HIGHLAND CAPITAL MANAGEMENT LP v. Schneider
76 Fed. R. Serv. 3d 1651, 2010 U.S. App. LEXIS 15231, 607 F.3d 322 (2010)
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Rule of Law:
An agent lacks apparent authority to bind a principal when the third party knows or should know of the limitations on the agent's authority. A third party's belief in the agent's authority is not reasonable if it is based on an agent's ambiguous statements that are contradicted by a prior express agreement and the entire course of dealing.
Facts:
- The Schneider family owned $69 million in promissory notes issued by McNaughton Apparel Group, Inc.
- The Schneiders engaged Glen Rauch of Glen Rauch Securities ('GRS') to act as their agent in selling the notes.
- Before negotiations, GRS and a potential buyer, RBC Dominion Securities Corp. ('RBC'), signed a Letter Agreement stating that 'the consummation of any transaction remains in the sole discretion and satisfaction of the [Schneiders].'
- Throughout weeks of negotiations, Rauch consistently told RBC that he needed to get the Schneiders' authorization for any firm offer or agreement.
- On March 9 and 13, 2001, the Schneiders learned privately from their attorneys about a potential acquisition of McNaughton that would cause the notes to be paid at 100% of their face value.
- On March 14, in two recorded morning phone calls, Rauch told RBC he had not received the Schneiders' approval to sell the notes at fifty-one percent of face value and did not expect to get it until later.
- Approximately ten minutes after the second recorded call, RBC initiated an unrecorded call with Rauch, during which RBC alleges a contract was formed.
- The Schneiders subsequently instructed Rauch to put the sale on hold, and the notes were later paid in full when McNaughton was acquired.
Procedural Posture:
- Highland Capital Management LP and RBC Dominion Securities Corp. sued Leonard Schneider and his children in the U.S. District Court for the Southern District of New York for breach of contract.
- The case was tried before a jury.
- The jury returned a verdict in favor of the plaintiffs, Highland and RBC, awarding damages of approximately $40 million.
- The Schneiders filed a post-trial motion for judgment as a matter of law (JMOL) or for a new trial, which the district court denied.
- The Schneiders, as appellants, appealed the district court's judgment to the U.S. Court of Appeals for the Second Circuit.
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Issue:
Does an agent have apparent authority to bind a principal to a contract when a prior written agreement and the course of dealing explicitly require the principal's final approval for any transaction, and the agent's alleged acceptance is an ambiguous statement made shortly after confirming he lacked such approval?
Opinions:
Majority - Leval, Circuit Judge
No. An agent does not have apparent authority to bind a principal where the third party's belief in that authority is unreasonable given the totality of the circumstances. Here, there was no evidence of actual authority, as the Schneiders never authorized Rauch to sell the notes at fifty-one percent; in fact, new information about McNaughton's value made it 'virtually inconceivable' they would have. More importantly, there was no apparent authority because the principal's own actions—the Letter Agreement explicitly reserving their 'sole discretion'—directly communicated the limits of Rauch's authority to RBC. The entire course of dealing reinforced that Rauch always needed the Schneiders' final approval. Given this context, RBC could not reasonably believe that an ambiguous statement by Rauch during a brief, unrecorded call—made just ten minutes after he explicitly stated he lacked authorization—was sufficient to form a binding contract.
Analysis:
This decision reinforces the principle that a third party's belief in an agent's authority must be objectively reasonable in light of all communications and dealings, particularly those originating from the principal. It clarifies that an agent's ambiguous words cannot create apparent authority when they contradict clear, pre-established limitations communicated by the principal. The case serves as a strong precedent for principals seeking to control their agents' power by explicitly defining the scope of that authority in writing to third parties, making it difficult for those third parties to later claim ignorance of those limitations.
