Farr v. Newman
199 N.E.2d 369, 4 A.L.R. 3d 215, 14 N.Y.2d 183 (1964)
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Rule of Law:
A principal is bound by notice given to their agent acting within the scope of their authority, even if the agent has a conflict of interest or makes an error in legal judgment and fails to communicate that notice to the principal.
Facts:
- Farr entered into an unrecorded agreement with the Newmans to purchase their real property for $3,000.
- Subsequently, Hardy agreed to purchase the same property from the Newmans for $4,000.
- Hardy hired an attorney to represent him in the transaction, who was also representing the sellers, the Newmans.
- Farr directly informed the attorney of his prior agreement with the Newmans.
- The attorney, believing in good faith that Farr's agreement was legally unenforceable, decided not to inform his client, Hardy, about Farr's claim.
- Hardy, unaware of Farr's claim, proceeded with the purchase and took conveyance of the property.
Procedural Posture:
- Farr sued Hardy in trial court, seeking specific performance to compel Hardy to convey the property to him.
- The trial court found for the defendant, Hardy, holding that Farr's agreement was unenforceable under the Statute of Frauds.
- Farr, as appellant, appealed to the Appellate Division.
- The Appellate Division reversed the trial court's judgment, finding Farr's agreement was enforceable.
- Hardy, as appellant, appealed the Appellate Division's decision to the Court of Appeals of New York.
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Issue:
Does an attorney's knowledge of a prior equitable claim to a property, acquired while representing both the buyer and seller, get imputed to the buyer-principal, even if the attorney failed to disclose that information due to a conflict of interest or an error in legal judgment?
Opinions:
Majority - Burke, J.
Yes. An attorney's knowledge is imputed to the buyer-principal, even with a conflict of interest, because the principal is bound by notice given to an agent acting within the scope of their authority. The substantive rule of equity requires only that notice of an outstanding equity be given to an authorized agent; it does not require that the principal have actual knowledge. The 'adverse interest' exception, which prevents imputation, does not apply where the agent merely makes an error of legal judgment in good faith rather than committing fraud or totally abandoning the principal's interests. By engaging the attorney, Hardy authorized him to receive such notice, and Farr's act of providing it was legally sufficient to bind Hardy, regardless of the attorney's subsequent failure to communicate it.
Dissenting - Van Voorhis, J.
No. The knowledge of an agent should not be imputed to a principal when the agent is simultaneously acting for another party with an adverse interest. The presumption that an agent will communicate information to their principal, which is the basis for the imputation rule, is invalid in a case of conflicting interests. Here, the attorney's loyalty was divided, as he was incentivized to conceal Farr's claim to benefit his other clients, the sellers, who wanted to secure a higher price from Hardy. This clear conflict of interest should trigger the exception to the imputation rule, as the attorney lulled his principal, Hardy, into a false sense of security for the benefit of another party.
Analysis:
This decision reinforces and clarifies the doctrine of imputed knowledge in agency law, particularly within the context of real estate transactions involving dual representation. It narrowly construes the 'adverse interest' exception, establishing that an agent's mere error of judgment or a non-fraudulent conflict of interest is insufficient to prevent knowledge from being imputed to the principal. The ruling emphasizes that imputation is a substantive rule of law, not just an evidentiary presumption, thereby placing a significant burden on principals to select trustworthy agents. This precedent strengthens the position of third parties who give notice to an agent, as they can rely on that notice being legally effective even if the agent is secretly unfaithful to their principal.
