Court addresses Partner’s Authority to Act on Behalf of Partnership

In this case, a father and son entered into a co-equal farming partnership. The purpose of the partnership was “to acquire, own, mortgage, lease, sell or otherwise dispose of farm real estate and engage in farming operations.” According to the written partnership agreement, any decision having a “substantial effect” on the partnership required the unanimous agreement of both partners. The written agreement did not allow any oral modifications, unless they were made in writing and agreed to by both parties. The agreement further provided that the partnership would continue until it was terminated by mutual agreement of the parties. If a partner died, the agreement indicated that the partnership would not be dissolved. In that event, the legal representative of the deceased would be able to choose whether to retain or sell their interest. 

The father died in 2004 and the mother entered into an oral agreement with the son specifying that she would assume her husband’s ownership share and his share of the partnership’s liabilities. Thereafter, the son applied for a loan for a corporation that the son and his wife owned.  The loan officer required that the assets of the farming partnership be used as collateral to secure the debt.  The bank and the son entered into a loan agreement, signed by the son and his wife.  Additionally, the son signed a mortgage encumbering the partnership’s assets and securing the loan. This document was only signed by the son as “general partner.” The son also delivered a “Partnership Authorization” agreement to the bank, stating that at a meeting of the partners, the partnership agreed to authorize the mortgage. It is not clear from the facts of this case whether that authorization was of record (recorded by the County Recorder’s Office).  The son also signed a commercial security agreement with the bank, once again indicating that he had the authority to pledge the farm partnership’s assets as collateral. 

The son failed to pay the mortgage and the bank filed a petition to foreclose and sought a judgment against the partnership’s real estate for over $300,000. The partnership resisted the banks action and asserted that the mortgage was invalid because the mother had failed to sign the mortgage. The partnership further argued that the bank knew that the mother had been admitted as a partner. The trial court ruled that Iowa’s Uniform Partnership Act (Iowa Code §486A.301(1)) allows each agent of the partnership to act on behalf of the partnership, thus, the mortgage was valid. 

The partnership appealed and the Iowa Court of Appeals affirmed the trial court’s ruling, stating that the bank had no reason to know that the son lacked unilateral authority to enter into the mortgage agreement on behalf of the partnership. According to the appellate court, Iowa law does not prevent a partner from binding the partnership by his or her acts. None of the documents the bank received indicated that the mother’s signature was required. 

This case points out the need for partners to communicate with each other regarding partnership assets and raises additional questions about a partner’s apparent or actual authority to encumber real property owned by a partnership.  For example, does a lender have a duty to ask for a copy of a partnership agreement, if it exists? In this case, the court did not require that. Simply put, the son’s delivery of the “partnership authorization” demonstrated his “apparent authority” to enter into such agreements without the express consent of his mother. Apparent authority was enough for the court, in this case. 

This issue has also been raised with respect to Limited Liability Corporations (LLC’s) in Iowa. Many LLC’s that own farming assets, in Iowa, have also executed an operating agreement, explicitly laying out the authority of each manager or member. If the bank does not ask to examine the operating agreement before they enter into a loan agreement with a member or manager who has the apparent authority to enter into such agreement, are they subverting their duty of due diligence? This is an issue that will continue to pop up in Iowa courts, because of the relative infancy of Iowa’s LLC statute. Perhaps the best course of action for farmers looking to obtain financing on behalf of a farm partnership, LLC or corporation is to file a “Statement of Authority” to act on behalf of the entity with the county where the property is situated. This puts a lender and all others on notice that the person has the “actual authority” to enter into transactions on behalf of the entity and may make obtaining financing easier. Additionally, a partnership or other entity may want to record a “Memorandum of Agreement,” putting banks and others on notice that an agreement exists between the parties. Bank of the West v. Early Farm Partnership, No. 0-963/10-1093 (Iowa Ct. App. Mar. 30, 2011).