Virginia Court of Appeals Finds ‘Knowledge’ to Mean ‘Constructive Knowledge’ Under the Virginia Limited Liability Act

The Court of Appeals held that “knowledge,” as used in subsection (C), means “constructive knowledge” as understood under Virginia’s common law of apparent authority — not “actual knowledge” as the appellant urged. This holding imposes a duty of reasonable inquiry on third parties transacting with LLC managers involving real property.

The case is Loan Funder LLC, Series 715 v. Farm Life, LLC, 86 Va. App. 552, (Jan. 20, 2026).

Background

The case arose when Zhongwei Lu, one of seven equal members and a manager of Farm Life, LLC, unilaterally obtained a $1.567 million loan and encumbered Farm Life’s sole substantial asset — nearly 100 acres in Hamilton, Virginia — with a deed of trust from RCN Capital, without the consent of Farm Life’s other members. Lu used the loan proceeds for an unrelated personal venture in Florida. To satisfy RCN’s requirements, as explained in the Court of Appeals’ decision, Lu submitted fabricated operating agreement amendments, the first of which RCN’s own counsel flagged as deficient, containing mathematical errors and omitting signatures from all members other than Lu.

One day after being notified of the deficiency, Lu submitted amended, fabricated documents purporting to grant him authority to bind Farm Life. Lu obtained the loan from RCN, for which Loan Funder soon took on the role of lender and conducted its own review and underwriting. Just three months after the first payment was due, Lu notified Farm Life of the loan he had obtained without Farm Life’s consent, and that Farm Life was now in default. 

Farm Life brought suit to quiet title in the Circuit Court of Loudoun County, Virginia, and the trial court ruled that title to the property would be quieted and voided the deed of trust pursuant to subsection (B) of the LLC Act. The Court of Appeals determined that the trial court erred by relying on subsection (B) rather than (C), which governs real property transfers, of the LLC Act to the facts but also found that the error was harmless to the outcome because Loan Funder had constructive knowledge of Lu’s lack of authority to unilaterally encumber Farm Life’s property. As such, the Court of Appeals concluded Farm Life was not bound by the relevant deed of trust and affirmed the judgement of the trial court.

The Decision

Virginia Code § 13.1-1021.1(C) provides that any manager of a manager-managed LLC may sign instruments transferring the LLC’s interest in real property, and that such instruments “shall be conclusive in favor of a person who gives value without knowledge of the lack of authority of the person signing and delivering the instrument.” (Emphasis added). In addressing the question of whether the “knowledge” requirement was “actual” or “constructive,” the Court of Appeals determined the term “knowledge” provision was ambiguous, as courts in Virginia and elsewhere have interpreted it to mean actual knowledge in some contexts and constructive knowledge in others. Loan Funder argued for an “actual knowledge” standard, contending it lacked actual awareness of Lu’s lack of authority. 

The court applied the longstanding Virginia principle that statutes will not be interpreted to overrule the common law unless the legislature’s intent to do so is “plainly manifested.” The court identified the common law doctrine of apparent authority as the relevant rule, under which the inquiry focuses on whether a reasonably prudent person would have known of limitations on an agent’s authority — a constructive knowledge standard. The court determined that reading “knowledge” to mean only actual knowledge would significantly depart from the common law by allowing third parties to rely on a manager’s representations without exercising any reasonable diligence. The court also reasoned that an “actual knowledge” standard would produce absurd results by “excus[ing] third parties even when they fail to exercise minimum care, effectively holding LLCs strictly liable (in a civil sense) for the actions of a manager who conducts unpermitted real estate transfers in secret.” 

The Court of Appeals ultimately held that Loan Funder had constructive knowledge of Lu’s lack of authority, emphasizing that (1) Lu was evidently operating outside the ordinary scope of Farm Life’s business, (2) Loan Funder was a sophisticated entity that should have recognized the disconnect between the transaction and Farm Life’s activities, (3) multiple red flags — including the deficient initial amendment — should have prompted further inquiry, and (4) Farm Life itself never represented Lu as having majority authority. 

Key Takeaway

This decision is instructive to lenders, purchasers, and other parties transacting with LLC managers involving Virginia real property deals, as it makes clear that under Virginia Code § 13.1-1021.1(C), parties should conduct reasonable diligence into an LLC manager’s authority. Reliance on the manager’s self-reported authority alone is insufficient.