It is critically important, for both lenders and borrowers, to
confirm that the borrower is actually authorized to enter into a
financing transaction, borrow money, and pledge assets as security
for those obligations (if the financing is secured). If a borrower
(entity) acts without express legal authority or beyond the stated
scope of authority in its charter, operating agreement, or offering
documents (collectively, the "Fund Documents"), the
entity may be sued by its investors, the transaction may be voided
by a court, the lender may suffer a loss, and/or other negative
consequences may result.
Recently, we represented a lender to a mature investment fund
that sought to enter into a subscription credit facility. In the
course of diligence, we found that the borrower's operating
agreement authorized it to enter into a financing
transaction, incur debt, and pledge its assets as security, while
the borrower's offering documents expressly prohibited
the same. Given
