Cohn v. Lionel Corporation, 21 N.Y.2d 559 (1968)
A principal has a duty to indemnify an agent for damages or expenditures incurred as a proximate consequence of the agent’s good-faith execution of the agency, provided the act was not manifestly wrong.
Summary
Cohn, an officer of Lionel Corp., guaranteed a financial condition for a transaction at Lionel’s request. When the condition failed, Cohn was forced to pay on the guarantee. He sued Lionel for indemnification. The New York Court of Appeals held that Cohn’s complaint stated a cause of action for indemnity because he acted as Lionel’s agent in providing the guarantee. The court emphasized that a principal must indemnify an agent for losses incurred while acting in good faith on the principal’s behalf, as long as the act wasn’t obviously wrongful. This case illustrates the scope of a principal’s duty to protect their agents from liabilities incurred during authorized activities.
Facts
Lionel Corp. negotiated to acquire stock from the Steinthals, who required $800,000 in cash upon completion of the deal.
Lionel agreed to register 30,500 shares of Lionel stock for the Steinthals to sell, but the Steinthals then demanded a guarantee that the sale of these shares would realize $800,000.
Lionel refused to provide the guarantee due to potential tax implications.
Lionel’s management requested Cohn, an officer and director, to provide the guarantee to facilitate the acquisition.
Cohn provided the guarantee, and the Steinthals executed contracts with Lionel.
The market value of Lionel shares declined, causing the Steinthals to enforce the guarantee against Cohn, resulting in a judgment against Cohn.
Procedural History
Cohn sued Lionel for indemnification.
Lionel moved to dismiss the complaint for legal insufficiency under CPLR 3211(a)(7).
Special Term granted the motion, and the Appellate Division affirmed.
The Court of Appeals reversed the lower courts, reinstating Cohn’s third cause of action.
Issue(s)
Whether a principal is required to indemnify an agent for losses incurred by the agent while acting on behalf of the principal, specifically when the agent provides a guarantee at the principal’s request to facilitate a business transaction?
Holding
Yes, because where one is directed by another to do an act in his behalf, not manifestly wrong, the law implies a promise of indemnity by the principal for damages resulting from the good-faith execution of the agency.
Court’s Reasoning
The Court of Appeals focused on the legal sufficiency of Cohn’s complaint, construing the pleadings liberally in his favor and assuming the truth of his allegations.
The court cited the general rule that a principal must indemnify an agent for damages or expenditures incurred as a proximate consequence of the good-faith execution of the agency.
The court stated: “The general rule is that, where one is employed or directed, by another to do an act in his behalf, not manifestly wrong, the law implies a promise of indemnity by the principal for damages resulting from or expenditures incurred as a proximate consequence of the good faith execution of the agency.”
The court found that Cohn’s complaint unequivocally asserted that he executed the guarantee agreement as an agent for Lionel, acting at Lionel’s special insistence and request.
The court also noted that the fact Cohn’s act helped Lionel maintain a favorable tax advantage did not, by itself, establish that Cohn participated in an illegal act.
The court acknowledged that Cohn’s third cause of action (agency) contradicted the theory of his first cause of action (officer indemnification), but it affirmed that a plaintiff can advance inconsistent theories in alleging a right to recovery.