Judge: Mark H. Epstein, Case: 23SMCV04596, Date: 2024-08-01 Tentative Ruling

Case Number: 23SMCV04596    Hearing Date: August 1, 2024    Dept: I

This is a motion to quash by 601 Fremont and it is DENIED.

Defendant is an LLC organized in Nevada and doing business there.  According to the evidence in the motion, defendant has never done any business in California and has no meaningful contacts here.  While plaintiff seems to assert that the court must go by the allegations in the complaint (and the court might be misreading plaintiff’s argument), that is not the case.  This is a speaking motion and evidence is appropriate.  That said, plaintiff has no real evidence of anything like minimum contacts.

But the whole minimum contacts issue is not really the question here.  The contract at issue contains a consent to jurisdiction clause.  Of course, a defendant with no contacts with California whatsoever can still consent to jurisdiction here, and such a consent will be binding.  (Muckle v. Superior Court (2002) 102 Cal.App.4th 218.)  That is the potential situation here given the contract.  There is nothing about the consent to jurisdiction clause that would make it ineffective.  Normally, that would end the inquiry.

But defendant makes a different argument.  It states that RMD, which was its manager, lacked the authority to enter into the contract in the first place.  More specifically, defendant’s operating agreement says that a majority of the membership is required to consent before the entity can incur any indebtedness of more than $25,000 (with an exception allegedly not relevant here).  Defendant, which has since removed RMD as the manager, contends that this is such a debt and that a majority of the membership never authorized it.  As such, defendant asserts, the contract is invalid ab initio, and as it falls, so does the consent to jurisdiction.

The problem is that the case is not about the operating agreement alone; it is about ostensible agency.  An agent has the authority to bind the principal—at least within the scope of the agent’s authority.  Defendant agrees with that rule of law, but claims that RMD did not have the authority to sign this contract on defendant’s behalf.  But authority comes in two flavors: actual and ostensible.  (J.L. v. Children’s Institute, Inc. (2009) 177 Cal.App.4th 388.)  The court will assume for purposes of this motion that there was no actual authority.  But there still seems to be ostensible authority.

Ostensible authority is authority that the agent appears to have even if the agent does not actually have it.  Where a third party relies on the agent’s apparent authority, the principal will be bound thereby.  But (as is usually the case in the law) there is an exception.  A rogue agent cannot simply assert authority and bind the principal.  The principal must have done something to cloak the agent with apparent authority for the doctrine to apply.  However, if the principal has done so and a third party relies on that apparent authority (reasonably), then the ostensible agent can bind the principal notwithstanding the lack of actual authority.  (Van Den Eikhof v. Hocker (1978) 87 Cal.App.3d 900.)  That seems to be the case here.

No one disputes that RMD was in fact defendant’s manager at the time the contract was entered into.  In the LLC world, the manager can be more powerful than the CEO of a regular corporation.  The manager generally has full apparent power to do almost anything.  Maybe not dissolving the LLC or selling it, but there would be no reason for one contracting with the entity through the manager to believe that the manager is otherwise limited, and there is no assertion that plaintiff here was aware of the limitation in the Operating Agreement.  Further, section 7.5 of the operating agreement expressly states that third parties are entitled to rely upon the managing member’s apparent authority to bind the company and that such third parties need not inquire as to the manager’s authority.  By providing the manager with that cloak of authority, the defendant did take action by which a third party could and reasonably would rely on the manager’s authority to enter into a contract such as the guaranty here.  In fact, given section 7.5, even if plaintiff had been aware that a majority of members had to approve the loan, there is no reason why plaintiff could not rely on the manager’s authority in signing the loan to assume that such approval had been obtained.

The court considered whether to continue the motion to allow jurisdictional discovery, but decided against it.  The way this works, once jurisdiction is challenged, it is up to the plaintiff to prove (by a preponderance of the evidence) that there is jurisdiction.  That was done by virtue of the consent to jurisdiction clause in the contract.  (There is a bit of an issue as to that.  The actual guaranty is discussed in the papers, but is not actually before the court.  Given that everyone seems to agree that the contract contains the consent clause, the court will assume so as well.  However, if the defense believes that the clause is not so clear, the court will continue the matter to allow the guaranty to be brought before the court.  After all, plaintiff cannot rely on its allegations to defeat a motion to quash based on lack of personal jurisdiction.  That said, it seems a waste of time if the clause is clear and no one disputes it.)  Once plaintiff has made out a prima facie case, it is up to the defense to present evidence as to why that ought not carry the day.   Where the defense has called jurisdiction into doubt, it is often the better move to allow plaintiff to take jurisdictional discovery to be able to overcome defendant’s showing, after which the court can weigh the evidence and reach a conclusion.  But here, defendant failed of its showing.  Defendant never even addressed the ostensible agency issue—which is really the only issue in the motion.  Further, the very document upon which defendant relies—the Operating Agreement—expressly states that a third party (such as plaintiff here) can rely on the manager’s apparent authority to enter into contracts without inquiring further.  Given that, even crediting all of the defendant’s evidence in full, the motion fails.  There is no point in jurisdictional discovery.

The motion is therefore DENIED.  The court will, however, STAY the action for 15 days.  If, during that time, defendant seeks writ review, the stay will be extended until the writ is determined.  If no such review is sought, the stay will expire of its own terms.  Of course, defendant has the time allowed by law to seek writ review—nothing in the foregoing is designed to limit that right.  It is only that the stay will not remain in effect after 15 days absent an order from the Court of Appeal.

The court will set a CMC for approximately 45 days hence.  If the matter is on writ review at that time, the CMC will be continued until the writ is resolved.