Ivey & Kornmann v. Welk

#27973-r-SLZ
2017 S.D. 42

IN THE SUPREME COURT
OF THE
STATE OF SOUTH DAKOTA

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IVEY AND KORNMANN, a
South Dakota Partnership, Plaintiff and Appellee,

WILLIAM G. WELK, Defendant and Appellant.

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APPEAL FROM THE CIRCUIT COURT OF
THE FIFTH JUDICIAL CIRCUIT
BROWN COUNTY, SOUTH DAKOTA

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THE HONORABLE RODNEY J. STEELE
Retired Judge

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MARSHALL C. LOVRIEN of
Bantz, Gosch & Cremer, LLC
Aberdeen, South Dakota Attorneys for plaintiff and
appellee.

DANNY R. SMEINS
Britton, South Dakota

and

BRAD A. SINCLAIR of
Kaler Doeling, PLLP
Fargo, North Dakota Attorneys for defendant and
appellant.

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CONSIDERED ON BRIEFS
ON APRIL 24, 2017
OPINION FILED 06/28/17
#27973

ZINTER, Justice

[¶1.] William Welk executed a promissory note in favor of Ivey and

Kornmann, a partnership (Partnership). The Partnership subsequently brought

this action to collect the debt. Welk raised several affirmative defenses, asserting

that the note was satisfied by a subsequent agreement or substitute performance.

Welk also counterclaimed for breach of contract, fraud, deceit, misrepresentation,

negligent misrepresentation, and unjust enrichment. The circuit court granted

summary judgment in favor of the Partnership on all of Welk’s defenses and

counterclaims. Welk appeals. We reverse and remand.

Facts and Procedural History

[¶2.] The Partnership owned undeveloped real property in Aberdeen.

Charles Kornmann, who was both a partner in the Partnership and a trustee of the

Kornmann Revocable Trust (Trust), decided to construct a twin home on the

property. He discussed the project with Welk, a family friend, and Welk agreed to

help construct the twin home. Welk subsequently provided labor and services

between April 2009 and January 2010. There is no writing evidencing the

agreement or the consideration Welk was to receive.

[¶3.] In May 2009, after Welk had started on the project, the Partnership

conveyed the property to Kornmann and his wife as trustees of the Trust. The

record suggests that Welk was not aware of the transfer. The twin home was

completed in mid-2010, and on August 25, 2010, the City issued a final certificate of

occupancy.

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[¶4.] On September 29, 2010, the Partnership loaned Welk $31,000.

Although the record does not reflect the purpose of the loan, the record reflects that

the money came from Kornmann’s personal bank account. The record also reflects

that on October 1, 2010, Welk executed a promissory note, payable to the

Partnership on demand, for the $31,000 plus interest.

[¶5.] Three years later, an unrelated dispute arose between Kornmann and

Welk regarding their interests in a condominium in Mexico. On December 24, 2013,

Kornmann sent Welk a letter about the dispute. In the letter, Kornmann reminded

Welk that the Partnership held the promissory note and that payment could be

demanded at any time. Welk replied to the letter but made no reference to the note.

[¶6.] On November 5, 2014, the Partnership demanded payment of the note.

Welk did not respond to the written demand, and the Partnership commenced this

action on the note. Welk raised numerous affirmative defenses, including accord

and satisfaction, novation, and substitution. Welk also filed counterclaims against

the Partnership for breach of contract, fraud, deceit, misrepresentation, negligent

misrepresentation, and unjust enrichment. The counterclaims were based on

Welk’s allegation that he had entered into an agreement with the Partnership to

assist with construction of the twin home. He alleged that he was to be

compensated for his contributions either by obtaining an interest in the property or

monetary compensation. Welk, however, alleged that he and Kornmann had agreed

that Welk would give up his right to compensation in return for satisfaction of the

note. Therefore, Welk claimed that if he was found liable to the Partnership on the

note, the Partnership was liable to him for breach of the agreement regarding

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construction of the twin home. He also claimed that if he was found liable on the

note, the Partnership was liable for fraud, deceit, misrepresentation, and unjust

enrichment in its dealings with him.

[¶7.] The circuit court granted summary judgment in favor of the

Partnership on the note, Welk’s affirmative defenses, and Welk’s counterclaims.

With respect to the note, there was no dispute that it was a valid note that Welk

had not repaid. The court rejected Welk’s affirmative defenses alleging discharge

(accord and satisfaction, novation, and substitution) because the partnership

agreement required unanimous consent of the partners to discharge a debt, and

Welk failed to identify any evidence suggesting all partners agreed to discharge the

Partnership’s note. Under these circumstances, the court reasoned that even if

Kornmann and Welk had agreed to discharge the note, the discharge was not

enforceable because Kornmann had no authority to unilaterally discharge

Partnership debts. With respect to the counterclaims against the Partnership, the

court ruled that breach of contract, fraud, deceit, misrepresentation, negligent

misrepresentation, and unjust enrichment could only be asserted against the Trust,

the entity that then owned the twin home. Because Welk had not sued the Trust,

the court dismissed all of Welk’s counterclaims. Accordingly, the court entered

judgment in favor of the Partnership for $38,242.96 and denied Welk any relief.

Welk now appeals.

Decision

[¶8.] Summary judgment may be granted “if the pleadings, depositions,

answers to interrogatories, and admissions on file, together with the affidavits, if

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any, show that there is no genuine issue as to any material fact and that the

moving party is entitled to a judgment as a matter of law.” SDCL 15-6-56(c). “The

evidence must be viewed most favorably to the nonmoving party and reasonable

doubts should be resolved against the moving party.” Karst v. Shur-Co., 2016 S.D.

35, ¶ 15, 878 N.W.2d 604, 612. “[S]ummary judgment will only be affirmed if there

are no genuine issues of material fact and the legal questions have been decided

correctly.” Wulf v. Senst, 2003 S.D. 105, ¶ 19, 669 N.W.2d 135, 142.

[¶9.] Welk argues there were numerous genuine issues of material fact

relating to his affirmative defenses and counterclaims. He also argues that the

circuit court incorrectly decided the legal questions it addressed. For the reason

later explained, we limit our review to the legal questions that were actually

decided.

Affirmative Defenses

[¶10.] We first examine the legal issue upon which the circuit court granted

summary judgment on the affirmative defenses of accord and satisfaction, novation,

and substitution. 1 The court concluded that those defenses were unavailable

because there was no evidence that all the partners had agreed to discharge the

debt and because Kornmann had no authority to unilaterally discharge the note.

The court relied on a provision of the partnership agreement providing: “No partner

shall, without the consent of all other partners, compromise or release any debt due

the partnership except upon full payment thereof . . . .” Welk, however, contends

1. Although Welk raised several other affirmative defenses, he does not present
argument on them. Accordingly, we do not consider them.

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that this provision does not categorically prevent a partner from binding the

partnership in that partner’s dealings with third parties. We agree.

[¶11.] A partnership agreement governs “relations among the partners and

between the partners and the partnership.” SDCL 48-7A-103(a). But a partnership

agreement generally does not “[r]estrict [the] rights of third parties.” SDCL 48-7A-

103(b)(10). After all, “[e]ach partner is an agent of the partnership for the purpose

of its business.” SDCL 48-7A-301(1). Therefore, an act of Kornmann in carrying on

the Partnership’s business in the ordinary course would generally bind the

Partnership. 2 And if Kornmann did enter into an agreement with Welk to

discharge the partnership note—a material issue of fact that is disputed—the

circuit court erred in concluding that any action on the alleged discharge agreement

was barred solely by Kornmann’s lack of authority under the partnership

agreement.

2. An act of the partner in carrying on partnership business binds 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.” SDCL
48-7A-301(1) (emphasis added). Additionally, “[a]n act of a partner which is
not apparently for carrying on in the ordinary course the partnership
business or business of the kind carried on by the partnership binds the
partnership only if the act was authorized by the other partners.” SDCL 48-
7A-301(2). It does not appear that these exceptions to the general rule were
the basis for the circuit court’s decision. The circuit court did not rule that
Kornmann lacked authority and that Welk knew or had received notification
that Kornmann lacked authority. Similarly, the court did not rule that
Kornmann had no apparent authority. Summary judgment was granted for
the sole reason that the partnership agreement did not give Kornmann
authority to discharge the debt without consent of the other partners.

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Counterclaims

[¶12.] Welk counterclaimed for breach of contract, fraud, deceit, and

misrepresentation. He alleged that if he was found liable on the note, he was

entitled to compensation for his labor and services in constructing the twin home.

He also alleged that the Partnership was liable for fraud, deceit, and

misrepresentation by misleading him into giving up his right to compensation. The

circuit court ruled that all such claims could only be asserted against the Trust,

which now owns the property and was not made a party to this action.

[¶13.] The record does not reflect the circuit court’s reasoning for concluding

that all of the counterclaims were actionable only against the current owner of the

property. On appeal, Welk contends that he is not relegated to suing the Trust

because his agreement to help construct the twin home was with the Partnership

and that all of his dealings and communications were with the Partnership through

Kornmann. The Partnership responds that Welk’s counterclaims cannot be

maintained against the Partnership because the Partnership never owned or had

an interest in the twin home.

[¶14.] The Partnership’s contention, however, is based on a material issue of

disputed fact that was not considered by the circuit court. 3 Additionally, the parties

3. There is no dispute that the Partnership owned the property when Welk first
agreed to help construct the twin home. There is also no dispute that the
note was payable to the Partnership and that Welk dealt only with
Kornmann, a partner in the Partnership. However, it is disputed whether
Kornmann was acting on behalf of the Partnership, the Trust, or himself
when he discussed building the twin home with Welk. Additionally, Welk
introduced evidence suggesting some commingling of Partnership, Trust, and
personal assets.

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have not addressed, and we are unable to identify, the legal theory supporting the

circuit court’s conclusion that none of these counterclaims may be asserted against

the Partnership. If Kornmann was acting on behalf of the Partnership, we fail to

see how the Partnership is shielded from liability for its own alleged breach of

contract, fraud, deceit, and misrepresentation in its dealings with Welk. The

Partnership offers no legal theory supporting such a proposition. Rather, it raises a

factual argument that the Partnership did not actually construct the twin home.

But as previously noted, there are disputed issues of fact about that matter. See

supra n.3.

[¶15.] With respect to the counterclaim for unjust enrichment, the

Partnership asserts that unjust enrichment was “inapplicable” because the

Partnership was not enriched. We acknowledge that unjust enrichment requires

the “retention” of a benefit that is unjust, Hofeldt v. Mehling, 2003 S.D. 25, ¶ 15,

658 N.W.2d 783, 788, and that the Trust is now the entity that is retaining the

benefits that Welk conferred. But we have not been directed to any undisputed

evidence suggesting that the Partnership received no benefit from these

transactions, and Welk has identified evidence showing some commingling of

Partnership, Trust, and personal assets. At this summary judgment stage of the

proceedings, the circuit court erred in concluding that Welk had no actionable claim

against the Partnership for unjust enrichment as well as for its own acts in dealing

with Welk.

[¶16.] In sum, the circuit court incorrectly resolved two preliminary

questions of law (the legal effect of the partnership agreement and the viability of

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Welk’s counterclaims). It appears that those rulings foreclosed the court’s analysis

of numerous additional issues of law and fact that both parties have raised in this

appeal. 4 This is the summary-judgment stage of the action, and the numerous

unaddressed issues must first be addressed by the circuit court. We reverse and

remand.

[¶17.] SEVERSON and KERN, Justices, and PFEIFLE, Circuit Court Judge,

and WILBUR, Retired Justice, concur.

[¶18.] PFEIFLE, Circuit Court Judge, sitting for GILBERTSON, Chief

Justice, disqualified.

4. One example illustrates the problem. The circuit court mentioned that
promissory notes may be required to be in writing. But the court did not rule
on that question or the Partnership’s appellate assertion that an accord and
satisfaction and novation must also be in writing. On appeal, the
Partnership contends that a writing is required because Welk is attempting
to amend a written note. This contention was not addressed by the circuit
court.

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