Heath v. Craighill, Rendleman, Ingle & Blythe, P.A.
1990 N.C. App. LEXIS 70, 97 N.C. App. 236, 388 S.E.2d 178 (1990)
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Rule of Law:
A professional corporation is not liable for the wrongful acts of one of its members if those acts were not within the ordinary course of the firm's business and were not done with the actual or apparent authority of the corporation.
Facts:
- M. Lee Heath, Jr. was a client of the law firm Craighill, Rendleman, Clarkson, Ingle & Blythe, P.A. (the firm), for whom attorney Francis O. Clarkson, Jr. had prepared a will and another partner handled real estate matters.
- Beginning in late 1982, Clarkson, a member of the firm, began soliciting Heath to invest in various personal business ventures unrelated to legal services.
- In August 1983, Heath invested $25,000 with Clarkson in an "Arab oil deal," receiving Clarkson's personal promissory note for $50,000 in return, and later collected $62,500.
- Clarkson officially resigned from the firm effective September 30, 1983, though he was permitted to use his office space for approximately two more months.
- In November 1983, after his resignation, Clarkson solicited two more investments from Heath totaling $75,000, again providing his personal promissory notes.
- For the November investments, Clarkson gave Heath two letters assuring him the repayment funds would not come from illegal sources; one was handwritten on firm stationery and the other on Clarkson's personal stationery.
- The promissory notes were signed by Clarkson in his personal capacity, and his subsequent personal checks to Heath to repay the notes were dishonored.
- Heath was never billed by the law firm for any of the investment transactions with Clarkson.
Procedural Posture:
- Plaintiff M. Lee Heath, Jr. filed a complaint against the law firm Craighill, Rendleman, Clarkson, Ingle & Blythe, P.A. in a state trial court, alleging four theories of liability.
- At the close of the plaintiff's evidence, the trial court granted a directed verdict for the defendant law firm on the claims of breach of fiduciary duty, negligence, and violation of the North Carolina Securities Act.
- The agency claim was submitted to the jury, which returned a verdict for the plaintiff in the amount of $25,000.
- The defendant law firm then moved for judgment notwithstanding the verdict (JNOV) on the agency claim.
- The trial court granted the defendant's motion for JNOV, setting aside the jury's verdict.
- The plaintiff, Heath, appealed to the intermediate appellate court from both the directed verdict and the JNOV.
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Issue:
Is a law firm liable under theories of agency, breach of fiduciary duty, or negligence for the fraudulent investment schemes conducted by one of its former members when the transactions were personal, outside the scope of the firm's legal practice, and not reasonably perceived by the client as firm-sanctioned business?
Opinions:
Majority - Cozort, Judge.
No. A law firm is not liable for the fraudulent investment schemes of a former member because such acts are not within the scope of authority conferred by the firm. To hold a professional corporation liable for the acts of one of its members, the plaintiff must show the member was acting in the ordinary course of the firm's business or with the firm's actual or apparent authority. Here, Clarkson lacked actual authority, as the firm's charter was limited to legal services, and the power of attorney Heath had granted the firm was never used and required joint action. Clarkson also lacked apparent authority because Heath's belief that the firm sanctioned the deals was not reasonable. The transactions involved Clarkson's personal promissory notes and personal checks, the firm never billed Heath for them, and one partner overhearing a 'jestful comment' about the investments did not constitute notice to the firm. Furthermore, the firm owed no duty to supervise Clarkson's activities that were outside the practice of law and of which the firm had no reason to know, thus defeating the negligence and breach of fiduciary duty claims.
Analysis:
This case significantly clarifies the boundaries of vicarious liability for professional corporations, particularly law firms. It establishes that a firm is not a blanket insurer of its members' personal financial dealings, even when those dealings involve firm clients. The decision places a substantial burden on the plaintiff to demonstrate that the member's wrongful act was directly related to the firm's business or that the firm's actions created a reasonable belief of authority. This precedent protects professional firms from liability for partners' unauthorized, ultra vires acts, forcing clients and third parties to be diligent in distinguishing between official firm business and a partner's personal ventures.
