Fergus v. Ross , 477 Mass. 563 ( 2017 )

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SJC-12231
JOSEPH FERGUS vs. STEVEN A. ROSS.1
Suffolk. April 4, 2017. - August 2, 2017.
Present: Gants, C.J., Lenk, Hines, Gaziano, Lowy, & Budd, JJ.
Agency, Scope of authority or employment. Attorney at Law,
Attorney-client relationship.
Civil action commenced in the Superior Court Department on
August 31, 2010.
The case was heard by Frances A. McIntyre, J.
After review by the Appeals Court, the Supreme Judicial
Court granted leave to obtain further appellate review.
Arnold E. Cohen for the defendant.
Gordon E. Feener (Danielle F. Wehrli also present) for the
plaintiff.
LOWY, J. In a jury-waived trial, a Superior Court judge
determined that the defendant, Attorney Steven A. Ross, was
negligent for his part in financing a real estate loan to the
1
Individually and as trustee of the Wisconsin Avenue
Lending Trust.
2
plaintiff, Joseph Fergus. The judge found that the defendant
had conferred apparent authority on an individual, Bernard
Laverty, Jr., to act as his agent for the loan. In the course
of arranging the loan, unbeknownst to the defendant, Laverty
asked the plaintiff to use a portion of the loan from the
defendant to make a secured "side loan" to Laverty. The
plaintiff agreed. Ultimately, however, the side loan was
unsecured and Laverty defaulted. Relying on the rule that
imputes the knowledge of an agent to the principal, the judge
found that the defendant was negligent for failing to inform the
plaintiff prior to the closing that the side loan was not
secured. We now reverse, concluding that the facts found by the
trial judge failed to establish that Laverty had the apparent
authority to bind the defendant with respect to the side loan.
Background. The judge made the following factual findings,
which the parties do not dispute on appeal.
The plaintiff, a regular purchaser and seller of real
estate, needed between $75,000 and $100,000 to complete
renovations of a property in the Dorchester section of Boston.
Unable to acquire conventional financing for the project, he
inquired about private financing through a mortgage broker, who
referred the plaintiff to Laverty.
Laverty had an existing relationship with the defendant,
who operated a private lending operation through his law firm.
3
Laverty had received five or six loans from the defendant and
had previously referred potential borrowers to the defendant.
Laverty informed the defendant of the plaintiff's desire for a
loan. Although the defendant had paid Laverty referral fees on
other occasions, he did not do so for the plaintiff's loan.
When the plaintiff and Laverty met, Laverty implored the
plaintiff to seek more money than he needed for the renovations,
so that the plaintiff could make a side loan to Laverty.
Laverty needed $120,000 to close on a residential property in
Marshfield. Laverty offered to provide the plaintiff "a deed-
in-lieu" of a mortgage to secure the side loan. The plaintiff
agreed. Notwithstanding his ultimate failure to do so, Laverty
intended to provide the deed-in-lieu and to repay the $120,000.
Prior to the closing, the plaintiff had no direct contact
with the defendant. Rather, all discussions with the defendant
and the law firm regarding the loan were conducted by Laverty,
outside of the plaintiff's presence. Although the defendant
insulated himself from any direct contact with the plaintiff,
the parties arranged, through Laverty, for the defendant's wife
to inspect the Dorchester property, on the law firm's behalf.
She was told that the proceeds of the loan would be used for the
renovations.
The law firm set the value of the loan to the plaintiff at
$260,000, which included the costs of the loan itself such as
4
prepaid interest, origination fees, and appraisal and legal
fees. This amount provided sufficient funds for the plaintiff
to spend the necessary $75,000 to $100,000 on renovations at the
Dorchester property and make the $120,000 side loan to the
defendant. The law firm created an entity for the sole purpose
of providing the loan, as had apparently been its practice for
other loans, called the Wisconsin Avenue Lending Trust (trust).
The trustee for this entity was an apparently fictitious
individual named "Ronald Williams," although it was not clear
that the entire trust was built of straw.
The trust formally communicated its offer for the $260,000
loan (Dorchester loan) by way of a commitment letter, signed by
the defendant on behalf of the trust. On September 10, 2007,
Laverty brought the commitment letter specifying the terms to
the plaintiff, who accepted that day. The plaintiff also agreed
to pay the $2,500 legal fees of the lender. The letter did not
mention the side loan. Nevertheless, the plaintiff signed the
letter and gave it to Laverty to give to the law firm, relying
on Laverty's representations that the defendant would serve as
the closing agent for both the Dorchester loan and the side
loan.
On the same day, the plaintiff also handwrote a letter to
the defendant, explaining that Laverty was to receive a $120,000
loan from the plaintiff, drawn from the proceeds of the
5
Dorchester loan. The letter authorized the defendant to arrange
the requisite paperwork for the side loan. Laverty also took
this letter, representing to the plaintiff that he would deliver
it to the defendant. He never did so.
The next day, Laverty drove the plaintiff to the
defendant's office for the closing, where the plaintiff and the
defendant met for the first time. The plaintiff signed all of
the loan documents, without reading them, but with an
understanding of the fundamental requirements: he would be
obligated to pay back the principal within ninety days and he
was granting a mortgage. The side loan, however, was not
mentioned at the closing or referenced in any of the documents.
Nor did Laverty have title to the Marshfield property such that
he could provide the plaintiff a deed-in-lieu of a mortgage.
The plaintiff signed the documents with a willingness to be
bound by them. The next day, the plaintiff obtained a bank
check in the amount of $120,000, payable to Laverty. Laverty
subsequently declared bankruptcy and did not repay the
plaintiff.
The judge concluded that the defendant had a duty as the
"closing agent" for the transaction to advise the plaintiff
regarding the deficiencies of the side loan. Although the
defendant did not have actual knowledge of the side loan or its
terms, the defendant was deemed to have constructive knowledge
6
through his agent, Laverty. The defendant did not inform the
plaintiff that Laverty lacked title to the property that was to
serve as security for the side loan, and thus, the judge found,
the defendant committed a breach of this duty. The judge
credited the plaintiff's testimony that he would not have
proceeded with the side loan if he had known it was unsecured.
The defendant timely appealed, and the Appeals Court
affirmed. Fergus v. Ross, 89 Mass. App. Ct. 528, 535-536
(2016). We granted the defendant's application for further
appellate review and now reverse.
Discussion. On appeal, the defendant argues that the judge
erred in two key respects. First, the defendant argues that the
judge lacked an adequate basis to find that the defendant had
conferred apparent authority on Laverty with respect to the side
loan. Second, the defendant claims that he owed no duty to the
plaintiff regarding the side loan as the "closing agent" for the
Dorchester loan.
We agree that there was an insufficient basis to conclude
that the defendant conferred apparent authority on Laverty for
the side loan. As a result, the defendant lacked constructive
knowledge of the side loan, which was essential to the breach of
the alleged duty. Thus, the finding of negligence must be
reversed.
7
1. Agency. "[T]he question of agency is usually an issue
for the fact finder." Theos & Sons, Inc. v. Mack Trucks, Inc.,
431 Mass. 736, 742 (2000) (Theos). Thus, the question before us
is whether there was an adequate basis for the judge to conclude
that an agency relationship existed, pursuant to Laverty's
apparent authority.
Generally, an agency relationship is created by express or
implied mutual consent that an agent will "act on behalf and for
the benefit of the principal, and subject to the principal's
control." Theos, 431 Mass. at 742. See Restatement (Third) of
Agency § 1.01 (2006). See also Haufler v. Zotos, 446 Mass. 489,
498 (2006) (judge's finding of agency not clearly erroneous).
The agent may impose legal obligations or otherwise bind the
principal, based on the agent's either actual or apparent
authority to do so. Theos, supra at 743. A principal is liable
for the agent's conduct when the agent acts with "the actual or
apparent authority of the principal in that transaction." Id.
In this case, the judge found an agency relationship between the
defendant and Laverty based exclusively on apparent authority.
Apparent authority exists when the principal, by his or her
words or conduct, causes a third person to reasonably believe
that the principal consents to the agent acting on the
principal's behalf. Licata v. GGNSC Malden Dexter LLC, 466
Mass. 793, 801 (2014). Critically, "[o]nly the words and
8
conduct of the principal, . . . and not those of the agent, are
considered in determining the existence of apparent authority."
Id. The principal's manifestation of apparent authority does
not need to be direct communication with the third party. See
Restatement (Third) of Agency, supra at §§ 2.03, 3.03. See also
Menard & Co. Masonry Bldg. Contractors v. Marshall Bldg. Sys.,
Inc., 539 A.2d 523, 526 (R.I. 1988). The principal can also
ratify an agent's conduct after the fact, by "acquiesc[ing] in
the agent's action, or fail[ing] promptly to disavow the
unauthorized conduct after disclosure of material facts"
(citation omitted). Licata, supra at 802.
The judge found that the defendant's conduct allowed the
plaintiff reasonably to conclude that Laverty had the authority
to act on the defendant's behalf with respect to the side loan,
relying primarily on four facts. First, the defendant had no
contact with the plaintiff until the closing. All communication
from the defendant to the plaintiff, and vice versa, went
through Laverty. Thus, it was through Laverty that the
defendant's wife inspected the property on behalf of the law
firm. Second, the plaintiff never requested a specific amount
for the loan, but rather the terms in the commitment letter were
set by the law firm, ostensibly pursuant to Laverty's
representations. Third, Laverty had, in the past, referred
borrowers to the defendant in exchange for a fee, although no
9
such fee was paid in this case. Fourth, the closing took place
in the law firm's office, where Laverty brought the plaintiff.
Laverty remained there throughout the closing, urging the
plaintiff to sign the papers.
These facts may well have been sufficient to conclude that
Laverty was the defendant's agent with respect to the Dorchester
loan. See DeVaux v. American Home Assur. Co., 387 Mass. 814,
816-817, 819 (1983) (fact finder could conclude that attorney's
secretary, who answered telephone, gave advice to prospective
client, and misfiled client's letter requesting service, had
apparent authority to bind attorney who lacked actual
knowledge). As such, the defendant could have been liable for
any fraudulent, negligent, or deceitful conduct by Laverty. The
judge, however, specifically found that Laverty lacked any
fraudulent intent, and she did not make any finding that Laverty
was negligent.2
2
We note also that, although the judge found that the
defendant "entirely insulated himself" from direct contact with
the plaintiff, the judge did not find that the defendant was
wilfully ignorant of the side loan. See Licata v. GGNSC Malden
Dexter LLC, 466 Mass. 793, 802 (2014) (there may be ratification
of agent's conduct "when [the principal] shuts his eyes to means
of information within his own possession and control, and
ratifies an act deliberately" [citation omitted]). Furthermore,
the judge rejected the plaintiff's claims pursuant to G. L.
c. 93A, for breach of contract, and for fraudulent
misrepresentation, and the plaintiff does not appeal from those
rulings.
10
Instead, the defendant's liability was premised on
Laverty's theoretical apparent authority to bind the defendant
to assume some form of responsibility for the side loan. Yet,
the judge did not find any conduct of the defendant that related
specifically to his acquiescence to, or ratification of,
Laverty's conduct regarding the side loan.
Although the judge identified facts suggesting that Laverty
was, in some capacity, the defendant's agent, they do not
connect any manifestation of acquiescence by the defendant to
the side loan. See Licata, 466 Mass. at 801-802 (alleged
agent's signature as authorized representative did not establish
apparent authority in absence of manifestation of assent by
principal). To the contrary, the plaintiff knew from the outset
that he was receiving a loan from the trust, through the
defendant and his law firm, and the judge did not find that the
plaintiff believed that Laverty was the defendant's employee.
Contrast DeVaux, 387 Mass. at 819 & n.10 (factual question
whether attorney's secretary had actual or apparent authority to
establish attorney-client relationship). Only the words and
conduct of the would-be agent, Laverty, connected the defendant
to the side loan, and they are insufficient to create apparent
authority as to the side loan. See Licata, supra at 801; Theos,
431 Mass. at 745.
11
Nor do the findings of the judge support a conclusion that
the defendant ratified Laverty's representations after the fact.
Where authority is premised on ratification by the principal,
the "[r]atification must be based upon full knowledge of all
material facts," or evidence of wilful ignorance. Licata, 466
Mass. at 802, quoting Kidder v. Greenman, 283 Mass. 601, 615
(1933). By the same token, a principal does not have an
obligation to disavow the agent's conduct, in the absence of
actual knowledge. Licata, supra at 803, citing See v. Norris,
234 Mass. 345, 348 (1920). The judge did not find that the
defendant knew about the side loan, and specifically found that
the defendant did not know that Laverty lacked the title for the
property intended to serve as security for the side loan.3
3
The Appeals Court and the parties have made much of the
judge's "belie[f]" that the defendant "may well have known"
about the side loan, based on the amount by which the Dorchester
loan exceeded the cost of the renovations. See Fergus v. Ross,
89 Mass. App. Ct. 528, 533-534 (2016). Whether this constitutes
a finding that the defendant knew generally of the side loan is
not clear. The judge's findings, however, are clear that the
defendant did not actually know the details of the side loan
that he failed to disclose (i.e., that the side loan was not
secured). Instead, the defendant's liability was premised
exclusively on constructive knowledge pursuant to his agency
relationship with Laverty. Therefore, anything that the
defendant might -- or should -- have known about the side loan
or Laverty's lack of title is irrelevant to the theory of
negligence for which the defendant was ultimately found liable.
We make no ruling as to whether the defendant could have been
found liable using a different theory of negligence on these
facts.
12
Further, the judge did not find that the defendant was wilfully
ignorant of these facts.
Moreover, the commitment letter and loan documents prepared
by the defendant made no mention of the side loan. Thus, if the
plaintiff had read the documents, he would have seen that the
defendant was not contemplating the side loan to Laverty as part
of the Dorchester loan to the plaintiff. See Licata, 466 Mass.
at 802. See also Haufler, 446 Mass. at 501 ("The general rule
is, that, in the absence of fraud, one who signs a written
agreement is bound by its terms whether he reads and understands
it or not" [citation omitted]). Based on these findings by the
judge, it was not reasonable for the plaintiff to rely "on
everything that was told [to him by Laverty] about getting this
loan," instead of the contents of the loan documents.4 See
Licata, supra.
2. Duty of care. The defendant also argues that he could
not owe a duty to the plaintiff as a "closing agent" for the
transaction, where the judge found that the defendant and
plaintiff did not form an attorney-client relationship. We need
4
The judge found that the plaintiff expected to receive the
deed-in-lieu of a mortgage for the Marshfield property at some
later point in time. The judge's findings do not specify
whether the plaintiff understood that he was not signing any
documents related to the side loan at the closing. The judge's
findings, however, appear to reflect that the plaintiff did not
understand the documents he was signing, and also that he did
not read them.
13
not examine whether a duty would have been owed if Laverty had
possessed the apparent authority to impose a duty of care upon
the defendant, or whether Laverty's representation that the
defendant would "take care of everything" constituted an
enforceable promise on these facts. See Robertson v. Gaston
Snow & Ely Bartlett, 404 Mass. 515, 524, cert. denied, 493 U.S.
894 (1989) ("[A]n attorney owes a duty to nonclients who the
attorney knows will rely on the services rendered").
In this case, the theory of negligence was premised on
imputing Laverty's knowledge of the side loan to the defendant,
as a result of their agency relationship. See Sunrise Props.,
Inc. v. Bacon, Wilson, Ratner, Cohen, Salvage, Fialky &
Fitzgerald, P.C., 425 Mass. 63, 66-67 (1997) (agent's knowledge
imputed to principal in absence of fraud by agent that does not
benefit principal). Because Laverty lacked the requisite
apparent authority, Laverty's knowledge is not imputable to the
defendant. See id. Therefore, the defendant cannot be
negligent for failing to disclose or disavow that which he did
not know, either actually or constructively.
Conclusion. The facts found by the judge are insufficient
to conclude that Laverty had apparent authority from the
defendant to bind the defendant as a closing agent for the side
loan. No conduct of the defendant manifested acquiescence to
participation in the side loan. Nor did the defendant ratify
14
Laverty's conduct after the fact, because the loan documents
drafted by the defendant contained no reference to the side
loan. Thus, the theory of negligence on which the defendant was
found liable fails, because it was premised on the imputation of
Laverty's knowledge to the defendant pursuant to the alleged
agency relationship.
Judgment reversed.