Goldston v. Bandwidth Technology Corp.

• Decision Date: 19 June 2008
• Docket Number: 3015.
• Citation: 2008 NY Slip Op 05560,859 N.Y.S.2d 651,52 A.D.3d 360
• Parties: ALAN M. GOLDSTON, as Assignee of GOLDSTON & SCHWAB, LLP, Appellant, v. BANDWIDTH TECHNOLOGY CORP. et al., Respondents.
• Court: New York Supreme Court — Appellate Division

52 A.D.3d 360

859 N.Y.S.2d 651

2008 NY Slip Op 05560

ALAN M. GOLDSTON, as Assignee of GOLDSTON & SCHWAB, LLP, Appellant, v. BANDWIDTH TECHNOLOGY CORP. et al., Respondents.

3015.

Appellate Division of the Supreme Court of the State of New York, First Department.

Decided June 19, 2008.

Judgment, Supreme Court, New York County (Rolando T. Acosta, J.), entered on or about March 19, 2007, after a nonjury trial, in an action by an attorney against former clients for specific performance of a retainer agreement, insofar as appealed from, holding the subject retainer agreement to be void and unenforceable, unanimously reversed, on the law, without costs, and judgment awarded in favor of plaintiff for 2% of defendant Bandwidth Technology Corp.'s authorized and outstanding shares, and the matter remanded for further proceedings, including the entry of an amended judgment.

Under well-established rules applicable to the principal-agent relationship, defendant Bandwidth Holdings Corp. and its wholly owned subsidiary, Bandwidth Technology Corp. (BTC), are bound by the retainer agreement signed by their president, Jonathan Star. Star had at least apparent authority to enter into the agreement with Goldston & Schwab (G & S), plaintiff's predecessor in interest. The corporations actually received services from the law firm under the agreement, and BTC further ratified the agreement by adopting a resolution terminating plaintiff, then the remaining member of G & S, from his position as corporate counsel. Defendants have set forth no grounds upon which they may be relieved from performance under the retainer agreement, and they are required to compensate plaintiff according to its terms.

The essential facts are uncontroverted. G & S entered into a September 1998 agreement to provide legal services to defendants BTC and Bandwidth Holdings Corp. The retainer agreement was duly executed by Jonathan Star, as president of defendant corporations. The agreement sets the law firm's compensation for its services to defendants at four shares of BTC stock, representing a 2% interest in the corporation. The agreement is for a fixed term of one year and retroactive to June 1, 1998, encompassing legal services rendered to the corporations prior to its execution, together with future services to be rendered throughout the balance of the contract term. In November 1998, Alan Schwab, plaintiff's law partner, left the firm and, by resolution adopted at a February 1999 shareholders' meeting, plaintiff was formally discharged by BTC from "any and all duties and authority granted to him as corporate attorney." Defendants failed to compensate plaintiff pursuant to the terms of the retainer agreement, and this action ensued.

After a nonjury trial, Supreme Court dismissed plaintiff's claim for compensation under the retainer agreement on the ground that defendants' president lacked the authority to engage the services of G & S without approval of the corporations' board of directors. The court concluded that the retainer agreement was void because Star did not have the authority to enter into a binding agreement on behalf of the corporations, adopting defendants' reasoning that the transfer of BTC stock to G & S as compensation for its services required board approval (citing Business Corporation Law §§ 504 and 505), which was not obtained.

Whether defendants are legally obligated to compensate plaintiff under the terms of the agreement is an issue that can be resolved as a matter of law. The agreement signed by Star, as agent for both corporations, is binding on defendants whether or not Star had actual authority to engage in the transaction or sought any necessary corporate approval. "`The president or other general officer of a corporation has power, prima facie, to do any act which the directors could authorize or ratify ... The true test of his authority to bind the corporation is ... whether, at the time, he is engaged in the discharge of the general duties of his office, and in the business of the corporation'" (Odell v 704 Broadway Condominium, 284 AD2d 52, 56-57 [2001], quoting Hastings v Brooklyn Life Ins. Co., 138 NY 473, 479 [1893]; see Allied Sheet Metal Works v Kerby Saunders, Inc., 206 AD2d 166, 168 [1994] [vice-president has "at least apparent authority to bind the corporation"]).

The retention of corporate counsel by Star is clearly an act subsumed within "the powers which, of necessity, inhere in the position of chief executive" (Odell, 284 AD2d at 56) and one that was undertaken "in the discharge of the general duties of his office, and in the business of the corporation" (id. at 57 [internal quotation marks and citation omitted]; see Park Riv. Owners Corp. v Bangser Klein Rocca & Blum, 269 AD2d 313 [2000] [president had presumptive authority to institute action and retain counsel]). Significantly, defendants do not contend that the retainer agreement is so extraordinary or provides for such unusual compensation as to require board approval (see Ullman-Briggs, Inc. v Salton, Inc., 754 F Supp 1003, 1006 [SD NY 1991]; Goldenberg v Bartell Broadcasting Corp., 47 Misc 2d 105, 109 [1965]). They argue only that the retainer agreement amounted to an "informally approved agreement" and that corporate practice "was to have all informally approved agreements signed by two principals."

Defendants' attempt to minimize the significance of a contract signed by their corporate president notwithstanding, an agreement entered into within the exercise of a corporate officer's apparent authority is binding on the corporation without regard to the officer's lack of actual authority (Odell, 284 AD2d at 57). Even in the instance where a chief executive's actual authority to enter into a particular agreement without the approval of the board of directors is in doubt, no obligation is imposed on the other party to the transaction "to show that [the president] did, in fact, consult the board" (id. at 56; see Hallock v State of New York, 64 NY2d 224, 231 [1984] [a principal is bound by a transaction entered into by its agent where the principal's conduct creates the appearance that the agent has such authority]). Even where an officer acts to the detriment of corporate interests, the law imposes no duty on a third party who deals with the corporation to inquire into its employee's actual authority. "The risk of loss from an unauthorized act of a dishonest employee falls on the corporation which appointed him to act on its behalf and not on the party who relies on his apparent authority" (Geotel, Inc. v Wallace, 162 AD2d 166, 168 [1990], lv dismissed, lv denied 76 NY2d 917 [1990]). Finally, it is well settled that the president of a corporation has presumptive authority to engage the services of counsel, even if those services exceed the terms of the general retainer agreement under which counsel was engaged (Twyeffort v Unexcelled Mfg. Co., 263 NY 6, 9-10 [1933]).

Because the retention of counsel falls within the scope of the executive's apparent authority, his actual authority is immaterial, and internal procedures for review or ratification of corporate transactions are irrelevant (cf. Leslie, Semple & Garrison v Gavit & Co., 81 AD2d 950, 951 [1981] [sale of corporation's physical assets]). Moreover, on the record before us, it is clear that defendants accepted the benefits of legal work performed by G & S and are therefore bound by the agreement, whether they authorized it or not (see Matter of Cologne Life Reins. Co. v Zurich Reins. [N. Am.], 286 AD2d 118, 126 [2001] citing Restatement [Second] of Agency § 94; Eden Temporary Servs. v House of Excellence, 270 AD2d 66, 67 [2000]). Thus, Supreme Court's finding that "it was company practice to have two principals sign all approved corporate contracts" is of no moment.

Business Corporation Law §§ 504 and 505 do not stand as an impediment to defendants' performance of their agreement with plaintiff. The former statute provides that "the judgment of the board or shareholders, as the case may be, as to the value of the consideration received for shares shall be conclusive" (Business Corporation Law § 504 [a]) and that shares may be issued for consideration for not less than the "value thereof, as is fixed from time to time by the board" (Business Corporation Law § 504 [c]). These provisions concern the valuation of stocks at time of issue (see Vohra v Prasad Realty Corp., 174 AD2d 735, 735 [1991]), and do not preclude an agreement to award issued and outstanding shares in lieu of a cash payment (id. at 736; see Torres v Speiser, 268 AD2d 253 [2000]; cf. Palmerton v Envirogas, Inc., 80 AD2d 996 [1981] [purported agreement to purchase stock in newly-formed corporation]). Furthermore, testimony established that BTC was in turmoil at the time of the retainer because its right to use bandwidth technology, the corporation's only valuable asset, was...