Elting v. Elting

Nebraska Supreme Court
288 Neb. 404 (2014)

ELI5:

Sections

Rule of Law:

Under the Uniform Partnership Act, ratification of a partner's unauthorized act requires that the ratifying partners have actual knowledge of the material facts, not merely constructive notice; furthermore, a partnership agreement's limitation of liability clause requiring 'good faith' does not protect a partner who fails to disclose significant financial risks and losses.

Facts:

Glenn Elting and Sons was a family farming partnership governed by an agreement that required a majority vote of the managing partners (Kerwin, Perry, Carl, and Knud) for significant business decisions.
Without obtaining a majority vote or consensus from the other managing partners, Kerwin Elting entered into a series of speculative 'Focal Point' grain contracts with Cargill in 2008 and 2009.
These contracts were risky and resulted in a total loss of $2,144,350 for the partnership.
During annual meetings with the bank to secure credit, Kerwin and Perry signed balance sheets that technically incorporated the adjusted lower corn prices resulting from the losses, but the specific contracts were not discussed.
Perry and Knud were unaware of the Focal Point contracts and the resulting losses until the partnership dissolved and they sought separate financing, at which point the bank pointed out discrepancies in their corn pricing data.
Kerwin claimed the other partners had ratified the contracts by signing the bank documents and that he was shielded by a clause in the partnership agreement limiting liability to willful misconduct or gross negligence.

Procedural Posture:

Perry, Knud, and ReJean Elting filed a complaint against Kerwin Elting in the District Court for Nuckolls County seeking damages for breach of the partnership agreement.
The District Court granted the plaintiffs' motion to amend the complaint to include additional discovered contracts.
A bench trial was held where the District Court acted as the finder of fact.
The District Court entered judgment in favor of the plaintiffs, awarding $1,072,175 plus prejudgment interest, finding Kerwin lacked authority and was not shielded by the liability clause.
Kerwin Elting appealed the judgment to the Nebraska Supreme Court.

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Issue:

Is a partner liable for losses resulting from unauthorized contracts when the other partners signed financial documents reflecting those losses without actual knowledge of the underlying transactions, and does a limitation of liability clause protect that partner?

Opinions:

Majority - Justice Miller-Lerman

Yes, the partner is liable. The court affirmed the lower court's decision, reasoning that Kerwin lacked the actual authority to bind the partnership because the partnership agreement required a majority vote for such actions, which the trial court found as a matter of fact did not occur. regarding ratification, the court held that under the Restatement (Third) of Agency, ratification requires the principal to have 'actual knowledge' of material facts. Although Perry signed balance sheets that reflected the losses, the court rejected the argument that 'constructive knowledge' (what he should have known by reading) was sufficient for ratification. Finally, the court ruled that the limitation of liability clause did not apply because it required actions to be taken in 'good faith.' The court found that concealing over $2 million in losses and failing to inform partners of high-risk contracts was inconsistent with good faith.

Analysis:

This case is significant for clarifying the distinction between 'notice' and 'actual knowledge' within the context of partnership ratification. The Nebraska Supreme Court explicitly adopted the Restatement (Third) of Agency view that a partner cannot ratify an unauthorized act through mere negligence or by signing documents they do not fully understand; actual cognitive awareness of the material facts is required. This raises the bar for partners attempting to use the defense of ratification. Additionally, the case reinforces the fiduciary nature of partnerships, establishing that contractual liability shields contingent on 'good faith' will be pierced when a partner is not forthright about significant financial exposures, essentially preventing partners from contractually insulating themselves from the consequences of concealing material information.

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