“Secret” Agent: A Person with Apparent Authority Can Bind Another Even to Unknown Deal

An agency relationship arises when one person (a “principal”) indicates by written or spoken words or other conduct that another person (an “agent”) has authority to act on the principal’s behalf and the agent consents so to act. Apparent authority is the power held by an agent or other actor to commit a principal to a binding arrangement with a third party when that third party reasonably believes the actor has authority to act on the principal’s behalf due to the words or actions of the principal. Apparent authority applies to actors who appear to be agents, but are not, and to agents who act beyond the scope of their actual authority. What conduct is sufficient to create apparent authority?

That question was considered in Fergus v. Ross, a split decision by the Massachusetts Appeals Court issued on June 9, 2016. In that case, Mr. Fergus required about $100,000 for some rehabilitation work at a property he owned in Dorchester. He could not obtain conventional financing and was introduced to Bernard Laverty, a real estate investor with connections to several “hard money” lending sources, that is, short-term, high-risk, high-interest private lenders; one such private lender being Steven A. Ross, an attorney. It turns out that Laverty was also in need of some financing to purchase a property in Marshfield and he persuaded Fergus to give him a side loan of $120,000 out of the proceeds of any loan that he could obtain from Ross. Laverty offered to give Fergus a “deed-in-lieu” on the Marshfield property to secure Laverty’s repayment of the side loan.

Laverty brought Fergus’s need for a hard money loan to Ross and, after some due diligence on the Dorchester property, Ross committed to a $260,000 loan to Fergus. Other than meeting at the closing, Ross and Fergus had no direct interaction; all interaction took place through Laverty. Laverty told Fergus that Ross would serve as the closing agent with respect to both loans, and that “everything, [including the deed-in-lieu] would be prepared at [Ross’s] office.” Laverty assisted in setting up the closing, transported Fergus to Ross’s office for the closing, and remained throughout the closing, encouraging Fergus to sign the closing documents. Unfortunately, there was no reference to the side loan in the closing documents and no protection of Fergus’s interest in the side loan.

Fergus repaid the $260,000 loan, but Laverty never repaid the $120,000 side loan. Fergus blamed Ross for his damages claiming that Laverty, acting as Ross’s agent, had bound Ross to act as closing agent on the side loan and that Ross had a duty to document the side loan in a manner that would protect Fergus’s interest. Ross denied knowing anything about the side loan and argued that there was not sufficient evidence to conclude that Laverty’s apparent authority extended to the side loan.

The Appeals Court disagreed and found that there was sufficient evidence of conduct by Ross that caused Fergus reasonably to believe that Laverty had authority to bind Ross to act as closing agent on the side loan. In particular, Ross established the amount of the loan to Fergus and knew or should have known that it greatly exceeded the amount required for renovations of the Dorchester property; Ross knew that Laverty was expending effort on the loan transaction even though Laverty was not receiving his customary referral fee from Ross; and Ross knew that Laverty frequently needed to borrow money for his various real estate projects. Ross admitted that he should have realized that Laverty was a liability, yet he placed Laverty in a position from which he could and did cause substantial harm to Fergus. The Appeals Court reasoned that “[h]aving accepted the benefits provided by Laverty, Ross should bear the loss caused by him.” Such an expansive view of apparent authority means that much due care should be taken on who you should let look like they have power to act for you.