Posting for

Tuesday, September 29, 1998

by: Bert Rush

brush@firstam.com

LEGAL AUTHORITY/LIMITED LIABILITY COMPANIES/COMMERCIAL PROPERTIES

The DIRT e-mail listserv (operated by Prof. Pat Randolph of the university of Missouri at Kansas City) yesterday featured a spirited discussion of whether single member limited liability companies should have a written operating agreement.

A more esoteric question can hardly be imagined.

On one side were those who said that while state statutes governing LLC's might not require a written operating agreement, failure to have one might jeopardize one's ability to enjoy perceived tax advantages and/or jeopardize the operator's claim of limited liability status.

Others came close to mocking the idea of the single-member LLC having an operating agreement, saying "How can you have a meaningful agreement with yourself?"

But still others say they have seen--and apparently counseled--paperless single member LLC's. Attorney Scott Osborne with the 50-person Seattle law firm of Graham & Dunn wrote:

"I have had several lenders on very large loans ($100MM+) accept a one-page "operating certificate" from the sole LLC member that simply recites who can sign documents on behalf of the LLC, the operating purpose of the LLC and certifies that the LLC has a single member."

It occurs to me that if there are lenders out there willing to rely on such skimpy documentation, sooner or later our underwriters and agents will be asked to insure them.

This is bad practice, and far below First American's underwriting standards.

When dealing with LLC's (as well as such other legal entities as partnerships and limited partnerships) we will need to see reliable evidence of identity of investors (a/k/a members or shareholders). This usually means we need to inspect the written Operating Agreement, together with any amendments. If it's proposed that fewer than all members will be signing off on our pending transaction, we will need to be shown the applicable provisions within the Operating Agreement which authorize the party or parties who propose to act on behalf of the LLC--and we need to watch out for language elsewhere in the Operating Agreement which might limit or place conditions on signers' authority.

The single member LLC presents a unique underwriting challenge--all such cases should be referred to senior title underwriters.

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