In June 2009, in the wake of the 2008 financial crisis, the Obama administration announced the most sweeping overhaul of the country’s financial regulatory system since the Great Depression. From the outset, the proposed financial reform has been met with criticism from both sides—some critics arguing that the reformation calls for too much regulation, while others arguing that it does not call for enough fundamental change in the financial systems. As we discussed in our June 24, 2009 article, the Obama Administration’s plan provided a broad outline for a refined regulatory system, but left much of the details to be filled in by Congress.
In December 2009, and after much debate, the House of Representatives passed its version of the reform legislation, marking a milestone in the Obama administration's efforts to rein in the abuses that contributed to the 2008 financial crisis and to prevent similar failures in the future. Now in the Senate for approval, the financial system overhaul has again been met with division among party lines.
On both Monday and Tuesday of this week, the proposed legislation was blocked from moving forward on the Senate floor, and there has been no visible sign that either party will budge. However, despite partisan maneuverings, both sides have expressed confidence that they will eventually work out a proposed legislation that gains bipartisan support. Lawmakers from both parties have emphasized that nobody wants to experience a repeat of the 2008 financial crisis that nearly collapsed the U.S. economy.
Importantly, should the Senate pass its version of the financial regulatory legislation, the difficulties will not end there. Indeed, there are potentially significant differences between the House and the Senate versions of the legislation, and the two Congressional chambers will have to work out those differences once the Senate passes its own version of the legislation.
Although the Obama administration’s financial system regulatory overhaul has been met with criticism in its details, one thing remains constant: our country’s financial industry needs some sort of regulatory reform to help prevent a repeat of the 2008 economic meltdown and the bailouts that necessarily followed.
Wednesday, April 28, 2010
Thursday, April 22, 2010
Supreme Court Decides Mutual Fund Fees Case, Rejects Test Adopted By 8th Circuit
Last April, the issue of mutual fund adviser’s fiduciary duties concerning fees was before the United States Court of Appeals for the 8th Circuit in the case Gallus v. Ameriprise. Gallus considered the scope of a mutual fund adviser’s fiduciary duties under Section 36(b) of the Investment Company Act of 1940 (“1940 Act”) codified as 15 U. S. C. §80a–35(b).
The Court of Appeals reversed the decision of the United States District Court for the District of Minnesota holding that an inquiry into Section 36(b) does not rely solely on the Gartenberg factors laid out by the Second Circuit in Gartenberg v. Merrill Lynch Asset Management, Inc. The Gartenberg test looks at whether the “fee is so disproportionately large that it bears no reasonable relationship to the services rendered and could not have been the product of arm’s-length bargaining.”
The Court explained that while Gartenberg provides a “useful framework for resolving the claims of excessive fees”, the size of the fee should be considered alongside the mutual fund adviser’s conduct. Thus, the Eighth Circuit read the plain language of Section 36(b) to impose a “duty to be honest and transparent throughout the negotiation process.” In its decision, the Court heavily relied on the decision reached by the 7th Circuit in Jones v. Harris Associates L.P. In Jones, Chief Judge Easterbrook also rejected the proposition that Gartenberg should be the sole test applied to determine the reasonableness of an adviser’s fee. Instead, the Seventh Circuit declared that the focus should be on the fairness and transparency of the process for approving mutual fund adviser fees.
On March 30, 2010, the U.S. Supreme Court rejected the test proposed in the 7th Circuit (and subsequently adopted by the 8th Circuit). The Supreme Court unanimously agreed that Section 36(b) does not extend a duty to the negotiation process between mutual fund advisers and their clients. In addition to reinforcing the Gartenberg test as the appropriate approach in resolving Section 36(b) claims, the Court also clarified several points to create uniform application amongst the Circuits. Namely, the Court explicitly stated:
§ The weight given to comparison of fee size will depend on the circumstances surrounding the parties.
§ It is appropriate for a court to look at the fees an investment adviser charges a captive mutual fund versus the fees charged to independent clients.
§ Courts should give deference to the fee size because pursuant to the ’40 Act, fees must be approved by a “fully informed mutual fund board.” However, the level of deference may vary depending on the approval procedure of the board.
To read the Supreme Court’s full opinion, please click here.
Monday, April 19, 2010
When is a Promissory Note a Security?
The Missouri Securities Act of 2003 (“2003 Act”) provides the definition of a “Security.” Section 409.1-102(28) (Cum. Supp. 2008) states that the term “Security” means:
[A] note; stock; treasury stock; security future; bond; debenture; evidence of indebtedness; certificate of interest or participation in a profit-sharing agreement; collateral trust certificate; preorganization certificate or subscription; transferable share; investment contract; voting trust certificate; certificate of deposit for a security; fractional undivided interest in oil, gas, or other mineral rights; put, call, straddle, option, or privilege on a security, certificate of deposit, or group or index of securities, including an interest therein or based on the value thereof; put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency; or, in general, an interest or instrument commonly known as a “security”; or a certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
Whether or not the term “note” applies such that the financial obligation at issue is considered a “security” is an issue that has not been decided by the Missouri courts. However, the United States Supreme Court in Reves v. Earnst & Young, 494 U.S. 56, 62 (1990) recognized that not all notes, which are used in a variety of settings, involve investments. Thus, the Court found that the phrase “any note” contained in § 3(a)(10) of the Securities Exchange Act of 1934 should not be interpreted to mean literally “any note,” but must be understood against the backdrop of what Congress was attempting to accomplish in enacting the Securities Acts. Id. After all, “Congress was concerned with regulating the investment market, not with creating a general federal cause of action for fraud.” Id. at 65.
In order to determine which notes should be considered securities, the Supreme Court adopted the “family resemblance” test. Id. at 65. The test begins with a presumption that every note is a security. Id. This presumption can be rebutted in two ways. Id. The first way of overcoming the presumption is by showing that the note in question “bears a family resemblance” to a list of instruments commonly denominated “notes” that fall outside the “security” category. Id. This list includes:
the note delivered in consumer financing, the note secured by a mortgage on a home, the short-term note secured by a lien on a small business or some of its assets, the note evidencing a “character” loan to a bank customer, short-term notes secured by an assignment of accounts receivable, or a note which simply formalizes an open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized). Id.
The second way to overcome the presumption is by convincing the Court to essentially add an item to this list. The Court must consider four factors before doing so. Id. at 65-66. These factors are: (1) the motivations that would prompt a reasonable seller and buyer to enter into it; (2) the “plan of distribution” of the instrument to determine whether it is an instrument where there is “common trading for speculation or investment”; (3) the reasonable expectations of the investing public; and (4) whether another regulatory scheme significantly reduces the risk of the instrument. Id. at 66-67. The Missouri Commissioner of Securities issued an interpretive opinion on October 1, 2003, that adopted the Reves’ “family resemblance” test for the State of Missouri. See Loan Participations under the Missouri Securities Act of 2003, IO-13-03. Because the notes at issue in this case do not appear to bear a family resemblance to those that are on the list of notes which fall outside the “security” category, an analysis of the four Reves factors is necessary.
A. Motivations of Buyer and Seller
In Reves, the Supreme Court stated that the first factor requires an examination of the motivations that would prompt a reasonable seller and buyer to enter into the transaction. 494 U.S. at 66. The Court stated that:
If the seller’s purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a “security.” If the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller’s cash-flow difficulties, or to advance some other commercial or consumer purpose, on the other hand, the note is less sensibly described as a “security.” Id.
The Supreme Court found that in the case before it this element weighed in favor of finding that the notes were securities because the defendant sold the notes in an effort to raise capital for its general business operations, and the purchasers bought them in order to earn a profit in the form of interest. Id. at 67-68.
Although at least one court has described this test as “somewhat tautological,” it nevertheless has been applied by a number of courts since Reves. See Singer v. Livoti, 741 F.Supp. 1040, 1049 (S.D.N.Y. 1990).
B. Plan of Distribution
In Reves, the Supreme Court stated that the second factor examines “the plan of distribution” of the instrument to determine whether it is an instrument in which there is “common trading for speculation or investment.” 494 U.S. at 66. The defendant in Reves offered the notes over an extended period to its 23,000 members, as well as to nonmembers, and more than 1,600 people held notes when the defendant filed for bankruptcy. Id. at 68. The Supreme Court found that this factor weighed in favor of finding the notes to be securities because, while not traded on a stock exchange, the notes were offered and sold to a “broad segment of the public.” Id.
In LeBrun v. Kuswa, 24 F.Supp.2d 641, 647 (E.D.La. 1998), the defendant obtained loans from eleven individuals personally known by an associate of the defendant in order to provide capital for operations of a business. 24 F.Supp.2d at 642. The court found that there was no common trading for speculation or investment in the notes, including no offering or sale to a “broad segment of the public.” Id. Therefore, the court concluded that this factor weighed against finding the notes in the case before it were securities. Id.
Other courts have also found that the second Reves factor weighs against finding a note a security where “the plan of distribution was limited to those persons in close proximity with Defendant and therefore not offered and sold to a broad segment necessary to establish the requisite ‘common trading’ in an instrument.” Ford v. Spartin, Civ. A. No. HAR 92-696, 1992 WL 297432 at *3 (D.Md. July 23, 1992) (finding that the second Reves factor was not met where notes were procured by four individuals); see also Tab Partnership v. Grantland Financial Corp., 866 F.Supp. 807, 809 (S.D.N.Y. 1994) (finding that securities laws are not properly invoked where a loan results from direct negotiations between the parties); see also Prochaska & Associates, Inc., v. Merrill Lynch Pierce Fenner & Smith, Inc., 798 F.Supp. 1427, 1431 (D.Neb. 1992) (finding that the four notes at issue failed to satisfy the second Reves factor where there was nothing in the facts to support a finding that the they were part of or comprised any sort of commonly traded or offered instruments); see also Premier Microwave Corp. v. Comtech Communications Corp., No. 88 CIV 2570 (KMW), 1991 WL 12430 at *5 (S.D.N.Y. Jan. 28, 1991) (finding that the second Reves factor was inapplicable to the note at issue because there was no plan of distribution and there was no “common trading for speculation or investment” for the note).
C. Reasonable Expectations of the Public
The third Reves factor looks at the public’s reasonable perceptions about the instrument at issue. 494 U.S. at 68. This is an objective factor whereby the Court must assess the beliefs of the investing public to determine whether there was a reasonable expectation that the instruments were securities, thereby affording the protections of the securities laws. LeBrun, 24 F.Supp.2d at 648.
In LeBrun, the court found that, even assuming the plaintiffs could be characterized as the “investing public,” their reasonable expectations “were nothing more than the payment of the notes, plus the specified high interest.” 24 F.Supp.2d at 648. The loan agreements were not publicly traded. Id. Moreover, there was no advertising or marketing of the notes to the general public, but only a specific inquiry into a select group of individuals. Id. Thus, the court concluded that the third Reves factor weighed against a finding that the notes were securities. Id. Other courts have also found that there is no expectation that instruments are securities where the notes represent a private transaction producing only a fixed return in the form of interest. See Campbell v. C.D. Payne and Geldermann Securities, Inc., 894 S.W.2d 411, 418-19 (Tex. App. 1995) (finding that notes representing loan to company for operating expenses with fixed rate of return were not of such a nature that would lead the general public to consider them as securities).
D. Other Risk-Reducing Regulatory Scheme
The final Reves factor examines whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument. 494 U.S. at 67. In Reves, the Supreme Court found that this factor weighed in favor of finding the notes were securities because the notes at issue were uncollateralized and uninsured. Id. at 69.
Several courts outside of Missouri have applied the regulatory scheme analysis to the notes at issue before them. In LeBrun the federal district court concluded that there was an absence of an alternative regulatory scheme to address the risks of the instruments. 24 F.Supp. 2d. 641. Regardless, the court concluded that, on balance, the application of the Reves factors justified a finding that the notes in question were not securities. Id., CF. Bradford v. Moench, 809 F.Supp. 1473, 1484 (D. Utah 1992).
In sum, while the statutes and caselaw provide some guidance on what the law deems to be a regulated and actionable security under the securities laws, each instrument should have its unique characteristics evaluated by competent legal counsel prior to issuance.
[A] note; stock; treasury stock; security future; bond; debenture; evidence of indebtedness; certificate of interest or participation in a profit-sharing agreement; collateral trust certificate; preorganization certificate or subscription; transferable share; investment contract; voting trust certificate; certificate of deposit for a security; fractional undivided interest in oil, gas, or other mineral rights; put, call, straddle, option, or privilege on a security, certificate of deposit, or group or index of securities, including an interest therein or based on the value thereof; put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency; or, in general, an interest or instrument commonly known as a “security”; or a certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.
Whether or not the term “note” applies such that the financial obligation at issue is considered a “security” is an issue that has not been decided by the Missouri courts. However, the United States Supreme Court in Reves v. Earnst & Young, 494 U.S. 56, 62 (1990) recognized that not all notes, which are used in a variety of settings, involve investments. Thus, the Court found that the phrase “any note” contained in § 3(a)(10) of the Securities Exchange Act of 1934 should not be interpreted to mean literally “any note,” but must be understood against the backdrop of what Congress was attempting to accomplish in enacting the Securities Acts. Id. After all, “Congress was concerned with regulating the investment market, not with creating a general federal cause of action for fraud.” Id. at 65.
In order to determine which notes should be considered securities, the Supreme Court adopted the “family resemblance” test. Id. at 65. The test begins with a presumption that every note is a security. Id. This presumption can be rebutted in two ways. Id. The first way of overcoming the presumption is by showing that the note in question “bears a family resemblance” to a list of instruments commonly denominated “notes” that fall outside the “security” category. Id. This list includes:
the note delivered in consumer financing, the note secured by a mortgage on a home, the short-term note secured by a lien on a small business or some of its assets, the note evidencing a “character” loan to a bank customer, short-term notes secured by an assignment of accounts receivable, or a note which simply formalizes an open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized). Id.
The second way to overcome the presumption is by convincing the Court to essentially add an item to this list. The Court must consider four factors before doing so. Id. at 65-66. These factors are: (1) the motivations that would prompt a reasonable seller and buyer to enter into it; (2) the “plan of distribution” of the instrument to determine whether it is an instrument where there is “common trading for speculation or investment”; (3) the reasonable expectations of the investing public; and (4) whether another regulatory scheme significantly reduces the risk of the instrument. Id. at 66-67. The Missouri Commissioner of Securities issued an interpretive opinion on October 1, 2003, that adopted the Reves’ “family resemblance” test for the State of Missouri. See Loan Participations under the Missouri Securities Act of 2003, IO-13-03. Because the notes at issue in this case do not appear to bear a family resemblance to those that are on the list of notes which fall outside the “security” category, an analysis of the four Reves factors is necessary.
A. Motivations of Buyer and Seller
In Reves, the Supreme Court stated that the first factor requires an examination of the motivations that would prompt a reasonable seller and buyer to enter into the transaction. 494 U.S. at 66. The Court stated that:
If the seller’s purpose is to raise money for the general use of a business enterprise or to finance substantial investments and the buyer is interested primarily in the profit the note is expected to generate, the instrument is likely to be a “security.” If the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller’s cash-flow difficulties, or to advance some other commercial or consumer purpose, on the other hand, the note is less sensibly described as a “security.” Id.
The Supreme Court found that in the case before it this element weighed in favor of finding that the notes were securities because the defendant sold the notes in an effort to raise capital for its general business operations, and the purchasers bought them in order to earn a profit in the form of interest. Id. at 67-68.
Although at least one court has described this test as “somewhat tautological,” it nevertheless has been applied by a number of courts since Reves. See Singer v. Livoti, 741 F.Supp. 1040, 1049 (S.D.N.Y. 1990).
B. Plan of Distribution
In Reves, the Supreme Court stated that the second factor examines “the plan of distribution” of the instrument to determine whether it is an instrument in which there is “common trading for speculation or investment.” 494 U.S. at 66. The defendant in Reves offered the notes over an extended period to its 23,000 members, as well as to nonmembers, and more than 1,600 people held notes when the defendant filed for bankruptcy. Id. at 68. The Supreme Court found that this factor weighed in favor of finding the notes to be securities because, while not traded on a stock exchange, the notes were offered and sold to a “broad segment of the public.” Id.
In LeBrun v. Kuswa, 24 F.Supp.2d 641, 647 (E.D.La. 1998), the defendant obtained loans from eleven individuals personally known by an associate of the defendant in order to provide capital for operations of a business. 24 F.Supp.2d at 642. The court found that there was no common trading for speculation or investment in the notes, including no offering or sale to a “broad segment of the public.” Id. Therefore, the court concluded that this factor weighed against finding the notes in the case before it were securities. Id.
Other courts have also found that the second Reves factor weighs against finding a note a security where “the plan of distribution was limited to those persons in close proximity with Defendant and therefore not offered and sold to a broad segment necessary to establish the requisite ‘common trading’ in an instrument.” Ford v. Spartin, Civ. A. No. HAR 92-696, 1992 WL 297432 at *3 (D.Md. July 23, 1992) (finding that the second Reves factor was not met where notes were procured by four individuals); see also Tab Partnership v. Grantland Financial Corp., 866 F.Supp. 807, 809 (S.D.N.Y. 1994) (finding that securities laws are not properly invoked where a loan results from direct negotiations between the parties); see also Prochaska & Associates, Inc., v. Merrill Lynch Pierce Fenner & Smith, Inc., 798 F.Supp. 1427, 1431 (D.Neb. 1992) (finding that the four notes at issue failed to satisfy the second Reves factor where there was nothing in the facts to support a finding that the they were part of or comprised any sort of commonly traded or offered instruments); see also Premier Microwave Corp. v. Comtech Communications Corp., No. 88 CIV 2570 (KMW), 1991 WL 12430 at *5 (S.D.N.Y. Jan. 28, 1991) (finding that the second Reves factor was inapplicable to the note at issue because there was no plan of distribution and there was no “common trading for speculation or investment” for the note).
C. Reasonable Expectations of the Public
The third Reves factor looks at the public’s reasonable perceptions about the instrument at issue. 494 U.S. at 68. This is an objective factor whereby the Court must assess the beliefs of the investing public to determine whether there was a reasonable expectation that the instruments were securities, thereby affording the protections of the securities laws. LeBrun, 24 F.Supp.2d at 648.
In LeBrun, the court found that, even assuming the plaintiffs could be characterized as the “investing public,” their reasonable expectations “were nothing more than the payment of the notes, plus the specified high interest.” 24 F.Supp.2d at 648. The loan agreements were not publicly traded. Id. Moreover, there was no advertising or marketing of the notes to the general public, but only a specific inquiry into a select group of individuals. Id. Thus, the court concluded that the third Reves factor weighed against a finding that the notes were securities. Id. Other courts have also found that there is no expectation that instruments are securities where the notes represent a private transaction producing only a fixed return in the form of interest. See Campbell v. C.D. Payne and Geldermann Securities, Inc., 894 S.W.2d 411, 418-19 (Tex. App. 1995) (finding that notes representing loan to company for operating expenses with fixed rate of return were not of such a nature that would lead the general public to consider them as securities).
D. Other Risk-Reducing Regulatory Scheme
The final Reves factor examines whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument. 494 U.S. at 67. In Reves, the Supreme Court found that this factor weighed in favor of finding the notes were securities because the notes at issue were uncollateralized and uninsured. Id. at 69.
Several courts outside of Missouri have applied the regulatory scheme analysis to the notes at issue before them. In LeBrun the federal district court concluded that there was an absence of an alternative regulatory scheme to address the risks of the instruments. 24 F.Supp. 2d. 641. Regardless, the court concluded that, on balance, the application of the Reves factors justified a finding that the notes in question were not securities. Id., CF. Bradford v. Moench, 809 F.Supp. 1473, 1484 (D. Utah 1992).
In sum, while the statutes and caselaw provide some guidance on what the law deems to be a regulated and actionable security under the securities laws, each instrument should have its unique characteristics evaluated by competent legal counsel prior to issuance.
Friday, April 16, 2010
Are You Doing Something That Requires Registration?
Not everyone involved in an investment transaction is an agent requiring registration. The activities requiring registration as an agent or broker is found in statute, common law and regulatory opinions. Although no single factor has been identified by these authorities to determine whether someone engaged in a financial transaction requires registration, factors given weight have been; whether the individual was involved in negotiations, solicited the investors, discussed the details of the investment, and if the person received compensation on a transaction-related basis.
Although Missouri has not statutorily or through administrative rulemaking defined those activities, there is guidance at the federal level from SEC No Action Letters and common law. In SEC v. U.S. Pension Trust Corp., No. 07-22570-CIV, 2009 WL 2365702 (S.D. Fla. July 30, 2009), the district court looked at several factors to determine whether a person’s activities were outside of the activities requiring registration as a broker. These factors include whether the person: (1) actively solicited investors; (2) advised investors as to the merits of an investment; (3) acted with “certain regularity of participation in securities transactions; and (4) received commissions or transaction based remuneration. U.S. Pension Trust, 2009 WL 2365702 at *9.
Two states provide a registration process for persons who participate in the offer or sale of securities who are not agents or brokers, Texas and Michigan. In Michigan these persons are “finders” and are defined as a person who, for consideration, participates in the offer to sell, sale, or purchase of securities or commodities by locating, introducing, or referring potential purchasers or sellers. Section 451.801, RSMi (Cum. Supp. 2008). Finders are included in the definition of investment adviser in the Michigan Securities Act and must register as such. In Texas, finders are defined as “An individual who receives compensation for introducing an accredited investor to an issuer or an issuer to an accredited investor solely for the purpose of a potential investment in the securities of the issuer, but does not participate in negotiating any of the terms of an investment and does not give advice to any such parties regarding the advantages or disadvantages of entering into an investment, and conducts this activity in accordance with §115.11 of this title (relating to Activities of a Finder). Note that an individual registered as a finder is not permitted to register in any other capacity; however, a registered general dealer is allowed to engage in finder activity without separate registration as a finder.” TX 7 CSR 7-115.1. Texas provides a registration process for finders.
The Missouri Securities Act contains exemptions for agent registration. The Act defines an agent in Section 409.1-102(1), RSMo, (Cum. Supp. 2008), as “an individual other than a broker-dealer, who represents a broker-dealer in effecting or attempting to effect purchases or sales of securities or represents an issuer in effecting or attempting to effect purchases or sales of the issuer’s securities.” Section 409.4-402. (a), RSMo (Cum. Supp. 2008), the registration provision for agents of broker-dealers in the Missouri Securities Act reads: “It is unlawful for an individual to transact business in this state as an agent unless the individual is registered under this act as an agent or is exempt from registration as an agent under subsection (b).”
The Missouri Securities Act’s exemption provision for agent registration found in Section 409.4-402(b) RSMo. (Cum. Supp. 2008), specifically provides in subdivision Section 409.4-402(b)(3), “an individual who represents an issuer with respect to an offer or sale of the issuer's own securities or those of the issuer’s parent or any of the issuer's subsidiaries, and who is not compensated in connection with the individual’s participation by the payment of commissions or other remuneration based, directly or indirectly, on transactions in those securities.” Moreover, subdivision (8) provides: “an individual who represents an issuer and who restricts participation to performing clerical or ministerial acts is exempt from registration.”
The prudent course of action is to evaluate your status and conduct and consult with counsel or your state regulator before you engage in any securities transaction as an unregistered person.
Although Missouri has not statutorily or through administrative rulemaking defined those activities, there is guidance at the federal level from SEC No Action Letters and common law. In SEC v. U.S. Pension Trust Corp., No. 07-22570-CIV, 2009 WL 2365702 (S.D. Fla. July 30, 2009), the district court looked at several factors to determine whether a person’s activities were outside of the activities requiring registration as a broker. These factors include whether the person: (1) actively solicited investors; (2) advised investors as to the merits of an investment; (3) acted with “certain regularity of participation in securities transactions; and (4) received commissions or transaction based remuneration. U.S. Pension Trust, 2009 WL 2365702 at *9.
Two states provide a registration process for persons who participate in the offer or sale of securities who are not agents or brokers, Texas and Michigan. In Michigan these persons are “finders” and are defined as a person who, for consideration, participates in the offer to sell, sale, or purchase of securities or commodities by locating, introducing, or referring potential purchasers or sellers. Section 451.801, RSMi (Cum. Supp. 2008). Finders are included in the definition of investment adviser in the Michigan Securities Act and must register as such. In Texas, finders are defined as “An individual who receives compensation for introducing an accredited investor to an issuer or an issuer to an accredited investor solely for the purpose of a potential investment in the securities of the issuer, but does not participate in negotiating any of the terms of an investment and does not give advice to any such parties regarding the advantages or disadvantages of entering into an investment, and conducts this activity in accordance with §115.11 of this title (relating to Activities of a Finder). Note that an individual registered as a finder is not permitted to register in any other capacity; however, a registered general dealer is allowed to engage in finder activity without separate registration as a finder.” TX 7 CSR 7-115.1. Texas provides a registration process for finders.
The Missouri Securities Act contains exemptions for agent registration. The Act defines an agent in Section 409.1-102(1), RSMo, (Cum. Supp. 2008), as “an individual other than a broker-dealer, who represents a broker-dealer in effecting or attempting to effect purchases or sales of securities or represents an issuer in effecting or attempting to effect purchases or sales of the issuer’s securities.” Section 409.4-402. (a), RSMo (Cum. Supp. 2008), the registration provision for agents of broker-dealers in the Missouri Securities Act reads: “It is unlawful for an individual to transact business in this state as an agent unless the individual is registered under this act as an agent or is exempt from registration as an agent under subsection (b).”
The Missouri Securities Act’s exemption provision for agent registration found in Section 409.4-402(b) RSMo. (Cum. Supp. 2008), specifically provides in subdivision Section 409.4-402(b)(3), “an individual who represents an issuer with respect to an offer or sale of the issuer's own securities or those of the issuer’s parent or any of the issuer's subsidiaries, and who is not compensated in connection with the individual’s participation by the payment of commissions or other remuneration based, directly or indirectly, on transactions in those securities.” Moreover, subdivision (8) provides: “an individual who represents an issuer and who restricts participation to performing clerical or ministerial acts is exempt from registration.”
The prudent course of action is to evaluate your status and conduct and consult with counsel or your state regulator before you engage in any securities transaction as an unregistered person.
Sunday, April 11, 2010
The Missouri Attorney’s Settlement Authority
When does an attorney in Missouri have the authority to settle your case? The answer to the question may depend upon whether or not he or she has your actual authority, or merely the authority of power in the eyes of third parties.
“Actual authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him.” Hardcore Concrete, LLC v. Fortner Ins. Services, Inc., 220 S.W.3d 350, 355 (Mo. App. S.D. 2007) (quoting RESTATEMENT (SECOND) OF AGENCY § 1 (1958)). Actual authority may be express or implied. Id. (citing Nichols v. Prudential Ins. Co. of America, 851 S.W.2d 657, 661 (Mo. App. E.D. 1993)). “‘Express authority is created when the principal explicitly tells the agent what to do’” and “‘[i]mplied authority consists of those powers incidental and necessary to carry out the express authority.’” Id. (citing Nichols, 851 S.W.2d at 661).
In Missouri it is clear that upon the death of a principal an agent no longer has actual authority. Wood v. Hudson, 823 S.W.2d 158, 160 (Mo. App. E.D. 1992) (finding that deceased defendant could not be liable for injuries resulting from accident with truck driven by decedent’s agent because the principal-agent relationship is terminated by death); see also Ridenour v. Duncan, 291 S.W.2d 900, 905-06 (Mo. 1956) (finding that agent did not have authority to execute deed pursuant to principal’s explicit instructions because any authority conferred by a principal upon any agent to act terminated with the principal’s death).
“The rules of law applicable to principal and agent control the relation between an attorney and his clients.” State ex rel. A. M. T. v. Weinstein, 411 S.W.2d 267, 272 (Mo. App. 1967). Therefore, an attorney’s authority to act on behalf of his client terminates upon the client’s death. This rule was clearly stated by the Missouri court of appeals in State ex rel. White v. Terte: "The general rule is that the relationship between an attorney and client in a lawsuit is one of agency, and that upon the death of the client, that relationship terminates, with all authority incidental thereto, and the attorneys have no authority to take any further steps whatsoever in behalf of the deceased party unless and until authorized by the personal representatives of the deceased, duly qualified. Id. 293 S.W.2d 6, 10 (Mo. App. 1956); see also Glaser v. Hornbeck, 477 S.W.2d 432, 433 (Mo. App. 1972) (finding that attorney’s attempt to file notice of appeal after his clients’ deaths was ineffective because his employment as attorney and authority to act as an agent ceased immediately upon his their deaths).
Moreover, a cause of action for personal injuries, other than those resulting in death, shall not abate by reason of the injured person’s death, nor by reason of the death of the person against whom such cause of action shall have accrued; “but in case of the death of either or both such parties, such cause of action shall survive to the personal representative of such injured party.” MO. REV. STAT. § 537.020.1 (2009) (emphasis added).
Further, MO. REV. STAT. § 537.021.1 (2009) provides that: "The existence of a cause of action for an injury to property, for a personal injury not resulting in death, or for wrongful death, which action survives the death of the wrongdoer or the person injured, or both, shall authorize and require the appointment by a probate division of the circuit court of: (1)A personal representative of the estate of a person whose property is injured, or a person injured ...
Absent the grant of express authority to settle a lawsuit, an attorney’s authority to do so should be analyzed in terms of apparent authority." Rosenblum v. Jacks or Better of America West Inc., 745 S.W.2d 754, 760 (Mo. App. E.D. 1988). “It has long been recognized that an attorney can have apparent authority to act for a client.” Id. Apparent authority is created by conduct of the principal (the client) which causes a third person reasonably to believe that another (the attorney) has the authority to act for the principal. Id. Apparent authority exists only concerning third parties that believe and have reason to believe that the authority exists, and “may be shown by evidence of the facts and circumstances attending the actions of the parties.” Parks v. MBNA America Bank, 204 S.W.3d 305, 313 (Mo. App. W.D. 2006).
In Rosenbloom, 745 S.W.2d at 760, the court noted that, “regrettably, the cases in Missouri arising out of settlements gone awry have entailed a mutation of the general principles of agency.” The court observed that Leffler and its progeny, by focusing on the acts or representations of the attorney (agent), instead of the client (principal), in effect resorted to a new species of authority, “presumptive” or “presumed” authority, rather than the equally serviceable concept of apparent authority. Id. at 761-62. However, the court noted that the Leffler presumption is not wholly irreconcilable with the concept of apparent authority. Id. at 762. In this connection, the court pointed to the RESTATEMENT (SECOND) OF AGENCY, § 49, comment c: "Inferences from agent’s position. Acts are interpreted in the light of ordinary human experience. If a principal puts an agent into, or knowingly permits him to occupy, a position in which according to the ordinary habits of persons in the locality, trade or profession, it is usual for such an agent to have a particular kind of authority, anyone dealing with him is justified in inferring that he has such authority, in the absence of reason to know otherwise. The content of such apparent authority is a matter to be determined from the facts." Id. The court then applied the general principles of agency to the case before it, and found that the trial court could have found that apparent authority existed based on the facts of the case. Specifically, the trial court could have found that the client knew that settlement negotiations were taking place and that the other party’s attorney was never on notice that there was a limitation put on the attorney’s authority. Id. at 762. Moreover, the attorney was knowingly permitted by the client to occupy the position of exclusive negotiator, and to make and reject offers. Id.
The RESTATEMENT (SECOND) OF AGENCY § 120 (1958) states that:
(1) The death of the principal terminates the authority of the agent without notice to him, except as stated in subsections (2) and (3) and in the caveat.
(2) Until notice of a depositor’s death, a bank has authority to pay checks drawn by him or by agents authorized by him before death.
(3) Until notice of the death of the holder of a check deposited for collection, the bank in which it is deposited and those to which the check is sent for collection have authority to go forward with the process of collection.
Caveat: No inference is to be drawn from the rule stated in this Section that an agent does not have power to bind the estate of a deceased principal in transactions dependent upon a special relation between the agent and the principal, such as trustee and beneficiary, or in transactions in which special rules are applicable, as in dealings with negotiable instruments.
RESTATEMENT (SECOND) OF AGENCY § 120 Comment c. Apparent authority, which addresses the precise issue presented in this case, states:
"Like authority, apparent authority terminates with the death of the principal. Third persons who, in ignorance of the death, deal with the former agent (who also may be ignorant of the death) have no rights upon the contract against the estate of the deceased, unless the situation is one within the rules stated in Subsections (2) or (3) or the Caveat, except as they may be subrogated to any right which the agent may have because of a special contract with the principal."
An example of the application of this rule can be found in In re Estate of Kelly, 547 A.2d 284, 286 (N.H. 1988), where the petitioners were not aware of the client’s death at the time they arrived at the settlement with the attorney. The petitioners brought an action to set aside a settlement arrived at after the death of the client. The petitioners alleged that actual, as well as apparent, authority terminated with the death of the principal. Id. at 287. The court, looking to RESTATEMENT (SECOND) OF AGENCY § 120 (1958), concluded that none of the exceptions to § 120 applied, and that consequently the apparent authority of the attorney terminated with the death of his client. Id. at 288-89. Therefore, the settlement would not be enforced. Id. at 289.
Missouri courts have not adopted or cited to RESTATEMENT (SECOND) OF AGENCY § 120. However, since its publication in 1958, Missouri courts have cited to and relied upon other sections of the RESTATEMENT (SECOND) OF AGENCY.
The RESTATEMENT (THIRD) OF AGENCY § 3.11 (2006) states as follows:
(1) The termination of actual authority does not by itself end any apparent authority held by an agent.
(2) Apparent authority ends when it is no longer reasonable for the third party with whom an agent deals to believe that the agent continues to act with actual authority.
RESTATEMENT (THIRD) OF AGENCY § 3.11 Comment b. Principal’s death or loss of capacity, which addresses the precise issue presented in this case, states:
A principal’s death or loss of capacity does not by itself or automatically end the agent’s apparent authority. This is contrary to the position taken in Restatement Second, Agency § 120, Comment c. Change is warranted for several reasons, including the nature of apparent authority and various indications of policy contrary to the position taken in § 120.
An agent may act with apparent authority following the principal’s death or loss of capacity because the basis of apparent authority is a principal’s manifestation to third parties, coupled with a third party's reasonable belief that the agent acts with actual authority. See §§ 2.03 and 3.03. Neither element requires that the principal consent or manifest assent at the time the agent takes action. When third parties do not have notice that the principal has died or lost capacity, they may reasonably believe the agent to be authorized.
The RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 31(3) (2000) also addresses the issue presented here: "A lawyer’s apparent authority to act for a client with respect to another person ends when the other person knows or should know of facts from which it can be reasonably inferred that the lawyer lacks actual authority, including knowledge of any event described in Subsection(2)." Subsection (2) lists circumstances under which a lawyer’s actual authority to represent a client ends, which includes when the client dies. RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 31(2)(b).
Prior to the publication of either RESTATEMENT (THIRD) OF AGENCY or RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS, courts outside of Missouri found that death does not terminate apparent authority. For example, in Schock v. U.S., 56 F. Supp.2d 185, 187 (D.R.I. 1999), an attorney withdrew all the funds from the account of the decedent. The decedent’s only heir brought an action against the bank from which the funds were withdrawn. Id.
In addressing the issue of whether a principal’s death terminated the apparent authority of the attorney to withdraw the funds, the court looked to RESTATEMENT (SECOND) OF AGENCY § 120 cmt. c (1958), which states that apparent authority terminates with the death of the client. Id. at 193. The court noted that this statement of the law was “illogical.” Id. The court found that:
The public policy for which the state [] created apparent agency would be eviscerated by adopting the rule that [plaintiff] promotes. The doctrine of apparent agency exists in order to allow third parties to depend on agents without investigating their agency before every single transaction. If a third party had to confirm the agency relationship repeatedly, then it might as well deal directly with the principal. [Plaintiff] seeks to place the risk that a principal has died onto third parties, rather than on the principal. That is absurd." Id.
Other cases since the publication of RESTATEMENT (THIRD) OF AGENCY have also found that the death of a principal does not terminate the apparent authority of an agent. See Grizzle v. U.S. Bank, 892 N.E.2d 983, 986 (Ohio Ct. App. 2008) (finding that summary judgment was inappropriate where genuine issue of material fact existed as to whether defendant was acting under apparent authority to withdrawal funds after principal’s death).
Missouri courts have not adopted or cited to either RESTATEMENT (THIRD) OF AGENCY § 3.11 or RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 31(3). It should be noted, however, that both were only recently published, giving Missouri courts somewhat limited opportunity to rely on their provisions. At least one Missouri court has relied upon other sections of the RESTATEMENT (THIRD) OF AGENCY. See Milligan v. Chesterfield Village GP, LLC, 239 S.W.3d 613, 622 (Mo. App. S.D. 2007) (citing to RESTATEMENT (THIRD) OF AGENCY § 6.01 (2005)).
Finally, “The compromise of a pending suit by an attorney having apparent authority will be binding upon his client, unless it be so unfair as to put the other party upon inquiry as to the authority, or imply fraud.” Wenneker v. Frager, 448 S.W.2d 932, 937 (Mo. App. 1969) (citing Black v. Rogers, 75 Mo. 441, 1882 WL 9621 at *4 (Mo. 1882)). In other words, courts will only find a settlement negotiated by an attorney with only apparent authority to be binding on his client if it was not unfair and if there was no fraud in its procurement. See Stearns Bank N.A. v. Palmer, 182 S.W.3d 624, 626 (Mo. App. E.D. 2005) (finding settlement binding because “only allegations of unfairness in the agreement to dismiss or fraud in its procurement would undermine the attorney’s apparent authority” and party attacking the agreement made no allegations that it was unfair or procured by fraud); See also Promotional Consultants, Inc. v. Logsdon, 25 S.W.3d 501, 505 (Mo. App. E.D. 2000) (finding settlement binding because “there was nothing in the record or arguments of counsel that the settlement agreement, or any of the provisions contained within, was unfair or otherwise fraudulently obtained”); see also Mollenbrink v. Gibson, 479 S.W.2d 145, 148 (Mo. App. 1972) (finding settlement binding because “[n]o fraud upon appellants is even slightly in the case.”); see also Wenneker, 448 S.W.2d at 937 (finding the settlement binding because of “the seeming reasonableness of the settlement.”).
“Actual authority is the power of the agent to affect the legal relations of the principal by acts done in accordance with the principal’s manifestations of consent to him.” Hardcore Concrete, LLC v. Fortner Ins. Services, Inc., 220 S.W.3d 350, 355 (Mo. App. S.D. 2007) (quoting RESTATEMENT (SECOND) OF AGENCY § 1 (1958)). Actual authority may be express or implied. Id. (citing Nichols v. Prudential Ins. Co. of America, 851 S.W.2d 657, 661 (Mo. App. E.D. 1993)). “‘Express authority is created when the principal explicitly tells the agent what to do’” and “‘[i]mplied authority consists of those powers incidental and necessary to carry out the express authority.’” Id. (citing Nichols, 851 S.W.2d at 661).
In Missouri it is clear that upon the death of a principal an agent no longer has actual authority. Wood v. Hudson, 823 S.W.2d 158, 160 (Mo. App. E.D. 1992) (finding that deceased defendant could not be liable for injuries resulting from accident with truck driven by decedent’s agent because the principal-agent relationship is terminated by death); see also Ridenour v. Duncan, 291 S.W.2d 900, 905-06 (Mo. 1956) (finding that agent did not have authority to execute deed pursuant to principal’s explicit instructions because any authority conferred by a principal upon any agent to act terminated with the principal’s death).
“The rules of law applicable to principal and agent control the relation between an attorney and his clients.” State ex rel. A. M. T. v. Weinstein, 411 S.W.2d 267, 272 (Mo. App. 1967). Therefore, an attorney’s authority to act on behalf of his client terminates upon the client’s death. This rule was clearly stated by the Missouri court of appeals in State ex rel. White v. Terte: "The general rule is that the relationship between an attorney and client in a lawsuit is one of agency, and that upon the death of the client, that relationship terminates, with all authority incidental thereto, and the attorneys have no authority to take any further steps whatsoever in behalf of the deceased party unless and until authorized by the personal representatives of the deceased, duly qualified. Id. 293 S.W.2d 6, 10 (Mo. App. 1956); see also Glaser v. Hornbeck, 477 S.W.2d 432, 433 (Mo. App. 1972) (finding that attorney’s attempt to file notice of appeal after his clients’ deaths was ineffective because his employment as attorney and authority to act as an agent ceased immediately upon his their deaths).
Moreover, a cause of action for personal injuries, other than those resulting in death, shall not abate by reason of the injured person’s death, nor by reason of the death of the person against whom such cause of action shall have accrued; “but in case of the death of either or both such parties, such cause of action shall survive to the personal representative of such injured party.” MO. REV. STAT. § 537.020.1 (2009) (emphasis added).
Further, MO. REV. STAT. § 537.021.1 (2009) provides that: "The existence of a cause of action for an injury to property, for a personal injury not resulting in death, or for wrongful death, which action survives the death of the wrongdoer or the person injured, or both, shall authorize and require the appointment by a probate division of the circuit court of: (1)A personal representative of the estate of a person whose property is injured, or a person injured ...
Absent the grant of express authority to settle a lawsuit, an attorney’s authority to do so should be analyzed in terms of apparent authority." Rosenblum v. Jacks or Better of America West Inc., 745 S.W.2d 754, 760 (Mo. App. E.D. 1988). “It has long been recognized that an attorney can have apparent authority to act for a client.” Id. Apparent authority is created by conduct of the principal (the client) which causes a third person reasonably to believe that another (the attorney) has the authority to act for the principal. Id. Apparent authority exists only concerning third parties that believe and have reason to believe that the authority exists, and “may be shown by evidence of the facts and circumstances attending the actions of the parties.” Parks v. MBNA America Bank, 204 S.W.3d 305, 313 (Mo. App. W.D. 2006).
In Rosenbloom, 745 S.W.2d at 760, the court noted that, “regrettably, the cases in Missouri arising out of settlements gone awry have entailed a mutation of the general principles of agency.” The court observed that Leffler and its progeny, by focusing on the acts or representations of the attorney (agent), instead of the client (principal), in effect resorted to a new species of authority, “presumptive” or “presumed” authority, rather than the equally serviceable concept of apparent authority. Id. at 761-62. However, the court noted that the Leffler presumption is not wholly irreconcilable with the concept of apparent authority. Id. at 762. In this connection, the court pointed to the RESTATEMENT (SECOND) OF AGENCY, § 49, comment c: "Inferences from agent’s position. Acts are interpreted in the light of ordinary human experience. If a principal puts an agent into, or knowingly permits him to occupy, a position in which according to the ordinary habits of persons in the locality, trade or profession, it is usual for such an agent to have a particular kind of authority, anyone dealing with him is justified in inferring that he has such authority, in the absence of reason to know otherwise. The content of such apparent authority is a matter to be determined from the facts." Id. The court then applied the general principles of agency to the case before it, and found that the trial court could have found that apparent authority existed based on the facts of the case. Specifically, the trial court could have found that the client knew that settlement negotiations were taking place and that the other party’s attorney was never on notice that there was a limitation put on the attorney’s authority. Id. at 762. Moreover, the attorney was knowingly permitted by the client to occupy the position of exclusive negotiator, and to make and reject offers. Id.
The RESTATEMENT (SECOND) OF AGENCY § 120 (1958) states that:
(1) The death of the principal terminates the authority of the agent without notice to him, except as stated in subsections (2) and (3) and in the caveat.
(2) Until notice of a depositor’s death, a bank has authority to pay checks drawn by him or by agents authorized by him before death.
(3) Until notice of the death of the holder of a check deposited for collection, the bank in which it is deposited and those to which the check is sent for collection have authority to go forward with the process of collection.
Caveat: No inference is to be drawn from the rule stated in this Section that an agent does not have power to bind the estate of a deceased principal in transactions dependent upon a special relation between the agent and the principal, such as trustee and beneficiary, or in transactions in which special rules are applicable, as in dealings with negotiable instruments.
RESTATEMENT (SECOND) OF AGENCY § 120 Comment c. Apparent authority, which addresses the precise issue presented in this case, states:
"Like authority, apparent authority terminates with the death of the principal. Third persons who, in ignorance of the death, deal with the former agent (who also may be ignorant of the death) have no rights upon the contract against the estate of the deceased, unless the situation is one within the rules stated in Subsections (2) or (3) or the Caveat, except as they may be subrogated to any right which the agent may have because of a special contract with the principal."
An example of the application of this rule can be found in In re Estate of Kelly, 547 A.2d 284, 286 (N.H. 1988), where the petitioners were not aware of the client’s death at the time they arrived at the settlement with the attorney. The petitioners brought an action to set aside a settlement arrived at after the death of the client. The petitioners alleged that actual, as well as apparent, authority terminated with the death of the principal. Id. at 287. The court, looking to RESTATEMENT (SECOND) OF AGENCY § 120 (1958), concluded that none of the exceptions to § 120 applied, and that consequently the apparent authority of the attorney terminated with the death of his client. Id. at 288-89. Therefore, the settlement would not be enforced. Id. at 289.
Missouri courts have not adopted or cited to RESTATEMENT (SECOND) OF AGENCY § 120. However, since its publication in 1958, Missouri courts have cited to and relied upon other sections of the RESTATEMENT (SECOND) OF AGENCY.
The RESTATEMENT (THIRD) OF AGENCY § 3.11 (2006) states as follows:
(1) The termination of actual authority does not by itself end any apparent authority held by an agent.
(2) Apparent authority ends when it is no longer reasonable for the third party with whom an agent deals to believe that the agent continues to act with actual authority.
RESTATEMENT (THIRD) OF AGENCY § 3.11 Comment b. Principal’s death or loss of capacity, which addresses the precise issue presented in this case, states:
A principal’s death or loss of capacity does not by itself or automatically end the agent’s apparent authority. This is contrary to the position taken in Restatement Second, Agency § 120, Comment c. Change is warranted for several reasons, including the nature of apparent authority and various indications of policy contrary to the position taken in § 120.
An agent may act with apparent authority following the principal’s death or loss of capacity because the basis of apparent authority is a principal’s manifestation to third parties, coupled with a third party's reasonable belief that the agent acts with actual authority. See §§ 2.03 and 3.03. Neither element requires that the principal consent or manifest assent at the time the agent takes action. When third parties do not have notice that the principal has died or lost capacity, they may reasonably believe the agent to be authorized.
The RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 31(3) (2000) also addresses the issue presented here: "A lawyer’s apparent authority to act for a client with respect to another person ends when the other person knows or should know of facts from which it can be reasonably inferred that the lawyer lacks actual authority, including knowledge of any event described in Subsection(2)." Subsection (2) lists circumstances under which a lawyer’s actual authority to represent a client ends, which includes when the client dies. RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 31(2)(b).
Prior to the publication of either RESTATEMENT (THIRD) OF AGENCY or RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS, courts outside of Missouri found that death does not terminate apparent authority. For example, in Schock v. U.S., 56 F. Supp.2d 185, 187 (D.R.I. 1999), an attorney withdrew all the funds from the account of the decedent. The decedent’s only heir brought an action against the bank from which the funds were withdrawn. Id.
In addressing the issue of whether a principal’s death terminated the apparent authority of the attorney to withdraw the funds, the court looked to RESTATEMENT (SECOND) OF AGENCY § 120 cmt. c (1958), which states that apparent authority terminates with the death of the client. Id. at 193. The court noted that this statement of the law was “illogical.” Id. The court found that:
The public policy for which the state [] created apparent agency would be eviscerated by adopting the rule that [plaintiff] promotes. The doctrine of apparent agency exists in order to allow third parties to depend on agents without investigating their agency before every single transaction. If a third party had to confirm the agency relationship repeatedly, then it might as well deal directly with the principal. [Plaintiff] seeks to place the risk that a principal has died onto third parties, rather than on the principal. That is absurd." Id.
Other cases since the publication of RESTATEMENT (THIRD) OF AGENCY have also found that the death of a principal does not terminate the apparent authority of an agent. See Grizzle v. U.S. Bank, 892 N.E.2d 983, 986 (Ohio Ct. App. 2008) (finding that summary judgment was inappropriate where genuine issue of material fact existed as to whether defendant was acting under apparent authority to withdrawal funds after principal’s death).
Missouri courts have not adopted or cited to either RESTATEMENT (THIRD) OF AGENCY § 3.11 or RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 31(3). It should be noted, however, that both were only recently published, giving Missouri courts somewhat limited opportunity to rely on their provisions. At least one Missouri court has relied upon other sections of the RESTATEMENT (THIRD) OF AGENCY. See Milligan v. Chesterfield Village GP, LLC, 239 S.W.3d 613, 622 (Mo. App. S.D. 2007) (citing to RESTATEMENT (THIRD) OF AGENCY § 6.01 (2005)).
Finally, “The compromise of a pending suit by an attorney having apparent authority will be binding upon his client, unless it be so unfair as to put the other party upon inquiry as to the authority, or imply fraud.” Wenneker v. Frager, 448 S.W.2d 932, 937 (Mo. App. 1969) (citing Black v. Rogers, 75 Mo. 441, 1882 WL 9621 at *4 (Mo. 1882)). In other words, courts will only find a settlement negotiated by an attorney with only apparent authority to be binding on his client if it was not unfair and if there was no fraud in its procurement. See Stearns Bank N.A. v. Palmer, 182 S.W.3d 624, 626 (Mo. App. E.D. 2005) (finding settlement binding because “only allegations of unfairness in the agreement to dismiss or fraud in its procurement would undermine the attorney’s apparent authority” and party attacking the agreement made no allegations that it was unfair or procured by fraud); See also Promotional Consultants, Inc. v. Logsdon, 25 S.W.3d 501, 505 (Mo. App. E.D. 2000) (finding settlement binding because “there was nothing in the record or arguments of counsel that the settlement agreement, or any of the provisions contained within, was unfair or otherwise fraudulently obtained”); see also Mollenbrink v. Gibson, 479 S.W.2d 145, 148 (Mo. App. 1972) (finding settlement binding because “[n]o fraud upon appellants is even slightly in the case.”); see also Wenneker, 448 S.W.2d at 937 (finding the settlement binding because of “the seeming reasonableness of the settlement.”).
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