## Facts

- Scherr & Scherr was a general partnership between brothers Pius Scherr and Albinus Scherr that conducted construction and real-estate projects and banked with First National Bank and Trust Company of Williston.
- The partnership opened a checking account at the Bank, and the account signature card indicated that either partner’s signature could bind the partnership in transactions with the Bank.
- The partners later executed a written partnership agreement providing that neither partner could borrow or lend money for the partnership without the other partner’s consent.
- The Bank requested and received a copy of the partnership agreement and kept it in its files.
- Without Albinus’s knowledge or consent, Pius obtained a $65,000 loan from the Bank in the partnership’s name and signed the note on behalf of the partnership.
- After default, the Bank sued the partnership and both partners to collect on the $65,000 note.
- Following earlier proceedings and a remand, the trial court held a bench trial on authority and notice and dismissed the Bank’s claims against the partnership and Albinus, effectively leaving Pius as the liable party.
- The Bank appealed, arguing the partnership and Albinus should be liable under North Dakota’s U.C.C. and partnership law.

## Issues

1. Whether a partnership and a nonconsenting partner are bound by a promissory note signed by another partner when the lender has actual notice of a partnership-agreement restriction requiring both partners’ consent to borrow.
2. Whether a lender with actual notice of such a restriction may nonetheless rely on apparent authority derived from an earlier signature card authorizing either partner to transact with the bank.
3. Whether U.C.C.-based enforcement concepts and good-faith requirements permit shifting the loss to the partnership and an innocent partner when the lender proceeds contrary to known authority limitations.

## Decision

- The Supreme Court of North Dakota affirmed the judgment dismissing the Bank’s claims against Scherr & Scherr and Albinus.
- Because the Bank had actual notice of the partnership agreement restricting unilateral borrowing, it could not reasonably or in good faith rely on Pius’s apparent authority to bind the partnership or Albinus on the $65,000 note.
- The court deferred to the trial court’s findings that Albinus did not know of or consent to the loan and that the Bank possessed the limiting agreement.

## Legal Principles

- A partner’s authority to bind a partnership is subject to limitations in the partnership agreement when the third party has actual knowledge of those limitations.
- Apparent authority does not bind the partnership against a third party who has notice that the agent’s authority is restricted.
- U.C.C. enforcement and related loss-allocation rules are conditioned on the creditor’s good faith; a lender with actual notice of an authority restriction cannot ignore it and then impose liability on the partnership or an innocent partner.

## Conclusion

A lender that has actual notice of a partnership agreement requiring joint consent for borrowing cannot enforce a later partnership note signed by only one partner against the partnership or a nonconsenting partner; the risk of loss remains with the lender rather than being shifted to the innocent partner or the partnership.


First Nat’l Bank & Tr. Co. of Williston v. Scherr, 467 N.W.2d 427 (N.D. 1991)