Court Opinion

ID: 9632242
Source: CourtListenerOpinion
Date Created: 2023-08-22 11:07:35.233365+00
Date Added: 2024-06-11T12:34:33.745983
License: Public Domain

KENNEDY, Circuit Judge,
dissenting.
Even accepting that Jeff bears the burden of proof regarding the fraud-on-the-partnership exception to personal liability, Jeff proffered sufficient evidence such that a genuine issue of material fact existed on the issue of fraud on the partnership. Cf. Maj Op. at 298-99. I would reverse the district court’s grant of summary judgment in favor of the FDIC and remand for a trial with respect to the personal liability of Jeff individually as a partner for the partnership’s liability. Therefore, I respectfully dissent.
I.
As a preliminary matter, I note that the failure of the district court to enter separate judgments in this case on the FDIC’s different claims against the different plaintiffs has added to the confusion in this appeal. The FDIC’s motion for summary judgment makes clear its four distinct claims: “(1) MBS and Jeff Miller as a general partner of MBS-$1,904,340.00, jointly and severally; (2) Jeff Miller d/b/a JMS-an amount to be determined representing the value of the MBS partnership at the time of the transfer of substantially all of its assets to JMS; (3) Jeff and Lori Miller-$65,000.00, jointly and severally, on the 52.85 acres of land in Paulding County; and (4) Jeff and Lori Miller-$128,340.00, jointly and severally, [for their share of] the 55.8 acres of land in Paulding County.” J.A. at 157.
The FDIC’s claims against Jeff and Lori for unjust enrichment in the amounts of $65,000 and $61,870-claims (3) and (4) here-are largely uncontested on áppeal except to the extent that these properties were also subject to forfeiture as a result of Steve’s criminal trial, and it is unclear whether that forfeiture is subordinate to these claims. The government is not entitled to claim either twice. With regard to claim (4), Jeff and Lori are held liable for unjust enrichment in proportion to their share of the price of acquiring the 55.8-acre property.1 I agree with the majority that we should affirm the judgment of the district court with respect to these claims.
I also agree that Jeff and JMS are liable for unjust enrichment on claim (2) to the extent of the partnership’s assets transferred to Jeff, to be valued by the district court. With the approval of the district court in Steve’s criminal ease, all MBS assets were transferred to JMS, without consideration, to maintain the operational value of the business. J.A. at 172-73. United States Trotting Association rules prohibited MBS horses from racing if Steve, under indictment, remained involved with the partnership. J.A. at 172. Upon transfer of MBS assets to Jeff, according to Steve, “[t]he value of [MBS] exceeded $1 million.” J.A. at 89. Jeff does not contest that these JMS assets must be forfeited to the government, either as part of Steve’s criminal proceedings or here to the extent that the partnership is liable, and I agree that Jeff has been unjustly enriched by the transfer of these assets and that the FDIC is entitled *305to the value of the assets. J.A. at 379. I would remand to the district court to decide the appropriate valuation date.
I dissent only from the majority’s conclusion on the FDIC’s first claim-Jeffs personal liability as a partner, derivative of MBS’s unjust enrichment, for the entire $1,904,340 embezzled by Steve and deposited in the partnership bank account. As the district court correctly pointed out, the critical question here is whether Steve committed a fraud on the partnership under Section 1665.11 of the Ohio Revised Code.2 If he did, personal liability should not flow from MB S to Jeff as a partner for any unpaid portion of the partnership debt, assuming Jeff had no actual knowledge of the fraud. The district court answered this question twice, initially concluding that the FDIC was not entitled to summary judgment against Jeff because it failed to rebut Jeffs testimony that he was ignorant as to the source of the funds deposited in the partnership bank account and thus failed to demonstrate that knowledge should be imputed to Jeff. J.A. at 399.3 On the FDIC’s motion for reconsideration, the district court shifted the burden of proof from the FDIC to Jeff to prove fraud on the partnership. However, the court left in place its prior ruling that there was an issue of fact as to Jeffs actual knowledge of any embezzlement and his brother’s fraud. The FDIC had raised an argument in its brief that Jeff should have known the discrepancy existed, but, by its ruling, the district court rejected that argument. As to the fraud-on-the-partnership issue, the district court then ruled that Jeff had failed to raise enough evidence of to raise a genuine issue of material fact of fraud on the partnership to defeat the FDIC’s summary judgment motion. However, even with the burden of proof on Jeff as to the fraud-on-the-partnership exception, I believe that the district court should have denied summary judgment for the following reasons.
II.
A genuine issue of material fact exists as to whether Steve committed a fraud on the partnership. Steve’s purported fraud on the partnership would defeat the imputation of the knowledge of MBS’s unjust enrichment from Steve to Jeff, and thus remove personal liability flowing from the partnership to Jeff.
The following facts put forth by Jeff are uncontested. In his affidavit in opposition to summary judgment, Jeff stated that Steve “handled all things financial,” “did all of the banking,” and “kept all of the *306records pertaining to the business” at his home. J.A. at 171. The affidavit continued: “[t]he statements from our checking account even went to Steve’s home, not the farm.” Id. Jeff “turned over to Steve all revenue received by MBS to pay the farm note and other obligations.” Id. He knew nothing of Steve’s embezzlement.
It is undisputed that Steve embezzled the $1,722,223 from Oakwood which he transferred into MBS’s bank account or used to purchase the two properties. Jeff does not question this. Appellant Br. at 18. The parties differ on the amount earned by MBS over the relevant period. Jeff asserts that MBS had income of $2,716,346 from race winnings during this period which were turned over to Steve to pay the operating expenses of the partnership, while the FDIC asserts that MBS had income of $2,390,029.4 Jeff turned all winnings over to Steve. The total amount of deposits in MBS’s bank account during its existence was $3,519,782. The total amount of checks written from the MBS account was $3,548,526.84.
This evidence reveals that Steve used the MBS account as his own personal slush fund, stealing both from Oakwood and the partnership, while he deceitfully portrayed the financial affairs of the partnership as if it were a profitable business. The difference between the sum of embezzled funds plus MBS revenue and MBS deposits reveals a persuasive measure of MBS revenue stolen by Steve.5 Steve stole money from Oakwood and mixed it together with that stolen from the partnership in the MBS account. Neither party disputes that Steve had charge of managing MBS’s funds. Without Steve’s deposit of funds stolen from Oakwood and with financial transparency and honest accounting, the partnership’s budget shortfalls would have become apparent to Jeff, and the partnership would have ended for lack of economic viability with minimal personal liability to Jeff. Instead, the evidence gives rise to the inference that Steve artificially propped up MBS financially by making embezzled funds available to the partnership in MBS’s bank account. Jeff has testified that he had no idea that this was going on. Steve’s monopolization of MBS’s financial situation shielded that information from Jeff to ensure the ongoing viability of his *307fraudulent scheme.6 Steve apparently made sure to keep enough money in the MBS account so that the checks Jeff wrote did not bounce.
The district court should have found the above allegations and evidence sufficient to defeat summary judgment even under the standard it followed.7 Furthermore, the mere fact that Jeff has provided evidence that Steve misappropriated partnership funds without his actual knowledge is sufficient to show fraud on the partnership. See Ventre v. Datronic Rental Corp., No. 92 C 3289, 1996 WL 681279, at *8 (N.D.Ill. Nov.21,1996) (unpublished) (denying a motion to dismiss where plaintiff-partner is not imputed knowledge of partner who investigated the accounting of alleged fraudulent transactions because plaintiff alleged that other partners committed fraud on the partnership by misappropriating and diverting partnership funds); Batchelor v. Fort Scott Assoc., No. CA921119, 1993 WL 183651, at *3 (ArkApp. May 26,1993) (unpublished) (no knowledge of fraud imputed to the partnership where partner arranged for partnership money to be paid out as a “secret commission” to a third partner and this along with other actions by the partner constituted a fraud on the partnership); Allied Chemical Co. v. DeHaven, 824 S.W.2d 257, 265 (Tex.App. 1992) (partnership not bound by partner’s knowledge that other partner’s deal with a chemical company benefitted the chemical company at the expense of the partnership where the misappropriation of funds from the partnership by this other partner through this deal constituted a fraud on the partnership); McIntosh v. Detroit Sav. Bank, 247 Mich. 10, 225 N.W. 628, 630 (1929) (partner committed fraud on the partnership by depositing partnership funds into his own account, therefore the court did not impute knowledge of that partner’s fraud to the partnership); see also Marine v. Commissioner, 92 T.C. 958, 977, 1989 WL 47992 (1989) (embezzlement by a partner constitutes a fraud on the partnership such that knowledge of that embezzlement should not be imputed to the partnership).
Courts have also held that a partner has committed fraud on the partnership where one partner maintained sole responsibility for a business function and managed that business of the partnership as if it were doing fine when in fact it was not. See Invest Almaz v. Temple-Inland Forest Prods. Corp., 243 F.3d 57, 75 (1st Cir.2001) (holding that a reasonable jury could find fraud on the partnership for fraudulent concealment where a joint co-venturer *308maintained sole responsibility over selecting, preparing, and purchasing a manufacturing plant for a construction materials manufacturer (the innocent partner); allegedly discovered violations of environmental regulations at the plant site, knew that the plant was overvalued, and appreciated the obsolescence of the plant’s equipment; and carried through on the business deal as if everything was OK, when in fact that partner ought to have told the innocent party of those material facts). In Oreto v. Limbach, No. 91AP090066, 1992 WL 89970 (Ohio App. 5 Dist. Apr.20, 1992), an unpublished Ohio decision, the court dealt with the precise situation in which one partner managed the business without the other partner’s involvement. 1992 WL 89970 at *2. The partner managing the business never told the other partner that he had received notice of a tax assessment and left it unpaid. Id. The court held that the innocent partner had alleged enough on the issue of fraud on the partnership to survive a motion to dismiss a request for a hearing on his personal liability. Id. Likewise here, Jeff deserves a trial where a genuine issue of fact exists as to whether Steve committed a fraud on the partnership by stealing MB S funds and taking sole control over partnership funds as part of a scheme to benefit from misrepresenting the state of the partnership’s finances.
III.
The concurring opinion seems to agree that there is insufficient proof that Jeff had actual knowledge of the embezzlement; or, at least, he takes no issue with the district court’s previous ruling, which is still intact, that Jeff had no actual knowledge. The concurrence instead focuses on the fraud-on-the-partnership question and argues that it is inapplicable in this situation. I disagree.
The concurrence relies heavily on the contention that the fraud-on-the-partnership exception “ ‘does not apply ... with respect to the rights of third parties acting without knowledge of the fraud.’ ” Cone. Op. at 302 (citing Grassmueck v. Am. Shorthorn Assoc., 365 F.Supp.2d 1042 (D.Neb.2005)). The court in Grassmueck relies on the American Jurisprudence treatise for its position that the rights of innocent third parties should not be affected by fraud-on-the-partnership exception. See Am.Jur.2d. Partnership § 210. But this provision seems to apply only in the context of the relationship between the partnership and the innocent third party. It says nothing of the relationship between innocent partner and innocent third party. I have not suggested that the partnership here should be able to avail itself of the fraud-on-the-partnership exception to relieve it of any liability to Oakwood Bank. Indeed, I agree with the majority that summary judgment is appropriate with respect to all of the funds that unjustly enriched the partnership itself. See supra at 292. However, this is simply not relevant to the question of whether Jeff, an innocent party as well, may avail himself of the exception in order to limit his personal liability.
The concurrence also suggests that fraud-on-the-partnership exception should not apply when the fraud is committed for the benefit of the partnership. The concurrence then asserts, without explanation, that MBS benefitted here from the embezzlement. Although the partnership may have been unjustly enriched, there is simply no merit to the assertion that it benefitted from the embezzlement. As I state above, Steve’s indiscriminate use of the funds for his own benefit did nothing good for Steve or the partnership. As the record indicates, MBS was an enterprise engaged in what appeared to be a successful racing business, one that was turning in *309not insubstantial legitimate revenue from race winnings. The embezzlement, however, led to the partnership’s continued operation when, unknown to Jeff, its expenses were exceeding its income. I find it hard to believe, then, that Steve’s embezzlement, which he used primarily as his own personal slush fund, could be considered a benefit to the partnership qua partnership.
IV.
I take a moment to comment on the irony that the majority opinion holds Jeff, proprietor of Jeff Miller Stables, a horse racing operation worth in the ballpark of $1 million, personally liable for nearly $2 million for “unjust enrichment.” Unjustness aside, where is the enrichment? By all accounts, Jeff worked slavishly managing the day-to-day operations of an unprofitable partnership, and by the time the partnership assets had been transferred to him individually, its worth was only approximately half of the alleged embezzled amount. During MBS’s operation and since, the record we have indicates that Jeff only drew a salary; he did not share in non-existent profits.8 The majority states that “[t]he funds Steve embezzled allowed MBS to operate” in benefit of Jeff. Maj. Op. at 800-01. Quite the contrary, economic failure, or in an economist’s parlance, a “correction,” would have been the best benefit to Jeff. It would have caused him to terminate the partnership and escape with minimal debt if any. No doubt, the subsequent transfer of all MBS assets to JMS enriched Jeff. Oakwood’s embezzled funds put into the partnership itself unjustly enriched Jeff as a partner to that extent, even should a factfinder decide that Steve did defraud the partnership. Thus, I concur that any assets possessed by the partnership that were transferred to Jeff personally unjustly enriched him. But to what extent Jeff should be held personally liable as a partner is a question for a factfinder to decide, in accordance with his claimed fraud-on-the-partnership defense under O.R.C. § 1775.11. For the foregoing reasons, I respectfully dissent.

. Jeff and Lori owned approximately 48% of the property that cost $128,340 to purchase. The properly was co-owned by Jeff, Lori, Steve, Steve's wife, and Seth Miller, Jeff's son.

. The statute reads as follows:
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.
O.R.C. § 1775.11 (emphasis added).

. "Plaintiff contends O.R.C. § 1775.11 permits the imputation of Steve Miller’s knowledge of the unjust enrichment of MBS to the partnership. However, as the emphasized portion of § 1775.11 clearly holds, no imputation can be made where there was fraud on the partnership committed by a partner. Here, the fraud was perpetrated by Steve Miller, a partner in MBS. Unlike the loans made to Jeff and Lori Miller of which they admit knowledge, there is no evidence controverting Jeff Miller’s testimony that he had no knowledge that funds embezzled from ODBC were placed in MBS accounts or were used to pay MBS expenses. Therefore, the Court finds Plaintiff has failed to satisfy the knowledge requirement of its unjust enrichment claim against MBS for $1,904,340.00.” D.Ct. Opinion (March 23, 2007)

. The roughly $300,000 difference in earnings relates to the winnings of Eternal Camnation, which were deposited into a separate bank account. Maj. Op. at 299. Jeff claims that the horse was owned by the partnership and that its winnings were part of the partnership earnings. In addition, Jeff testified that monies won by a horse, Dex The Balls, in the amount of $208,000, which were also deposited in a separate account, was revenue to the partnership since the partnership had a 95% ownership interest in the horse. Taken in the light most favorable to Jeff, it seems that Jeff could reasonably have believed that both of these amounts were earnings of the partnership. If Jeff truly believed that these were partnership earnings, then the difference between earnings and expenditures of the partnership from Jeff’s point of view would be closer to $600,000 over the three-year period. Viewed from his perspective, then, it is even more reasonable to conclude that Jeff did not realize that there was an apparent discrepancy between the partnership’s income and expenditures.

. The computation follows using FDIC's figure for MBS income: ($2,390,029 + $1,722,-223)-$3,519,782 = $592,470.
The majority holds that Jeff should have known of the embezzlement because there was a discrepancy between the partnership’s winnings and its expenditures. But the earnings and expenditures were almost all in relatively small amounts, Steve kept all of the books, and Jeff always turned the winnings over to Steve during the period in question. That the winnings were not equal to the expenditures is apparent now but would not have been obvious at the time to someone who, like Jeff, had no access to the books and who was not keeping track of the winnings or expenditures.

. Nonetheless, Jeff, to the best of his ability, provided evidence as to the partnership revenue turned over to Steve for partnership expenses. Jeff's ability to produce such information was limited by Steve's monopolization of and refusal to provide any records and should not be counted against Jeff, especially at the summary judgment stage.

. In its order granting summary judgment to FDIC after the rehearing, the district court relied on Cohen v. Lamko, Inc., 10 Ohio St.3d 167, 169, 462 N.E.2d 407 (1984), which would require a showing of 1) a representation, or where there is a duty to disclose, concealment of fact; 2) which is material to the transaction at hand; 3) made falsely, without knowledge of its falsity, or with such utter disregard and recklessness as to whether it is true or false that knowledge may be inferred; 4) with the intent of misleading another into relying upon it; 5) justifiable reliance upon the representation or concealment; and 6) a resulting injury proximately caused by the reliance. However, the only element that is conceivably contested by anyone in this case is whether Jeff reasonably relied on Steve’s misrepresentations (i.e. whether Jeff had any knowledge of what Steve was doing). In my opinion, the evidence Jeff has provided is sufficient to rule that there is a genuine issue of material fact with respect to this element and that summary judgment should be denied.

. There is no suggestion that Jeff received an excessive salary. He cared for the horses for seven days a week, raced them, bred them, and sometimes was the jockey.