Elting v. Elting
288 Neb. 404, ___ N.W.2d ___ (2014)
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Rule of Law:
Ratification of a partner's unauthorized act requires the other partners to have actual, not merely constructive, knowledge of the material facts of the act. A limitation of liability clause protecting a partner for actions taken in good faith does not shield a partner who acts without authority and without the candor expected among partners.
Facts:
- Glenn Elting and Sons was a family farming partnership whose 2005 Amended Partnership Agreement required a majority vote of managing partners for partnership actions.
- In 2008, the managing partners became Kerwin Elting, his brother Perry Elting, Kerwin's son Carl, and Perry's son Knud, meaning three out of four votes were needed for any major decision.
- The partnership had existing hedge contracts with Cargill to sell its corn, which had been entered into with full partner consent.
- In 2008 and 2009, without consulting or obtaining approval from Perry or Knud, Kerwin entered into a series of speculative 'focal point contracts' with Cargill on behalf of the partnership.
- While an initial focal point contract yielded a small gain, subsequent contracts resulted in total partnership losses of $2,144,350.
- During a January 2009 annual bank meeting, Perry signed a 2008 balance sheet which, unbeknownst to him, reflected the adjusted corn prices resulting from the focal point contract losses.
- In 2010, after the partnership had begun dissolution proceedings, Perry and Knud first learned of the focal point contracts when their banker noticed a discrepancy between their financial projections and Kerwin's.
Procedural Posture:
- Perry Elting, Knud Elting, and ReJean Elting (appellees) filed a complaint against Kerwin Elting (appellant) in the district court for Nuckolls County, Nebraska, a state trial court.
- The complaint, later amended, alleged Kerwin breached the partnership agreement by entering into unauthorized contracts and sought damages for the resulting losses.
- Kerwin asserted affirmative defenses, including that he had authority, his actions were ratified, and a limitation of liability clause in the partnership agreement shielded him from liability.
- Following a bench trial, the district court found in favor of the appellees.
- The district court ruled that Kerwin lacked authority, his actions were not ratified, the liability clause did not apply, and awarded the appellees $1,072,175 in damages plus prejudgment interest.
- Kerwin appealed the trial court's judgment to the Nebraska Supreme Court.
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Issue:
Does a managing partner who enters into significant contracts without the required majority approval from other partners, as specified in the partnership agreement, bear liability for the resulting losses when the other partners lacked actual knowledge of the contracts?
Opinions:
Majority - Miller-Lerman, J.
Yes, a managing partner who acts without the contractually required authority is liable for resulting losses, particularly when the other partners did not have the actual knowledge required to ratify the unauthorized actions. The court's reasoning is threefold. First, Kerwin lacked actual authority because the Partnership Agreement explicitly required approval from a majority of the four managing partners for such a significant decision, and he failed to obtain it. Second, the other partners did not ratify Kerwin's unauthorized actions. Ratification requires actual knowledge of the material facts, and constructive knowledge—what Perry might have learned by scrutinizing the balance sheet he signed—is insufficient. The trial court found Perry and Knud's testimony that they were unaware of the contracts to be credible. Third, the partnership's limitation of liability clause, which protects partners for actions taken in good faith, does not apply. Kerwin's failure to inform his partners of the unauthorized contracts and the massive resulting losses was inconsistent with the candor expected among partners and did not constitute good faith.
Analysis:
This decision reinforces the principle that the terms of a partnership agreement are paramount in governing the authority of partners. It establishes a significant precedent in Nebraska partnership law by clearly distinguishing between actual and constructive knowledge for the purpose of ratification, adopting the Restatement (Third) of Agency's view that actual knowledge is required. This holding protects partners from inadvertently ratifying unauthorized acts they were not genuinely aware of. Furthermore, the ruling narrows the scope of 'good faith' safe harbors in liability clauses, indicating that a partner cannot violate fundamental authority provisions and then claim good faith protection, thereby linking good faith to duties of candor and adherence to the partnership's governing structure.
