In a recent decision, Fergus v. Ross, No. SJC-12231 (August 2, 2017), the Supreme Judicial Court (“SJC”) narrowed an expansive 2016 Appeals Court interpretation of the agency law doctrine of “apparent authority”. As discussed in a prior blog post, on a complicated series of facts, the Appeals Court had upheld a trial court decision finding Ross, an attorney and private lender, liable under the doctrine of apparent authority for his failure to warn Fergus that a side loan arrangement between Fergus and a third party, Laverty, was not secured by the property Fergus believed would secure it. On further appellate review, the SJC reversed, finding that neither the words nor the actions of the principal, Ross, evidenced any knowledge of the subject transaction or acquiescence or ratification of the conduct of his claimed agent, Laverty. Therefore, there was no basis to find that the agent, Laverty, had apparent authority to bind Ross to act as closing agent on the side loan.
The case arose out of a $260,000 loan that Ross made to Fergus. The loan was brought to Ross by Laverty, who had brought previous loans to Ross for which he was paid a fee. Unbeknownst to Ross, Laverty persuaded Fergus to make a side loan of $120,000 to Laverty out of the proceeds of the $260,000 loan. The side loan was to be secured by property in Marshfield allegedly owned by Laverty. Ross prepared the closing documents for the $260,000 loan to Fergus. The documents, which Fergus never read but nevertheless signed, made no reference to the side loan and Ross claimed to be unaware of it. Upon receipt of the $260,000 loan funds, Fergus, in turn, loaned $120,000 to Laverty, who subsequently defaulted, declared bankruptcy and never repaid the loan which, it turned out, was never secured by the Marshfield property (which was not even owned by Laverty).
Fergus sued Ross. After a bench trial, the judge found in Fergus’ favor on his negligence claim against Ross on a theory that Laverty, acting as Ross’s agent, bound Ross to act as closing agent on the side loan whereby Ross had a duty to document the side loan in a manner that would protect Fergus’s interest. The Appeals Court affirmed, finding that Ross’s conduct caused Fergus reasonably to believe that Laverty had authority to bind Ross to act as closing agent on the side loan and to protect Fergus’s interest in it based on the following facts:
- Ross knew or should have known that the amount of the $260,000 loan greatly exceeded the stated amount required by Fergus for renovations because Ross’s wife inspected the property with Laverty;
- Ross knew that Laverty was spending his time on the 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.
Upon further appellate review, the SJC viewed the facts and their application to agency law very differently. The court highlighted that “only the words and conduct of the principal, . . . and not those of the agent are considered in determining the existence of apparent authority.” Id. at 8 (citing Licata v. GGNSC Malden Dexter LLC, 466 Mass. 793, 801 (2014)). There were certainly words and conduct of Ross evidencing Ross’s awareness of and connection with the $260,000 loan. However, there was no such connection shown between Ross and the side loan. In fact, Ross professed to know nothing about the side loan prior to or at the time of the closing and the court made no finding to the contrary. Nor was there any evidence of or finding that Ross had acquiesced in or ratified the conduct of Laverty regarding the side loan. The court found that Ross had no fraudulent intent in connection with the transaction. Nor was there evidence of willful ignorance of the loan on the part of Ross. The closing documents relating to the $260,000 loan made no reference to the side loan and Ross was not aware that Laverty did not own the Marshfield property.
On these facts, the SJC held that there was simply no basis to find that Laverty had apparent authority to bind Ross to act as closing agent for Fergus on the side loan. Accordingly, the SJC reversed the judgment below, rejecting the Appeals Court’s expansive interpretation of apparent authority, and grounding it firmly in the words and deeds of the principal.