Apparent Authority and Lawyers

Apparent Authority and Lawyers

Section 8 of the Second Restatement defines apparent authority as the power to affect another person’s legal relations through transactions with third persons, professedly as that person’s agent, arising from and in accordance with that person’s manifestations to the third persons.¹ The earlier sections reduced that definition to two working elements. The principal must in some way hold the agent out as having authority, and the outsider must reasonably rely on that appearance.² This section applies both elements to lawyers.

Lawyers strain the doctrine because a client who retains a lawyer to run a case hands over its procedure but keeps legal control over the subject matter and over decisions that affect the client’s substantial rights.³ The outsider sees none of that division. Opposing counsel sees a lawyer of record who speaks for the client, and has no view of the retainer or of the client’s private instructions. A lawyer can therefore hold the power to commit the client in ways the client never approved, the gap between authority and power with which this chapter began.

Three settings put that gap under pressure. In a settlement, opposing counsel claims that the client is bound by a deal the client never approved. In a fraud, the lawyer deceives the client, the outsider, or both, and one innocent party must absorb the loss. In a law firm, the firm is the principal, and a lawyer’s misconduct may reach the firm’s own assets. Each setting asks the pair of questions that runs through the whole chapter: what did the principal do, and what could the outsider reasonably believe as a result?

Settlement Authority

Three questions sort a dispute over a lawyer’s settlement, and each looks at a different moment and a different audience. Did the client give the lawyer actual authority to settle? If not, did the client’s own conduct toward the other side support a reasonable belief that the lawyer could settle? If neither, did the client later ratify the deal? Taking the questions in that order keeps the theories apart, which prevents most of the errors this topic invites.

The first question starts from the baseline that a lawyer negotiating for a client is the client’s agent, and without a grant of authority from the client a lawyer cannot settle a claim.⁴ A retainer does carry part of the power. The lawyer’s general authority over the procedural side of the case ordinarily includes implied actual authority to engage in settlement negotiations with opposing counsel. It stops short of closing the deal: the client keeps legal control over the subject matter of the litigation and over decisions affecting substantial rights, so the employment relationship alone gives the lawyer no implied authority to settle.⁵ Negotiation tests what the other side would accept and leaves the client free to refuse. A settlement ends the claim, and the claim belongs to the client.

Words from the client can supply the missing authority. A client who tells the lawyer “I will go along with whatever deal you can get” has authorized a settlement, and a client who says “I authorize you to settle anywhere over $30,000” has authorized one above a floor that the lawyer must respect.⁶ Conduct can supply it too. In one reported decision the evidence showed that each call the lawyer placed to the client was preceded or followed by a call to opposing counsel, and that the client, on receiving a letter confirming the settlement, did not object but said, in effect, “okay, great, they settled it.” The court found that reaction “hardly the reaction one would expect of someone who has not given his attorney the authority to settle the case.”⁷ Actual authority resolves the dispute whether or not opposing counsel ever formed a belief about it.

Opposing counsel reaches the second question only when the client shows that no such authority was given. The claim then rests on apparent authority, which some states recognize in this setting.⁸ Courts disagree about how much a client says to the world by naming a lawyer to appear in a case. A few treat the client as having “clothed” the lawyer with apparent authority to settle merely by holding the lawyer out as counsel in the case. Most courts reject that blanket rule and adopt a presumption instead: they presume that an attorney of record who settles purportedly on a client’s behalf had authority to do so, and the party disputing that authority carries the burden of proof.⁹ The presumption is rebuttable, so a client who truly withheld authority can still prove it, and the burden falls on her because she holds the evidence of what she told her lawyer.

Most courts decline the blanket rule because a position communicates only what it customarily carries, and the line between ordinary and extraordinary acts depends partly on custom. A corporate president, for instance, can ordinarily bind the corporation to contracts in the ordinary course of business but may lack authority to settle litigation involving it.¹⁰ A lawyer’s appointment likewise carries routine acts with ease. A Kansas appellate court held that the mere appointment of a lawyer as attorney for an estate clothed him with apparent authority to obligate the estate for a survey, a service routinely and directly connected with administering the estate.¹¹ Ordering a survey is the sort of act the position routinely carries. A settlement ends the client’s claim, and that contrast explains why most courts look to the presumption and the surrounding facts and do not treat the title as enough.

Some courts also distinguish settlements made in open court from those reached away from the courthouse, finding the lawyer’s authority more readily in the first kind.¹² The distinction tracks what the other side can see, since a lawyer who speaks for the client before a judge is visibly the client’s voice. For a decision that applies these elements to a lawyer’s claimed power to settle, see International Telemeter Corp. v. Teleprompter Corp.

The presumption protects an outsider who has nothing to doubt. It loses force once the client’s own words supply the doubt.

The letter moves the answer. Remove it and leave the same signed agreement, and the client has only private instructions that opposing counsel never saw, which do nothing to dislodge a belief grounded in the lawyer’s appearance as counsel of record.

Ratification catches what the first two questions miss. Even when a lawyer lacked actual and apparent authority, the client is bound if she later ratifies the settlement.¹³ The inquiry looks backward and turns on what the client does after learning of the deal, not on what the other side believed at the signing. A client who takes the settlement payment, knowing what it is for, affirms the deal by her conduct, while a client who objects as soon as she learns of it keeps the question open. The ratification section later in this chapter develops what counts as affirmation.

The third step does most of the sorting, because the presumption favors the party relying on the lawyer until something the client communicated, or something the other side knew, shows that the reliance was unreasonable. The fourth step matters only when the first three fail, and it is easy to overlook because it concerns the client’s conduct after the signing.

When Lawyers Defraud Clients

Apparent authority assumes a lawyer who stretches or misuses authority while openly acting for the client. A dishonest lawyer poses a harder problem. The lawyer deceives the client, the outsider, or both, and keeps what the deal produced. Client and outsider are then victims of the same wrongdoer, the money is gone, and one innocent party must bear the loss.

re Dreier shows how a court assigns that loss. Dreier, a lawyer, forged his client’s signature on the original settlement agreement and sent it to the adverse party, JANA, which signed it and wired the agreed amount to his trust account, and he never told his client that the funds had arrived.¹⁵ The payment was $6.3 million, which Dreier stole to invest in a Ponzi scheme he was running on the side.¹⁶ When the fraud surfaced, the client, Gardi, argued that the purported settlement was unenforceable, so that his claims against JANA remained alive. Had the court accepted that argument, JANA would have borne the loss from Dreier’s theft. The court refused. Dreier had duped both parties, and as between two innocent parties, “the risk of loss from the unauthorized acts of a dishonest agent falls on the principal that selected the agent.”¹⁷

The rule turns on selection. The client picked the lawyer and put him in charge of the matter, and the outsider dealt with Dreier only because the client had done so. No safeguard fully protects a principal against a determined fraud, since an agent bent on deceit can forge evidence or otherwise circumvent most safeguards, and in practice a rule of apparent authority can therefore operate as a rule of strict liability.¹⁸

The same allocation reaches a lawyer who lies only to the client. In Bakery Machinery v. Traditional Baking a lawyer misled his own client about the case, a default judgment followed, and the court left the client to seek relief from the lawyer. The lawyer’s lies did not make his omissions any less the client’s, because the client had chosen him to conduct the case, and the opposing party had done nothing wrong that would justify taking from it a judgment it had won. Dreier and this case differ in whom the lawyer deceived. They come out the same way for the same reason: a lawyer’s dishonesty toward the client does not move the loss onto the outsider.

The reasoning reaches beyond law practice. In Billups Petroleum Co. v. Hardin’s Bakeries a salesman’s position facilitated a fraud, and the court found apparent authority because the customer reasonably could assume, under the circumstances, that the salesman was authorized to prepare bills and accept payments for the delivered bread.¹⁹ Where a jurisdiction frames the issue as apparent authority, the client need not have authorized the fraud itself, though that would help. The question is whether the agent had apparent authority to engage in the transaction that led to the fraud.²⁰ A strong nexus between the organization and the fraud lets one predict with some confidence that a court will hold the principal liable, and the nexus is stronger when the agency relationship helped the agent carry out the fraud.²¹

A stranger who merely claims to be the client’s lawyer lacks all of that.

Apparent authority requires both a holding-out by the principal and reasonable reliance by the outsider, so a belief that begins and ends with the agent’s own words supplies neither.²² Dreier differs on every point that matters: the client chose him, put him in charge of the dispute, and his forgery carried the client’s own name.

On Dreier, all three questions point toward liability. The client had selected him, his role in the negotiation let him deal with JANA and receive its money, and the settlement was the transaction that led to the fraud. The client never saw the money, and the court still held him to the settlement. The loss rule therefore follows selection and the nexus and does not require the client to profit. The stranger in the deposit scenario fails the first question, and with it the others.

Law Firms as Principals

When the principal is a law firm, the manifestations that count are the firm’s own: its name, letterhead, and address, the titles it gives its lawyers, and the way it lets them deal with clients. The roles also shift. In the earlier subsections the client was the principal and the outsider was opposing counsel. Here a client or another outsider has lost money through a lawyer’s act, and the question is whether the firm must answer for it.

The Restatement (Third) of the Law Governing Lawyers imposes liability on a firm for injuries legally caused by any wrongful act or omission of a principal or employee who was acting in the ordinary course of the firm’s business or with actual or apparent authority.²⁵ Employee is a term of art in the Third Restatement of Agency: an agent whose principal controls or has the right to control the manner and means of the agent’s work, and for whose torts the principal is vicariously liable.²⁶ The two alternatives work differently. The ordinary-course route does not ask what the outsider believed. A firm’s ordinary course covers the practice of law and activities normally related to it, so the firm answers for malpractice by any firm lawyer, debts that staff incur in buying services or supplies, misapplication of funds in the custody of the firm or its personnel, and torts committed by a principal or employee within the scope of employment, such as a firm employee’s negligent driving on firm business.²⁷

The second route catches what the first misses. Even when the wrongful conduct fell outside the firm’s ordinary course, the firm can still be liable if a person with actual or apparent authority committed the act or omission.²⁸ That is where the manifestation and reasonable-belief elements from § 8 take over. Behind both routes sits a reason of quality control: vicarious liability requires not only a firm but also its principals to stand behind the performance of other firm personnel, and because many law firms are thinly capitalized, the principals’ liability helps assure compensation to those with claims.²⁹

The cases show how fact-dependent the line is. In Cook v. Brundidge, Fountain, Elliott & Churchill the court reversed summary judgment for a firm and sent to trial whether a partner’s investment advice to a client fell within the ordinary course of the firm’s business. In Rouse v. Pollard the court refused to hold a firm’s other partners liable when a lawyer embezzled money a client had given him to invest, because nothing the partners did indicated that he could act for them in investing money.

Where the claim rests on apparent authority, the firm’s own communications decide it. In Sheinkopf v. Stone the court reasoned that trappings of office, such as an office, furnishings, and a private secretary, do not without other evidence provide a basis for finding apparent authority. Nothing showed that the firm supplied those amenities for anything other than the practice of law, so the plaintiff could not reasonably have believed, from the firm’s words and deeds, that the lawyer was acting as the firm’s agent in the investment.³⁰ The same passage corrects a common slip. Apparent authority usually consists of the firm’s manifestation of the acts a partner is authorized to do, created by placing the lawyer in the position of partner, and it does not consist of notice of the acts a partner is not authorized to do.³¹ A firm’s silence about what its partners may not do is therefore not, by itself, a manifestation of what they may do. Whether a lawyer’s solicitation of investment money from a client counts as legal work or as a side venture is a question the cases answer fact by fact, so an answer should tie the result to what the firm itself communicated.

The ending rules from earlier in this chapter apply to firms as well. A firm that has held out a lawyer controls the appearance, so the firm, and not the client, must correct it when the relationship changes.

The third and fourth steps do most of the work in fact patterns, because the same stolen funds produce different results depending on whether the firm’s own communications reached the kind of act in dispute.