Opinion ID: 1539669
Heading Depth: 1
Heading Rank: 3

Heading: Validity of the Settlement Agreement

Text: Green Leaves (at Cheah's direction) [4] argues that the motions judge erred in denying its motion to vacate the settlement agreement with 617 H Street Associates. The question turns on whether Yu possessed either actual or apparent authority to enter into that agreement on behalf of the corporation. The judge doubted that Green Leaves had established Yu's lack of actual authority as a corporate officer, and found that, in any event, Yu was invested with apparent authority. We conclude that the judge was correct on both counts. Generally speaking, actual authority in private corporations and other private-sector organizations originates both with the statute through which the organization achieves a legally recognized form and with the organization's constitutional documents. These provide the skeleton or essential architecture for beginning to determine which acts committed by human actors should be attributed to the organization. An organization's charter, certificate of incorporation, articles, and bylaws typically specify, among other basic structural matters, certain key positions within the organization and authority to act on behalf of the organization that is associated with each position. Private-sector organizations formed as corporations have a governing body ordinarily known as a board of directors ... that, by statute, must take specified types of actions and that also, by statute, is assigned ultimate supervisory responsibility for the corporation's business and affairs. Directors commonly appoint officers for the corporation. Officers hold defined executive positions carrying titles; the nature and scope of each officer's authority may be defined by statute, by the corporation's constitutional documents, by specific resolutions adopted by the directors, and by custom associating specific functions with a particular position.[ [5] ] Under the law of the District of Columbia, Yu's authority as a corporate officer to act on behalf of Green Leaves was governed in the first instance by the corporation's bylaws and any applicable resolution of the board of directors not inconsistent with the bylaws. [6] But Green Leaves did not produce its bylaws or any board resolution in support of its contention that Yu lacked the requisite authority; it fairly may be held to have waived any claim that the bylaws limited Yu's powers. [7] Green Leaves was a small corporation with only three officers; it cannot be presumed that Yu lacked general officer authority in this context merely because his title was secretary rather than president, or because he was not the principal shareholder. Yu may have had no role in managing Green Leaves's restaurant before the fire, but he took a major role afterward in collecting the available insurance and redressing the damage. And while Yu executed the settlement agreement without the approval of Cheah, Green Leaves's president and 50% shareholder, Green Leaves did not show that Yu needed Cheah's approval under the bylaws or otherwise. Indeed, Lee supported Yu's action, and the two of them made up a majority of Green Leaves's board of directors. To be sure, Yu presented no evidence that the board formally and properly authorized or ratified his action. But the allocation of the burden of proof is determinative. The burden is on [a corporation] challenging [the] authority of [its] officer to act to show he did not possess [the] power he assumed to exercise, and it is insufficient merely to show [that the] board of directors did not authorize it. [8] On this record, we hold that Green Leaves failed to carry its burden of proving Yu's lack of actual authority. Alternatively, we hold that the undisputed evidence supports the judge's factual determination that Yu had apparent authority to enter into the settlement agreement on behalf of Green Leaves by virtue of Cheah's own actions in response to 617 H Street Associates's first complaint in Superior Court. [9] [A]pparent authority arises when a principal places an agent in a position which causes a third person to reasonably believe the principal had consented to the exercise of authority the agent purports to hold. [10] Apparent authority thus may exist without the principal's express authorization of the agent's representations or conduct: Apparent authority depends upon the third-party's perception of the agent's authority. The third party's perception may be based upon written or spoken words or any other conduct of the principal which, reasonably interpreted, causes the third person to believe that the principal consents to have the act done on [his] behalf by the person purporting to act for [him].[ [11] ] Green Leaves and Cheah argue that Audrey Wong (the landlord's managing agent) knew Cheah was the president of the corporation, the major shareholder, and in charge, and that Yu told her that he was not supposed to do anything. [12] But the circumstances after the fire, including Cheah's prolonged inaction, forced Yu to take an active role and to deal with the landlord himself in order to stanch his (and the other guarantors') escalating liability. By itself, Cheah's contrasting failure to come forward and exercise responsibility could have been taken to mean that authority in the corporation had shifted to Yu. But whether or not that was so, Cheah unambiguously conveyed his consent to Yu's assumption of authority to act on Green Leaves's behalf by the way he reacted to 617 H Street Associates' complaint for damages. The landlord initially served its complaint only on Green Leaves (by its registered agent) and Cheah; Yu and Lee were not served until many months later. Green Leaves failed to answer the complaint. In other words, notwithstanding his position as president, director and principal shareholder, Cheah took no action on behalf of the corporation and allowed it to default. Moreover, in the answer and cross-claims he filed for himself, Cheah alleged that Green Leaves was under the stewardship of Yu and Lee, and that he himself was only a passive investor in the corporation. According to Cheah's pleading, Yu and Lee managed the day-to-day affairs of the restaurant and were responsible for all matters attendant thereto, including but not limited to maintaining all insurance coverage and otherwise abiding by all terms of the Lease Agreement.  (Emphasis added.) Cheah denied any responsibility of his own; he professed ignorance of any actions taken by Yu and Lee respecting the payment of rent, the procurement of insurance, and the repair of the fire-damaged premises; and he asserted that he did not even know whether the rent had been paid or what rent would be due in the future under the lease. In addition, as a further defense, Cheah alleged that 617 H Street Associates had failed to mitigate its damages. That defense could have meant only one thing: that Cheah wanted the landlord to cut its losses by repossessing the property and re-leasing it to another, paying tenant. [13] The implication of Cheah's statements and his own failure to act for Green Leaves was that Yu and Lee were vested with that authority; and, further, that Cheah consented to their entering into a settlement agreement on behalf of Green Leaves pursuant to which the landlord would mitigate its damages by taking back the property and renting it to another tenant. Audrey Wong thus had every reason to credit Yu's sworn averment, when he appeared in landlord and tenant court in response to the complaint for possession, that he was authorized to enter into a binding agreement on Green Leaves's behalf. [14] Accordingly, we hold that the judge did not err in denying Green Leaves's and Cheah's motion to vacate the settlement agreement. [15]