"A principal who puts a servant or other agent in a position which enables the agent, while apparently acting within his authority, to commit a fraud upon third persons is subject to liability to such third persons for the fraud."
Grease Monkey International, Inc. v. Montoya
Sensenig, Grease Monkey's president, CEO, and board chairman, had broad authority to act as Grease Monkey's agent, including authority to raise capital from lenders for less than $500,000. For four years, he secured payments by telling people that they were investments in the company and that he used his personal account as the corporate account since it was a new company. However, none of these funds were invested in Grease Monkey. Instead, Sensenig used them for his own personal benefit. Sensenig continued to give investors promissory notes, interest payments, information on on the growth of their "investments," and Grease Monkey promotional items.
The "investors" then filed a complaint against Grease Monkey for breach of contract, fraud, misrepresentation, breach of duty of good faith and fair dealing, promissory estoppel, extreme and outrageous conduct, and negligent hiring and supervision.
Trial court found for respondents on their fraud and misrepresentation claims and dismissed their others. It entered judgment against Grease Monkey for the outstanding balance due on the promissory notes, and made the following findings:
- Respondentss reasonably believed they were investing in Grease Monkey.
- Sensenig's representations were material, false representations, upon which respondentss relied to their detriment.
- Sensenig was acting within his apparent authority when making the representations.
- Grease Monkey was liable with regard to the investments.
Court of appeals affirmed.
Is Grease Monkey liable for Sensenig's fraud and misrepresentations?
Since Grease Monkey did not monitor Sensenig's activities, only his results, he acted as a non-servant agent. Thus, this case must be tested under the Restatement (Second) of Agency § 261.
A person acting under apparent authority may be liable even though he is acting purely in his self-interests. It is common to impose liability based on "apparent authority," particularly when the person making the misrepresentation is an important corporate official.
Sensenig's position allowed him to commit fraud if he had a mind to. He acted within his apparent authority. He knowingly made false representations to respondentss with the intent to induce them to rely on them. The representations were material, and respondentss did rely on them. These acts constituted fraud and misrepresentation. If someone innocent must suffer for Sensenig's acts, it should be Grease Monkey for putting him in the position to commit these acts.
Grease Monkey is liable for Sensenig's fraud and misrepresentation. Affirmed.
: While the conclusion is right, the test applied should not depend on whether or not the agent is a servant, but instead on whether the act is physical or a representation. A servant must act with some intent to act for his master's purposes in order to impose liability in circumstances involving negligent physical acts, but an agent does not require such intent if he used his apparent authority to commit a tort. Thus, here, the majority still applied the right test because respondentss were injured by relying on Sensenig's apparent authority, and the right result has been reached.