• Are Your Loan Documents Executed by the Correct Party?
  • November 2, 2016 | Author: Alison W. Rind
  • Law Firm: Lerch, Early & Brewer, Chartered - Bethesda Office
  • Loan documents are only as good as the authority granted to the signatory to execute the document on behalf of your entity borrowers and guarantors. Yet, lenders will often rely on their customer’s verbal confirmation or informal written communication of authorized signatories.

    The best way to determine the appropriate signatory is to review the organizational documents of the borrower. For example, limited liability companies typically have operating agreements. The operating agreement determines who the members are, who may be managers or managing members, and who can authorize a loan transaction.

    If the party executing the documents on behalf of the entity has no authority to do so, a lender could be left with unenforceable loan documents.

    For corporations, investigation beyond the organizational documents may be necessary, as bylaws do not usually identify the officers and directors. However, organizational minutes (if a new entity) or annual meeting minutes (if an existing entity) will identify the directors (if any) and officers. A review of the bylaws then will disclose which officers are authorized to act.

    What do you do if you receive conflicting information from a borrower? For example, what if the borrower tells you one thing but the documents tell you another? A prudent lender must reconcile the differences and make sure the borrower corrects any documentation errors. For instance, if the operating agreement identifies certain members but the borrower gives you different members, ask for the amendment to the operating agreement and assignment agreement for the existing members. Tax returns also are helpful to review to determine owners and ownership interests.

    Once you identify the appropriate parties, the loan documentation should include the authorizing resolution executed by the appropriate parties to the entity to confirm authority to execute and deliver the loan documents. Where appropriate, a lender may also require an opinion of counsel to confirm the due authority to execute and deliver the loan documents.

    When in doubt, consult the lender’s counsel (either in house or outside counsel) and get it right at the outset.