Court Opinion

ID: 9472980
Source: CourtListenerOpinion
Date Created: 2023-08-05 04:16:28.232825+00
Date Added: 2024-06-11T17:43:15.717051
License: Public Domain

VAN GRAAFEILAND, Circuit Judge,
dissenting:
Every litigant, even a bank, is entitled to have its legal disputes tried and determined in accordance with correct legal procedures and established rules of law. Because that is not what is happening in the instant case, I dissent.
This case involves employee stock options, a device used to attract and retain capable personnel. When First Stamford Bank and Trust Company (“First Stamford”) was organized in 1971, “Qualified Stock Options” were given to a number of its employees including appellee Fisher. Under the Internal Revenue Code, a “Qualified Stock Option” must provide that it is not exercisable after five years from the date it is granted. 26 U.S.C. § 422(b)(3). Moreover, “at all times during the period beginning with the date of the granting of the option and ending on the day 3 months before the date of such exercise,” the grantee must be an employee of the granting corporation or a related corporation as described in the statute. Id. § 422(a)(2).
In accordance with the statutory requirements, Fisher’s option, which gave him the right to purchase a total of 1,000 shares at $20 per share, provided that 200 shares were to be purchased between June 23, 1971, the option date, and June 23, 1972; 200 shares between June 23, 1972 and June 23, 1973; 200 shares between June 23, 1973 *525and June 23, 1974; 200 shares between June 23, 1974 and June 23, 1975; and 200 shares between June 23, 1975 and June 23, 1976. It also provided that Fisher had to be a full-time employee at the time he exercised his option, unless his employment was terminated prior to June 23, 1976 without fault on his part, in which event he would be entitled, within three months from the date of termination, to exercise his option as to the full number of shares available to him.
At the 1976 annual meeting of First Stamford’s shareholders held on June 8, 1976, the shareholders “empowered” the board of directors to extend stock options theretofore granted to four employees including Fisher, Fisher’s extension to be for a term of five and one-half years. However, the board never acted in accordance with the authority thus given it, and no hand was raised in protest, perhaps because the market value of the stock was substantially less than the option price.
Three years later, after Fisher had retired, the situation changed. On June 26, 1979, First Stamford’s president sent each shareholder a letter which read in part as follows:
We are pleased to inform you that the Board of Directors of the First Stamford Bank and Trust Company has just approved a resolution pursuant to which the assets and liabilities of FSB are to be sold to People’s Savings Bank-Bridgeport. Under the proposed agreement (which we hope to reduce to writing within the next several weeks) stockholders can anticipate receiving a payment of between $65.00 and $70.00 per share.
One month thereafter, Fisher informed the Bank by letter that he had decided to exercise his stock option “in accordance with” the 1976 shareholders’ resolution.
Two months later, the first complaint in this action was served. The pertinent provisions of that complaint read as follows:
4. On 6-23-71 the plaintiff, Charles Fisher, and the defendant, First Stamford Bank and Trust Company, entered into an Agreement which granted plaintiff a proprietary interest in the defendant to acquire options to purchase 1,000 shares of common stock of the defendant corporation, First Stamford Bank and Trust Company, at a price of $20.00 per share on or before 6-23-76. A copy of the Agreement is attached hereto as Exhibit A.
5. On or about 6-10-76 the defendant, First Stamford Bank and Trust Company, extended the stock option Agreement heretofore granted and attached hereto as Exhibit A, to the plaintiff, Charles Fisher, for a term of five and one half years at $20.00 per share commencing on 7-1-76.
6. On 7-30-79 the plaintiff, Charles Fisher, elected to exercise his stock option for 1,000 shares of the defendant corporation stock at $20.00 per share, or a total of $20,000, in accordance with the 6-10-76 resolution of the defendant corporation. A copy of plaintiff’s letter electing to exercise his stock option of 1,000 of First Stamford Bank and Trust common stock at $20.00 per share or $20,000 is attached hereto as Exhibit B.
It is noteworthy that the complaint did not mention or even hint of any alleged oral agreement between Fisher and Norman Reader, First Stamford’s president.
On May 4,1981, Fisher served an amended complaint. Once again, no mention was made of an alleged oral agreement between Fisher and Reader. The complaint alleged that “[i]n June of 1976, at a time when the plaintiff was not an employee of the defendant, defendant agreed to extend and did extend the options previously granted to the plaintiff,” and that “notwithstanding its agreement with the plaintiff, as aforesaid” the defendant refused to allow plaintiff to exercise his options.
Another sixteen months went by. On September 3,1982, eight months after First Stamford’s motion for immediate trial had been granted and the case placed on the ensuing jury calendar, Fisher was permitted to serve a second amended complaint. In this complaint, Fisher alleged for the *526first time that, before he terminated his employment in January of 1976, the defendant promised to extend his option in consideration of his promise to render services to the defendant in connection with the opening of a new office later that year. This completely new theory of liability, which the district court permitted Fisher to propound on the very eve of the scheduled trial, begot a series of errors that has now culminated in my colleagues’ cursory af-firmance on a theory of ratification.
The existence vel non of this tardily-alleged oral agreement between Fisher and Reader, and Fisher’s alleged compliance with its terms, were the only questions presented to the jury. As the district court itself described the first crucial question, “[t]his jury is solely going to be called upon to determine whether or not the Plaintiff has established the agreement that he says was entered into between him and the bank through Mr. Reader____” This question never should have gone to the jury.
The district court recognized, and Fisher did not dispute, that Reader was without authority to enter into a stock option agreement with the plaintiff. Connecticut law reserves to boards of directors the right to grant options and specify their terms. Conn.Gen.Stat. § 33-344(a). Fisher admittedly knew this to be so. Because Fisher failed to prove that First Stamford’s board granted his alleged extended option or even knew of its existence, the Bank’s motion for a directed verdict, made at the close of Fisher’s case and renewed at the close of all the evidence, should have been granted. Regardless of the jury’s answer to the court’s interrogatory, the alleged extended option would be illegal and void. See Levine v. Randolph Corp., 150 Conn. 232, 244, 188 A.2d 59 (1963). If the district court preferred to reserve decision on the directed verdict motions, it should have granted First Stamford’s motion for judgment n.o.v., which technically was simply a renewal of its prior motions, Mattivi v. South African Marine Corp., “Huguenot”, 618 F.2d 163, 167 n. 3 (2d Cir.1980).
Having determined to send the case to the jury, the district court should have granted First Stamford’s request to instruct the jury that, under Conn.Gen.Stat. § 33-344(a), only First Stamford’s board of directors lawfully could grant a stock option. A jury that is asked to determine whether a person entered into an apparently lawful agreement is going to view the matter in an entirely different light than if it were instructed that the agreement was unlawful. In the absence of knowledge to the contrary, “[fjinders of fact are permitted to make logical inferences of innocent behavior, because ‘[cjonformity to recognized standards of conduct is the usual and customary action of every member of the community.’ ” Grey v. Heckler, 721 F.2d 41, 49 (2d Cir.1983) (Van Graafeiland, C.J., dissenting) (citing Matter of Callahan, 142 Misc. 28, 34, 254 N.Y.S. 46 (1931), aff'd, 236 A.D. 814, 259 N.Y.S. 987 (1932), aff'd, 262 N.Y. 524, 188 N.E. 48 (1933)). Although it is not suggested that the district court should have instructed the jury concerning the inferences it must draw, it was prejudiciously erroneous for the court to deprive the jury of the facts from which it could make its own common sense determination whether a person such as Mr. Reader knowingly would violate the law.
It will not do to say that the district court’s errors were rendered meaningless because judgment was entered against the Bank on a theory of ratification. Before an unauthorized agreement can be ratified, it first must be found to have been entered into.
Moreover, in determining the issue of ratification, the district judge viewed the evidence in the light most favorable to the plaintiff, just as if that entire issue had been submitted to the jury. Recognizing that the district court erred, my colleagues now proceed to determine the factual issue of ratification de novo, and conclude that the “totality of the circumstances” demonstrates that the board of directors ratified the purported agreement. I respectfully disagree.
*527In determining whether the doctrine of ratification has any role to play in this case, one must bear in mind two universally accepted rules that go to the very heart of this doctrine.
Rule 1:

In order to ratify the unauthorized act of an agent, the ratification must be made by the principal with a full and complete knowledge of all the material facts connected with the transaction to which it relates.

This Court has adhered to the foregoing rule:
Under the law of agency ratification can only occur when the principal, having knowledge of the material facts involved in a transaction, evidences an intention to ratify it.
Breen Air Freight, Ltd. v. Air Cargo, Inc., 470 F.2d 767, 773 (2d Cir.1972), cert. denied, 411 U.S. 932, 93 S.Ct. 1901, 36 L.Ed.2d 392 (1973).
So also has the Supreme Court of Connecticut:
There is no ratification unless the party has full knowledge of all the facts, nor unless there is the intent to ratify.
Goodwin v. The Town of East Hartford, 70 Conn. 18, 42, 38 A. 876 (1897). See also Botticello v. Stefanovicz, 177 Conn. 22, 28, 411 A.2d 16 (1979); Cohen v. Holloways’, Inc., 158 Conn. 395, 408-09, 260 A.2d 573 (1969); O’Connor v. Metropolitan Life Insurance Co., 121 Conn. 599, 609-10, 186 A. 618 (1936); Lester v. Kinne, 37 Conn. 9, 13-14 (1870); Seeley v. North, 16 Conn. 92, 97 (1844).
For additional discussions of the general rule, see 2A Fletcher Cyc Corp. § 756; 2 Williston on Contracts 3d Ed. § 278; 19 C.J.S. Corporations § 1015.
Rule 2:

In determining whether a principal has full and complete knowledge of all the facts, one may not charge the principal with the knowledge of an agent who has been acting in excess of his authority.

Connecticut follows the general rule of agency that knowledge of an agent, acting within the scope of his authority and in reference to a matter over which his authority extends, is knowledge of the principal. City of West Haven v. United States Fidelity & Guaranty Co., 174 Conn. 392, 395, 389 A.2d 392 (1978). “This assumes, however, that the agent is acting within the scope of his authority.” Id.; see also Indiana Bicycle Co. v. Tuttle, 74 Conn. 489, 492, 51 A. 538 (1902). This “scope of authority” limitation on the doctrine of imputed knowledge applies in full measure to any claim of ratification. This is the law both in Connecticut, Cohen v. Holloways’, Inc., 158 Conn. 395, 409, 260 A.2d 573 (1969), and elsewhere, Kenneally v. First National Bank of Anoka, 400 F.2d 838, 842 (8th Cir.1968), cert. denied, 393 U.S. 1063, 89 S.Ct. 716, 21 L.Ed.2d 706 (1969). See also Fletcher, supra, § 759; Williston, supra, § 278 at 270 n. 11; 19 C.J.S., supra, § 1015 at 489; 2A C.J.S., Agency, § 73(c) at 668 n. 6; Restatement of Agency 2d § 280.
Viewing the evidence in the light of the above clearly applicable rules of law, I am at a loss to determine how it can be held to “amply demonstrate” that First Stamford’s board of directors ratified Fisher’s alleged agreement with Reader. There is not one iota of proof in the record that any member of the fifteen-man board of directors, save the alleged wrongdoer, Reader, had any knowledge of Reader’s alleged but clearly unauthorized acts, and it simply is wrong to impute Reader’s knowledge to the other board members. In language that is strikingly apropos, Fletcher states:
Thus, the knowledge of the president of a corporation, who has signed a contract without authority of the directors, is not knowledge on the part of the corporation, where the other stockholders and directors have no knowledge of it.
Fletcher, supra, at § 759.
Moreover, ratification by the board cannot be inferred from the fact that Fisher worked as a bank “consultant” for several months in 1976. “[I]t is essential to im*528plied ratification from acceptance and retention of benefits that it and the acceptance of the benefits be with knowledge of all the material facts.” Fletcher, supra, § 773 at 489. Fisher was paid $4,000 for his 1976 services, and “[r]atification cannot ... be inferred from acts which may be readily explained without involving any intention to ratify.” 3 Am.Jur.2d Agency, § 170 at 555. See Cyclone Fence Co. v. McAviney, 121 Conn. 656, 661, 186 A. 635 (1936); Lester v. Kinne, supra, 37 Conn, at 13-14.
Finally, I fail to see how the shareholders’ 1976 resolution empowering the board of directors to extend the stock options of four employees, a resolution that the board never acted upon, can be considered a ratification by the board of an unauthorized agreement between Reader and only one of the four employees.
Perhaps because as an appellate court we are unused to deciding factual issues, see Hill York Corp. v. American International Franchises, Inc., 448 F.2d 680, 691 (5th Cir.1971), my colleagues feel free to make factual determinations based on the “totality of the circumstances.” Were I reviewing the majority opinion as an appellate judge, I would hold that, if my colleagues’ findings were not clearly inadequate, they were clearly erroneous. As a member of the same panel, I can only dissent.
Although I am satisfied that the above discussed errors, standing alone, mandate reversal, I cannot conclude without expressing my differences with the majority concerning part performance under the statute of frauds. It is a rule of ancient vintage that, in order to take a case out of the statute, “[t]he acts done in part performance ... must be such as are necessarily to be imputed to the agreement, and should be done solely with a view to the identical agreement being performed that is sought to be enforced.” Lester v. Kinne, supra, 37 Conn, at 14; see also Van Epps v. Redfield, 69 Conn. 104, 109-10, 36 A. 1011 (1897); Verzier v. Convard, 75 Conn. 1, 6-8, 52 A. 255 (1902). The conduct must be such as cannot “in the ordinary course of human conduct, be accounted for in any other manner than as having been done in pursuance of a contract.” Verzier at 7 (quoting Pomeroy on Contracts § 108).
The record shows that Fisher sent the Bank monthly statements for his services as a consultant. The November 1976 bill in the amount of $172.54 bore the heading “Final Bill for Consulting Fee”. This amount was paid on January 7, 1977 with a letter that stated:
This represents total payment by First Stamford Bank and Trust Company as per your agreement, taking into consideration all expenses previously paid by the bank.
It turned out, however, that the total payments made to that date were $3,500 rather than $4,000. Accordingly, on January 13, 1977, Fisher sent the Bank a bill for $500 which read “Final Bill for Consulting regarding new Bedford St. Office.” This also was paid.
Five years later, Fisher served a second amended complaint contending for the first time that his “final” bills were not final at all but, instead, his consulting services in connection with the new Bedford Street office were performed pursuant to an oral stock option agreement with Reader. Under established Connecticut law, permitting Fisher to prove an alleged verbal stock option contract under these circumstances would constitute a “virtual repeal” of the statute of frauds. Van Epps v. Redfield, supra, 69 Conn, at 110, 36 A. 1011. See also Burnside & Co. v. Havener Securities Corp., 25 A.D.2d 373, 375, 269 N.Y.S.2d 724 (1st Dep’t 1966) (per curiam).
For all the foregoing reasons, I dissent.