D & G Equipment Co., Inc. v. First Nat. Bank of Greencastle, Pa.

• Decision Date: 13 June 1985
• Docket Number: No. 84-5271,84-5271
• Citation: 764 F.2d 950
• Parties: 41 UCC Rep.Serv. 154 D & G EQUIPMENT CO., INC., Appellant, v. The FIRST NATIONAL BANK OF GREENCASTLE, PA., Appellee, v. GEORGION, Roger L., Third Party Defendant.
• Court: U.S. Court of Appeals — Third Circuit

Page 950

764 F.2d 950

41 UCC Rep.Serv. 154

D & G EQUIPMENT CO., INC., Appellant, v. The FIRST NATIONAL BANK OF GREENCASTLE, PA., Appellee, v. GEORGION, Roger L., Third Party Defendant.

No. 84-5271.

United States Court of Appeals Third Circuit.

Argued Nov. 1, 1984.

Decided June 13, 1985.

Dale A. Cooter (Argued), Nicholas H. Hantzes, Cooter & Gell, Washington, D.C., for appellant.

G. Thomas Miller (Argued), McNees, Wallace & Nurick, Harrisburg, Pa., for appellee.

Richard W. Cleckner, Cleckner and Fearen, Harrisburg, Pa., for third party defendant.

Before GARTH and SLOVITER, Circuit Judges, and BARRY, District Judge ^*.

OPINION OF THE COURT

GARTH, Circuit Judge.

D & G Equipment Company appeals from a final judgment of the district court holding that the First National Bank of Greencastle ("First National") was not liable as a converter of corporate funds, even though the bank allowed Roger Georgion, a former corporate officer of D & G, to deposit and disburse checks payable to D & G through a personal account opened in Georgion's name, trading as D & G Equipment Co. The district court concluded that Georgion retained apparent authority to act for D & G even after notice of his removal as an officer had been conveyed to the bank by D & G. We reverse.

I.

D & G Equipment, a Maryland corporation, was formed by a group of ten investors in 1977. D & G engaged in the business of leasing aerial cranes for use in the construction industry. At the time of D & G's formation, Roger Georgion (Georgion) was elected as president of the corporation and charged with responsibility for its operation. ¹ For a number of years, D & G maintained a corporate checking account with the First National Bank of Greencastle. Georgion, as president and chief operating officer of D & G, was an authorized signatory on the account.

In late 1981, the shareholders of D & G grew dissatisfied with Georgion's management of the corporation. On December 12 1981, the D & G Board of Directors met and voted to remove Georgion from his position as president and chief operating officer. At the same meeting, Henry Donaldson, then vice president of D & G, was named chief operating officer in Georgion's stead. The Directors also agreed that Donaldson would assume the powers of corporate president until a vote for a successor to Georgion was taken. In addition, the Board elected Edward Quinn to the position of assistant treasurer. Both Donaldson and Quinn were then designated as authorized signatories on all bank accounts for the corporation.

On December 13, 1981, Donaldson telephoned First National and spoke to Richard Myers, a vice president. He informed Myers that Georgion had been removed from his positions with D & G and requested that the bank temporarily freeze D & G's account. The following day, Donaldson met with Myers and gave him an original notarized corporate resolution stating Georgion had been removed. Donaldson also gave Myers a new signature card that indicated only Donaldson and Quinn were authorized signatories on the D & G account. The bank accepted delivery of both the corporate resolution and the new signature card.

On December 24, 1981, Georgion opened a new account with First National. The account was designated "Roger L. Georgion, T/A D & G Equipment Co., Inc." and was used by Georgion to deposit checks in his possession payable to D & G. The bank did not notify any D & G shareholders or directors, including Donaldson or Quinn, of the opening of the account. Rather, the bank relied upon the representations of Georgion and his counsel that Georgion's removal was improper and ineffective, that Georgion was therefore still president of D & G, and that Georgion was accordingly authorized to conduct the affairs of the company, notwithstanding any writing to the contrary.

Approximately $31,000.00 in D & G funds was deposited and approximately $29,500.00 was disbursed through Georgion's "trading as" account between December 24, 1981, and January 7, 1982. The payments made by Georgion covered D & G's rent, taxes, and insurance, with the bulk of the funds--over $22,000.00--applied to past due and current insurance premium charges. On January 7, 1982, Donaldson discovered the existence of Georgion's "trading as" account and advised the bank to discontinue processing any D & G funds through the account. The bank thereafter obtained from Georgion a voluntary indemnity agreement, stating Georgion agreed to hold the bank harmless for any actual losses sustained by virtue of opening the account. Transactions through the "trading as" account were suspended shortly thereafter and the account was closed.

D & G commenced this diversity action in the Middle District of Pennsylvania to seek recovery of the disbursed funds. D & G's amended complaint alleged that First National: 1) breached its fiduciary duty to D & G; 2) wrongfully paid Georgion funds belonging to D & G; 3) converted funds belonging to D & G; 4) breached its contract of deposit with D & G; and 5) was negligent in its handling of D & G funds. First National answered denying liability and filed a third party complaint alleging Georgion was liable for any alleged improper disbursement of D & G funds.

After a bench trial, the district court entered judgment in favor of First National and dismissed the third party complaint against Georgion. The court found that Georgion had apparent authority to act on behalf of D & G and that therefore the bank was not liable under any theory of conversion. The court further found that First National had not failed to use ordinary care in permitting the deposit and disbursement of D & G's funds by Georgion. Without deciding whether the intended creditors of D & G were paid, the court found, on the basis of Georgion's testimony, that the monies were used for the benefit of D & G.

We reverse the district court's holding that Georgion retained apparent authority to act for D & G and that First National was therefore not liable as a converter of corporate funds. We remand to the district court for a determination of the compensatory damages recoverable by D & G and direct that the district court reinstate First National's third party complaint against Georgion.

II.

An initial question in this appeal is whether after December 14, 1981, Georgion retained apparent authority to deposit and disburse corporate funds. The district court's finding that Georgion possessed such apparent authority is a mixed question of fact and law. When a finding is essentially one dealing with the effect of certain transactions or events, rather than a finding that resolves disputed facts, a reviewing court remains free to substitute its judgment for that of the trial court. See In re Trimble Company, 479 F.2d 103, 112 (3d Cir.1973). Indeed, this court has stated that "in determining whether the facts as found by the district court constitute apparent authority under Pennsylvania law, we may exercise an 'independent review.' " William B. Tanner Company, Inc. v. WIOO, Inc., 528 F.2d 262, 266 (3d Cir.1975), quoting United States ex rel. Hayward v. Johnson, 508 F.2d 322, 325 (3d Cir.1975).

Under Pennsylvania law, apparent authority flows from the conduct of the principal and not from that of the agent. Pennsylvania courts define apparent authority as that authority which, although not actually granted, the principal knowingly permits the agent to exercise, or holds him out as possessing. See Revere Press, Inc. v. Blumberg, 431 Pa. 370, 246 A.2d 407, 410 (1968); Jennings v. Pittsburgh Mercantile Co., 414 Pa. 641, 202 A.2d 51, 54 (1964). The Restatement (Second) of Agency further defines apparent authority as "the power to affect the legal relations of another person by transactions with third persons, professedly as agent for the other, arising from and in accordance with the other's manifestations to such third persons." Restatement (Second) of Agency Sec. 8 (1958).

The undisputed facts of this case establish that D & G explicitly notified First National that Georgion had been removed from his positions with D & G and was no longer to be an authorized signatory on corporate accounts. Georgion contends that the Board's action was defective under the corporate laws of Maryland, the state of D & G's incorporation, and that hence he retained actual authority. At the very least, Georgion asserts he retained apparent authority. This argument, however, mistakes the issue. Whether the Board's actions ultimately conformed to Maryland law cannot determine the effectiveness of the notice given to First National as a third-party.

Apparent authority can exist only to the extent that it is reasonable for the third party dealing with the agent to believe the agent is authorized. See Restatement (Second) of Agency Sec. 8, comment c (1958). All of the actions taken by D & G were actions to deny, not to grant, authority to Georgion. D & G's efforts were designed to prevent, not to authorize, Georgion from continuing to use corporate funds.

To allow First National to rely solely upon the statements of Georgion and his counsel as to Georgion's authority to act on behalf of D & G is to enable an agent to create apparent authority by his own representations--a principle rejected by Pennsylvania courts. See Jennings v. Pittsburgh Mercantile Co., supra at 54 ("An agent cannot, simply by his own words, invest himself with apparent authority. Such authority emanates from the actions of the principal and not the agent."); cf. Restatement (Second) of Agency Sec. 168 (1958) ("A disclosed or partially disclosed principal is not thereby subject to liability because of untrue representations by an agent as to the existence or extent of his authority or the facts upon which it depends.")

That D & G's actions sufficed to terminate Georgion's apparent authority is clear under existing doctrine and case law. ² The Restatement provides that if a principal has manifested that an agent is a general...