New Developments

Delaware Court of Chancery on the actual and apparent authority of a transaction lawyer

In MetCap Securities LLC v. Pearl Senior Care, Inc., NASC struck a deal to acquire Beverly Enterprises. The merger agreement contained a parenthetical requiring NASC to pay a finder’s fee to MetCap, an investment banker. NASC could not raise sufficient funds to complete the all-cash deal so it entered into an agreement with Pearl Senior Care to assume all of NASC’s obligations to purchase Beverly, including the obligation to pay MetCap’s finder’s fee.

Beverly, NASC, and Pearl negotiated a revised merger agreement and, as is typical, the final negotiating and drafting went late into the night. Around 10 p.m. on a Sunday, the two main lawyers for NASC went home, leaving one of their partners, Dickerson, to finish the work and leaving signature pages with him. Three hours later, Pearl’s counsel deleted the parenthetical and Dickerson apparently acquiesced or didn’t notice. Thus Pearl neither assumed nor was assigned NASC’s obligation to MetCap. The final version of the amended merger agreement was finalized at 4 a.m. and Dickerson attached the signature pages. Four months later the acquisition closed and MetCap discovered that NASC, not Pearl, was the only entity obligated to pay its finder’s fee. NASC was formed for the express purpose of acquiring Beverly and did not have any assets, which MetCap knew when it agreed to perform investment advisory services. MetCap and NASC sued Beverly and Pearl for reformation and damages.

Vice Chancellor Noble dismissed a fraud claim and a third party beneficiary claim. He also dismissed an unjust enrichment claim against NASC but declined to dismiss an unjust enrichment claim against Pearl. Finally, he denied MetCap’s claim for reformation but not NASC’s claim for reformation.

This case is particularly intriguing in its consideration of Dickerson’s power to bind NASC. NASC argued that Dickerson’s power to bind it was circumscribed because he was “deal counsel”, apparently suggesting a status with less power to bind the principal than a transaction lawyer would ordinarily have. The Vice Chancellor held that the scope of a deal counsel’s actual authority would, of course, be fact-specific. He rightly focused, however, on Pearl’s lawyer’s reasonable perception of Dickerson’s powers and found no evidence that suggested knowledge of any limits on Dickerson’s authority. Nonetheless, evidence suggested that Dickerson did not tell NASC that he had acquiesced to the omission of the parenthetical. Ordinarily, an agent’s knowledge binds the principal but here, said Vice Chancellor Noble, the complaint sufficiently (though weakly) alleged that Dickerson might have been conflicted in his role so that ascription of his knowledge to his principal was not appropriate.

In a footnote in a later opinion denying reargument, Vice Chancellor Noble wrote,

MetCap’s insistence that the Court look to the “circumstances” surrounding the Third Amendment and focus on MetCap’s perceived lack of any means to obtain payment of its fee, requires the Court to address an issue that it had sought to avoid. The Court, thus, turns to the allegations regarding the conduct of the attorney representing … NASC (but not MetCap) when he made the final revisions to the Third Amendment that eliminated the provision that arguably would have transferred NASC’s liability for MetCap’s fee to Pearl …. If that attorney, negligently or without authorization (and the Amended Complaint at ¶ 23 alleges that he was without authority), revised the Third Amendment to deprive NASC of its entitlement to have its $20 million obligation to MetCap paid at closing, then NASC would seem to have a claim against that attorney and his firm through which it would be able to meet its obligations (perhaps reduced by the cost of collection) to MetCap. This observation is not essential to resolution of the motion for reargument, but the Amended Complaint’s description of the obvious source of funding induces a skeptical view toward the allegation that NASC is unable to pay, an allegation that is accepted for present purposes under Court of Chancery Rule 12(b)(6). In short, NASC may not now have the funds to meet its obligation to MetCap, but the Amended Complaint, if its allegations are correct, suggests a way for NASC to recover the needed funds.

Francis Pileggi has two posts on this case (here and here) and Steven Davidoff has a terrific post on it, as well (here)

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.

Minnesota Supreme Court on imputing sole officer's intent to corporation

The Supreme Court of Minnesota has held that the intent of a corporation’s sole officer (and director and shareholder) may be imputed to the corporation. In Travelers Indemnity Co. v. Bloomington Steel & Supply Co., Reiners, Bloomington’s sole shareholder, director, and officer, struck Padilla, an employee of another company that shared space with Bloomington. Padilla sued Reiners for assault and battery and also sued Bloomington on theories of respondeat superior and negligence (negligent hiring, retention, and supervision). Travelers denied any obligation to defend Bloomington under an exclusion for acts “expected or intended” by Bloomington. Travelers argued that Reiners’ actions, expectations, and intent should be imputed to Bloomington.

The court, per Page, J., held that Reiners’ acts and knowledge in the course of his employment and within the scope of his authority will be imputed to Bloomington. The court declined to disregard the separation between Reiners and Bloomington simply because Reiners controlled Bloomington.

Reiners had pleaded guilty to criminal charges stemming from his assault on Padilla and the record contained at least some indications of Reiners’ prior aggressive behavior. Quaere what more Travelers will have to show and how much more judicial time and money will be expended before Travelers’ efforts to deny liability are successful?

Missouri court on apparent authority

The Missouri Court of Appeals has held that an officer of a corporation created apparent authority in her son when she signed a credit application as “Secretary-Owner” of the corporation, left a section requiring the names of all owners blank, her son later listed himself, falsely, as an owner, and submitted the application to a third party that extended credit to its detriment. In Motorsport Marketing, Inc. v. Wiedmaier, Inc.(Mo. Ct. App. 2006), Motorsport sold NASCAR merchandise on credit based upon a credit application submitted by Wiedmaier, Inc., owner and operator of a truck stop. Motorsport dealt exclusively with Michael Wiedmaier, son of the only two Wiedmaier, Inc. shareholders and officers. The merchandise was shipped to an L.L.C. owned by Michael, which sold NASCAR merchandise over the internet. Payments were made to Motorsport by the L.L.C., which Michael falsely represented to Motorsport as being a division of Wiedmaier, Inc. Some of the merchandise was displayed for sale at the truck stop, apparently acquired by Wiedmaier Inc. from the L.L.C. When the account exceeded $90,000 in unpaid charges, Motorsport finally contacted Michael’s mom who denied corporate liability on the ground that Michael had not been authorized to act on the corporation’s behalf. Quaere whether the credit application in fact did not create apparent authority because it listed Michael only as an owner, not as an officer, employee, or agent? Quaere whether the corporate Secretary’s execution of the credit application, presumably knowing its purpose, was sufficient to endue Michael with actual authority or whether her subsequent actions were ratification by acquiescence thereby binding the corporation?

Massachusetts federal court on email address as apparent authority

The United States District Court for the District of Massachusetts has held that a putative principal who provides an email address for a putative agent does not create apparent authority. In CSX Transportation, Inc. v. Recovery Express, Inc. (D.Mass. 2006), Plaintiff believed it sold used railcars for scrap to Recovery Express and IDEC, an unrelated company that shared space with Recovery Express. When its invoice went unpaid, CSX sued. Liability of Recovery Express was predicated upon communication with Albert Arillotta, who clearly had a connection with IDEC but who falsely represented that he represented Recovery Express, as well. Part of the services that Recovery Express provided to IDEC was an email address for Arillotta and the email that Arillotta sent to CSX was from albert @recoveryexpress.com. Analogizing an email address to the provision of business cards, the court held that Arillotta’s email account was insufficient to create apparent authority.