QAD Investors, Inc. v. Kelly

Laurence Kelly (defendant) and Stephen MacKenzie (defendant) owned an option to buy a parking lot but did not have enough money to do so. In 1993, QAD Investors, Inc. (QAD) provided a $20,000 loan after repeatedly meeting with Kelly and MacKenzie and reviewing Kelly’s personal financial statement. During these meetings, MacKenzie referred to Kelly as his joint venturer; Kelly did not object to this description. QAD’s check was deposited into an account that Kelly exclusively controlled. QAD received a receipt for the loan, which referred to a promissory note. The note identified Kelly and MacKenzie as the borrowers and stated that Kelly and MacKenzie jointly and severally pledged their collateral as security. MacKenzie signed the note but Kelly did not and did not see the note until 1995, although Kelly knew the note existed. MacKenzie made the first several loan repayments, after which Kelly did so from an account that Kelly exclusively controlled. In addition, Kelly engaged in multiple personal and written communications with QAD about the difficulty in making repayments. Kelly continued to communicate with QAD about repayment issues after MacKenzie left the venture. Kelly never told QAD that Kelly did not believe himself or the joint venture to be obligated by the note. In January 1997, QAD sued Kelly and MacKenzie for repayment. QAD argued, among other things, that MacKenzie had apparent authority to sign the note for Kelly and the partnership due to the joint venture (which was a form of partnership) and that Kelly ratified MacKenzie’s actions by making payments and failing to disclaim liability. Kelly did not dispute that he and MacKenzie were partners but asserted as affirmative defenses that he did not (1) represent that he agreed to be liable under the note, (2) sign or see the note until years after it was made, or (3) authorize MacKenzie to sign the note for him. After a bench trial, the court found that Kelly authorized MacKenzie to sign the note for the joint venture and that the partnership ratified Mackenzie’s actions via Kelly’s and MacKenzie’s subsequent conduct. Kelly appealed.