“Whose Agent is It Anyway”? – When the Debtor Tries to Disown the Written Agreement

Creditors, often times, those in the equipment leasing business, will enter into an equipment lease agreement with a business lessee where the agreement is signed perhaps by a manager or some other employee whose job it is to furnish and equip the debtor’s business. When the debtor’s business gets in trouble, employees are let go and the lease payments stop. The equipment lessor sends notices reminding the lessee to pay or that the lease is in default, demanding payment. Much to the surprise of the lessor, the lessee now says that while the person who signed the lease was an employee of the debtor, that person had no authority to sign the lease or bind the debtor, and therefore, the lease is not an obligation of the debtor.

Leaving aside that the debtor had the benefit of using the equipment for some period of time, can the debtor effectively disown a signed agreement by denying the authority of the debtor’s employee to sign the agreement? Clearly, the employee is an agent of the debtor, and probably represented to the lessor that he has authority to sign the lease. When is the debtor bound by the act of its agent who signs the agreement?

Under New York law an agent’s authority may be actual or apparent. Actual authority exists when an agent has the power to do an act or to conduct a transaction on behalf of the principal based upon the principal’s clear direction that the agent perform the act.  Minskoff v. American Exp. Travel Related Servs. Co., 98 F.3d 703, 708 (2d Cir.1996). Actual authority may be express or implied, and in the case of express authority is the kind of authority distinctly and plainly articulated, either orally or in writing. On the other hand, implied authority exists when verbal or other acts of the principal reasonably give the appearance of authority to the agent. Implied authority has also been defined as a kind of authority arising solely from the designation by the principal of a kind of agent who ordinarily possesses certain powers. The general rule in New York with regard to implied authority is that an agent employed to do an act is deemed authorized to do it in the manner in which business entrusted to him is usually done. Songbird Jet Ltd., Inc. v. Amax, Inc., 581 F.Supp. 912, 919 (S.D.N.Y.1984).

Apparent authority, in contrast to actual authority, is not a function of the representations made by the principal to the agent, but rather is based on the conduct of the principal in relation to a third party such that an appearance of authority is created. Such appearance of authority may, however, arise without any contact between the principal and the third party, especially where the principal has voluntarily placed the agent in a context whereby a person of “ordinary prudence” and knowledgeable of business practices is justified in assuming that the agent has authority to perform the particular act.  General Motors Acceptance Corporation v. Finnegan, 156 Misc. 2d 253, 592 N.Y.S.2d 570, 572 (Sup. Ct. Orange Co. 1992).

So for example, where the lessor has been dealing with the general manager of a hotel, club or restaurant and the general manager represents that he or she manages and runs the debtor’s establishment, when that general manager signs the equipment lease as general manager it is reasonable for the lessor to accept the general manager’s representations that his or her signature is binding upon the lessee. After all, a general manager is ordinarily a person who would be interacting with vendors and the kind of person a lessor would expect to interact with. The lessor need not find the “owner”, nor should the lessor have to insist upon a corporate or other equivalent resolution approving the transaction. The general manager was at the time of signing the authorized agent of the lessee, with either actual or apparent authority. Simply put, the debtor is bound by the act of his agent.