Hurley v. Ornsteen
42 N.E.2d 273, 311 Mass. 477, 1942 Mass. LEXIS 735 (1942)
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Rule of Law:
Individual corporate officers or a majority of the board of directors cannot bind the corporation to an extraordinary act, such as an accord and satisfaction, unless the remaining directors have knowledge of and acquiesce to the act, or there is evidence of implied or ostensible authority from a prior course of conduct of performing similar acts.
Facts:
- Feldman & Company, Inc., a stockbrokerage business, was managed by a three-member board of directors.
- Albert Feldman served as president, treasurer, and director, while Richard Feldman served as clerk and director; the third director's identity and involvement are not in the record.
- A client (the defendant) maintained a brokerage account with the corporation, dealing exclusively with Richard Feldman.
- The defendant owed the corporation approximately $1,561.60, a debt for which the corporation held 600 shares of the defendant's stock as collateral.
- Albert Feldman sent the defendant a letter proposing to forgive the entire debt in exchange for the collateral, which was then worth significantly less than the amount owed.
- The defendant spoke with Richard Feldman, who confirmed the corporation would accept the collateral as full payment and settle the account on that basis.
- The defendant agreed to the arrangement, but there was no evidence that the third director had any knowledge of this agreement to compromise the debt.
Procedural Posture:
- The trustee in bankruptcy of Feldman & Company, Inc. sued the defendant in a Massachusetts trial court to recover an outstanding debt.
- The defendant asserted the affirmative defense of accord and satisfaction.
- At the conclusion of the trial, the judge denied the defendant's requests for rulings that the evidence warranted a finding of accord and satisfaction.
- The trial court judge found in favor of the plaintiff for $926.10.
- The defendant (appellant) appealed the judge's denial of his requested rulings to the Supreme Judicial Court of Massachusetts.
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Issue:
Does an agreement by two of a corporation's three directors to settle a client's debt for less than the full amount, made without the knowledge or acquiescence of the third director, constitute a valid and binding accord and satisfaction on the corporation?
Opinions:
Majority - Dolan, J.
No. An agreement by a majority of a board of directors to compromise a corporate claim is not binding on the corporation if the other directors have no knowledge of the transaction and do not subsequently adopt it. While a board of directors has the power to compromise claims, and a majority can act for the board, this power is predicated on the knowledge and acquiescence of all members. Here, there was no evidence the third director knew of or consented to the accord and satisfaction. Furthermore, the individual offices of president or clerk do not confer inherent authority to perform extraordinary acts like releasing a corporate debt. While Richard Feldman had apparent authority for routine brokerage transactions based on his course of conduct with the defendant, this authority did not extend to the unusual act of compromising a claim, as there was no evidence he or Albert Feldman had ever done so before.
Analysis:
This decision clarifies the limits of the authority of corporate officers and directors, particularly concerning actions outside the ordinary course of business. It establishes that an accord and satisfaction is considered an extraordinary act requiring a higher level of authority than routine transactions. The ruling reinforces the principle that apparent authority is not boundless; it is defined by the specific acts the principal has previously permitted the agent to perform. This precedent protects corporations from being bound by unauthorized, significant decisions made by individual officers or informal subgroups of directors, emphasizing the importance of full board awareness or formal approval for such matters.
