not be made, he notified the CEO that he was no longer interested in becoming a member of PaulMark. Ferrel issued a promissory note for both of his check and requested that they be repaid. However, before the CEO could sign the promissory notes he was fired; PaulMark never repaid the notes or acknowledged their existence. Consequently, Ferrel filed the current commercial litigation lawsuit against PaulMark.

In his business litigation complaint, Ferrel sought repayment of his loans; however, PaulMark argued that he was not entitled to repayment on the basis that its CEO lacked the authority to solicit and accept loans from Ferrel or J.F. Brewing. PaulMark argued that its operating agreement required the CEO to obtain approval and authorization from a majority of PaulMark’s lending members before entering into any loan agreements with new members. However, none of PaulMark’s members objected when its CEO accepted J.F. Brewing’s checks.

The trial court granted Ferrel’s motion for summary judgment regarding the loans, a decision which PaulMark appealed. In its review, the appellate court referred to the Illinois Limited Liability Company Act, which governs the members of an LLC. It states that:

[e]ach member is an agent of the limited liability company for the purpose of its business, and an act of a member . . in the ordinary course, the company’s business or business of the kind carried on by the company binds the company, unless the member had no authority to act for the company in the particular matter and the person with whom the member was dealing knew or had notice that the member lacked authority.” 805 ILCS 180/13-5(a)(1) (West 2008).

Given that neither party disputed that the CEO was acting on behalf of PaulMark when he accepted those loans, it then follows that he had the authority to bind the company to the agreements of those loans. The court held that PaulMark’s operating agreement did not override the state’s Act because even if the CEO might have lacked actual authority, it was clear that he did have apparent authority. Therefore, the appellate court affirmed the trial court’s ruling regarding the motion for summary judgment in favor of the plaintiff.

Kreisman Law Offices has been handling business litigation cases for Illinois companies for more than 36 years in and around Chicago, Cook County, and surrounding areas, including Round Lake Beach, Beach Park, Highwood, Fox River Grove, Mount Prospect, Carol Stream, Wheaton, Batavia, Chicago’s Logan Square, and South Elgin.

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