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A principal who puts a servant or other agent in a position which enables the agent, while apparently acting within his authority, to commit a fraud upon third persons is subject to liability to such third persons for the fraud.
The president of the corporation secured payments from the customers under the guise that the payments were investments in the corporation and then used the customers' money for his own personal benefit. The customers filed claims for fraud and misrepresentation. The trial court rendered judgment in favor of the customers and the court of appeals affirmed. The court of appeals held that "given the circumstances of this case and existing Colorado case law, we adopt Restatement (Second) of Agency § 261 as reflecting Colorado law and conclude that the trial court did not err in applying it here."
Was the corporation liable for the president’s acts?
The court held that the appropriate analytical framework for the case was the apparent authority doctrine, under which the customers must have established that the president was put in a position which enabled him to commit fraud, and that acting within his apparent authority, the agent committed fraud. The court found that the corporation was liable for the president's acts under the apparent authority doctrine because the findings of the trial court supported a conclusion that the corporation put the president in a position where he could commit fraud, that he acted within his apparent authority when he raised capital from individuals such as the customers, and that he made false representations to the customers with the awareness they were false and with intent to induce the customers to rely on the representations.