New Developments

Washington State Supreme Court on apparent authority

The Supreme Court of Washington has held that a principal is bound by an agent acting within apparent authority and that the agent’s offer to sell at a price below the authorized price was not, by itself, ground to set aside the transaction. In Udall v. T.D. Escrow Services, Inc., T.D. Escrow Services, the trustee of a deed of trust on a private residence, foreclosed the property at the direction of the lender. T.D. Escrow retained ABC Legal Services (yes, that’s the real name) to conduct the sale. T.D. Escrow advertised the property and stated the property would be sold to the highest bidder.

T.D. Escrow authorized ABC to accept a minimum bid of about $159,000. ABC distributed a sheet at the auction erroneously stating that the minimum bid was about $59,000; Udall bid one dollar more and was declared the winner.

Udall tendered full payment, T.D. Escrow Services refused to convey the property after it discovered the error, and Udall brought suit to quiet title.

Justice Fairhurst held that ABC had apparent authority to sell the property for $59,000 and so T.D. Escrow was bound by the sale contract and was required to deliver title to Udall. Relying on Restatement (Third) of Agency §§ 2.03 and 3.03, she held that the sale notice constituted a manifestation by T.D. Escrow to Udall that caused Udall to believe, reasonably, that ABC was T.D. Escrow’s agent for the sale and was authorized to accept his bid. Justice Fairhurst also found apparent authority from the fact that T.D. Escrow had engaged ABC to engage in a general class of transactions, selling foreclosure properties on its behalf. Finally, the court found that the price discrepancy did not defeat apparent authority in this instance, though the court observed that a gross disparity coupled with “circumstances indicating some additional unfairness” might be sufficient to award equitable relief from consequence of apparent authority.

This opinion is obviously absolutely correct. I have substituted this case for In re Matter of McDuffie on page 96 because the facts are easier, the discussion of Agency law is better, and so the policy discussion is probably more effective. You can find the edited version of Udall, along with Notes and Questions, in the casebook Supplement.

Connecticut Court of Appeals on LLC promoter liability/power

The Appellate Court of Connecticut has held that a promoter of an LLC is liable on a contract made in the LLC’s name but before formation and therefore had the power to transfer the contract to another entity that could sue to enforce the contract. In BRJM, LLC v. Output Systems, Inc., Nicholas Kepple agreed to purchase real estate from Output Systems, Inc. The purchase contract was made in the name of M & K Realty, LLC, which was an entity to be co-owned by Kepple and his friend McGuiness (gee, how’d they think of THAT name?). After the contract was formed, McGuiness pulled out and Kepple assigned the contract to BRJM, LLC, an entity he owned. When a subsequent appraisal revealed that the property was worth twice the contract price, Output Systems refused to close and BRJM sued. One defense was that the contract was void because M & K Realty, LLC had not been formed when the contract was executed.

Justice Schaller held that, as a matter of first impression, the individual entering into a contract on behalf of a non-existent LLC is personally liable. The court relied on Restatement (Third) of Agency § 6.04 for the proposition that an “agent” is liable on a contract entered into on behalf of a non-existent principal. Justice Schaller acknowledged that this rule was to protect third parties, not to empower individuals who contract on behalf of non-existent entities. The court also drew an analogy to promoter liability in the corporate setting, both under common law and under MBCA § 2.04, which would hold the promoter liable.

Although the court acknowledged that the Restatement section and promoter liability rule are intended to protect third parties rather than to empower promoters, it held nonetheless that those rules allow promoters to enforce such contracts as well. Thus Kepple was liable on the contract, could enforce it, and thus could (and did) assign it to a third party.

It’s not clear to me that this case must be correct. Certainly the legal rules the court invokes do not stand for the result the court reached. The doctrine of entity by estoppel might do the trick. Here, Output Systems intended to deal solely with M & K Realty, LLC, which could induce the court to hold that Output Systems was estopped to challenge that entity’s existence. That doesn’t, by itself, permit Kepple to transfer the contract in M & K Realty’s name to another entity, though. However, given that the plaintiff is, in effect, a limited liability entity owned and controlled by Kepple, one might analogize this situation to the entity by estoppel setting.

This case could be taught after, or instead of, P.D. 2000, L.L.C. v. First Financial Planners, Inc. on page 745.