Court Affirms Division of Business Assets and Liabilities After Death of Partner

On March 8, 2023, the Iowa Court of Appeals affirmed the division of a farm partnership’s alleged assets and liabilities after the death of one of the business partners. With “scant” evidence, the Court of Appeals affirmed that the deceased partner took out a loan as an individual, not as a business partner. Additionally, the deceased partner’s estate was not entitled to the proceeds from the sale of the partnership’s farm equipment because it was sold at a loss.

Background

Two brothers, Michael and Steven, owned 160 acres of farmland as tenants-in-common. The brothers operated the farm as a partnership with Michael supplying the labor and Steven supplying the machinery. In 2010, Michael took out a $90,000 loan using the farmland as collateral. At the time of his death, a $57,286 balance remained.

A few years after his death, Michael’s estate and Steven agreed to sell the farmland and farm assets. Steven sold the farm machinery and kept the $88,914 proceeds. The funds from the farmland sale were deposited into a trust account. Unable to agree on how the proceeds should be distributed, the estate petitioned the probate court. The estate claimed that Steven was liable for half of the $57,286 loan as a partner. It also claimed that Steven owed the estate half of the proceeds from the sale of the machinery.

The district court found in favor of Steven on both accounts. The district court held that the loan was Michael’s personal obligation, not a partnership debt. During the hearing, Steven testified that he sold the machinery at a loss but was not asking the estate for reimbursement. The district court found Steven credible and denied both claims of the estate. The estate appealed.

Farm Mortgage

On appeal, the parties agreed that the brothers formed a partnership. The estate argued that that the partnership was liable for the mortgage debt because the farmland was used as collateral and Steven signed the mortgage. Each partner has authority to bind 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.” Iowa Code § 486A.301.

The district court found that when Michael took out the loan against the farmland, he did so acting in his individual capacity, not as a partner and agent of the partnership. Specifically, the district court believed Steven’s testimony that Michael never claimed the loan was for business purposes. Steven also testified that Michael admitted that he lacked authority to bind the partnership in this particular manner. Finally, the district court was most persuaded by the fact that only Michael signed the promissory note.

Steven did admit that the loan was likely deposited into the brothers’ joint “farm account.” However, Michael would withdraw money from it for both business and his personal expenses. The Court of Appeals affirmed the district court’s finding, ruling that there was substantial evidence to support the determination.

Farm Equipment Sale

The estate next argued that it was entitled to the proceeds from the sale of the farm equipment because it was partnership property. The estate claimed that Steven’s testimony was not credible because he did not provide any documentation on the machinery losses.

The district court agreed that the farm equipment was partnership property. See Iowa Code § 486A.203. The district court determined, however, that Steven lost money from the sale of the equipment because the proceeds received from the sale were less than what was owed on the equipment. Steven did not ask for reimbursement from the estate for the loss. The Court of Appeals found that substantial evidence supported the district court’s findings.  The estate offered no evidence to refute Steven’s testimony, which the district court found credible. The estate did not meet its burden to prove its claim to half the equipment-sale proceeds. Thus, the Court of Appeals affirmed that the estate was not entitled to any portion of the proceeds.