New York Law Review

Tag: Corporate Guarantee

  • Collision Plan, Inc. v. Bank of New York, 75 N.Y.2d 862 (1990): Duty to Inquire into Apparent Authority

    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.

  • Cohn v. Lionel Corporation, 21 N.Y.2d 559 (1968): Principal’s Duty to Indemnify Agent

    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.