It is well settled law that officers of a corporation have the authority to perform such duties in the management of the affairs of the corporation as are set forth in the corporation’s by-laws or corporate resolutions. Under case law, an officer also has the implied authority to bind the corporation to acts which may not be specified in the by-laws or corporate resolutions, based on the corporation’s or officer’s course of conduct.
In Corn Belt Bank v. Lincoln Savings and Loan Association, the plaintiff, Corn Belt Bank (the “Bank”) sought recovery against Lincoln Savings and Loan Association (“Lincoln”) as guarantor of certain loans made to certain individual defendants. Lincoln filed a third party action against defendants Robert Darley (“Darley”) and Alfred J. Frisch (“Frisch”), the officers of Lincoln who executed the guaranties on behalf of Lincoln, because Darley and Frisch allegedly did not have the authority to issue such guaranties.
The court noted that an agent has the authority to bind a principal when the principal has permitted its agent to assume such authority or held out its agent to the public as possessing such authority. Officers, however, have no apparent authority to bind a corporation to unusual or extraordinary contracts. Thus, in determining whether an officer has apparent authority to bind its corporation to a transaction, a court must analyze the conduct of the principal and examine whether the transaction is customary or outside of the normal course of the corporation’s business.
Lincoln argued that Darley and Frisch did not have the authority to issue guaranties because Lincoln itself did not have the power to issue guaranties. The court rejected this argument, noting that a provision in the Illinois Savings and Loan Act provides that a savings and loan association has the power to make loans and to take actions “reasonably incident” to that power. The court concluded the circumstances of the case demonstrated that issuing guaranties was reasonably incident to Lincoln’s power to make loans, as there was evidence that Darley and Frisch had previously issued guaranties.
Furthermore, there was evidence that Lincoln had given Darley and Frisch great discretion in the manner in which they conducted business at Lincoln. It was the practice of Darley and Frisch to report the loans to the loan committee after making loans, and the loan committee seldom disapproved of their actions. Based on the totality of the evidence, the court concluded that it was improper for the trial court to have entered summary judgment against Darley and Frisch.
The Corn Belt Bank case demonstrates the importance of a corporation’s prior course of conduct when determining whether an officer has implied authority to bind the corporation. The corporation’s prior course of conduct is most easily evidenced in minutes of meetings of the board of directors. If you have any questions regarding whether an officer has the implied authority to enter into a transaction, please contact a member of the firm.