Blackburn v. Witter
201 Cal. App. 2d 518, 1962 Cal. App. LEXIS 2623, 19 Cal. Rptr. 842 (1962)
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Rule of Law:
A principal who puts an agent in a position that enables the agent, while apparently acting within their authority, to commit fraud upon a third person is subject to liability for the fraud under the doctrine of ostensible authority.
Facts:
- Mrs. Blackburn, a widow with no business experience, hired Mr. Long as her investment advisor.
- Long was employed as a representative first by Walston and Company and subsequently by Dean Witter and Company.
- While employed, Long convinced Blackburn to sell some of her stock and invest the proceeds in a nonexistent company he called 'American Commercial Investment Company.'
- Long represented that this fictitious company was a large, growing construction firm that would pay 10% interest.
- Blackburn sold her existing stocks through Long, acting in his capacity as an agent for his employers, to fund the fraudulent investment.
- For the money invested, Long provided Blackburn with informal 'rediform' receipts and personal promissory notes, rather than official company documents.
- When Blackburn questioned the unusual paperwork, Long told her the company was new and its official stationery was still being printed.
- The fraudulent transactions never appeared on the official monthly summaries Blackburn received from either Walston and Company or Dean Witter and Company.
Procedural Posture:
- Mrs. Blackburn sued Walston and Company, Dean Witter and Company, and their respective bonding agencies in the trial court.
- The trial court found in favor of Blackburn, holding the brokerage firms liable on a theory of ostensible authority.
- The brokerage firms (appellants) appealed the trial court's judgment.
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Issue:
Does a principal's liability under the doctrine of ostensible authority extend to an agent's fraudulent acts when the agent, acting for personal gain, is placed in a position by the principal that facilitates the fraud upon a third person who relies in good faith and with ordinary care on the agent's apparent authority?
Opinions:
Majority - Stone, J.
Yes. A principal is liable for an agent's fraudulent acts under the doctrine of ostensible authority where the principal has placed the agent in a position that enables the commission of the fraud. California Civil Code § 2334 binds a principal to the acts of an agent under ostensible authority, provided the third party acted in good faith and with ordinary care. The court adopted the principle from the Restatement of Agency § 261, which holds a principal liable when an agent's position facilitates the fraud, making the transaction appear regular to the third person. Here, the brokerage firms placed Long in a position of trust and confidence, enabling him to defraud Blackburn. Despite irregularities in the transaction, the trial court found that Blackburn, an inexperienced widow who trusted her advisor, acted with ordinary care, a finding of fact to which this court defers. The firms cannot accept the benefits of Long selling stock as their agent but then deny liability when he misappropriates the proceeds from that same transaction.
Analysis:
This decision solidifies the application of ostensible authority to hold principals liable for the fraudulent acts of their agents, even when the agent acts solely for personal benefit. It underscores that liability is based not on the agent's actual authority but on the appearance of authority created by the principal. The ruling emphasizes that a principal who places an agent in a position of trust, particularly with vulnerable clients in a specialized field like finance, bears the risk of that agent's misconduct. Future cases will likely use this precedent to hold employers responsible for creating the circumstances that allow a trusted agent to commit fraud, focusing on the third party's reasonable perception of the agent's authority.
