Collision Plan, Inc. v. Bank of New York, 75 N.Y.2d 862 (1990)
When a bank relies on the apparent authority of a corporate officer in a transaction that is extraordinary, such as a corporation guaranteeing the debt of an unrelated entity, the bank has a duty to make a reasonable inquiry into the officer’s actual authority.
Summary
Collision Plan, Inc. sued Bank of New York, alleging the bank failed to properly investigate the authority of Nicholas Neu to execute a mortgage and guarantee on behalf of Collision. The Court of Appeals held that while the bank could rely on apparent authority, the unusual nature of the transaction—a corporation guaranteeing the debt of an unrelated corporation—triggered a duty of reasonable inquiry. The court found the bank’s internal memoranda evinced an understanding of the peculiarity of the mortgage. The Court reinstated most of the complaint, except for causes of action related to slander of title, attorney’s fees, and punitive damages, which were properly dismissed.
Facts
Richard Albert sought a loan from the Bank of New York. As collateral, a mortgage and guarantee were provided by Collision Plan, Inc., a corporation seemingly unrelated to Albert’s business. Nicholas Neu, purportedly acting on behalf of Collision, executed the agreement, mortgage, and guarantee. Albert also signed the secretary’s certificate of resolution, which authorized the mortgage on behalf of Collision. The bank’s internal documents suggested awareness of the unusual nature of the arrangement.
Procedural History
Collision Plan, Inc. sued the Bank of New York. The trial court granted the bank’s motion to dismiss the complaint. The Appellate Division affirmed. The Court of Appeals modified the Appellate Division’s order, reinstating the complaint except for the sixth, seventh, and eighth causes of action, which were dismissed.
Issue(s)
Whether the Bank of New York had a duty to investigate the circumstances surrounding the mortgage transaction involving Nicholas Neu and Richard Albert, given that the transaction involved a corporation guaranteeing the debt of an unrelated corporation.
Holding
Yes, because when a bank invokes the doctrine of apparent authority to justify its actions in an extraordinary transaction, it concomitantly assumes a duty of reasonable inquiry as to the agent’s actual authority.
Court’s Reasoning
The Court reasoned that while reliance on apparent authority may be justified in many situations, the nature of the transaction in this case was so unusual that it should have prompted the bank to investigate Neu’s actual authority. Specifically, the court stated, “The mortgage arrangement should have triggered the duty of reasonable inquiry since a gratuitous guarantee by a corporation of a debt of an unrelated corporation is extraordinary.” The court pointed to Business Corporation Law § 908, which requires express shareholder authority for contracts of guarantee and suretyship not in the regular line of corporate business. Furthermore, the court noted that the bank’s internal memoranda indicated an understanding of the peculiarity of the mortgage, and Albert’s signature on the secretary’s certificate of resolution was inconsistent with his position as the loan’s prime beneficiary. The court cited Ford v Unity Hosp., 32 NY2d 464, 472-473 stating that invoking the doctrine of apparent authority assumed a duty of reasonable inquiry as to Neu’s actual perimeter of authority. Regarding the dismissed causes of action, the court noted the slander of title claim lacked an allegation of special damages, the claim for attorneys’ fees lacked an allegation of malice, and punitive damages cannot be a separate cause of action and require an allegation of malice or wanton and reckless conduct. The court referenced Drug Research Corp. v Curtis Pub. Co., 7 NY2d 435, 441 and City of Buffalo v Clement Co., 28 NY2d 241, 263.