FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff-Appellee, v. JEFF MILLER STABLES, et al., Defendants-Appellants.
No. 07-4436
United States Court of Appeals, Sixth Circuit.
Submitted: Aug. 1, 2008. Decided and Filed: July 23, 2009.
573 F.3d 289
If we were to permit a warrantless home entry under these circumstances, which were not urgent or life threatening, the effect would certainly undercut making “the presumption of unreasonableness ... difficult to rebut.” Ibid. Rather, it would allow police officers on the scene to cloak themselves in judicial robes even when there is no immediate and serious consequence to waiting for the approval of a neutral and detached magistrate. For this reason, we hold that the community caretaker exception does not provide the government with refuge from the warrant requirement except when delay is reasonably likely to result in injury or ongoing harm to the community at large.
IV
The district court did not err in granting defendant‘s motion to suppress evidence obtained in the search of his uncle‘s apartment. Here, a police officer engaged in a warrantless search of an apartment after unreasonably concluding that an exigency existed. Cf. Herring v. United States, — U.S. —, 129 S.Ct. 695, 704, 172 L.Ed.2d 496 (2009) (admitting evidence obtained from an unreasonable search by an officer acting in good-faith reliance on erroneous information provided by another law enforcement agency that negligently maintained its records); Illinois v. Rodriguez, 497 U.S. 177, 188-89, 110 S.Ct. 2793, 111 L.Ed.2d 148 (1990) (admitting evidence obtained from a search based on the consent of a third party with apparent authority over the property); Illinois v. Krull, 480 U.S. 340, 349-50, 107 S.Ct. 1160, 94 L.Ed.2d 364 (1987) (admitting evidence obtained from warrantless administrative searches performed in good-faith reliance of a statute later declared unconstitutional). No exception to the exclusionary rule covers the case where the police officer‘s own conclusion was unreasonable.
V
For these reasons, we AFFIRM the district court‘s order.
Before: KENNEDY, GILMAN, and GIBBONS, Circuit Judges.
GIBBONS, J., delivered the opinion of the court, in which GILMAN, J., joined. GILMAN, J. (pp. 301-04), delivered a separate concurring opinion. KENNEDY, J. (pp. 304-09), delivered a separate dissenting opinion.
OPINION
JULIA SMITH GIBBONS, Circuit Judge.
Jeff and Lori Miller, husband and wife (“Jeff” and “Lori” or “the Millers“), along with their horse-racing operation Jeff Miller Stables and its predecessor in interest Miller Brothers Stables, appeal from the order of the district court requiring them to pay more than $2 million in restitution to the Federal Deposit Insurance Corporation (“FDIC“) in its role as receiver for the failed Oakwood Deposit Bank Company. The Millers argue that the district court
I.
The facts giving rise to the instant litigation began to materialize on February 1, 2002, when the Oakwood Deposit Bank Company (“ODBC“) of Oakwood, Ohio, failed. The FDIC took over ODBC as its receiver and commenced an investigation to determine the cause of the bank‘s failure. Investigators quickly surmised that ODBC had failed because its chief executive officer, Mark Steven Miller (“Steve“), had engaged in a massive embezzlement scheme causing losses of more than $48 million. Steve pled guilty to charges of money laundering and embezzlement and is currently serving a 168-month sentence in federal prison. With the criminal investigation at an end, the FDIC, in its role as ODBC‘s receiver, began to attempt to recover for the bank some of the funds Steve had embezzled from the 1980s until the bank‘s 2002 failure. The search for recoverable assets led the FDIC to probe the business relationship between Steve and his brother Jeff.
Jeff and Steve were general partners in a horse-racing operation known as Miller Brothers Stables (“MBS“). MBS trained and raced standardbred horses—those that race while pulling a sulky, as in harness racing. The brothers’ racing operation began in 1989 when Jeff purchased a 52.85 acre farm (the “Farm“) in Paulding County, Ohio, from which the brothers bred and trained their horses. At its zenith, MBS consisted of more than forty standardbred racing horses, a number of foals and yearlings, and a 47.5% stake in Eternal Camnation Stables.1 In his guilty plea and in an affidavit before the district court in this civil proceeding, Steve admitted that he embezzled the $65,000 Jeff used to purchase the Farm from ODBC. Jeff denied that he had any knowledge of the funds’ illicit origin and instead asserted that he believed that the money was a legitimate loan from ODBC. He further claimed to have made regular payments on the $65,000 loan; however, according to Jeff, he made these payments directly to Steve rather than to ODBC.
In 2001, Jeff and Lori joined with Steve, Steve‘s wife Janet Miller (“Janet“), and another relative Seth Miller (“Seth“) to purchase 55.8 acres of land adjacent to the Farm (the “adjacent property“). Jeff and Lori owned a 48% share of the adjacent property. Steve admitted to embezzling from ODBC the $128,340 purchase price for the property. The addition to the Farm, which more than doubled its original size, enabled the Millers to expand their horse-training and breeding operation. It also allowed their son to build a house on a portion of the adjacent property. Jeff and Lori assert that they did not know that Steve had embezzled the funds; they do, however, admit that they made no payments to ODBC or anyone else to repay the money used to purchase the adjacent property. Following the failure of ODBC and Steve‘s indictment, Jeff transferred all of MBS‘s assets to a new sole
To aid its investigation, the FDIC hired a team of forensic accountants to examine ODBC‘s books and to determine if any of the transactions were fraudulent. The accountants traced the money Steve advanced from ODBC to various ledger accounts of MBS. If the accountants saw that the offsetting entries contained even a very general description such as “time deposit” or “note,” they did not label the underlying transfer of funds as fraudulent. Nor did the accountants label as fraudulent transactions between deposit accounts held by different entities Steve controlled. The accountants instead identified several specific ledger accounts as the source of fraudulent funds and traced those funds from the bank to the Miller-related entities. The forensic accountants labeled only these funds as fraudulent. The accountants’ May 2004 report concluded that MBS received $1,722,223 in fraudulent transfers from ODBC. MBS also benefitted from $182,117 of fraudulent cashier‘s checks drawn on ODBC and paid to third parties on MBS‘s behalf, making the total amount of embezzled funds used by Steve to maintain MBS as a going concern $1,904,340. This sum was in addition to the funds Steve embezzled to purchase the Farm and the adjacent property.2
Armed with this information, the FDIC filed suit against Jeff, Lori, MBS, and JMS on September 28, 2004, seeking disgorgement of the sums of money by which Jeff, Lori, and Jeff‘s horse-racing operations had been unjustly enriched. Importantly, the FDIC did not allege that Jeff and Lori had actual knowledge of Steve‘s embezzlement scheme. On March 23, 2007, the district court entered summary judgment in favor of the FDIC as to the $65,000 used to purchase the Farm and the $61,870 used to purchase the adjacent property.3 The district court, however, denied summary judgment as to the FDIC‘s claim for the more than $1.9 million that Jeff‘s racing operation allegedly benefitted from the funds Steve embezzled from ODBC. The district court held that the FDIC had failed to prove that Steve had not committed fraud on the partnership. Fraud on the partnership would prevent the imputation of knowledge of Steve‘s embezzlement to Jeff and thereby prevent the FDIC‘s recovery. See
On August 31, 2007, the district court entered an order requiring the parties to brief the issue of who held the burden of proving fraud on the partnership under Ohio law. After hearing arguments from counsel, the district court concluded that Jeff, as the party asserting the exception, bore the burden of proving that Steve had defrauded the partnership. The district
II.
The Millers argue that the district court erred in granting summary judgment on each of the three claims made by the FDIC for restitution. Jeff and Lori contend that genuine issues of material fact exist thereby making summary judgment inappropriate. We review a district court‘s grant of a summary judgment motion de novo. Smith Wholesale Co. v. R.J. Reynolds Tobacco Co., 477 F.3d 854, 861 (6th Cir.2007). Summary judgment is appropriate where there are no genuine issues of material fact in dispute, and one party is entitled to judgment as a matter of law.
A.
The Millers’ first assignment of error surrounds the district court‘s granting summary judgment in favor of the FDIC as to the $65,000 used to purchase the Farm in 1989. They make two arguments on appeal. Jeff and Lori first claim that
Under Ohio law, in order for the FDIC to recover under a theory of unjust enrichment, it must prove that ODBC conferred a benefit upon Jeff, Lori, and Jeff‘s
1.
Steve submitted an affidavit to the district court in which he admitted to embezzling the $65,000 in 1989. The report of the forensic accountants does not contain a finding with regard to the $65,000 used to purchase the Farm because the accountants did not go back that far in time in their efforts to reconstruct ODBC‘s books. The Millers argue that the district court erred by refusing to draw the conclusion that Steve, a convicted felon, lied in his affidavit.
For the purpose of attacking the character for truthfulness of a witness ... evidence that any witness has been convicted of a crime shall be admitted regardless of the punishment, if it readily can be determined that establishing the elements of the crime required proof or admission of an act of dishonesty or false statement by the witness.
2.
Jeff and Lori‘s second argument is that a rational trier of fact could find that they had made payments to Jeff‘s brother on what they perceived to be a loan. In his affidavit in response to the FDIC‘s
B.
Jeff and Lori next assert that the district court erred by granting summary judgment on the FDIC‘s claim for reimbursement of the $61,870 expended to purchase the 55.8-acre adjacent property. The Millers argue that it is inequitable to require them to pay for “land they will never enjoy” because the government has obtained a forfeiture order as to Steve and Janet Miller‘s undivided one-half interest in the land. (App. Br. at 18.) Jeff and Lori further argue that even if restitution is proper, the district court erred in calculating the amount due by basing the award upon the amount lost by ODBC rather than the value gained by Jeff and Lori. The Millers concede that they have failed to make any payments to ODBC on the “loan” used to purchase the adjacent property and further admit “that it would be unjust for them to keep the property without payment.” (App. Br. at 17.) The FDIC wholeheartedly agrees with this assessment and urges us to reject the Millers’ remaining arguments.
Jeff and Lori‘s first argument—that they have not benefitted from ownership of the adjacent property—is without merit. The Millers used the property, located next to the Farm, to aid in the expansion of Jeff‘s horse-racing operation and even allowed their son to build a home on part of the property. Under any definition of the term “benefit,” the Millers realized significant advantages upon acquiring their share of the adjacent property. It is also undisputed that Jeff and Lori have retained the money that ultimately came from ODBC and purchased the property without repayment. The FDIC seeks repayment of the money the Millers have improperly retained. See Hummel, 14 N.E.2d at 927 (“[U]njust enrichment of a person occurs when he has and retains money or benefits which in justice and equity belong to another.“) (emphasis added). Because we find that Jeff and Lori have received significant benefits from their use of ODBC‘s money, we hold that the district court did not err in its finding that the Millers knowingly received a benefit.
Jeff and Lori‘s second argument that the district court erred in its calculation of the restitution owed is also incorrect. The total purchase price for the property was $128,340. Dividing this purchase price by 55.8 acres, yields a per-acre price of exactly $2,300. The district court then deducted the two acres of the adjacent property owned by Seth. This left 53.8 acres, which the district court divided evenly between Jeff, Lori, Steve, and Janet. Simple math yields the result that Jeff and Lori unjustly retained the benefit of $61,870, as the district court found. The Millers are correct that we have held that “the proper measure of liability is the reasonable value of services” provided. Reisenfeld, 277 F.3d at 862. Ohio case law, however, further clarifies that “[t]he reasonable value of the benefit conferred is the monetary amount expended for the services provided.” City of Girard v. Leatherworks P‘ship, 2005-Ohio-4779, at ¶ 41 (Ct.App.) (emphasis added) (citing St. Vincent Med. Ctr. v. Sader, 100 Ohio App.3d 379, 654 N.E.2d 144, 147 (1995)). The “service” provided by ODBC was the embezzled funds used for the purchase of the adjacent property. The Millers do not contest the purchase price of the property or the propriety of the district court‘s determination of their ownership share therein. Further, the report of the forensic accountants specifically labeled the entire sum used to purchase the 55.8 acre parcel as embezzled from OBDC. We therefore hold that the district court did not err under Ohio law in its calculation of the appropriate amount of damages owed to the FDIC.4
C.
The final assignments of error involve the district court‘s entry of summary judgment as to the $1,904,340 the FDIC alleged MBS, and by extension JMS, benefitted from Steve‘s embezzlement scheme. Jeff5 raises two primary arguments on appeal. First, Jeff argues that the district court erred by requiring him to prove that there was fraud on the partnership to invoke the exception provided by
1.
Jeff argues that the district court erred in construing the provisions of Sec-
Jeff is correct that there is a dearth of Ohio case law interpreting
2.
We next turn our attention to whether the FDIC provided the district court with sufficient proof as to the amount of money Steve embezzled to support MBS‘s ongoing operations to allow the district court to grant summary judgment. Jeff argues that he provided the district court with enough evidence to require a trial on the issue of whether, and in what amount, MBS benefitted from Steve‘s embezzlement scheme. Specifically, Jeff notes that he provided the district court with nearly two hundred pages of reports from the USTA detailing the winnings that MBS horses, trainers, and jockeys earned in races from 1998-2001. These receipts reveal that MBS should have received $2,390,029 in revenue from its racing operation during those four years. Because the total amount deposited in MBS‘s accounts during the years in question was $3,519,782, Jeff argues that at most MBS was unjustly enriched by $803,436—far less than the $1,904,340 judgment issued by the district court.
As the district court demonstrated in its order granting summary judgment, Jeff‘s own mathematical calculations do not withstand scrutiny. The figures cited by Jeff as revenues inappropriately include the $182,117 of obligations to third parties that MBS paid with embezzled funds. Jeff‘s revenue figures also include winnings from Eternal Camnation Stables, an entirely separate partnership with separate accounts that the FDIC did not allege any embezzled money reached. Upon subtracting the payments to third parties and Eternal Camnation‘s winnings, the difference between the revenues that Jeff asserted MBS earned and the total deposits into MBS‘s accounts equaled $1,129,753. As noted above, Jeff cannot demonstrate that any of these revenues actually made it into MBS‘s accounts. Jeff only can assert that he gave the checks to his brother Steve. (Aff. of Jeff Miller at 6.) The district court thus faced a set of figures whose authenticity a team of forensic accountants and numerous spreadsheets vouched for and a contrasting set of assertions by Jeff that included extraneous revenues from other business ventures and a lack of any proof that the funds ever actually reached MBS. Summary judgment is appropriate where reasonable minds could not disagree as to the conclusion to be drawn from the evidence. Anderson, 477 U.S. at 250, 106 S.Ct. 2505 (noting that summary judgment and a motion for a directed verdict under
Our dissenting colleague takes issue with our analysis and argues that it is “uncontested” that Steve “handled all things financial,” “did all of the banking,” and “kept all of the records pertaining to the business.” (Dis. Op. at 305.) The quoted conclusory statements are all contained in Jeff‘s affidavit and are presented without elaboration. Yet, the FDIC presented evidence that, far from being a fiscal neophyte, Jeff maintained nearly complete control of MBS‘s checkbook. Out of 3,553 checks written on the account
It is Jeff who bears the burden of proof as to the fraud on the partnership exception. See State ex rel. Nat‘l Broad. Co., 526 N.E.2d at 790. Nonetheless, it is the FDIC that has come forth with the all of the hard evidence. Jeff has failed to produce even one endorsed check to support his contention that Steve made all MBS‘s deposits and “monopolized” MBS‘s finances. The FDIC has provided 3,547 checks that prove otherwise. No rational juror could find that Jeff‘s bare assertions of ignorance outweigh this profusion of paperwork. Anderson, 477 U.S. at 250, 106 S.Ct. 2505 (only when the factual issues “may reasonably be resolved in favor of either party” must a district court conduct a trial). Despite the dissent‘s protestations otherwise, this is hardly a case “in which one partner managed the business without the other partner‘s involvement.” (Dis. Op. at 308.)
Merchants Advance, L.L.C. v. Boukzam, 2008-Ohio-4860, 2008 WL 4356102 (Ct. App.2008), demonstrates that $1,904,340 represents the proper measure of damages under Ohio law. In Merchants Advance, the Ohio Court of Appeals faced a similar circumstance where the plaintiff sought to recover from the new owner proceeds from a loan made to a prior owner of a chain of restaurants. The prior owner entered into an agreement with the plaintiff whereby the plaintiff would provide $242,000 to fund the restaurants’ normal business operations in return for the right to receive $350,000 from the restaurants’ future credit-card receipts. Id. at ¶ 6. After the plaintiff made the final advance of the $242,000, the prior owner transferred the restaurants to the new owner, who promptly breached the agreement by refusing to turn over any of the credit-card receipts. Id. at ¶ 8. The plaintiff sued, claiming that the new owner was unjustly enriched by the funds the prior owner had received. Id. at ¶ 10. The Ohio Court of Appeals held that even though the prior owner had already spent the monies advanced by the plaintiff, and thus not retained them, the new owner had to refund the money the plaintiff loaned. Id. at ¶¶ 34-37. The benefit conferred by the plaintiff that the new owner retained was not the advanced money but rather the going concerns, i.e., the restaurants whose operations the money funded. Id. at ¶ 34.
The facts here are quite similar. The funds Steve embezzled allowed MBS to operate. After Steve‘s indictment, Jeff transferred all of MBS‘s assets to his new sole proprietorship, JMS. The benefit Jeff retained was a going concern; he knew of this benefit, see
While we have resolved all the legal issues, the dissent says one issue is yet
We could respond by noting that it is not the province of the jury to decide issues of equity; the jury‘s domain is only to decide those claims that are, or would have been, cognizable at common law. See City of Monterey v. Del Monte Dunes, 526 U.S. 687, 708-09, 119 S.Ct. 1624, 143 L.Ed.2d 882 (1999). However, the dissent‘s concern stems from its assumption that Jeff is also a victim in this case, along with the ODBC depositors, whose money Steve embezzled and in whose shoes the FDIC stands. Ohio‘s elected legislature and courts have reasonably determined as a matter of public policy that where such a situation arises, absent fraud or some other affirmative defense, it is the original victim—here the FDIC—who is to be made whole. Cosby, 750 N.E.2d at 1213 (noting that passive retention of a benefit where such retention is “unconscionable” is enough to trigger liability). As our job in this case is solely to apply Ohio law, our role is to apply Ohio‘s resolution of this public policy question, not to second guess the determination or shift the question to a jury for further “equitable” deliberation. Ohio has already deliberated the issue. Commensurate with the our limited judicial role, we have enforced its decision about where the loss should lie.
III.
Because the defendants have failed to demonstrate that there is any “genuine issue as to any material fact,” the district court was correct to employ summary judgment to find in favor of the FDIC as to its unjust enrichment claims under Ohio law.
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
I
[n]otice 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.
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 case of a fraud on the partnership committed by or with the consent of that partner.”
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.
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.
III
Jeff‘s argument, however, is without merit for several reasons. First, Steve‘s embezzlement from ODBC was not a fraud “on the partnership” because MBS benefitted from the embezzlement. See
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 MBS. 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
Jeff‘s 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
V
For all the reasons set forth above, I concur with the lead opinion.
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 appeal 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 case, 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
I dissent only from the majority‘s conclusion on the FDIC‘s first claim—Jeff‘s 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
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
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
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. CA92-1119, 1993 WL 183651, at *3 (Ark.App. 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
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.‘” Conc. 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
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 300-01. 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
Jeffrey Michael MOLDOWAN, Plaintiff-Appellee, v. CITY OF WARREN, Donald Ingles, Michael Schultz (07-2115); Alan Warnick (07-2116); Maureen Fournier (07-2117), Defendants-Appellants.
Nos. 07-2115, 07-2116, 07-2117.
United States Court of Appeals, Sixth Circuit.
Argued: Jan. 20, 2009. Decided and Filed: July 23, 2009.