 |
 |
 |
|
|
|
||
|
|||||||
|
|
|
|
|
|
||
|
|||||||
Posting for
Friday, June 5, 1998
by: Bert Rush
brush@firstam.com
COMPETENCY AND CAPACITY OF PARTIES/LEGAL AUTHORITY/CORPORATIONS
A California Court of Appeal has published a decision that worries me. Here's what happened:
Kirt Lyle was President, Secretary and Chief Financial Officer of Flightways Manufacturing, Inc., a corporation. Lyle entered into a two-year lease for a beach house at Malibu--on behalf of Fightways as the tenant. The lease agreement was signed by Lyle as President of Flightways. A deposit check for $11,000 was drawn against a Flightways corporate account. The lease was negotiated by a leasing agent, and the owner/lessor, Robert Snukal, never met Lyle.
Lyle moved in and paid rent with checks against his personal account, as well as checks against a Flightways corporate account. When rent payments stopped Snukal filed suit against Flightways for breach of contract. By this time Lyle was out at Flightways, replaced by someone who claimed Lyle wasn't authorized to enter into the lease on behalf of the corporation.
The trial court awarded judgment in favor of Snukal against Flightways for $22,300, plus attorney fees and costs of $12,935.
Flightways appealed on the issue of whether the signature of a corporate president, standing alone, is sufficient to bind a corporation under California Corporations Code section 313. In pertinent part, section 313 provides:
"...any note, mortgage, evidence of indebtedness, contract, share certificate, conveyance or other instrument in writing...executed or entered into between any corporation and any other person, when signed by the chairman of the board, the president or any vice president and the secretary, any assist ant secretary, the chief financial officer or any assistant treasurer of such corporation, is not invalidated as to the corporation by any lack of authority of the signing officers in the absence of actual knowledge on the part of the other person that the signing officers had no authority to execute the same." (Note: the source of this statute is the Pennsylvania Business Corporation Law, section 305.)
After an intermediate court of appeal affirmed, the District Court of Appeal reversed--holding that under section 313 two signatures are required to enable third parties to rely on "the assertive authority of various senior executive officers of the corporation concerning the execution of any instrument on behalf of the corporation." (Citation omitted.)
In reaching this decision, the Court of Appeal said,
"The statute is not a model of drafting.... (U)nder the plain meaning of section 313, it is arguable the signature of either the chairman of the board or the president is sufficient to bind the corpora- tion, and that it is the other officers enumerated in the statute who must sign in the specified combi- nations to bind the corporation."
But the justices were swayed by "two leading treatises" (Marsh's California Corporations Law and Ballantine & Sterling) to hold that the legislative intent was to require signatures of two officers.
In a footnote the Court also said, "Although Lyle also served as chief financial officer and secretary of Flightways, he signed the lease solely in his capacity as president. Therefore, it is unnecessary to address whether section 313's requirement of two signatures calls for the signature of two discrete individuals, or whether one individual who holds more than one office can provide the requisite two signatures."
When this decision was originally released last December it brought heartburn to attorneys doing corporate and transactional work. They raised the point that corporate contracts are commonly signed by one officer--and are binding and enforceable if backed by a corporate resolution, or if authority to act can be supported by the doctrine of ostensible authority.
So the Court of Appeal vacated the decision, held another hearing or two, and on May ll re-issued the decision with this added language:
"We emphasize our holding is limited to an interpretation of section 313. This statute provides one basis for validating a corporate document. However, section 313 is not the exclusive means of establishing whether a corporate signatory or signatories bind a corporation. Nothing in our opinion is intended to affect in any way other validating concepts or means of proving the actual, apparent or ostensible authority of a corporate signatory."
The official cite is Snukal v. Flightways Manufacturing, Inc., 63 Cal.App.4th 1062, 74 Cal.Rptr.2d 571 (1998).
What bothers me is the fear that many of our employees and agents may have fallen into the habit of accepting one signature (the president's) as binding a corporation, without understanding the whys and wherefores of this practice. Mainly, we may be forgetting to obtain copies or reliable evidence of enabling corporate resolutions. And forget about "ostensible authority"--who wants to go to court and try to prove it?
A reported decision such as this gives people--such as trial attorneys--ideas. In another downturn we could be seeing a lot of claims involving Snukal issues. Let's do our best with our training to avoid that. "Coach Fundamentals!"
Questions, comments, argument? Just press the "Reply" button and send your thoughts to LandSakes.
**********
Following Friday's posting Oscar Beasley wrote:
Bert if you put this to just a corporate context then your concern that we do not always obtain the proper resolutions is very apt. I can conceive that one of our bankruptcy judges could play this case either way depending upon the result that the bankruptcy court wants and I think that is even more frightening.
Gerard Knorr (Troy/Detroit) wrote:
This looks like one of those cases wanted to reach a result and crafted the opinion to reach the desired result.
Mike Calder (San Francisco) wrote:
Is there something about beach houses in Malibu that gives us such problems with competency/capacity issues? [See Claims Chronicles 1] The willingness to accept a single, unsupported signature seems to increase with our familiarity with the customer. The more often we have worked with a client, the more complacent we seem to become in verifying his or her authority to act.
San Francisco has recently had a claim arise based on an authority challenge. At the time of the transaction, the party signing has done numerous deals with First American. The disputed document, the execution of which we apparently did not question based on our escrow officer's extensive familiarity with the signer, was signed by an Asst. Secretary. As it turns out, a resolution did exist, but it, too, was faulty. We ended up paying over $60,000 in fees and $80,000 for settlement.
We need not only to verify authority, but make sure the authority documentation, e.g. corporate resolution, is also sufficient.
And, Mike Fromhold (Valley Forge) wrote:
Bert, It's nice to see that California follows some Pennsylvania practices...not saying whether that is good or bad. Section 301 was repealed in 1988, see now title 15 PACSA 1506. (I'll fax you a copy if you are interested) Now, if two of the statutorily designated officers sign, the execution of the document is deemed valid, notwithstanding any provision in the articles or by-laws of the corporation to the contrary. Many times, neither the articles or by-laws are available, and therefore a prudent practice would require execution by two officers, as further supported by a corporate resolution and an encumbency certificate. Although corporate seals are not required, still a good idea to require same.
