Opinion
December 3, 1970
Appeal from an order of the Supreme Court at Special Term, entered August 16, 1968 in Ulster County, which granted defendant's motion for summary judgment dismissing the complaint. By virtue of proceedings instituted by it in the United States District Court, Varifab, Inc., was supervised and controlled under Chapter XI of the Federal Bankruptcy Act from July 24, 1962 until its discharge on March 22, 1965. On the former date, the Referee in Bankruptcy ordered that the corporation, as debtor-in-possession, be authorized to operate the business and manage its property until further court order, during which time it was ordered to file, among other things, a verified monthly report setting forth a summary of the business operation and of "the amount of indebtedness incurred and remaining unpaid and contractual and other obligations assumed." The debtor-in-possession was empowered "to enter into any contracts incidental to the normal and usual operation of said business and the management and preservation of said property." On November 13, 1964, Gunther Newman, purportedly as President and Chairman of the Board of Directors and on behalf of Varifab, entered into an alleged agreement under which plaintiff was to receive an option to purchase 100,000 shares of unissued common capital stock of Varifab at $4 per share for five years after defendant's Chapter XI discharge, as well as an option for another 100,000 shares at $5 during the three-year period after the expiration of the first option. The options were specified to be "subject to the removal of all legal limitations and restrictions presently existing by reason of the pendency of such Chapter 11 proceeding." The agreement was never disclosed to the District Court or any representative thereof and defendant's board of directors, which did not function during bankruptcy, was not advised of it until receipt of a letter dated December 8, 1967 exercising its option on 25,000 shares. When Varifab filed its petition under Chapter XI, the exclusive jurisdiction of its property was vested in the court and thereafter neither the debtor-in-possession nor Newman nor any other officer of the corporation could enter into such an unusual contract, the potential effect of which was to grant corporate control, without court authority, which had not been granted here (Bankruptcy Act, § 313; U.S. Code, tit. 11, § 713; Matter of Yellow Tr. Frgt. Lines, 207 F.2d 602, 604; Urban Props. Corp. v. Benson, Inc., 116 F.2d 321, 324; Matter of Whitman Center, 285 F. Supp. 199; cf. White v. Murtha, 343 F.2d 831, 833). Appellant's meritless argument that court approval was unnecessary because the options were not effective until after defendant's discharge overlooks the fact that, if valid, it was effective immediately but exercisable after discharge. Apart from bankruptcy law, when a third person has notice of a limitation of an agent's authority, as plaintiff did here, he cannot subject the principal to liability upon a transaction with the agent in violation of such limitation ( Ernst Iron Works v. Duralith Corp., 270 N.Y. 165, 170). Order affirmed, with costs. Herlihy, P.J., Reynolds, Staley, Jr., Greenblott and Cooke, JJ., concur.