Who Has Authority to Pledge LLC Assets as Collateral?

07.23.26

By Sophia Smith, Boardman Clark Law Clerk

Business deals are often built around company assets pledged as collateral to secure a loan or other obligation. In these transactions, the secured party must be confident that the individual pledging the company’s assets actually has legal authority to do so. When that authority is missing or unclear, both sides risk finding out too late that the pledge cannot be enforced, turning a seemingly safe deal into an expensive dispute. This risk was recently illustrated in Canon Advance, LLC v. DG Midwest, LLC. The decision turned in part on specific provisions of the restated Wisconsin limited liability company act (the “Act”) but also on general principles of agency that may apply to other types of entities.

The Case

In Canon, Canon Advance, LLC sought to recover $350,000 from DG Midwest, LLC after Lovin Khanna, a member of Midwest, pledged Midwest’s assets as collateral. Midwest argued that Khanna lacked apparent authority to encumber the company’s assets, and the court agreed.

The court first noted that Wis. Stat. § 183.0301 (2022) does not automatically grant agency authority to an LLC member. As a result, the court analyzed the issue under the doctrine of apparent authority, relying on Schaefer v. Dudarenke, 89 Wis. 2d 483, 278 N.W.2d 844 (1979). Under Schaefer, apparent authority requires proof of three elements: “(1) acts by the agent or principal justifying belief in the agency; (2) knowledge thereof by the party sought to be held; and (3) reliance thereon by the plaintiff, consistent with ordinary care and prudence.”

Regarding the first element, Khanna signed the financing agreement and represented that he was authorized to execute the agreement on Midwest’s behalf. As to the second element, Midwest submitted an affidavit from its managing member, Brandon Rick, stating: “I, Brandon Rick, as managing member of DG Midwest, never had any knowledge regarding the existence of the Financing Agreement, nor that Lovin Khanna may have represented that he had the authority to pledge DG Midwest’s assets as collateral therein.”

With respect to the third element, the court found no evidence that Canon relied on Khanna’s purported authority in a manner consistent with ordinary care and prudence. Specifically, Canon failed to obtain a company resolution authorizing the transaction or conduct other due diligence to verify Khanna’s authority.

Based on this evidence, the court concluded that Midwest did not rebut the first element of apparent authority. However, Midwest successfully established the second and third elements by showing that it had no knowledge of the financing agreement and that Canon failed to exercise ordinary care and prudence in relying on Khanna’s claimed authority.

One factor in the result of this case was which version of Wisconsin’s limited liability law, restated in 2022, applied. See our prior article on Wisconsin's LLC statutes for a brief discussion of the differences between the prior and restated Act.

The court applied Wis. Stat. § 183.0301 as restated, and the relevant language has remained unchanged since the decision was issued. Moreover, the court's analysis turned on the common law doctrine of apparent authority under Schaefer v. Dudarenke, which remains good law.

However, had the case been decided under the pre-2021 version of the Act, the result may have been different. Under the former Act, members of a member-managed LLC could be agents of the LLC. As a result, Khanna's authority may have been evaluated under the statutory agency provisions of Wis. Stat. § 183.0301 (2020) rather than under common law apparent authority principles. In that circumstance, Canon's claim may have been stronger because Khanna's status as a member could itself have supplied authority to bind the LLC.

Commentary

If a Wisconsin LLC wants to put the public on notice on who has authority to act on behalf of the LLC, the restated Act allows an LLC to file a statement of authority with the Wisconsin Department of Financial Institutions that can either grant or restrict authority with respect to a position or a specific person and describe specific authority.

However, such a filing only protects a lender or other third parties engaging with the LLC if they take the time to check the Department’s online records for a statement of authority. As noted above, Canon failed to obtain a resolution or conduct other due diligence to verify Khanna’s authority. The case result is a good reminder to those dealing with LLCs (or other business entities) to conduct adequate investigation to be comfortable that persons signing or acting on behalf of the other party have appropriate authorization to do so.

Conclusion

The decision in Canon is a reminder that collateral is only as good as the authority behind its pledge. When a business representative pledges company assets (or otherwise acts on behalf of the company), counterparties must verify that the signer is truly authorized to bind the entity, or risk ending up with an agreement they cannot enforce. Taking the time to confirm authority at the start of the deal can help keep a straightforward transaction from turning into litigation.

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