Water, Waste & Land v. Lanham - 955 P.2d 997 (Colo. 1998)

Rule:

This somewhat counterintuitive proposition, that an agent is liable even when the third party knows that the agent is acting on behalf of an unidentified principal--has been recognized as sound by the courts of this state, and it is a well-established rule under the common law. An agent who negotiates contract is not liable when he has given notice to the third party that there is a principal for whom he acts and also notice of the name or identity of the principal. Thus, an agent is liable on contracts negotiated on behalf of a partially disclosed principal; that is, a principal whose existence, but not identity, is known to the other party. 

Facts:

Water, Waste, & Land, Inc. is a land development and engineering company doing business under the name "Westec." At the time of the events in this case, Donald Lanham and Larry Clark were managers and also members of Preferred Income Investors, L.L.C. (Company or P.I.I.). The Company is a limited liability company organized under the Colorado Limited Liability Company Act, 7-80-101 to -1101, 2 C.R.S. (1997) (the LLC Act). In March 1995, Clark contacted Westec about the possibility of hiring Westec to perform engineering work in connection with a development project which involved the construction of a fast-food restaurant known as Taco Cabana. In the course of preliminary discussions, Clark gave his business card to representatives of Westec. The business card included Lanham's address, which was also the address listed as the Company's principal office and place of business in its articles of organization filed with the secretary of state. While the Company's name was not on the business card, the letters "P.I.I." appeared above the address on the card. However, there was no indication as to what the acronym meant or that P.I.I. was a limited liability company. After further negotiations, an oral agreement was reached concerning Westec's involvement with the Company's restaurant project. Clark instructed Westec to send a written proposal of its work to Lanham and the proposal was sent in April 1995. Westec sent Lanham a form of contract, which Lanham was to execute and return to Westec. Although Westec never received a signed contract, in mid-August it did receive verbal authorization from Clark to begin work. Westec completed the engineering work and sent a bill for $ 9,183.40 to Lanham. No payments were made on the bill. Westec filed a claim in county court against Clark and Lanham individually as well as against the Company. At trial, the Company admitted liability for the amount claimed by Westec. The county court entered judgment in favor of Westec. The county court found that: (1) Clark had contacted Westec to do engineering work for Lanham; (2) it was "unknown" to Westec that Lanham had organized the Company as a limited liability company; and (3) the letters "P.I.I." on Clark's business card were insufficient to place Westec on notice that the Company was a limited liability company. Based on its findings, the county court ruled that: (1) Clark was an agent of both Lanham and the Company with "authority to obligate . . . Lanham and the Company"; (2) a valid and binding contract existed for the work; (3) Westec "did not have knowledge of any business entity" and only dealt with Clark and Lanham "on a personal basis"; and (4) Westec understood Clark to be Lanham's agent and therefore "Clark is not personally liable." Accordingly, the county court dismissed Clark from the suit, concluding he could not be held personally liable, and entered judgment in the amount of $ 9,183 against Lanham and the Company. Lanham appealed. The district court reversed, concluding that "the issue which the court must address is whether the County Court erred in holding Lanham, a member and primary manager of the company, personally liable for a debt of the company." In addressing that issue, the district court found that Westec was placed on notice that it was dealing with a limited liability company based on two factors: (1) the business card containing the letters "P.I.I."; and (2) the notice provision of section 7-80-208, of the LLC Act. Principally in reliance upon the LLC Act's notice provision, section 7-80-208, which provides that the filing of the articles of organization serve as constructive notice of a company's status as a limited liability company, the district court held that "the County Court erred in finding that Westec had no notice that it was dealing with an L.L.C." Contrary to the trial court's findings, the district court held that "evidence presented at trial was uncontradicted that Westec knew it was dealing with a business entity (P.I.I.) and 7-80-208 imputes notice that the entity was an 'L.L.C.' in addition to any common law presumption of a duty to inquire." In the district court's view, the notice provision, as well as Westec's failure to investigate or request a personal guarantee, relieved Lanham of personal liability for claims against the Company.

Issue:

Were the members or managers of an LLC excused from personal liability on a contract where the other party to the contract did not have notice that the members or managers were negotiating on behalf of a limited liability company at the time the contract was made?

Answer:

Yes.

Conclusion:

The court decided that the members or managers of an LLC were excused from personal liability on a contract where the other party to the contract did not have notice that the members or managers were negotiating on behalf of a limited liability company at the time the contract was made. The county court had found that the party dealing with the members or managers was unaware that they were acting as agents of a limited liability company when they negotiated the contract, and the evidence in the record supported the county court's findings, hence there was no legal basis to excuse the agents of the LLC from liability. The court held that the statutory notice provision applied only where a third party sought to impose liability on an LLC's members or managers simply due to their status as members or managers of the LLC. When a third party sued a manager or member of an LLC under an agency theory, the principles of agency law applied notwithstanding the Limited Liability Company Act's statutory notice rules. The district court erred in substituting its own factual determinations for the findings of the county court.