Menard, Inc. v. Dage-MTI, Inc.

SULLIVAN, Justice.

Menard, Inc., offered to purchase 30 acres of land from Dage-MTI, Inc., for $ 1,450,000. Arthur Sterling, Dage's president, accepted the offer in a written agreement in which he represented that he had the requisite authority to bind Dage to the sale. The Dage board of directors did not approve and refused to complete the transaction. We hold that as president, Sterling possessed the inherent authority to bind Dage in these circumstances.

Background

Dage-MTI, Inc., is a closely held Indiana corporation which manufactures specialized electronics equipment. At all times relevant to this appeal, Dage was governed by a six-member board of directors ("Board"), consisting of Ronald and Lynn Kerrigan, Louis Piccolo (a financial consultant retained by Ronald Kerrigan), Arthur and Marie Sterling, and William Conners. In addition to being a Board member, Arthur Sterling ("Sterling") had served as president of Dage for at least 20 years at the time of the trial on this matter. . .

In late October of 1993, the Dage shareholders met in New Jersey to discuss an offer by Sterling to purchase the Kerrigans' shares of Dage. During the course of the meeting, Sterling first informed other directors that Menard, Inc., had expressed interest in purchasing a 30-acre parcel of land owned by Dage and located in the Michigan City area. . . .

On October 30, 1993, Menard forwarded a formal offer to Sterling pertaining to the purchase of 10.5 acres of the 30-acre parcel. Upon receipt of the offer, Sterling did not contact Menard to discuss the terms and conditions of the offer. Instead, on or about November 4, 1993, he forwarded the offer to all the Dage directors with a cover note acknowledging that Board approval was required to accept or reject the offer. Ultimately, this offer was rejected: Kerrigan, Piccolo, and Gorinsky determined that the offer should be rejected due to the collective effect of certain sections of the purchase agreement submitted by Menard, as well as co-development obligations that the offer imposed on Dage. This rejection was communicated to Sterling, and although he viewed the offer to purchase favorably, he let the offer lapse. Later, he informed Menard's agent, Gary Litvin, that members of Dage's Board objected to various provisions of the offer.

On November 30, 1993, Sterling called Kerrigan and informed him that Menard would make a second offer for the entire 30-acre parcel. Sterling presented a two-part proposed resolution ("consent resolution") to the Board: the first part authorized Sterling to "offer and purchase" "another parcel located immediately to the north of the 30-acre parcel and referred to as the "Simon property "; the second part authorized Sterling to "offer and sell" the 30-acre parcel. Sterling, Kerrigan, Piccolo, and Gorinsky discussed the offer and Sterling was told to change the "offer and sell" provision to "to offer for sale " He was also instructed that he could purchase the Simon property on behalf of Dage, but could only "offer" the 30-acre parcel to Menard" a particular price. Additionally, Sterling was told that in soliciting offers for the 30-acre parcel, he was not to negotiate the terms of a sale. Gorinsky reminded Sterling that any offer from Menard would require Board review and acceptance, and he instructed Sterling to forward any offer to the Board for approval or rejection.

Finally, Sterling was told that if Menard submitted an agreement with the same objectionable provisions as the first offer, it would be rejected. Sterling agreed to follow the instructions of the Board "as long as I don't have to pay for" Gorinsky's and Piccolo's services in reviewing the offer. Based upon the discussion, Sterling drafted a new resolution, which stated that he was authorized "to take such actions as are necessary to offer for sale our 30 acre parcel . . . for a price not less than $1,200,000."

On December 6, 1993, Sterling informed Piccolo that Menard had agreed to make another offer. Piccolo reminded Sterling of his obligation to secure Board approval of the offer. Menard forwarded a second proposed purchase agreement to Sterling. This agreement contained the same provisions that the Board found objectionable in the first proposed agreement. However, this offer differed in that it was for the purchase of the entire 30-acre parcel for $1,450,000.

During a week-long series of discussions beginning December 14, 1993, and unknown to any other member of the Dage Board, Sterling negotiated several minor changes in the Menard agreement and then signed the revised offer on behalf of Dage. Menard also signed, accepting the offer. Under Paragraph 5(c)(I) of the agreement, Sterling, as president of Dage, represented as follows: "The persons signing this Agreement on behalf of the Seller are duly authorized to do so and their signatures bind the Seller in accordance with the terms of this Agreement.". . . No one at Dage had informed Menard that Sterling's authority with respect to the sale of the 30-acre parcel was limited to only the solicitation of offers.

Upon learning of the signed agreement with Menard, the Board instructed Sterling to extricate Dage from the agreement. Later, the Board hired counsel to inform Menard of its intent to question the agreement's enforceability. However, it was not until March 29, 1994, that Dage first gave notice to Menard of this intent.

Menard ultimately filed suit to require Dage to specifically perform the agreement and to secure the payment of damages. Menard initially filed a motion for partial summary judgment, which was denied. Following a bench trial, the trial court ruled in favor of Dage. The Court of Appeals affirmed, finding that Sterling did not have the express or apparent authority to bind the corporation in this land transaction. . . .

Discussion

The trial court's judgment in this case is embodied in Findings of Fact and Conclusions of Law entered pursuant to Trial Rule 52(A). The findings or judgment are not to be set aside unless clearly erroneous, and due regard is to be given to the trial court's ability to assess the credibility of witnesses. . . . In our review, we first consider whether the evidence supports the factual findings. . . . Second, we consider whether the findings support the judgment. . . . As we have noted several times in recent cases, while we defer substantially to findings of fact, we do not do so to conclusions of law. . . . Here, we find that the evidence supports the trial court's findings of fact. However, its conclusions of law employed principles of "actual authority" and "apparent authority" when they should have employed principles of "inherent authority." A judgment is clearly erroneous if it relies on an incorrect legal standard. . . .

I

Two main classifications of authority are generally recognized: "actual authority" and "apparent authority." Actual authority is created "by written or spoken words or other conduct of the principal which, reasonably interpreted, causes the agent to believe that the principal desires him so to act on the principal's account.". . . ". . .. Apparent authority refers to a third party's reasonable belief that the principal has authorized the acts of its agent, Pepkowski v. Life of Indiana Ins. Co. . . .; it arises from the principal's indirect or direct manifestations to a third party and not from the representations or acts of the agent . . .

On occasion, Indiana has taken an expansive view of apparent authority, including within the discussion the concept of "inherent agency power." . . .

"'Inherent agency power is a term used . . . to indicate the power of an agent which is derived not from authority, apparent authority or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent.'" Koval. . . (quoting Restatement (Second) of Agency '8A (1958)). . . This "'status based' . . . [form of] vicarious liability rests upon certain important social and commercial policies," primarily that the "'business enterprise should bear the burden of the losses created by the mistakes or overzealousness of its agents [because such liability] stimulates the watchfulness of the employer in selecting and supervising the agents.'" In re Atlantic Fin. Management, Inc., (second alteration in original) (quoting W. Seavey, Handbook of the Law of Agency ' 91 (1964)),. . .. And while "representations of the principal to the third party are central for defining apparent authority," the concept of inherent authority differs and "originates from the customary authority of a person in the particular type of agency relationship so that no representations beyond the fact of the existence of the agency need be shown." Cange v. Stotler & Co.,. . .) (citing Restatement (Second) of Agency . . . (stating that the "plaintiff need not prove any actions on [defendant's] part besides its allowing [an employee] to act as its agent for handling plaintiff's account because the trier of fact could find [the employee's] statements within his inherent authority") .

In Cange, the Seventh Circuit explained this concept's genesis:

Judge Learned Hand articulated this concept of inherent agency power when he upheld a jury verdict for plaintiff based on a contract the jury found to be an unconditional engagement for a singing tour despite the principal's instructions to its agent to engage the singer only for such recitals as he could later persuade record dealers to book her for, instructions which were not told to plaintiff. . . . He reasoned that the scope of an agency must be measured "not alone by the words in which it is created, but by the whole setting in which those words are used, including the customary powers of such agents" and thus the contract was enforceable because "the customary implication would seem to have been that [the agent's] authority was without limitation of the kind here imposed.". . . The principal benefits from the existence of inherent authority because "the very purpose of delegated authority is to avoid constant recourse by third persons to the principal, which would be a corollary of denying the agent any latitude beyond his exact instructions.". . .

We find the concept of inherent authority C rather than actual or apparent authority C controls our analysis in this case. Menard did not negotiate and ultimately contract with a lower-tiered employee or a prototypical "general" or "special" agent, with respect to whom actual or apparent authority might be at issue. Menard dealt with the president of the corporation, whom "'"the law recognizes . . . [as one of] the officers [who] are the means, the hands and the head, by which corporations normally act."'" . . .

Our determination that the inherent agency concept controls our analysis does not end the inquiry, however. The Restatement (Second) of Agency '161 provides that an agent's inherent authority subjects his principal to liability for acts done on his account which [(1)] usually accompany or are incidental to transactions which the agent is authorized to conduct if, although they are forbidden by the principal, [(2)] the other party reasonably believes that the agent is authorized to do them and [(3)] has no notice that he is not so authorized.

Distilled to its basics, we find that Sterling had inherent authority here if: (1) first, Sterling acted within the usual and ordinary scope of his authority as president; (2) second, Menard reasonably believed that Sterling was authorized to contract for the sale and purchase of Dage real estate; and (3) third, Menard had no notice that Sterling was not authorized to sell the 30-acre parcel without Board approval. . . .

[. . .]

As to whether Sterling acted within the usual and ordinary scope of his authority as president, the trial court found that Sterling, a director and substantial shareholder of Dage, had served as Dage's president from its inception; had managed the affairs of Dage for an extended period of time with little or no Board oversight; and had purchased real estate for Dage without Board approval. . . . However, the trial court reached the conclusion that "the record persuasively demonstrates that the land transaction in question was an extraordinary transaction" for Dage, which manufactures electronic video products. . . . Thus, the court concluded that "Sterling was not performing an act that was appropriate in the ordinary course of Dage's business."

We initially note that the Restatement looks at whether the acts "usually accompany or are incidental to transactions which the agent is authorized to conduct." . . . On the other hand, our analysis of inherent agency in Koval was focused on whether "' general agent . . . acted within the usual and ordinary scope of the business in which he was employed.'" . . . There is a difference.

The Restatement looks at the agent's office or station in the company to gauge the scope of the agent's authority, whereas our analysis in Koval looked to the purpose and scope of the business in which the general agent (i.e., attorney) was employed. We find the Restatement, which is focused "solely [on] the agency relation," is more appropriate in the current situation involving corporate officers, who are "natural persons who hold and administer the offices of the corporation." Community Care Centers, Inc.,. . .

Given that the trial court found that Sterling, as president of the company since its inception, had managed its affairs for an extended period of time with little or no Board oversight and, in particular, had purchased real estate for Dage in the past without Board approval, we conclude that Sterling's actions at issue here were acts that "usually accompany or are incidental to transactions which [he was] authorized to conduct." . . .

Next, we must determine whether Menard reasonably believed that Sterling was authorized to contract for the sale and purchase of Dage real estate. While Sterling's apparent authority to bind Dage was "vitiated" by Menard's knowledge that the sale of Dage real estate required Board approval,. . . this information did not defeat Sterling's inherent authority as Dage president to bind the corporation in a "setting" where he was the sole negotiator, . . .

Because the inherent agency theory "originates from the customary authority of a person in the particular type of agency relationship, we look to the agent's indirect or direct manifestations to determine whether Menard could have "reasonably believed at that Sterling was authorized to contract for the sale and purchase of Dage real estate. . . . And considering that the "agent" in this case is a general officer of the corporation (as opposed to an "appointed general agent" or "company general manager"), we find that Menard "should not be required to scrutinize too carefully the mandates of [this] permanent . . . agent[] . . . who [did] no more than what is usually done by [a corporate president]." . . .

We find it reasonable that Menard did not question the corporate president's statement that he had "authority from his Board of Directors to proceed" with the land transaction. . . .

We also find it reasonable for Menard not to scrutinize Sterling's personal "acknowledgement that he signed the agreement for the purchase and sale of the real estate by authority of Dage's board of directors.". We believe this especially to be the case where (1) Sterling himself was a member of the Board, . . .; (2) the agreement contained an express representation that "the persons signing this Agreement on behalf of the Seller are duly authorized to do so and their signatures bind the Seller in accordance with the terms of this Agreement,". . .; and (3) Menard was aware that Dage's corporate counsel, Patrick Donoghue, was involved in the review of the terms of the agreement. . . .

Finally, we consider whether Menard had notice that Sterling was not authorized to sell the 30-acre parcel without Board approval. The record does not indicate that Menard was aware of the existence of the consent resolution, much less that it limited Sterling's authority as president. Nor was there evidence that either the Board or Sterling informed Menard that Sterling's authority with respect to the sale of the 30-acre parcel was limited to only the solicitation of offers. And, as discussed supra, Sterling personally acknowledged that he signed the agreement by authority of Dage's Board of Directors, of which he was a member.

It is true, as the Court of Appeals noted, that Menard was advised early in the transaction that Sterling had to go to the Board to obtain approval. Menard. . . . This knowledge would have vitiated the apparent authority of a lower-tiered employee or a prototypical general or special agent. But we do not find it sufficient notice that Sterling, an officer with inherent authority, was not authorized to bind Dage" the closing.

The trial court found that Sterling signed the agreement with Menard during the week of December 14, 1993; that he represented in the agreement that he was authorized to sign it and that his signature bound Dage; and that when Dage's lawyers contacted Menard on March 29, 1994, it "was the first notice given by Dage to Menard that there was any issue regarding the enforceability of the agreement.". . . Indeed, Sterling wrote to Menard on February 7, 1994, indicating that Dage was performing as required by the agreement. . . . We conclude that Menard had no notice that the Board had limited Sterling's authority with respect to 30-acre parcel. . . .

D

In Koval, this Court said: "if one of two innocent parties must suffer due to a betrayal of trust C either the principal or the third party C the loss should fall on the party who is most at fault. Because the principal puts the agent in a position of trust, the principal should bear the loss." Koval,. . .

That maxim has particular resonance here. The record fails to reveal a single affirmative act that Dage took to inform Menard of Sterling's limited authority with respect to the 30-acre parcel, and the Board did not notify Menard that Sterling had acted without its authority until 104 days after it learned of Sterling's action. . . . By this time, Sterling had taken additional steps to close the transaction. . . . Dage's failure to act should not now form the basis of relief, penalizing Menard and depriving it of its bargain. . . .

Conclusion

We (1) grant transfer, (2) vacate the opinion of the Court of Appeals, and (3) remand to the trial court for further proceedings consistent with our conclusion that Dage was bound by Sterling's actions.

[. . .]

SHEPARD, Chief Justice, dissenting.

I think today's decision will leave most corporate lawyers wondering what the law actually is.

A board of directors authorizes the president to sell some real estate but requires that the sale be submitted to the board for approval or disapproval. The president understands that he must submit any sale to the board. He tells the potential buyer that he must submit it. The buyer knows that its offer must be submitted to the board after the president signs the sales agreement. The agreement is in fact submitted to the board and disapproved. Our Court holds that the agreement is binding anyway.

The majority calls this "an expansive view of apparent authority.". . . Facially, this seems like an understatement.

On the other hand, the Court embarks upon its discussion of "inherent authority," which it rightfully describes as a specie of apparent authority, after endorsing the conclusions of the trial court and Court of Appeals that the corporation's president did not possess apparent authority to sell the land without board approval.

In the end, it is difficult to know how lawyers will advise their clients after today's decision. Where all parties to a corporate transaction understand that board approval is required and that it may or may not be forthcoming, the black letter law cited in today's opinion points toward a conclusion that the buyer's offer was not accepted by the seller.

While I agree with the general legal principles laid out by the majority, those principles seem undercut by the resolution of this case.