Chase v. Consolidated Foods Corp.
| Decision Date | 11 September 1984 |
| Docket Number | No. 83-2432,83-2432 |
| Citation | 744 F.2d 566 |
| Parties | 16 Fed. R. Evid. Serv. 955 David T. CHASE, Plaintiff-Appellant, v. CONSOLIDATED FOODS CORPORATION, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
James G. Hiering, Keck, Mahin & Cate, Chicago, Ill., for plaintiff-appellant.
Edward L. Foote, Winston & Strawn, Chicago, Ill., for defendant-appellee.
Before POSNER, Circuit Judge, PELL, Senior Circuit Judge, and WEIGEL, Senior District Judge. *
David Chase brought this diversity suit against Consolidated Foods Corporation, claiming that Consolidated had broken its contract with Chase to sell him the Fuller Brush Company, a division of Consoldiated. The jury gave judgment for Consolidated, and Chase appeals, claiming error in the instructions to the jury and in exclusion of evidence. The parties agree that Illinois law governs the substantive issues.
The alleged error in the instructions relates to the apparent authority of Newman, who was Consolidated's vice-president, secretary, and general counsel. Newman drafted an agreement for Chase to buy the Fuller Brush Company. Described as a letter of intent and signed by both parties (in June 1975), the agreement was expressly subject to the parties' negotiating a "definitive agreement" and to approval by Consolidated's board of directors. The agreement also allowed Chase to cancel it after studying the company--and in October he did cancel it. But negotiations resumed, and Newman prepared a new agreement in the form of a letter to Chase that began, "This is to confirm our understanding of the salient economic terms of your offer to acquire" Fuller Brush. The parties signed this agreement on November 17, 1975. It left a number of issues to subsequent negotiations--notably, determining the size of Fuller Brush's unfunded pension liability that the purchaser would assume--and did not specify a closing date for the sale.
Both agreements contain a formula for determining the purchase price of the Fuller Brush Company, although the record is not sufficient to enable us to compute an actual purchase price from the formula. What is clear, however, is that the November 17 agreement required Chase to put up $5 million in cash toward the total price. He wanted to borrow this money, and he thought that any lender would want to know whether Consolidated's board of directors had approved the sale. On November 26, at the request of Chase's associate, Calabro, Newman sent a telegram to Chase stating: "The Board of Directors of Consolidated Foods Corporation ratified the approval of the Executive Committee's agreement to sell the Fuller Brush Company to you based upon the terms outlined in the letter of November 17, 1975." But the board had not approved an agreement to sell; on November 26 it had approved the November 17 agreement only as a basis for further negotiations.
After November 26, relations between the parties went downhill. Consolidated says that Chase couldn't raise the $5 million; Chase says Consolidated decided to keep Fuller Brush Company because the company had started making money. The parties broke off negotiations in January, and later Chase brought this suit.
The main issue at trial was whether the November 17 agreement was a contract to sell Fuller Brush Company to Chase. The jury found it was not, and Chase has not appealed this finding. But he argues that the jury may have found as it did only because the judge did not instruct it correctly concerning Newman's apparent authority to bind Consolidated by his telegram of November 26, in which he said that the board of directors had approved the sale to Chase, though it had not. This was an important issue because Newman did not have actual authority to sell the Fuller Brush Company without getting the board's approval. The November 17 agreement became a binding contract of sale (on November 26) only if Newman's representation that the board had approved the sale was within the scope of his apparent authority to deal on Consolidated's behalf.
After making clear that only the board of directors had actual authority to sell Fuller Brush Company and that Chase had "the burden of proving the agent's authority to enter into the particular contract on which [Chase] rests his claim," the judge did give an instruction on apparent authority; only it is not a model of clarity. It states: The first sentence, which is the focus of Chase's objections, was taken verbatim from an instruction submitted by Consolidated; the second was added by the district judge.
Apart from the confusing change from neuter to masculine gender, and the singular "word" rather than "words," the problem with this instruction is that it is meant for a case where the principal is a human being rather than a corporation. Since a corporation can act only through agents, what does it mean to say that the agent's apparent authority must be based on the words and acts of the principal rather than the agent? Maybe it means that, for the corporation to be bound, the appearance of authority must be created by agents other than the agent whose authority is in question. He cannot just bootstrap himself into a position where he can bind his principal. He must be invested with apparent authority by the acts or statements or misleading omissions of other, and responsible, agents of his corporate principal. This interpretation would make the instruction a correct statement of Illinois agency law, see, e.g., Schoenberger v. Chicago Transit Authority, 84 Ill.App.3d 1132, 1137-38, 39 Ill.Dec. 941, 946, 405 N.E.2d 1076, 1081 (1980); but to assume that the jury so interpreted it would be unrealistic. Juries do not find it easy to understand the issues in commercial cases in the best of circumstances.
But we do not think the judge committed reversible error in giving this defective instruction and failing to give the instruction offered by Chase. That instruction was off the mark too. It states: "The actions of [various Consolidated officers including Newman] bind Consolidated if they acted within the powers Consolidated gave them or if Chase could reasonably have believed, based upon their titles, positions, actions, and the actions or inactions of Consolidated, that they were acting with Consolidated's authority." The problem is with the words, "or if Chase could reasonably have believed." The instruction nowhere requires that Chase have actually believed that Newman or the others were acting with Consolidated's authority. An appearance of authority that fools no one does not bind the principal. See, e.g., Minniti v. Cascade Employers Ass'n, Inc., 280 Or. 319, 329, 570 P.2d 1171, 1177 (1977); Restatement (Second) of Agency Sec. 8, comment a, at p. 31 (1957).
The facts make this omission more than a technicality, for they strongly suggest that Chase knew perfectly well that Newman had no authority to bind the corporation to the sale of the Fuller Brush Company. Chase is a wealthy and experienced investor (he estimates his net worth to be $33 million). He must at least have suspected that the sale of an entire corporate division worth millions would (as it did) require the approval of the seller's board of directors (see American Law Institute, Principles of Corporate Governance: Analysis and Recommendations, Tent.Draft No. 2, Sec. 3.02, comment f, at pp. 70-71 (April 13, 1984)), and that Consolidated's board would not approve the sale till the terms were fully worked out, which had not been done as of November 26. Nor would Consolidated be bound, under Illinois law, just by virtue of having given Newman some apparent authority to deal on its behalf by designating him as its secretary and general counsel. Even if it had given him the title of "president," this would not have invested him with apparent authority to "make a contract on its behalf which is unusual and extraordinary," that is, beyond the usual authority of a president, as a contract to sell a major corporate division would be. Sacks v. Helene Curtis Industries, Inc., 340 Ill.App. 76, 86, 91 N.E.2d 127, 132 (1950); see also id. at 88-89, 91 N.E.2d at 133; Restatement (Second) of Agency, supra, Sec. 27, comment a, at p. 104.
As for the telegram of November 26, in which...
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