Opinion ID: 1431745
Heading Depth: 1
Heading Rank: 2

Heading: summary judgment denial of the fraud defense

Text: In recognition of the nature of the parties involved in this sales transaction and the process of negotiation, payment and subsequent litigation, I also cannot agree with the summary judgment disposition of the fraud defense which arose from this business sale negotiation process. Franke, as the in-town managing partner, with her brother Roll, out-of-town, non-managing partner, undertook to sell the Gillette, Wyoming video rental agency, RV Enterprises. The partnership listed the business with a Gillette real estate agency, Century 21. The realtor then found a prospective customer, Wales, and proceeded with negotiation. Roll, as a partner, after two proposals were presented, agreed to the sale with Wales if a reduced commission could be obtained to provide a desired net price. When the realtor refused, Franke set about structuring a deal to cheat the realtor out of his commission by the introduction of a third party who was her boyfriend (the Australian), Monte G. Schulte, as a straw man purchaser. My instant objection to the decision of the majority is derived from the resulting fraud that was perpetrated on Wales, which was separate and distinct from the fraud perpetrated on the realtor. The sales documents for the sale to the straw man, Schulte, were obtained by Roll and then redone by Franke, who became the author of the instruments on resale to Wales. Fraud was perpetrated upon Wales as the successor buyer by the double layered sales terms. The first sales agreement, Franke-Roll to Schulte, provided for a large initial payment and a three month balloon payment for the substantial balance which was clearly not within Wales' payment capacity. This was also why the first proposal to sell to him did not close because of his insufficient financing and lack of credit. The second sales agreement, Schulte to Wales, was different from the first one by providing for payment of the balance of the purchase price on a thirty-six month amortized schedule, which could have been within Wales' capacity to pay. Additionally, security documents between Franke-Roll as the partnership and Schulte were executed and filed though unannounced and unknown to the innocent Wales. Wales was not told about the balloon payment provision in the first agreement, which became his burden even when not included in the second agreement. Consequently, even if Wales met his payment obligations on the second agreement, the one he had executed, the business deal was jeopardized since the balloon payment permitted the original owners to foreclose under the first sales agreement. As realistically could be anticipated and certainly even programmed, it did happen just that way. Despite whatever payment Wales made on an installment contract basis, the original partnership of Franke-Roll demanded a three month balloon payment satisfaction in full which exceeded any payment capacity of Wales. Recognition of the nature of the parties is intrinsic to the proper resolution in this case, and particularly so since disposition was made on a summary judgment basis. Roll, as brother, had initially funded the establishment of RV Enterprises on borrowed money to provide a business to be operated by his sister, Franke. Lacking profitability, it was later decided by the brother-sister partners to sell. Franke, as manager of the business, was to be the Gillette sales negotiator. During that time, she acquired as her boyfriend  or romantic interest, as her deposition indicates  Monte Schulte. Prospective buyer, Wales, had a cash settlement from a Florida worker's compensation injury claim. Franke set about to separate him from his cash by the sale of RV Enterprises and did just that. The actual existence or involvement of her brother as a partner was essentially undisclosed to Wales during the negotiation process. Since Roll had the money interest in the business from his bank loan debt in South Dakota, he was significantly involved in the sales decision but never in any direct contact with Wales. Roll did sign the real estate listing agreement and then later signed the first earnest money deposit and sales agreement for a sale to Wales. That earlier proposal did not mature since bank funding was not available to Wales to finance the amount required in excess of his available cash from the worker's compensation settlement. Lacking bank financing, a second proposal was floated between the parties which did not net Roll's demand for cash after payment of the real estate commission. Franke then, in conjunction with Schulte, set about cheating the realtor out of the commission by a straw man sale so that the initial cash payment desired by her brother, Roll, would be achieved. It is undisputed that fraud was perpetrated by Schulte and Franke, not only on the realtor but also on Wales, which occasions my dissent in analysis of the resulting summary judgment granted against Wales as the buyer. The question at issue is the responsibility of a brother-sister partnership for the fraud committed upon Wales as the buyer of the business when committed by the sister/partner, and the brother/partner essentially got the proceeds. [2] Related to the question presented is the structure of this litigation which in itself was surprising in that Wales did not counterclaim and only filed an affirmative defense. This litigation initiated by Franke-Roll, a Wyoming partnership, d/b/a RV Enterprises against Schulte and Wales prayed for preliminary non-transfer injunction and replevin of the business inventory chattel assets which, in this instance, was essentially the business. This lawsuit was to accommodate recovery for Franke-Roll of the balloon payment balance on the first sales agreement made between the partnership and straw man, Schulte. In answer, Wales pleaded as an affirmative defense that he had been defrauded in his payment of $55,000 cash as a deposit to make the sale. Schulte had picked up around $5,000 cash for his availability, and then shortly thereafter, broke off his relationship with Franke and departed for Florida or parts otherwise unknown. He was served in the replevin action and defaulted. Perhaps for this reason, or others undisclosed, a cross-claim against him by Wales was also not made. [3] I have no problem in the citation of the majority to W.S. XX-XX-XXX(b), but consider that the statute does not reach nor contemplate these facts where the partnership and the partner realized the benefit of the fraud in the sale of the business, whether disclosed or not. Although this case is far from carefully pleaded in issue development, I discern that other provisions of the Uniform Partnership Act, now found in Wyoming statutes, should be applied. An admission or representation made by any partner concerning partnership affairs within the scope of his authority as conferred by this act [§§ 17-13-101 through XX-XX-XXX] is evidence against the partnership. W.S. XX-XX-XXX (emphasis added). Notice to any partner of any matter relating to partnership affairs, and the knowledge of the partner acting in the particular matter, acquired while a partner or then present to his mind, and the knowledge of any other partner who reasonably could and should have communicated it to the acting partner, operate as notice to or knowledge of the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner. W.S. XX-XX-XXX. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership, or with the authority of his copartners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act. W.S. XX-XX-XXX. As a result of the long-standing common law standards that predate codification and the Uniform Partnership Act, the principle evolved that I describe as benefit-responsibility. The imposition of civil liability on an innocent partner for the fraud of his copartner is especially applicable where the innocent partner receives the fruits of the fraudulent conduct. A false representation by one partner, by means of which property is obtained by the firm, will in law be imputed to the other partners to the extent of holding them liable for the debt, where the property remains identifiable, and the claimant can follow it into the hands of the partnership and recover it. 59A Am.Jur.2d Partnership § 670 at 570 (1987) (footnotes omitted). Recognition of the rationale implicit in this principle occurred in one Wyoming case, Douglas Reservoirs Water Users Association v. Maurer & Garst, 398 P.2d 74 (Wyo. 1965), where the subject of partnership or partner responsibility for a partner's illegal action (theft) was questioned. However, the disconnected service escape from partnership liability found in Douglas Reservoirs Water Users Association, 398 P.2d at 78, has no application here where we have the sale of the partnership assets, in which endeavor the fraud was committed and where also the partnership and the other partner received the gathered fruit. The benefit-responsibility principle has a strong and firm history as anchored in an 1885 decision of the United States Supreme Court, Strang v. Bradner, 114 U.S. 555, 561, 5 S.Ct. 1038, 1041, 29 L.Ed. 248 (1885), where it is stated: The only other question to be determined is, whether the defendants, John B. Holland and Joseph Holland, can be held liable for the false and fraudulent representations of their partner, it being conceded that they were not made by their direction nor with their knowledge. Whether this action be regarded as one to recover damages for the deceit practised upon the plaintiffs, or as one to recover the amount of a debt created by fraud upon the part of Strang, we are of opinion that his fraud is to be imputed, for the purposes of the action, to all the members of his firm. The transaction between him and the plaintiffs is to be deemed a partnership transaction, because, in addition to his representation that the notes were for the benefit of his firm, he had, by virtue of his agency for the partnership, and as between the firm and those dealing with it in good faith, authority to negotiate for promissory notes and other securities for its use. Each partner was the agent and representative of the firm with reference to all business within the scope of the partnership. And if, in the conduct of partnership business, and with reference thereto, one partner makes false or fraudulent misrepresentations of fact to the injury of innocent persons who deal with him as representing the firm, and without notice of any limitations upon his general authority, his partners cannot escape pecuniary responsibility therefor upon the ground that such misrepresentations were made without their knowledge. This is especially so when, as in the case before us, the partners, who were not themselves guilty of wrong, received and appropriated the fruits of the fraudulent conduct of their associate in business. [Emphasis added.] A real estate transaction of similar rapport is found in Gannon, Goulding & Thies v. Hausaman, 42 Okla. 41, 140 P. 407, 410 (1914) (quoting Stanhope v. Swafford, 80 Iowa 45, 45 N.W. 403 (1890) and 14 A. & E. Ency. L. (2d Ed.) 156, respectively), where that court specified: Where one partner, while acting for the firm, makes an exchange of lands by means of false representations, the other partner is liable for the fraud, though he personally takes no part in the transaction, and is ignorant of the fraud.    One is also responsible for the fraud of a person who has assumed to act for him without authority, if he ratifies his act by accepting the benefit of it or otherwise. A considerable volume of cases can be found in general reference to this subject in 6 Uniform Partnership Act (U.L.A.) § 13 (1969) as relating to the model code sections. For example, the fruit or benefit of the fraudulent conduct was dispositive for decision in Carolina Bagging Co. v. Byrd, 185 N.C. 136, 116 S.E. 90 (1923). Partnership property sale fraud was similarly presented in Siebold v. Berdine, 61 Cal. App. 158, 214 P. 655 (1923). See also Griffin v. Bergeda, 152 Tenn. 512, 279 S.W. 385 (1926). Succinctly stated in A. Sam & Sons Produce Co. v. Campese, 14 A.D.2d 487, 217 N.Y.S.2d 275, 277 (1961), [f]raud by one partner whereby money or property is gained by the partnership renders all partners civilly liable despite a discharge in bankruptcy. Another example is Zemelman v. Boston Ins. Co., 84 Cal. Rptr. 206, 207, 4 Cal. App.3d 15 (1970) (quoting from Stewart v. Levy, 36 Cal. 159, 165 (1868)) involving an insurance proceeds claim. That court related: All the partners will be bound by the fraud of one of the partners in contracts relating to the partnership made with innocent third parties. That is to say, all are responsible for the injury occasioned by the fraud,    whether they were cognizant of the fraud or not. The rule is the same as it is in respect to the responsibility of the principal for the fraud of his agent, while acting within the scope of his authority; and, indeed, a partner becomes liable for the fraud of his co-partner, because of the relation each bears to the other of agent in the partnership business. Since this decision is rooted in summary judgment, the burden is on the partnership and partners to deny apparent authority of the fraudulent conduct. Cook v. Brundidge, Fountain, Elliott & Churchill, 533 S.W.2d 751 (Tex. 1976). In this case, partner/Franke committed fraud on the buyer/Wales of partnership property so that the partnership and other partner, Roll, received the monetary benefit. Unquestionably, as reflected in this record, the sale was authorized by each partner and undertaken in the partnership interest. I would reverse the countervailing summary judgment which leaves all the benefits of the fraud with the defrauding parties. The case should be tried on its merits to determine whether Wales has a proper defense to the repossession of the business assets which he purchased on the basis of the fraud committed on him by the partnership in arranging the sale.