Sometimes you come across a case so clean, so pure, with respect to first principles, it’s actually quite charming. So it is with Caribbean Sun Airlines v. Halevi International, decided this week by the Delaware Supreme Court.

Alan Boyer was hired as a financial advisor to Caribbean Sun Airlines and a related entity, and in that capacity, was given a significant amount of access to the premises. At some point, he offered to buy the whole company, and as part of the transaction, sought a loan from Halevi, to be taken out in Caribbean’s name. Except when he approached Halevi, he represented that he was president of the company and a significant shareholder. He forged some documents to that effect, though the paperwork he provided to Halevi contained significant inconsistencies. As part of the due diligence process, one of Halevi’s representatives accompanied Boyer for a site visit, where Boyer was treated respectfully by the employees and permitted to access the computers, but he refused to take the representative to see the airplanes.

Boyer then signed a loan agreement on behalf of Caribbean Sun, including a confession-of-judgment affidavit. Halevi wired the company about $4 million.

Meanwhile, the principals of Caribbean Sun had no knowledge of any of this. Halevi eventually brought a lawsuit seeking repayment of the loan plus interest (totaling around $25 million), and the Superior Court entered judgment in its favor, ruling that the confession of judgment was binding on Caribbean under a theory of apparent authority.

I swear to god you could take those words as I have typed them, without making a single alteration, and dump them into the final exam for any introductory BizOrgs law school class, right? Law professors know where this is going, of course, and I almost feel bad for ruining the test-ready nature of the set up by revealing the end of the story – but reveal I shall.

Utterly unsurprisingly, and citing liberally from the Restatement of Agency, the Delaware Supreme Court held that apparent authority cannot be created by the actions of the putative agent alone; a third party relying on the agent’s authority must have a reasonable belief traceable to the manifestations of the principal. Here, of course, Caribbean Sun had not so manifested; after all, it had nothing to do with the forged documents. In a section of the opinion I fully expect to make its way into multiple casebooks, the court helpfully wrote:

Halevi’s argument that the facts of Kopelowitz’s site visit support a finding of apparent authority is also unavailing. As mentioned, the Superior Court placed great weight on this testimony, highlighting Boyer’s extensive access to Caribbean Sun and Miami Air’s facilities, records, and bank accounts. But this access, without more, cannot support a finding of apparent authority.

Granting Boyer access to their facilities, records, and bank accounts is certainly a manifestation by Caribbean Sun and Miami Air. But as we have discussed, “[a]pparent authority is created by a person’s manifestation that another has the authority to act with legal consequences for the person that makes the manifestation . . . .” Granting access to facilities and corporate accounts to employees who have no authority to bind an entity is done frequently in the ordinary course of business. For example, a wide range of individuals, from accountants to human resources professionals to low-level managers, in the course of performing their job duties, need access to a corporation’s offices, records, and bank accounts. Because they are commonplace and essential to the functioning of most businesses, these manifestations alone do not give rise to a reasonable belief by a third party that an agent is authorized to bind the entity to a major transaction such as Halevi’s loan and security agreement.

During the site visit, there were no other manifestations from either corporation that Boyer was empowered to act on their behalf in a transaction of this nature. While he had access to both corporations’ facilities and information, this access was no more extensive than would have been given to many other employees. And Boyer’s statement that he “runs the place” and the reactions of other employees to Boyer’s presence is not a manifestation by either Caribbean Sun or Miami Air.

The court also held that, given the inconsistencies in the forged paperwork, Halevi was under a duty to investigate further and its reliance was not “reasonable” under the circumstances.

But what of the $4 million Halevi wired? Surely it’s unfair to let Caribbean Sun keep that money free and clear! But, fear not, Halevi is pursuing a separate action for repayment, not based on the confession-of-judgment, and I presume it has a decent shot at least based on some kind of unjust enrichment/disgorgement theory. Mostly, though, I look forward to finding out what exactly Caribbean Sun thought the money was for when it just showed up, unsolicited, in its bank account.

And another thing: On this week’s Shareholder Primacy podcast, Mike Levin and I talk about the court decision holding that American Airlines violated its ERISA duties by including BlackRock index funds in its 401(k) plan, and about the National Association of Corporate Directors. Here at Apple, here at Spotify, and here at YouTube.

Print:
Email this postTweet this postLike this postShare this post on LinkedIn
Photo of Ann Lipton Ann Lipton

Ann M. Lipton is Tulane Law School’s Michael M. Fleishman Professor in Business Law and Entrepreneurship and an affiliate of Tulane’s Murphy Institute.  An experienced securities and corporate litigator who has handled class actions involving some of the world’s largest companies, she joined …

Ann M. Lipton is Tulane Law School’s Michael M. Fleishman Professor in Business Law and Entrepreneurship and an affiliate of Tulane’s Murphy Institute.  An experienced securities and corporate litigator who has handled class actions involving some of the world’s largest companies, she joined the Tulane Law faculty in 2015 after two years as a visiting assistant professor at Duke University School of Law.

As a scholar, Lipton explores corporate governance, the relationships between corporations and investors, and the role of corporations in society. Read More