Donnelly about this transaction, and Donnelly confessed. He agreed to voluntarily repay Desso. However, Donnelly never repaid him, and Nationwide was forced to take the money from Donnelly's deferred compensation accounts. Donnelly also defrauded at least two more customers, Fiondella and Demonte. Nationwide discovered both cases of fraud and forced Donnelly to compensate the clients.
Finally, after Donnelly was terminated and lost his binding authority to sell Nationwide products, he attempted to sell Nationwide insurance. Donnelly sold a homeowner and an auto insurance policy. (Pl.'s Ex. 26). Nationwide's Underwriting Supervisor discovered this attempt and rejected the business. Nationwide then sent Donnelly another letter reminding him that he did not have the binding authority to sell Nationwide products.
Thus, the only conclusion must be that Nationwide knew about Donnelly's fraudulent activities and knew, or should have known, that he was likely to commit future criminal acts. It is in this light that the analysis of the affirmative steps that Nationwide took to remove any vestiges of Donnelly's authority must be viewed.
3. Nationwide's Actions at the Time of Termination and Thereafter
Nationwide removed Donnelly from his office and confiscated his supplies and his equipment after he was terminated. However, Nationwide was not prompt and allowed Donnelly to keep Nationwide. supplies and indicia of authority for several weeks after his termination. Furthermore, when Nationwide removed Donnelly from his office, it did not supervise him while he was packing and did not inventory any of his supplies. In fact, Nationwide failed to collect all of its supplies and indicia of authority. Nationwide kept no record of the visit to Donnelly's office. The Second Circuit has held that "although the principal is entitled to have indicia of authority returned to him upon termination of the relationship, if he is unsuccessful in accomplishing this, the risk of deception to third persons who have otherwise no notice of the termination rests upon the principal." Herbert, 931 F.2d at 994.
Also, Nationwide made no attempts to notify Donnelly's previous customers and the public of his termination. Nationwide failed to send any letters notifying his former clients
that he was terminated and was no longer permitted to sell any Nationwide products. Finally, Nationwide did not give public notice in any local newspapers or media. As a result of these omissions, Donnelly's former clients and the general public were uninformed about the status of Donnelly's authority.
Nationwide knew, or should have known, of Donnelly's fraudulent activity while he was employed. It had this knowledge on June 21, 1991, the date he was formally terminated. It had clear and convincing evidence of his fraudulent activity by September 20, 1991, the date he ceased to be an agent, and certainly by November and December of 1991 when the plaintiff was defrauded. Under such circumstances, Nationwide should have taken positive steps to alert the public of the threat Donnelly posed. At a minimum, Nationwide should have initially notified all of Donnelly's clients that he was no longer permitted to sell any Nationwide products. Furthermore, once Nationwide knew for certain that he was defrauding customers, and was disobeying orders not to sell Nationwide products to customers after he was terminated, the company, at the minimum, should have published a notice in the local paper stating that Donnelly was no longer a Nationwide agent.
From the start, Nationwide should have been prompt and forceful in confiscating their indicia of authority from Donnelly. Nationwide should have made a concerted effort to confiscate Donnelly's supplies and any papers with the Nationwide insignia on them as soon as it realized his potential for defrauding their customers. It did not.
Because of these omissions, it must be concluded that Nationwide did not take the necessary reasonable affirmative steps to terminate his agent's authority given the circumstances of Donnelly's actions.
B. Reasonable Reliance
Although Nationwide failed in its obligation to terminate Donnelly's actual authority by omitting several affirmative steps necessary to remove any vestiges of his apparent authority, Nationwide is not responsible for the fraud unless Mrs. Johnson reasonably relied upon Donnelly's apparent authority. The Second Circuit has held that the termination notice requirement is intertwined with and a derivative of the reasonable reliance requirement. Herbert, 931 F.2d at 996. In the words of the Second Circuit:
Apparent authority can exist only as long as the third person, to whom the principal has made a manifestation of authority continues to believe that the agent is authorized. He does not have this reasonable belief if he has reason to know that the principal has revoked, or that the agent has renounced the authority, or that such time has elapsed or such events have happened after the authorization as to require the reasonable inference that the agent's authority was terminated.
Id. at 996-97.
To recover under a theory of apparent authority, the plaintiff must also show that she reasonably relied upon the words or actions of the principal. Herbert, 931 F.2d at 996-97; Westchester, 705 F. Supp. at 169. The reasonableness of this reliance depends upon the characteristics of the third party. General Overseas Films Ltd., 542 F. Supp. at 690.
At the time of the fraud, which was only a few months after Donnelly's termination, Mrs. Johnson was a novice investor. She had never invested before and never had more than a few thousand dollars in a savings account. When she received her personal injury settlement, she was overwhelmed and did not know what do with the money. During the 1991 Thanksgiving holiday, while Donnelly was visiting, he recommended that she invest the money in a Nationwide tax free mutual fund similar to the one that her mother had invested in. Mrs. Johnson inquired whether Donnelly was able to sell Nationwide products, and Donnelly responded that he was no longer permitted to sell Nationwide insurance, but was permitted to sell Nationwide mutual funds. Donnelly explained that although he was no longer an exclusive Nationwide agent, he still sold insurance for other companies and could sell mutual funds for Nationwide. The plaintiff had known Donnelly many years, she knew that he had a long employment history with Nationwide, and that he had won several awards. She claims that she had no reason not to believe him when he explained his relationship with Nationwide. After all, he was a relative and a former priest.
To convince Mrs. Johnson to invest, Donnelly showed her a Nationwide prospectus. Mrs. Johnson also asked her mother, a Donnelly client, whether she was satisfied with her investment and she responded that she thought that it would be a good investment. Mrs. Johnson's mother, Mrs. Kelly, did not know that Donnelly was unable to sell Nationwide tax free mutual funds, because she had received no notice to that effect from Nationwide. After Mrs. Johnson purportedly purchased the fund, Donnelly sent her periodic account statements on Nationwide forms, and even remitted $ 15,000 on request.
Since Mrs. Johnson was an inexperienced investor, had no notice that Donnelly was unable to sell Nationwide tax free mutual funds, knew that Donnelly had been a very successful Nationwide agent for fifteen years, was shown Nationwide documents promoting the sale, and finally, received support from one of Donnelly's customers who recommended the investment, it was reasonable for Mrs. Johnson to rely on Donnelly's apparent authority.
In general, a third party is not required to inquire into the scope of the agent's authority. Herbert, 931 F.2d at 995. However, in a few instances, the court may require the third party to make reasonable inquiries about the ostensible agent's actual authority. Westchester, 705 F. Supp. at 169 "In the apparent authority context, the duty of inquiry arises only when (1) the facts and circumstances are such as to put the third party on inquiry; (2) the transaction is extraordinary; or (3) the novelty of the transaction alerts the third party to the danger of fraud." FDIC v. Providence College, 115 F.3d 136, 1997 U.S. App. LEXIS 12641, *13 (2d Cir. 1997); Herbert, 931 F.2d at 995-96. The Second Circuit has held that the duty to inquire about the "agent's apparent authority 'amounts to an alternative way of asking whether the third party reasonably relied on the representations of the agent that he possessed authority to bind the principal.'" Id. (quoting Herbert, 931 F.2d at 995-96). Therefore, unless the circumstances surrounding Mrs. Johnson's investment were so extraordinary and novel that her reliance on Donnelly's authority would have been unreasonable, there is no duty of inquiry.
The circumstances surrounding this case were not so extraordinary or novel that it was unreasonable for Mrs. Johnson to rely on Donnelly's apparent authority without actually inquiring into his actual authority. The transaction was neither novel nor extraordinary. Nationwide's agents sell Nationwide tax free mutual funds regularly, and receive commissions for the sales. Donnelly had previously sold Nationwide tax free mutual funds, and in fact, he had sold several such funds to Mrs. Johnson's relatives. Finally, although Mrs. Johnson knew that Donnelly was no longer Nationwide's exclusive agent, it was not unreasonable for her to assume that he could still sell its tax free mutual funds. Insurance agents often sell insurance and other investment products for many companies, and therefore, in light of the circumstances and the apparent authority that Donnelly maintained, it was not unreasonable for Mrs. Johnson to believe that Donnelly was simply an independent insurance agent who sold products for many companies. As Mrs. Johnson stated in her testimony, "Mr. Donnelly, was my brother-in-law, I didn't have any reason to question what he said." (Tr. at 222.)
Under the unique circumstances of this case, Nationwide's omissions and failures to take reasonable actions to destroy Donnelly's apparent authority results in liability to the plaintiff for his fraudulent act. It is not suggested that Nationwide was required to make guarantees that third parties will not be defrauded by someone like Donnelly. If Nationwide had taken the minimum steps of notification and confiscation as outlined above, and plaintiff had still been defrauded, Nationwide would not be liable.
Because, on June 21, 1991, Nationwide failed to take those minimum steps when it knew that Donnelly had committed fraud upon its clients and was susceptible to committing fraud in the future, it is liable. Even after that date, and before the final effective date of termination, when more evidence came forward, Nationwide still failed to take any minimum steps. In fact, despite the mounting evidence with regard to Donnelly's activities, Nationwide never, at any time, took any steps to alert its clients or the general public to the fact that Donnelly was no longer authorized to write business for Nationwide. This is in stark contrast to the extensive publicity that was given to him when he was an outstanding agent writing a high volume business. Nationwide made no effort to protect innocent people like Mrs. Johnson from a predator like Michael Donnelly.
It is not suggested that Nationwide was required to place clients and the general public on notice that Donnelly was being terminated because he was suspected of fraud, or that he was suspected of being capable of committing fraudulent acts upon clients in the future. That was not necessary or required. However, at the very least, his records should have been promptly seized, and clear and concise statements issued to all of Donnelly's clients and the general public that he had no authority whatsoever to write any business on behalf of Nationwide. Because of Nationwide's failures and omissions, it will never be known for certain if such steps would have prevented the fraud upon Mrs. Johnson. But, it is not a question of whether or not Nationwide's omissions were a proximate cause of the plaintiff's injury. The question is whether the omissions left Donnelly with sufficient apparent authority, as a Nationwide agent, so that the plaintiff could rely upon that authority without inquiring about its foundation. An answer in the affirmative is required.
The plaintiff is entitled to damages in the sum of Fifty-five Thousand Dollars ($ 55,000.00) with interest from December 30, 1991.
Therefore, it is
ORDERED that judgment be entered by the Clerk in favor of the plaintiff Shelly A. Johnson and against the defendants in the sum of Fifty-five Thousand Dollars ($ 55,000.00) with interest from December 30, 1991, in the sum of Thirty-four Thousand, Seven Hundred One Dollars and Seventy-six Cents ($ 34,701.76)
for the total of Eighty-nine Thousand Seven Hundred One Dollars and Seventy-six Cents ($ 89,701.76).
IT IS SO ORDERED.
David N. Hurd
United States Magistrate Judge
Dated: July 31, 1997
Utica, New York.