Commercial Division Blog

Posted: November 8, 2015 / Categories Commercial, Agency

Court Dismisses Claims Based on Vicarious Liability

On October 22, 2015, Justice Ramos of the New York County Commercial Division issued a decision in VFP Investments I LLC v. Foot Locker, Inc., 2015 NY Slip Op. 51554(U), dismissing claims based on vicarious liability.

In VFP Investments I LLC, the plaintiff, VFP, brought claims against individuals who orchestrated a scheme through which VFP and other lenders to non-party G3K were defrauded. Several of the plaintiff's claims were based on theories of vicarious liability. The court granted the motion to dismiss those claims.

Regarding respondeat superior liability, the court held:

To succeed on a respondeat superior theory of vicarious liability, the plaintiff must show that the agent was acting in furtherance of the principal's business and within the scope of employment. Guidelines for assessing whether an employee's conduct falls within the scope of employment include: the connection between the time, place and occasion for the act; the history of the relationship between employer and employee as spelled out in actual practice; whether the act is one commonly done by such an employee; the extent of departure from normal methods of performance; and whether the specific act was one that the employer could reasonably have anticipated. There is no vicarious liability under respondeat superior for acts committed solely for the employee's personal motives unrelated to the furtherance of the employer's business.

The pleadings fail to establish that the verification of receivables fits within the scope of Smith's or Rainier's roles as Foot Locker employees. VFP makes conclusory statements in its complaint that Smith's and Rainier's confirmations were within the scope of their employment with Foot Locker, but there are no factual allegations in the complaint that the verification of receivables is within the scope of employment of either defendant. As a sophisticated lender, VFP should know that outstanding invoices are typically verified by a corporation's accounting department. A reasonable person would not confer from Smith's or Rainier's job titles — "Director of In-Store Marketing" and "Divisional Vice President of Franchise Development," respectively — that either defendant's job duties included the verification of receivables, since neither defendant was an accountant nor purported to be an accountant.

Furthermore, VFP's allegations fail to establish that Smith and Rainier verified false or paid receivables to further Foot Locker's business. VFP alleges that G3K was able to continue its operations into 2014 and thereby provide Foot Locker with in-store materials at favorable prices because of defendants' false verifications. However, this statement is wholly conclusory and entirely unsubstantiated — VFP does not allege that G3K would have gone out of business but for defendants' verifications, nor does it allege that the prices that G3K offered Foot Locker were more favorable than those of other vendors. Instead, the pleadings demonstrate that Smith and Rainier acted solely for their own benefit, unrelated to furthering Foot Locker's business. If Smith and Rainier acted solely for their own benefit, their acts were outside the scope of employment as a matter of law.

(Internal quotations and citations omitted) (emphasis added).

The court rejected the arguments for liability based on actual authority, explaining:

Under New York law, actual authority arises from a direct manifestation of consent from the principal to the agent. It may be either express (conveyed orally or in writing) or implied based on circumstances. Implied actual authority is dependent on verbal or other acts by a principal which the agent reasonably believes give her the authority to conduct the transaction.

VFP has not adequately alleged express authority. VFP makes conclusory statements . . . that Smith's representations were made with "actual authority (express or implied)." However, VFP does not allege that Rainier's representations were made with actual authority, nor does VFP allege that Foot Locker gave Smith or Rainier actual authority to verify receivables orally or through writing.

The complaint also fails to show that Smith or Rainier had implied actual authority to verify receivables for VFP. VFP's allegations do not demonstrate that Foot Locker acted in a manner that caused Smith or Rainier to reasonably believe that they had the authority to engage in the underlying activity that resulted in the tortious conduct. The fact that Smith and Rainier had regular dealings with G3K is not enough to show that they reasonably believed that Foot Locker authorized them to verify receivables for VFP, MVC, or their auditors.

(Internal quotations and citations omitted) (emphasis added).

With respect to apparent authority, the court held:

In order for there to be apparent authority, there must be words or conduct of the principal, communicated to a third party, that give rise to the appearance and belief that the agent possesses authority. The agent cannot by his own acts imbue himself with apparent authority. Rather, the existence of apparent authority depends upon a factual showing that the third party relied upon the misrepresentation of the agent because of some misleading conduct on the part of the principal—not the agent. A third party with whom the agent deals may rely on an appearance of authority only to the extent that such reliance is reasonable.

The only words or conduct by Foot Locker regarding Smith's and Rainier's apparent authority to verify receivables that VFP relied on are the defendants' job titles and the Foot Locker letterheads and addresses in their e-mails. As discussed previously, "Director of In-Store Marketing" or "Divisional Vice President of Franchise Development" are not titles that, to the reasonable person, confer authority regarding accounting matters. VFP merely had to contact Foot Locker's accounting department to learn that Smith and Rainier were not authorized to verify receivables.

Also, the fact that Smith and Rainier communicated to VFP and its auditors via Foot Locker email addresses does not connote apparent authority to the reasonable person. Based on the alleged facts, VFP's reliance on Smith's and Rainier's authority was unreasonable and thus not apparent.

(Internal quotations and citations omitted) (emphasis added).

With respect to authority by estoppel, the court held that:

a person or corporation who is not otherwise liable as a party to a transaction purported to be done on his account, is nevertheless subject to liability to persons who have changed their positions because of their belief that the transaction was entered into by or for him, if (a) he intentionally or carelessly caused such belief, or (b) knowing of such belief and that others might change their positions because of it, he did not take reasonable steps to notify them of the facts. Reasonable reliance is essential to establishing such authority.

VFP does not make factual allegations showing that Foot Locker intentionally or carelessly caused VFP's belief that Smith or Rainier had the authority to verify receivables. VFP makes conclusory statements that Foot Locker conspired with Smith and Rainier to help G3K defraud VFP, MVC, and their auditors, but there are no factual allegations regarding Foot Locker's intentions, nor does VFP establish that Foot Locker owed any duty to VFP allowing it to have acted carelessly toward VFP by not informing it of Smith's wrongful actions.

The complaint also fails to demonstrate that Foot Locker knew of VFP's mistaken belief in Smith's or Rainier's authority to verify receivables. Beyond a conclusory statement that Foot Locker conspired with Smith and Rainier to defraud VFP, there are no factual allegations regarding Foot Locker's knowledge of VFP's communications with Smith or Rainier. Thus, Foot Locker could not have taken reasonable steps to notify VFP that Smith and Rainier lacked authority to verify receivables.

Additionally, VFP has not shown reasonable reliance on Foot Locker's silence regarding Smith's wrongful acts. By failing to make a single inquiry with Foot Locker regarding Smith's disappearance, VFP relied unreasonably rather than reasonably on Foot Locker's silence.

(Internal quotations and citations omitted) (emphasis added).