Menard, Inc. v. Dage-MTI, Inc.
726 N.E.2d 1206, 2000 WL 387518, 2000 Ind. LEXIS 292 (2000)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A corporate president has the inherent authority to bind the corporation to a transaction that is within the usual and ordinary scope of their position, even if acting against the board of directors' secret instructions, provided the third party reasonably believes the president is authorized and has no notice of the limitations on that authority.
Facts:
- Arthur Sterling was the long-serving president of Dage-MTI, Inc., a closely held corporation, and for many years managed its affairs with little or no oversight from the six-member board of directors.
- Menard, Inc. made an offer to purchase a 30-acre parcel of land from Dage, which Sterling communicated to the Dage board, acknowledging that board approval was required.
- After the board rejected the first offer, it passed a resolution authorizing Sterling only to 'offer for sale' the 30-acre parcel and explicitly instructed him that any purchase agreement would require board review and acceptance.
- Sterling received a second, more lucrative offer from Menard for the entire parcel.
- Early in the transaction, Sterling had advised Menard that he needed to get authority from his 'partners' for the sale.
- Without the board's knowledge or consent, Sterling negotiated minor changes to the second offer and then signed the purchase agreement on behalf of Dage.
- The signed agreement included a provision where Sterling represented that he was duly authorized to sign and that his signature bound Dage.
- After initially stating he needed board approval, Sterling subsequently confirmed to Menard that he had the authority from his board to proceed with the transaction.
Procedural Posture:
- Menard, Inc. filed suit against Dage-MTI, Inc. in an Indiana trial court, seeking specific performance of the real estate agreement and damages.
- The trial court denied Menard's motion for partial summary judgment.
- Following a bench trial, the trial court entered judgment in favor of Dage.
- Menard, as appellant, appealed to the Indiana Court of Appeals.
- The Court of Appeals affirmed the trial court's judgment, finding Sterling lacked express or apparent authority to bind Dage.
- Menard petitioned the Supreme Court of Indiana to accept the case for review (petition to transfer).
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a corporate president have the inherent authority to bind the corporation to a real estate contract when he acts against the board's express instructions, but the third party, while aware that board approval was initially required, reasonably believes the president subsequently obtained that authority and has no notice of the president's specific limitations?
Opinions:
Majority - Sullivan, J.
Yes, a corporate president has the inherent authority to bind the corporation under these circumstances. The court found that the concept of 'inherent authority,' rather than actual or apparent authority, was the correct legal standard. This authority is derived from the agent's position and exists to protect third parties. The court applied a three-part test from the Restatement (Second) of Agency § 161, concluding that: (1) Sterling's act of negotiating a land sale was incidental to his long-standing role as president who had previously purchased real estate without board approval; (2) Menard reasonably believed Sterling was authorized because he was the president, the sole negotiator, represented that he had obtained board approval, and signed an agreement warranting his authority; and (3) Menard had no notice of the board's specific, internal limitations on Sterling's authority. Menard's initial knowledge that board approval was needed did not constitute notice of a permanent limitation, especially after Sterling assured them he had secured that approval.
Dissenting - Shepard, C.J.
No, the agreement should not be binding. The dissent argues that the majority's decision creates uncertainty because all parties, including Menard, knew from the beginning that board approval was required for the sale. Menard's knowledge that Sterling had to get board approval should have prevented them from relying solely on Sterling's subsequent claim that he had received it. The fact that the board ultimately disapproved the sale should have been dispositive. The dissent contends that where all parties understand that a higher authority's approval is necessary, an agent cannot bind the principal simply by claiming to have obtained that approval.
Analysis:
This decision formally adopts and clarifies the doctrine of inherent authority for corporate officers in Indiana, distinguishing it from the more traditional concepts of actual and apparent authority. It establishes that a president's power can be derived solely from their position, creating a binding contract even in the face of secret or countermanded instructions from the board. The ruling shifts the risk of an officer's unauthorized actions from the innocent third party to the corporation that placed the officer in a position of trust. Consequently, corporations are incentivized to exercise greater oversight over their high-level executives and to be explicit with third parties about any limitations on their officers' customary authority.
