Plaintiff, as assignee of the C. S. Auto Sales Company, a partnership which consisted of James H. Cranston and Floyd Z. Sweet, filed a bill in the Wayne circuit court in chancery against *Page 11 defendant, for an accounting, and to recover from it $9,060 which he claimed the bank owed him as assignee of the C. S. Auto Sales Company. It is the claim of plaintiff that the C. S. Auto Sales Company was dealing in second-hand cars in Detroit; that at the time the partnership business began, it opened a bank account with defendant, and defendant contracted with the partnership that the signature of both partners should be signed to the orders for withdrawals of its funds, or checks, and no funds could be withdrawn from the bank except on the signatures of both Cranston and Sweet.
The signature card and agreement was as follows:
"Form 258 "C S Auto Sales Co.
"In account with THE DETROIT SAVINGS BANK, "DETROIT, MICHIGAN.
"Below please find duly authorized signatures, which you will recognize in the payment of funds or the transaction of other business on this account. I hereby authorize you to charge this account the sum of $1.00 per month, if the daily average balance is less than $100.00.
(Signed) "JAMES H. CRANSTON To sign (Signed) "FLOYD Z. SWEET To countersign
"Address 3740 Cass Ave.
"Dated 9/23/21."
It is the further claim that, during the time the C. S. Auto Sales Company was doing business, Cranston, one of the partners, forged Sweet's signature to three checks on defendant bank and received thereon a total of $700. The partnership owed plaintiff $10,265.53, and prior to the commencement of suit assigned to him its claim against defendant. There is no dispute about the $700 withdrawn *Page 12 from defendant on Cranston's forgeries. The partnership owed the bank $1,171.79, and upon an accounting the trial court dismissed the bill of complaint, inasmuch as it found the partnership owed the bank more than the amount the bank had permitted to be withdrawn on Cranston's forgeries. Plaintiff appeals.
The dispute arises over money of the partnership obtained by Cranston substantially as follows: The partnership was engaged in buying and selling automobiles. When an automobile was sold a check would be given in payment therefor to the partnership. Cranston would indorse the check with the name of the partnership, per J.H. Cranston, and present it to defendant for deposit in his personal account, or take part or all the proceeds of the check in cash, and deposit in the partnership account either no part of the proceeds of the check or a part thereof, as the case might be.
Cranston's balance in his personal account in defendant bank was augmented by credits resulting from the deposit of checks drawn to the partnership or the proceeds thereof, the credit being made by defendant to Cranston's individual account instead of the account of the partnership. No inquiry was made by the defendant bank as to Cranston's authority to convert the partnership funds to his individual account, though it acted with full knowledge of his acts. The question is whether the bank is liable for paying money to Cranston on his indorsement of partnership checks which belonged to the partnership, and knowingly giving him credit for partnership funds.
"SEC. 6. (1) A partnership is an association of two or more persons to carry on as co-owners a business for profit." Comp. Laws Supp. 1922, § 7966 (6). *Page 13
It is a legal entity, separate from the individuals composing it. Thurston v. Detroit Asphalt Paving Co., 226 Mich. 505; Parsons on Partnership (4th Ed.), § 63. Its property is distinct from that of the individual members of the partnership. Hubbardston Lumber Co. v. Covert, 35 Mich. 254;Dobson v. Whitker, 242 Mich. 308. There is community of property, interest, and profits. Beecher v. Bush, 45 Mich. 188 (40 Am. Rep. 465); Dutcher v. Buck, 96 Mich. 160 (20 L.R.A. 776); Brotherton v. Gilchrist, 144 Mich. 274 (115 Am. St. Rep. 397).
"SEC. 9. (1) Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership," * * * Comp. Laws Supp. 1922, § 7966 (9).
"(2) An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners." Comp. Laws Supp. 1922, § 7966 (9).
If the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority, then his acts do not bind the partnership. Comp. Laws Supp. 1922, § 7966 (9 [1]).
"SEC. 3. (1) A person has knowledge of a fact within the meaning of this act not only where he has actual knowledge thereof, but also when he has knowledge of such other facts as in the circumstances shows bad faith." Comp. Laws Supp. 1922, § 7966 (3). *Page 14
The authority of a partner to make lawful contracts for the firm does not authorize making unlawful contracts without the knowledge of the other partners. Minthorn v. Haines, 169 Mich. 169 . Each partner is the agent of his copartners in the transaction of partnership business, but not in matters foreign to that business. One partner cannot bind his copartner by any contract without the scope of the partnership. Township ofWexford v. Seeley, 196 Mich. 634.
The law has always been solicitous not to hinder the free circulation of commercial paper having a legitimate inception.Nichols v. Sober, 38 Mich. 678.
"To constitute notice of an infirmity in the instrument, or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith." 2 Comp. Laws 1915, § 6097.
"It will be observed from this provision of the negotiable instruments law, that one on whom the law imposes the burden of showing good faith must show something more than that he had no actual knowledge of the fraud. He must show that he had no knowledge of facts or circumstances that would operate to create a belief in his mind that there was fraud. He must show that there were no facts or circumstances known to him of such a character as to show bad faith in the taking of the instrument." Case v. City Nat'l Bank, 240 Mich. 419.
If there is nothing on the face of commercial paper to cast suspicion on its character, it can be impeached in the hands of a holder for value only by evidence of the holder's bad faith.Miller v. Finley, 26 Mich. 249 (12 Am. Rep. 306); Stevens v.McLachlan, 120 Mich. 285. An indorsee can be deprived of *Page 15 his right as a bona fide holder only upon evidence sufficient to show bad faith. Nichols v. Sober, supra; New York Iron Mine v. Citizens' Bank, 44 Mich. 344; Goodrich v. McDonald, 77 Mich. 486; Chapman v. Remington, 80 Mich. 552; Stevens v. McLachlan,supra; Case v. City Nat'l Bank, supra. 2 Comp. Laws 1915, § 6097. Bad faith may be shown by evidence of actual knowledge of the purposes for which the paper was given. Comp. Laws Supp. 1922, § 7966 (3 [1]). Stevens v. McLachlan,supra. An indorsee of commercial paper has no right to disregard any circumstance known to him calculated to lead a prudent man to suspect the indorser might be acting in fraud of his principal. New York Iron Mine v. Citizens' Bank, supra.
All partnerships are more or less limited in scope. 3 Kent, Comm. (14th Ed.), p. 42. One partner may not use partnership funds for private purposes. Kemeys v. Richards, 11 Barb. (N.Y.) 312; Rogers v. Batchelor, 12 Pet. (U.S.) 221; Viles v.Bangs, 36 Wis. 131; Cotzhausen v. Judd, 43 Wis. 213 (28 Am.Rep. 539); Burwell Clarke v. Springfield, 15 Ala. 273;Price v. Hunt, 59 Mo. 258; McNair v. Platt, 46 Ill. 211; Gove v. Lawrence, 6 Lans. (N.Y.) 89; Hurt v.Clarke, 56 Ala. 19 (28 Am. Rep. 751); Smith v. Andrews, 49 Ill. 28; Billings v. Meigs, 53 Barb. (N.Y.) 272; Purdy v.Powers, 6 Pa. 492; Ex parte Bushell, 3 Mont. D. DeG. Rep. (Eng.) 615; Todd v. Lorah, 75 Pa. 155; Wise v. Copley,36 Ga. 508; Arden v. Sharpe, 2 Esp. (Eng.) 524;Kendal v. Wood, 6 Law R. Ex. 243; Green v. Deakin, 2 Starkie (Eng.) 347; 3 Kent, Comm. (14th Ed.), p. 42; Story on Partnership (7th Ed.), §§ 131, 132.
When Cranston, having possession of valid checks of third persons belonging to the partnership, and payable to it, indorsed those checks in the partnership *Page 16 name per J.H. Cranston, and deposited them or the proceeds thereof to the credit of his own account in his own name in defendant bank, it, from the face of such checks themselves, not only had notice but knowledge of the ownership thereof and of their proceeds and of Cranston's misappropriation of such partnership funds. 3 Kent's Comm. (14th Ed.), p. 42;Green v. Deakin, supra; 1 Lindley on Partnership (2d Amer. Ed.), p. 171; 30 Cyc. 510; Hale v. Windsor Savings Bank, 90 Vt. 487 (98 A. 993); U.S. Fidelity Guaranty Co. v. Adoue, 104 Tex. 379 (137 S.W. 648, 138 S.W. 383, 37 L.R.A. [N. S.] 409, Ann. Cas. 1914 B, 667); Bank of Hickory v. McPherson, 102 Miss. 852 (59 So. 934); Toronto Club v. Dominion Bank, 25 Ont. Law Rep. 330; Mitchell v. First Nat'l Bank, 203 Ky. 770 (263 S.W. 15); Wagner Trading Co. v. Battery Park Nat'l Bank,228 N.Y. 37 (126 N.E. 347, 9 A.L.R. 340); Ward v. City TrustCo., 192 N.Y. 61 (84 N.E. 585); Niagara Woolen Co. v. PacificBank, 141 App. Div. (N.Y.) 265 (126 N.Y. Supp. 890); U.S.Fidelity Guaranty Co. v. People's Bank, 127 Tenn. 720 (157 S.W. 414); Bischoff v. Yorkville Bank, 218 N.Y. 106 (112 N.E. 759, L.R.A. 1916F, 1059); Havana Central R. Co. v.Knickerbocker Trust Co., 135 App. Div. (N.Y.) 313 (119 N.Y. Supp. 1035); Havana Central R. Co. v. Central Trust Co., 123 C.C.A. 72, 204 Fed. 546 (L.R.A. 1915 B, 715); Farmers'Loan Trust Co. v. Fidelity Trust Co., 30 C.C.A. 247, 86 Fed. 541; Gray v. Johnston, L. R. 3 Eng. Ir. App. Cas. 1;National Bank v. Insurance Co., 104 U.S. 54. SeeEmpire Trust Co. v. Cahan, 274 U.S. 473 (47 Sup. Ct. 661, 57 A.L.R. 921).
It dealt with such funds without making inquiry of the other partner at its peril. Todd v. Lorah, supra; Ex parte Bushell,supra. It knew Cranston was, prima facie, committing a fraud upon his partner, *Page 17 1 Lindley on Partnership (2d Amer. Ed.), p. 171; 30 Cyc. 510; and neither the transfer nor the indorsement were binding on the firm without actual authority or ratification. 30 Cyc. 512.Wise v. Copley, supra; Arden v. Sharpe, supra; Havana CentralR. Co. v. Knickerbocker Trust Co., supra; Toronto Club v.Dominion Bank, supra; Bank of Hickory v. McPherson, supra;Scott, Baker Co. v. Bandy, 2 Head (39 Tenn.), 197;Newman v. Richardson (C. C.), 9 Fed. 865; Huntington v. Lyman Co., 1 D. Chip. (Vt.) 438 (12 Am. Dec. 716); Hartness v.Wallace, 106 N.C. 427 (11 S.E. 259); First National Bank v.State Nat'l Bk., 65 C.C.A. 406, 131 Fed. 422. When defendant bank permitted Cranston to check out the funds so misappropriated and deposited, it actively participated in the fraud perpetrated on the partnership, and became liable for the proceeds of the checks so misappropriated by Cranston. It is immaterial that the bank did not profit, the test is, Did the partnership lose? One who ought to suspect is bound to inquire, and the law presumes he knows what proper inquiry would disclose. Ward v. City Trust Co., supra. The defendant bank could not deliberately shut its eyes to facts which, upon their face, showed a misapplication by Cranston of partnership funds, and thus aid him in securing the proceeds of his defalcation.Niagara Woolen Co. v. Pacific Bank, supra.
"In such cases the creditor, dealing with the partner and knowing the circumstances, will be deemed to act mala fide and in fraud of the partnership, and the transaction by which the funds, securities, and other effects of the partnership have been so obtained will be treated as a nullity." Story on Partnership (7th Ed.), § 132, and cases cited; Hotchin v. Kent,8 Mich. 526; Mechanics' Bank v. Barnes, 86 Mich. 632;Childs v. Pellett, 102 Mich. 558. *Page 18
It is said the partnership must be held to have had knowledge of Cranston's transactions with the bank, and plaintiff, as assignee of the partnership, is therefore estopped from maintaining against it the claim here made. This contention is answered by the statute, which provides that notice to one partner is notice to all "except in the case of a fraud on the partnership committed by or with consent of that partner." Comp. Laws Supp. 1922, § 7966 (12).
The decree of the trial court will be reversed, with costs to appellant, and a decree entered holding defendant entitled to credit for the money owed it by the partnership, the defendant liable for the money paid out by it on Cranston's forgeries, the defendant not liable for the money paid out on Cranston's checks on his personal account issued in payment of firm indebtedness, and not liable for money paid out to Cranston on partnership's checks cashed by him when such cash was not redeposited to Cranston's credit in defendant bank, and liable for money paid out on Cranston's checks upon his own account derived from the checks of the partnership indorsed in the partnership name by Cranston and deposited to the credit of his personal account in defendant bank or the proceeds thereof paid to him and immediately deposited to the credit of his personal account in defendant bank, except as above indicated, and remanding the cause for an accounting in accordance herewith.
NORTH, C.J., and FEAD and CLARK, JJ., concurred with POTTER, J.
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