Court Opinion

ID: 9632241
Source: CourtListenerOpinion
Date Created: 2023-08-22 11:07:35.226862+00
Date Added: 2024-06-11T12:34:33.329963
License: Public Domain

RONALD LEE GILMAN, Circuit Judge,
concurring.
I concur with the lead opinion in this case. But I write separately to further explain why I believe that the district court did not err in holding Jeff liable to the FDIC for the approximately $1.9 million benefit conferred on MBS by Steve’s embezzlement from ODBC. This discussion pays particular attention to the rationale underlying the fraud-on-the-partnership exception in explaining why Jeff was unable to successfully invoke the doctrine as a defense to the FDIC’s unjust-enrichment claim.
Steve of course knew that MBS was enriched to the tune of $1.9 million that he had embezzled from ODBC. The question before us, however, is whether this knowledge may be imputed to Jeff under Ohio Rev.Code § 1775.11. This statute allows a court to impute knowledge of an action taken by one partner to all the partners in a partnership, “except in the case of a fraud on the partnership.” Id. The resolution of this case therefore depends on our construction of that provision of the Ohio code.
I
Section 1775.11 of the Ohio Revised Code states that
[njotice 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 *302reasonably 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.
In other words, the knowledge of one partner of “any matter relating to partnership affairs” will generally be imputed to the other partners. But the statute also creates the exception that knowledge will not be imputed to the other partners “in the ease of a fraud on the partnership committed by or with the consent of that partner.” Ohio Rev.Code § 1775.11.
The statutory text codifies, word-for-word, section 12 of the Uniform Partnership Act of 1914(UPA). A well-regarded treatise explains the rationale behind UPA § 12 as follows: “UPA § 12 ... anticipates that there is communication among partners, imputes knowledge where such communication should exist, and, by creating a cost for noncommunication, imposes a need for communication.” J. William Callison & Maureen A. Sullivan, Partnership Law & Practice: General and Limited Partnerships § 8:34 (2008).
The treatise also explains that the main goal of the fraud-on-the-partnership exception is to allow a partnership that has been defrauded by one of its partners to sue the defrauding partner. Id. Without this exception, knowledge of the fraud would be imputed to the innocent partners. This would mean that “a partnership could not sue [that partner] for fraud because knowledge of the fraud defeats one of the elements of a fraud action.” Id. The exception therefore aims to avoid the absurd situation where an innocent partner is barred from suing another partner who defrauds the partnership.
But the exception is not intended to prevent third parties from pursuing claims against the entire partnership for unjust enrichment. As the district court explained in Grassmueck v. American Shorthorn Association, 365 F.Supp.2d 1042 (D.Neb. 2005), the fraud-on-the-partnership exception
does not apply 1) when the fraud is committed for the benefit of the partnership, 2) with respect to the rights of third parties acting without knowledge of the fraud, or 3) when the partner perpetrating the fraud acts as the sole representative or “alter-ego” of the partnership. Under such circumstances, the partnership is charged with the knowledge of that partner and cannot use lack of knowledge as a defense.
Id. at 1049-50 (citations omitted), aff'd 402 F.3d 833 (8th Cir.2005).
Just to be clear, the above-quoted language from Grassmueck was construing the 1997 version of the Uniform Partnership Act, not the 1914 version that has been codified in Ohio. Grassmueck, 365 F.Supp.2d at 1049-50 (citing § 102(f) of the UPA of 1997). But the 1997 version of the UPA did not change the way the fraud-on-the-partnership exception was expressed. Compare UPA of 1997 § 102(f) (imputing the knowledge of one partner to the entire partnership “except in the case of a fraud on the partnership committed by or with the consent of that partner.”), with UPA § 12 (using identical language to state the fraud-on-the-partnership exception).
II
Jeff attempts to defend himself from the FDIC’s unjust-enrichment action by invoking the fraud-on-the-partnership exception, claiming that Steve’s embezzlement from ODBC constituted fraud on MBS. He also alleges that Steve defrauded MBS by embezzling from MBS directly.
*303At first glance, Jeff’s position seems plausible. There is no reason to doubt Jeffs claim that he knew nothing of Steve’s embezzlement from ODBC. Nor is the assertion that Steve embezzled from MBS entirely implausible (although Jeff provides no persuasive evidence of this allegation). Jeff reasons that the FDIC is not entitled to summary judgment because these are instances of fraud on the partnership that prevent Steve’s knowledge of MBS’s $1.9 million benefit from being imputed to Jeff.
Our dissenting colleague is apparently persuaded by this line of reasoning, concluding that there is a genuine issue of material fact as to whether Jeff may invoke the fraud-on-the-partnership exception. As a result, our dissenting colleague concludes that the FDIC is not entitled to summary judgment for the $1.9 million.
Ill
Jeffs argument, however, is without merit for several reasons. First, Steve’s embezzlement from ODBC was not a fraud “on the partnership” because MBS benefit-ted from the embezzlement. See Ohio Rev.Code § 1775.11. Jeff is therefore unable to invoke the fraud-on-the-partnership exception because partners may not do so “when the fraud is committed for the benefit of the partnership.” See Grassmueck, 365 F.Supp.2d at 1049.
Nor can Jeff rely on allegations of Steve’s embezzlement from MBS to protect himself from liability to the FDIC. This is because the fraud-on-the-partnership exception “does not apply ... with respect to the rights of third parties acting without knowledge of the fraud.” Id. The relevant third party in this case is the FDIC, which had no knowledge of Steve’s purported embezzlement from MB S. Indeed, the question of whether Steve embezzled from MBS is entirely irrelevant to the nature of the FDIC’s unjust-enrichment claim, which is based solely on recovering the money that Steve embezzled from ODBC (including the $1.9 million). See Hambleton v. R.G. Barry Corp., 12 Ohio St.3d 179, 465 N.E.2d 1298, 1302 (1984) (stating the elements of unjust enrichment).
Moreover, the main purpose of the fraud-on-the-partnership exception, as previously noted, is to permit innocent partners to sue a fellow partner who has defrauded the partnership. Without the exception, the imputation-of-knowledge rule would prevent the innocent partners from doing so. But this right of Jeff to sue Steve for any funds that the latter may have embezzled from MBS does not bar the FDIC, as an innocent third party, from pursuing its unjust-enrichment action against Jeff for the $1.9 million that was embezzled from ODBC. See Grassmueck, 365 F.Supp.2d at 1049-50 (explaining that the exception cannot be used to undermine the rights of third parties who have no knowledge of the particular fraud at issue).
IV
Jeffs main response to the FDIC’s claim is that Steve had complete control over MBS’s finances. But there are two problems with this response. First, as the lead opinion accurately notes, the claim that Jeff had no such control is simply wrong: Jeff signed approximately 3,500 checks on behalf of MBS. He was also able to produce reams of documentation detailing MBS’s winnings from horse racing. These facts all but eviscerate the notion that Jeff had no control over MBS’s finances.
Then there is the second problem. Even assuming arguendo that Jeff indeed ignored all financial matters relating to *304MBS, Part III above explains why he cannot invoke the fraud-on-the-partnership exception to avoid liability to the FDIC, which is an innocent third party. I therefore conclude that the district court did not err in granting summary judgment to the FDIC with respect to the $1.9 million.
y
For all the reasons set forth above, I concur with the lead opinion.