Tuesday, April 12, 2011

Appanoose County Confidential: Partnerships Are Still Poison

Bank of the West v. Early Farm Partnership, no. 10-1093 (Iowa Ct. App. March 30, 2011)

Kevin Early and his father Richard formed the Early Farm Partnership. His father died in 2004, and the widow agreed to step into the shoes of her husband and become the owner of the decedent's 50 per cent share.

Mid States Engineering, a corporation owned by Kevin Early and his wife applied for a loan from Commercial Federal Bank, and the bank requested collateral. Kevin orally advised the loan officer that Sheila Early was an admitted partner and was a required signatory.

MidStates delivered a promissory note signed by Kevin and his wife and a mortgage of the partnership's real estate as security which was signed only by Kevin as general partner of the farm partnership. A security agreement was later delivered to the bank in which Kevin stated he had the full right power and authority to pledge collateral to the lender.

Bank of the West, successor to CFB, sued to foreclose its mortgage and filed a motion for summary judgment. The farm partnership resisted the motion with the affidavits of Kevin, his mother, and the bank's loan officer, alleging that there were genuine issues of material fact that precluded summary judgment.

The district court granted the bank's motion, ordered foreclosure of the mortgage, and this appeal followed.

The court of appeals affirmed, finding that although the Early Farm Partnership documents required unanimous agreement of the partners concerning partnership decisions that affected partnership assets, Kevin could and did act in a way that could bind the partnership.

Iowa Code section 486A.301 states in part,

(... E)ach partner is an agent of the partnership for the purpose of its business. An act of a partner, including the execution of an instrument in the partnership name, for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority.

The takehome's clear: For G-d's sake, forget partnerships, form a corporation and do it right. It'll be the cheapest money you ever spend.