Schmidt v. Farm Credit Services

United States District Court for the District of Kansas · Corporations

CorporationsCorporate authorityOfficer authorityDerivative actionsMortgagesexpress actual authoritycorporate officer authorityboard resolution

Facts

Schmidt C & R Co., Inc.'s president, John C. Schmidt, applied for a loan from defendant lender, and two directors, John and Pamela Schmidt, attended a February 27, 1980 board meeting whose minutes reflected a resolution authorizing him to borrow up to $400,000 on the corporation's behalf. The third director, Susan Ensign, later stated by affidavit that she had not been notified of that meeting. On March 31, 1980, the corporation executed a $320,000 promissory note and mortgage on all of its Marshall County real property, signed by John as president and Pamela as secretary. The lender knew the loan proceeds were intended to be reloaned by the corporation to John and Pamela Schmidt individually and relied on the board resolution, articles, and bylaws in concluding John had authority.

Issue

Whether the corporation's president had legal authority to bind the corporation to the note and mortgage under these circumstances. More specifically, the question was whether the mortgage could be invalidated because the lender knew the proceeds would be loaned to the corporation's officers and one director claimed she had not received notice of the board meeting authorizing the transaction.

Rule

If a principal expressly delegates authority to an agent, the agent has express actual authority to perform the delegated act. A corporation is generally bound by contracts entered into on its behalf by duly authorized officers acting within the scope of their authority, and corporate business transacted at a directors' meeting raises a presumption that due notice of the meeting was properly given.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Red Mesa Orchard, Inc., a Kansas corporation, has bylaws stating that the board may authorize any officer to execute contracts for the company. At a board meeting in Wichita, two of the three directors adopt a written resolution authorizing president Marcus Hale to borrow up to $500,000 from Prairie Valley Lending and grant a mortgage on company land; Marcus later signs a $420,000 note and mortgage within that limit.

In a derivative suit by a minority shareholder seeking to void the mortgage, which is the strongest argument that the corporation is bound?

Explanation. The governing rule is that a corporation is generally bound by contracts entered into on its behalf by duly authorized officers acting within the scope of their authority. Where the board, acting under the bylaws, expressly authorizes the president to borrow and execute security instruments, the officer has express actual authority. Because Marcus signed within the authorization granted, the corporation is bound.