Newberry v. Barth, Inc.
252 N.W.2d 711, 1977 Iowa Sup. LEXIS 1023 (1977)
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Rule of Law:
A corporate officer generally lacks the implied or apparent authority to bind the corporation to a contract for the sale of its principal asset, as such a transaction is not in the ordinary course of business.
Facts:
- Barth, Incorporated, a corporation, owned a large apartment complex as its principal asset.
- The corporation's publicly recorded articles of incorporation required prior consent from the preferred stockholder, the Federal Housing Commissioner (F.H.A.), to sell or encumber any real property.
- Florence Barth was the secretary-treasurer, a major common shareholder, and manager of the apartment complex.
- Following her husband's death, Florence Barth listed the apartment complex for sale with a real estate agency.
- On November 7, 1968, Florence Barth signed a contract to sell the apartment complex to Donald E. Newberry.
- The contract identified Florence Barth personally as the seller, not Barth, Incorporated.
- Newberry believed Florence Barth owned the property, although she never stated this to him.
- Barth, Incorporated never took formal action to authorize the sale, and the F.H.A., the preferred stockholder, never gave its consent.
Procedural Posture:
- Donald E. Newberry sued Barth, Incorporated and Florence Barth in a state trial court, seeking specific performance of the real estate sales contract.
- The trial court found for Newberry, ruling that Florence Barth's actions were binding on the corporation.
- The trial court entered a decree ordering both defendants to specifically perform the contract.
- Defendants Barth, Incorporated and Florence Barth, as appellants, appealed the trial court's decree to the Supreme Court of Iowa.
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Issue:
Does a corporate officer, acting without express corporate authority or the required consent of a preferred stockholder, have the apparent or inherent authority to bind the corporation to a contract for the sale of its principal asset?
Opinions:
Majority - Reynoldson, Justice
No, a corporate officer does not have the apparent or inherent authority to bind the corporation to a contract for the sale of its principal asset under these circumstances. The court reasoned that Florence Barth lacked any form of authority to execute the sale. She had no actual authority, as there was no corporate resolution authorizing the sale, and the articles of incorporation expressly prohibited it without the preferred stockholder's consent. She also lacked apparent authority because the corporation (the principal) did nothing to manifest to Newberry (the third party) that Barth had the power to sell its primary asset; her role as manager only created apparent authority for ordinary managerial duties. Finally, inherent agency power does not apply, as a corporate office alone does not confer the authority to sell the corporation's real estate. Newberry was on constructive notice of the ownership and the restrictions in the publicly recorded articles of incorporation.
Analysis:
This decision reinforces the legal distinction between a corporation and its officers, even when an officer is also a major shareholder. It underscores the principle that extraordinary corporate actions, such as the sale of a primary asset, require formal corporate authorization. The case serves as a crucial reminder for third parties dealing with corporations to perform due diligence, such as reviewing public records like articles of incorporation, to verify an agent's authority for significant transactions. By refusing to pierce the corporate veil or find apparent authority, the court upholds the integrity of corporate formalities and places the burden of inquiry on those seeking to bind the corporation through an agent's actions.
