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Federal Deposit Insurance Corporation v. Braemoor Associates

Court of Appeals for the Seventh Circuit
686 F.2d 550 (1982)
ELI5:

Rule of Law:

Under the Uniform Partnership Act, a partnership and its members are liable for the wrongful acts of a partner committed in the ordinary course of the partnership's business. The wrongdoing partner's knowledge is imputed to the entire partnership, even if the other partners were unaware of the breach.


Facts:

  • Braemoor Associates, a real estate joint venture, was formed by several individuals, including Paul Bere, who was president of the State Bank of Clearing.
  • Between 1970 and 1972, Bere caused his bank to make nine large loans to other joint venturers for Braemoor's use, establishing a pattern of financing the venture with bank funds.
  • In late 1971, when Braemoor needed $60,000 to pay a contractor, Bere had the State Bank of Clearing lend the money to a third party, Ringbloom, who immediately transferred the sum to Braemoor.
  • Bere did not disclose to the bank's board of directors that the loan's ultimate beneficiary was Braemoor, an enterprise he controlled.
  • Several months later, when Braemoor needed $240,000, Bere used a blank note previously signed by his brother and co-venturer, Lambert Bere, to engineer a $417,000 loan to Lambert from the bank.
  • Paul Bere directed $250,000 of that loan money to be deposited into an account for Ringbloom's company, which then paid $240,000 to Braemoor on the same day.
  • The other members of Braemoor were not aware that Bere was breaching his fiduciary duties to the bank to secure these funds, though they knew he was arranging financing and their venture benefited from the proceeds.

Procedural Posture:

  • The Federal Deposit Insurance Corporation (FDIC) sued Braemoor Associates and its individual members in the United States District Court.
  • The case proceeded to a bench trial.
  • At the close of the FDIC's presentation of evidence, the defendants moved to dismiss the complaint under Federal Rule of Civil Procedure 41(b).
  • The district court granted the defendants' motion and entered judgment dismissing the complaint.
  • The FDIC, as the appellant, appealed the dismissal to the U.S. Court of Appeals for the Seventh Circuit.

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Issue:

Does the Uniform Partnership Act make a joint venture and its members liable for funds wrongfully obtained by one partner for the venture's benefit, when the other partners were unaware of that partner's breach of fiduciary duty to the source of the funds?


Opinions:

Majority - Posner, Circuit Judge

Yes. Under the Uniform Partnership Act, a partnership is liable for the wrongful acts of a partner acting in the ordinary course of business, and that partner's knowledge is imputed to the other partners. The court found that Braemoor was liable on two independent grounds. First, under Section 12 of the Uniform Partnership Act, Paul Bere's knowledge of his own breach of fiduciary duty was imputed to the partnership because he was acting on behalf of, not against, the partnership. The exception for a fraud 'on the partnership' does not apply when the fraud benefits the partnership. Second, under Section 13 of the Act, the partnership is liable because Bere's wrongful act of channeling bank funds caused injury to the bank, and he was acting both 'in the ordinary course of the business' (as shown by the prior nine loans) and 'with the authority' of his co-partners, who had implicitly authorized him to arrange financing for the venture. The district court erred by analyzing the case under principles governing strangers to a breach of trust, rather than the stricter partnership and agency principles that apply.



Analysis:

This decision solidifies the application of agency and partnership principles to hold innocent partners liable for the malfeasance of a co-partner when the partnership benefits. It clarifies that under the UPA, a partner's subjective ignorance of another's wrongdoing is not a defense if the act was within the ordinary course of business. The ruling shifts the risk of a partner's misconduct from an innocent third party to the other partners, creating a strong incentive for partners to monitor each other's activities. This case serves as a key precedent for imputing knowledge and extending vicarious liability within partnerships and joint ventures.

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