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

Attorneys for Appellant

Michael A. Wukmer
John J. Morse
Ice Miller Donadio & Ryan
Indianapolis, IN

Gene Jones
Mark Lienhoop
Newby Lewis Kaminsky & Jones
LaPorte, IN

Attorneys for Appellee

Paul J. Peralta
D. Lucetta Pope
Baker & Daniels
South Bend, IN

IN THE
INDIANA SUPREME COURT

MENARD, INC.,
Appellant (Plaintiff below),

v.

DAGE-MTI, INC.,
Appellee (Defendant below).

)
) Supreme Court No.
) 46S03-0004-CV-00272
)
)
) Court of Appeals No.
) 46A03-9708-CV-00276
)
)

APPEAL FROM THE LAPORTE CIRCUIT COURT
The Honorable Robert W. Gilmore, Jr., Judge
Cause No. 46C01-9407-CP-184

ON PETITION TO TRANSFER

April 17, 2000

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
(ABoard@), 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 (ASterling@) had served as president of Dage for at least 20 years
at the time of the trial on this matter. Of the six directors, only Arthur
and Marie Sterling resided in Indiana.

For many years, Sterling operated Dage without significant input from
or oversight by the Board. Over the course of the summer and early fall of
1993, however, Kerrigan took steps to subject Dage management to Board
control. Kerrigan hired New York-based financial consultant and future
Board member Piccolo to assess the company=s performance. Kerrigan also
retained New York attorney Gerald Gorinsky to represent his interests
concerning Dage.

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. Menard is a
Wisconsin corporation that owns and operates home improvement stores in the
Midwestern region of the United States.

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 (Aconsent resolution@) to the
Board: the first part authorized Sterling to Aoffer and purchase@ another
parcel located immediately to the north of the 30-acre parcel and referred
to as the ASimon property@; the second part authorized Sterling to Aoffer
and sell@ the 30-acre parcel. Sterling, Kerrigan, Piccolo, and Gorinsky
discussed the offer and Sterling was told to change the Aoffer and sell@
provision to Ato offer for sale.@ He was also instructed that he could
purchase the Simon property on behalf of Dage, but could only Aoffer@ the
30-acre parcel to Menard at 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 Aas 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 Ato 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: AThe 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.@ (R. at 916;
Finding of Fact No. 47.) (R. at 1144, 1149.) 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. Menard, Inc.
v. Dage-MTI, Inc., 698 N.E.2d 1227 (Ind. Ct. App. 1998).

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. See T.R. 52(A); Shell Oil Co. v. Meyer, 705
N.E.2d 962, 972 (Ind. 1998), reh=g denied. In our review, we first
consider whether the evidence supports the factual findings. See id.;
Estate of Reasor v. Putnam Co., 635 N.E.2d 153, 158 (Ind. 1994), reh=g
denied. Second, we consider whether the findings support the judgment.
See Shell Oil Co., 705 N.E.2d at 972; Estate of Reasor, 635 N.E.2d at 158.
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.
See, e.g., Haseman v. Orman, 680 N.E.2d 531, 533 (Ind. 1997); State v. Van
Cleave, 674 N.E.2d 1293, 1295-96 (Ind. 1996), reh=g granted in part, 681
N.E.2d 181 (Ind. 1997). Here, we find that the evidence supports the trial
court=s findings of fact. However, its conclusions of law employed
principles of Aactual authority@ and Aapparent authority@ when they should
have employed principles of Ainherent authority.@ A judgment is clearly
erroneous if it relies on an incorrect legal standard. Shell Oil Co., 705
N.E.2d at 972.

I

Two main classifications of authority are generally recognized:
Aactual authority@ and Aapparent authority.@ Actual authority is created
Aby 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.@ Scott v. Randle, 697
N.E.2d 60, 66 (Ind. Ct. App. 1998), transfer denied; see Restatement
(Second) of Agency '' 7, 33 (1958). 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., 535 N.E.2d 1164, 1166-67
(Ind.1989); it arises from the principal=s indirect or direct
manifestations to a third party and not from the representations or acts of
the agent, id.; Drake v. Maid-Rite Co., 681 N.E.2d 734, 737-38 (Ind. Ct.
App. 1997), reh=g denied.

On occasion, Indiana has taken an expansive view of apparent
authority, including within the discussion the concept of Ainherent agency
power.@ See Koval v. Simon Telelect, Inc., 693 N.E.2d 1299, 1301 (Ind.
1998) (certifying answer to a federal court that retention of an attorney
confers the inherent power on that attorney to bind the client to an in
court proceeding); Storm v. Marsischke, 159 Ind. App. 136, 140-41, 304
N.E.2d 840, 843-44 (Ind. Ct. App. 1973).[1]

A>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,
693 N.E.2d at 1304 (Ind. 1998) (quoting Restatement (Second) of Agency ' 8A
(1958)) (omission in original) (emphasis added)).[2] This A>status based=
. . . [form of] vicarious liability rests upon certain important social and
commercial policies,@ primarily that the A>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., 784 F.2d 29, 32 (1st Cir. 1986) (second alteration in original)
(quoting W. Seavey, Handbook of the Law of Agency ' 91 (1964)), cert.
denied, 481 U.S. 1072 (1987). And while Arepresentations of the principal
to the third party are central for defining apparent authority,@ the
concept of inherent authority differs and Aoriginates 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., 826 F.2d 581, 591 (7th Cir. 1987) (citing
Restatement (Second) of Agency ' 161 cmt. b (1958)) (stating that the
Aplaintiff 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. Kidd v.
Thomas A. Edison, Inc., 239 F. 405 (S.D.N.Y.), aff=d, 242 F. 923 (2d
Cir. 1917). He reasoned that the scope of an agency must be measured
Anot 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 Athe
customary implication would seem to have been that [the agent=s]
authority was without limitation of the kind here imposed.@ Id. 239
F. at 406. The principal benefits from the existence of inherent
authority because A[t]he 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.@ Id. 239 F. at 408; see Restatement (Second) of Agency
'' 8A comment a, 161 comment a (1958).

Cange, 826 F.2d at 590-91 (alterations in original).

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 Ageneral@ or Aspecial@ agent, with respect to whom actual or
apparent authority might be at issue. Menard dealt with the president of
the corporation, whom A>A[t]he law recognizes . . . [as one of] the
officers [who] are the means, the hands and the head, by which corporations
normally act.@=@ Community Care Ctrs., Inc. v. Indiana Dep=t of Pub.
Welfare, 468 N.E.2d 602, 604 (Ind. Ct. App. 1984) (alterations added)
(quoting Fidelity & Casualty Co. v. Carroll, 186 Ind. 633, 635-36, 117 N.E.
858, 859 (1917) (quoting in turn 2 Thompson, Corporations ' 1387 (2d ed.
1910))), transfer denied; see also Burger Man, Inc. v. Jordan Paper Prods.,
Inc., 170 Ind. App. 295, 311-13, 352 N.E.2d 821, 831-32 (1976) (AWhen the
president and general manager does an act within the domain of the general
objects or business of the corporation, and within the scope of the usual
duties of the chief officer, it will be presumed that he had the authority
to do it, and whoever would assert the contrary must prove it.@). In so
finding, we consider significant the A>Adistinction . . . between a
corporate act, performed through the intermediation of a person specially
empowered to act as its agent, and a like act done immediately by the
corporation through its executive or administrative officers, which may be
termed its inherent agencies.@=@ Community Care Ctrs, Inc., 468 N.E.2d at
604 (emphasis added) (quoting Fidelity & Casualty Co., 186 Ind. at 635-36,
117 N.E. at 859 (quoting in turn 2 Thompson, Corporations ' 1387 (2d ed.
1910))).

II

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.[3]

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;[4] (2) second, Menard reasonably believed that
Sterling was authorized to contract for the sale and purchase of Dage real
estate;[5] and (3) third, Menard had no notice that Sterling was not
authorized to sell the 30-acre parcel without Board approval.[6] See also
Koval, 693 N.E.2d at 1304 n.7 (quoting Restatement (Second) of Agency '
161).

As discussed supra, the trial court entered findings of fact and
conclusions of law pursuant to Ind. Trial Rule 52. Having accepted the
findings of fact, we review them to see if they will support a finding that
Sterling had the inherent authority as president to bind Dage in this
transaction.

A

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. (R. at 911, 912; Findings of Fact Nos. 7-9,
16.) However, the trial court reached the conclusion that A[t]he record
persuasively demonstrates that the land transaction in question was an
extraordinary transaction@ for Dage, which manufactures electronic video
products. (R. at 921; Conclusion of Law No. 11.) Thus, the court concluded
that ASterling was not performing an act that was appropriate in the
ordinary course of Dage=s business.@ Id.

We initially note that the Restatement looks at whether the acts
Ausually accompany or are incidental to transactions which the agent is
authorized to conduct.@ Restatement (Second) of Agency '161 (emphasis
added). On the other hand, our analysis of inherent agency in Koval was
focused on whether A>a general agent . . . acted within the usual and
ordinary scope of the business in which he was employed.=@ 693 N.E.2d at
1304 (quoting Farm Bureau Mut. Ins. Co. v. Coffin, 136 Ind. App. 12, 16,
186 N.E.2d 180, 182 (1962) (emphasis added)) (concerning an attorney=s
inherent agency power in court proceedings). 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
Asolely [on] the agency relation,@ is more appropriate in the current
situation involving corporate officers, who are Anatural persons who hold
and administer the offices of the corporation.@ Community Care Centers,
Inc., 468 N.E.2d at 604.[7]

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 Ausually accompany or are
incidental to transactions which [he was] authorized to conduct.@
Restatement (Second) of Agency ' 161.

B

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 Avitiated@ by
Menard=s knowledge that the sale of Dage real estate required Board
approval, see Menard, Inc., 698 N.E.2d at 1232, this information did not
defeat Sterling=s inherent authority as Dage president to bind the
corporation in a Asetting@ where he was the sole negotiator, see Cange, 826
F.2d at 591.

Because the inherent agency theory Aoriginates from the customary
authority of a person in the particular type of agency relationship,@ id.,
we look to the agent=s indirect or direct manifestations to determine
whether Menard could have Areasonably believe[d]@ that Sterling was
authorized to contract for the sale and purchase of Dage real estate.
Koval, 693 N.E.2d at 1304 n.7.[8] And considering that the Aagent@ in this
case is a general officer of the corporation (as opposed to an Aappointed
general agent@ or Acompany general manager@), we find that Menard Ashould
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[9]].@ Restatement (Second) of Agency ' 161 cmt.
a.

Here, the facts establish that Menard reasonably believed that
Sterling was authorized to contract for the sale and purchase of Dage real
estate. We begin with the premise that A>the acts of a corporation done
through its officers are acts done per se.=@ Community Care Ctrs., Inc.,
468 N.E.2d at 604 (emphasis omitted) (quoting Fidelity & Casualty Co., 186
Ind. at 635-36, 117 N.E. at 859 (citing in turn 2 Thompson, Corporations '
1387 (2d ed. 1910))). Next, we note that at all times ASterling held
himself out as president of Dage.@ (R. at 919; Finding of Fact No. 67.) In
fact, ASterling ha[d] served as president of Dage since its inception@; as
noted in the preceding section, he was a substantial shareholder and member
of the six-person Board of Directors; he had managed the affairs of Dage
for an extended period of time with little or no Board oversight; and he
had purchased real estate for Dage without Board approval. (R. at 911,
912; Findings of Fact Nos. 7-9, 16.) And although Aearly in the
transaction, Sterling advised [Menard] that he was required to go back to
his >partners= to obtain authority to sell the entire thirty acres[,
Sterling later] confirmed that he had the authority from his Board of
Directors to proceed.@ (R. at 922-23; Conclusion of Law No. 19.)

We find it reasonable that Menard did not question the corporate
president=s statement that he had Aauthority from his Board of Directors to
proceed@ with the land transaction. Id.; see Federal Sav. & Loan Ins. Corp.
v. Shearson-American Express, Inc., 658 F. Supp. 1331, 1339 (D.P.R. 1987)
(A[T]he authority of an agent to do certain acts may reasonably be inferred
from the continuity of the acts themselves.@); McIntosh v. Vector
Properties, Inc., 889 P.2d 911, 914 (Ok. Ct. App. 1995) (finding that
defendant corporation=s actions led to plaintiff=s reasonable belief that
agent could bind corporation in commission-sharing agreement, where the
president of the corporation knew that the agent was holding himself out as
a vice-president and acknowledged that the agent, with the corporation=s
permission, had the authority to enter into the agreement); R.H. Kyle
Furniture Co. v. Russell Dry Goods Co., 340 S.W.2d 220, 225 (Ky. 1960)
(finding that persons dealing with corporations through their managers or
superintendents are justified in relying upon the apparent or implied
authority of such agents).

We also find it reasonable for Menard not to scrutinize Sterling=s
personal Aacknowledge[ment] that he signed the agreement for the purchase
and sale of the real estate by authority of Dage=s board of directors.@ (R.
at 919; Finding of Fact No. 67). We believe this especially to be the case
where (1) Sterling himself was a member of the Board, (R. at 912; Finding
of Fact No. 16); (2) the agreement contained an express representation that
A[t]he 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,@ (R. at 916; Finding of Fact No. 47) (R. at
1144, 1149); and (3) Menard was aware that Dage=s corporate counsel,
Patrick Donoghue, was involved in the review of the terms of the agreement.
(R. at 1133-34, 1141, 1391).

C

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, 698 N.E.2d at 1232 (citing Conclusions of Law Nos. 16-
22). This knowledge would have vitiated the apparent authority of a lower-
tiered employee or a prototypical general or special agent.[10] But we do
not find it sufficient notice that Sterling, an officer with inherent
authority, was not authorized to bind Dage at 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 Awas the
first notice given by Dage to Menard that there was any issue regarding the
enforceability of the agreement.@ (R. at 916, 919; Findings of Fact 46,
47, 63.) Indeed, Sterling wrote to Menard on February 7, 1994, indicating
that Dage was performing as required by the agreement. (R. at 2059.) We
conclude that Menard had no notice that the Board had limited Sterling=s
authority with respect to 30-acre parcel. See, e.g., Avery v. Kane Gas
Light & Heating Co., 403 F. Supp. 14 (W.D. Pa. 1975) (finding the
corporation bound by instruments signed by its president and treasurer
despite bylaws denying such officers= authority where party dealing with
the corporation had no actual notice of such bylaws); Filter v. Vernonia,
669 P.2d 350 (Or. Ct. App. 1983) (determining that unless the principal has
by some action given notice to third parties of the limitations on the
agent=s authority, a managing agent is presumed to have the authority to do
those acts which managing agents normally do); cf. Truck Crane Serv. Co. v.
Barr-Nelson, Inc., 329 N.W.2d 824 (Minn. 1983) (finding that where a third
party had been notified in writing by the president of the corporation that
the corporation denied liability for certain services, the third party was
put on inquiry notice as to the authority of any corporate employee to
countermand such a position); Wachovia Bank v. Bob Dunn Jaguar, Inc., 450
S.E.2d 527 (N.C. Ct. App. 1994) (holding that a vice-president lacks the
authority to execute documents and thereby bind the corporation when the
defendant corporation=s president met with the plaintiff bank and informed
it that no one other than the president may execute guaranties and that any
guaranty required the president=s approval and signature).

D

In Koval, this Court said: Aif 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, 693 N.E.2d at 1304 (citing Farm Bureau Mut. Ins. Co., 136 Ind. at
18, 186 N.E.2d at 183).

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. (R. at 917, 919; Findings of Fact
Nos. 52, 63.) By this time, Sterling had taken additional steps to close
the transaction. (R. at 918; Finding of Fact No. 56.) Dage=s failure to
act should not now form the basis of relief, penalizing Menard and
depriving it of its bargain. See Federal Savings & Loan Ins. Corp., 658 F.
Supp. at 1340 (AFactors such as duty of care required to exercise a high
standard of supervision and whether the employee was a high level officer
or director of the firm are also relevant [in establishing an employer=s
vicarious liability under an agency theory].@).

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.

DICKSON and RUCKER, JJ., concur.
SHEPARD, C.J., dissents with separate opinion.
BOEHM, J., not participating.
ATTORNEYS FOR APPELLANT ATTORNEYS FOR APPELLEE

Michael A. Wukmer Paul J. Peralta
John J. Morse D. Lucetta Pope
Indianapolis, Indiana South Bend, Indiana

Gene Jones
Mark Lienhoop
LaPorte, Indiana

IN THE

SUPREME COURT OF INDIANA

MENARD, INC., )
)
Appellant (Plaintiff Below), ) 46S03-0004-CV-272
) in the Supreme Court
v. )
) 46A03-9708-CV-276
DAGE-MTI, INC., ) in the Court of Appeals
)
Appellee (Defendant Below). )

APPEAL FROM THE LAPORTE CIRCUIT COURT
The Honorable Robert W. Gilmore, Jr., Judge
Cause No. 46C01-9407-CP-184

April 17, 2000

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.[11] He tells the potential buyer that he must submit it.[12] The
buyer knows that its offer must be submitted to the board after the
president signs the sales agreement.[13] 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.”
Slip op. at 7. 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.[14]

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.

-----------------------
[1] Because A[i]t is possible to say that the rationale underlying
the decision in [an >apparent authority= case] is the same rationale
underlying the principle of inherent agency power,@ Storm v Marsischke, 159
Ind. App. 136, 140, 304 N.E.2d 840, 843 n.3 (Ind. Ct. App. 1973), we find
both issues properly before this Court. See also Lind v. Schenley Indus.,
Inc., 278 F.2d 79, 85 (3d Cir.) (AIn many cases the same facts will support
a finding of >apparent= or >inherent agency.=@), cert. denied, 364 U.S. 835
(1960).

[2] There are at least two relevant sections of the Restatement
(Second) of Agency, which define the scope and extent of inherent authority
as it relates to the facts of this case: ' 8A (entitled, AInherent Agency
Power), and ' 161 (entitled, AUnauthorized Acts of General Agent@).

[3] The Restatement explains,
The rule in this Section . . . [is an] important illustration[]
of inherent power[], that is, power[] held by an agent, the exercise
of which [is] effective to subject the principal to liability in
transactions in which the agent has neither authority nor apparent
authority, but in which the agent derives his power wholly from his
relation with the principal. [It is] called inherent agency power[]
since there is no other common designation which adequately describes
[it].
Restatement (Second) of Agency ' 161 cmt. a (1958) (emphases added).
Relevant to the case before us is the observation that
if one appoints an agent to conduct a series of transactions over a
period of time, it is fair that he should bear losses which are
incurred when such an agent, although without authority to do so, does
something which is usually done in connection with the transactions he
is employed to conduct.
Id. (emphases added). In this case, the Board positioned its corporate
president, Sterling, to Aconduct a series of transactions@ with Menard
concerning the sale of Dage real estate. We find this section of the
Restatement applicable to this case.

[4] Section 8A puts forth a similar inquiry: Did the Ageneral agent
do[] something similar to what he is authorized to do, but in violation of
orders[?]@ Restatement (Second) of Agency ' 8A cmt. b.

[5] This inquiry into the third-party=s Areasonable belief@ is a broad-
based inquiry into the scope of the agent=s inherent authority in light of
his or her agency relation with the principal.

[6] This inquiry into the third-party=s Anotice@ is a narrow inquiry
focusing on the specific transaction.

[7] Under a standard Aapparent authority@ analysis, we agree with the
trial court and Court of Appeals that the land transaction in question was
an extraordinary transaction. See, e.g., Tedesco v. Gentry Dev. Inc., 521
So.2d 717, 724 (La. Ct. App. 1988) (declining to enforce a sales contract
for land signed by the president of a corporation and concluding Athat the
doctrine of apparent authority is inappropriate in the realm of sales and
mortgages of real estate@ where the president only had the actual authority
Ato initially list the property,@ and he had not obtained approval from the
board of directors to sell the corporation=s Aimmovable property@), aff=d,
540 So.2d 960 (La. 1989); Willsey v. W.C. Porter Farms Co., 522 S.W.2d 29,
32-33 (Mo. Ct. App. 1975) (finding the president of a corporation did not
have apparent authority to bind corporation to sell approximately 35% of
its farmland, where no other activity but farming had ever been carried on
by corporation and thus contract to sell land was not usual and customary
activity of corporation, and where purchasers were advised that land
involved was owned by corporation and that approval of other members of
corporation was necessary to validate contract).

[8] This inquiry is in contradistinction to the test for apparent
authority, which looks to the principal=s indirect or direct manifestations
to determine whether the third party could have reasonable believed that
the principal had authorized the acts of its agent. Pepkowski, 535 N.E.2d
at 1166-67.

[9] Dage=s By-laws are no different than those of most closely held
corporations in that the president is vested with the formal authority to
execute most, if not all, documents binding the corporation. Relevant to
the issue before us is Article V (AOfficers of the Corporation@), Section 8
(AExecution of Documents@):
Unless otherwise provided by the board of directors, all
contracts, leases, commercial paper and other instruments in writing
and legal documents, shall be signed by the president and attested by
the secretary. All bonds, deeds and mortgages shall be signed by the
president and attested by the secretary. All certificates of stock
shall be signed by the president and attested by the secretary.
(R. at 981.)

[10] This is because an agent=s apparent authority emanates not from
the agency itself but from the principal=s indirect and direct
manifestations, so that a third party is required under the rule of law to
Ause reasonable diligence and prudence to ascertain@ the extent of any
limitations of which he or she has become aware. See 3 Am. Jur. 2d Agency '
83 (1986). On the other hand, an individual=s inherent authority is
derived from the status of the office that he or she holds, so that a third
party is not Arequired to scrutinize too carefully@ a knowledge or
awareness that the officer=s authority has possibly been limited. See
Restatement (Second) of Agency ' 161 cmt. a. Put differently, it is
reasonable for a third party to assume that a corporate president (in this
case, the chief executive officer) has obtained the requisite Aboard
approval@ to conduct a land transaction, absent the third party=s actual
and specific notice to the contrary.

[11] “Piccolo reminded Sterling of his obligation to secure Board approval
of the offer.” Slip op. at 4.
[12] “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, 698 N.E.2d at 1232 (citing Conclusions of Law Nos. 16-
22).” Slip op. at 17.
[13] The majority leans heavily, slip op. at 5, 16-17, 18, on a recitation
in the sales agreement to the effect 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.”
(R. at 1149.) This same language appeared in the first sales agreement
submitted to the Board and disapproved. (R. at 1000, “The persons signing
this Agreement . . . .”) If this recitation plays the central legal role
the majority ascribes to it, it seems that the first sales agreement is the
one we should be litigating. Sensibly, no one has suggested that the
earlier document constituted a binding agreement.
[14] As the Court of Appeals said, Sterling’s apparent authority “was
vitiated by Menard’s knowledge that Sterling had to go to the board to
obtain approval.” Menard, 698 N.E.2d at 1232 (citing Conclusion of Law No.
22).