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21st Capital Corp. v. Tiffany and Company

A-2602-06T2 (N.J. Super. App. Div. 2008) (Unpublished)

AGENCY; APPARENT AUTHORITY — The doctrine of apparent authority looks to the actions of the principal, and not of the registered agent; therefore, if a lender never inquires into an account debtor’s employee’s position and merely relies on confirmation of debt of that employee, the account debtor is not estopped from denying the validity of the items listed on the acknowledgment forms.

A factoring financier purchased accounts receivable from an information technology consulting company that performed services for a retailer. At some time, an employee of the retailer submitted a verification form to the factoring financier purporting to confirm the retailer’s debt owed to the information technology company. The verification also purported to “waive all defenses regarding the factored accounts, including any challenge to the underlying invoice’s validity.” It turned out the invoices, were “either fraudulent, or duplicate of past work previously paid” by the retailer.

When the factoring financier sued the retailer, the retailer responded that “the employee in question was not authorized either to confirm its debt [the information technology company] or waive any defenses.” It further argued that the underlying invoices were fraudulent and therefore not collectible. The lower court granted the retailer’s request that the matter be dismissed, and the Appellate Division affirmed.

In its affirmation, the Court addressed “the issue of apparent authority. The doctrine of apparent authority applies ‘where the actions of a principal have misled a third party into believing that a relationship of authority existed.’ ... The Doctrine looks to the actions of the principal, and not of the alleged agent. ... The alleged agent cannot create apparent authority on his own accord, but must be held out as having such authority by the principal.” Here, the factoring financier never produced any evidence that the retailer held its employee out “as being authorized to obligate the company.” The factoring financier’s principal could not remember how he came to be in contact with the retailer’s employee. Further, the factoring financier “never inquired into [the employee’s] authority or verified [the employee’s] position at [the retailer]. According to [the factoring financier’s principal] it was [the employee] who informed him that [he, the employee] was authorized to verify the factored accounts receivable.” The Court also rejected the factoring financier’s argument based on a “course of dealing.” It found that the “invoice acknowledgment forms and open invoice report sent to [the retailer’s employee] were entirely separate from the actual invoices that [the retailer] was required to pay.” Further, the facts seemed to lead to the conclusion that the invoices, substantial as they were, were fraudulent.

The Court also pointed out that an assignee’s rights are derivative of the rights of its assignor. In the words of the Court, “an assignee ‘steps into the shoes’ of an assignor. ... ‘It is clear then that the rights of an assignee of an account receivable are subject to contract defenses or claims of the account debtor arising by virtue of the terms of the contract out of which the receivable was created.’”

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