New-York Firemen Insurance Co. v. Bennett

Hosmer, Ch. J. The opinion expressed by the Court, in the preceding case of The New-York Firemen insurance Company v. Ely and Parsons, is equally applicable to this case; and, on the ground of a loan on discount of the note in question, which the plaintiffs had no authority to make, the determination of the judge at the circuit was erroneous, and a new trial must be granted. The case, however, presents another question of great practical importance, which, in my opinion, was incorrectly decided. The note in suit was indorsed by Thaddeus W. Bennett, by signing the copartnership firm of Bennett, Cady & Co., which consisted of the said Bennett, Lathrop L. Sturges and Ebenezer P. Cady. This company did business as merchants in Virginia, where Sturges & Cady resided, and in New-York, which was the residence of Bennett. The note in question was made for the debt of Sturges & Sherman ; and there was no proof that Sturges or Cady had any knowledge of the indorsement of it, or gave any authority for this purpose. The judge charged the jury, that one partner has an implied — 579 — authority to bind the firm in all contracts relating to its concerns, and to contracts not relating to the concerns of the firm, if the person with whom the contract is made, had neither express nor implied knowledge, that there was no such authority. To this principle, hostile as it is to established law, I cannot subscribe. A joint-tenant, or person jointly interested with another, in real or personal property, is not legally authorized to do any act, which tends to his prejudice. 1 Lev. 234. 2 Co. Rep. 67. Bac. Abr. tit. Joint-tenant &c. H. 3. By long established law, however, originating in the custom of merchants, a contract by one partner, having the appearance of being in behalf of the firm, is considered as being obligatory on the partnership. Whenever a bill is drawn, accepted or indorsed, by one of the several partners, during the partnership existence, and in behalf of the firm, and it gets into the hands of a bona fide holder, the partners are liable, though in truth the partner negotiated the bill without the consent of the partners, and for his own peculiar benefit. But, in respect of a person, who, at the time of receiving the bill, knew, or had reason to believe, that the partner negotiated it for his individual advantage, and without the concurrence of his associates, the bill is entirely unavailable. The principles are obvious, and founded in general convenience. A partner, strictly speaking, has an implied authority, by virtue of the partnership connexion, to perform acts and make contracts, only within the limits of the partnership covenant. But, as persons dealing with him cannot always know when he is acting within the sphere allotted him, and when for his own use, those who are not guilty of gross negligence, and act bona fide, are protected in their contracts, whatever may be the concealed obliquity of his conduct. Hence, if be raise money on a bill or note, signed or indorsed in the name of the firm. the partnership is bound, although he performed the act with a view to his own individual use. On the same principle, if the person receiving the bill had knowledge that he was violating his duty to his partners ; yet if the bill came bona fide into the hands of a purchaser, he acquires a right to subject the partnership. Public convenience demands the establishment of these principles. If a secret fraud of the nature above-mentioned were to vitiate a note or bill, it would demand enquiries, which could not often be made or satisfied, before either of them could safely be received, and thus would operate as a — 580 — pernicious impediment to their free circulation. But neither justice nor convenience requires, that the person who has knowledge of the fraud, or is ignorant through gross negligence, should have right to subject a partnership, by the contract of one of the partners, made for his own benefit. If, therefore, at the time he received the instrument from one of the partners, he knew, or had reason to believe, that it was in payment of the partner’s debt, or for his own peculiar advantage, aside of the partnership benefit, he acquires no right, by this attempted prostitution of the firm. These principles are firmly and universally established on every page of the law merchant in relation to this subject. It is now insisted, that the payee of a promissory note, although he has knowledge that the maker or indorser in the name of the firm, is making payment, by this act, of his own debt, or is becoming the surety of another person, without the concurrence of his partners ; and that neither the partnership covenant nor the interest of the partnership sanctions the act ; yet that he has a right to subject the partnership. This principle, in direct hostility with justice and convenience, is endeavoured to be sustained, by the unwarranted supposition, that the payee, not having knowledge that special authority was not given the partner, may fold his arms, and reap a benefit from his supineness. Common sense and common integrity require, that he should make enquiry, in such case, and actually know, that authority was given. He is bound, on legal and fair principles, to sustain the affirmative. He knows, that the partnership is for mercantile operations. He knows, that the partner, signing or indorsing a note in the name of the firm, from the partnership contract had no implied authority. He knows, that the act can alone be authorized, by the delegation of express power. And he knows, that on the most common and best established principles, in promotion of justice and prevention of fraud, the person claiming the obligation of contract against a partnership, is bound to prove it. The principles on this subject are well established, and repel the plaintiff's claim. If the law were such as has been contended for, and as was delivered to the jury, by the judge at the circuit, it would superadd to the great, although necessary hardships now attending partnership contracts, a burden and discouragement, that would greatly impair, if not destroy this most useful connexion. In the case of Arden v. Sharp & Gilson, 2 Esp. Rep. 524. it — 581 — was decided, by Lord Kenyon, that where one partner puts the name of the firm to a bill of exchange, but the party at whose request it is done, knows that it is not on the partnership account, nor for their benefit, but it is the act of the partner only, he cannot sue the firm on that bill. But if one partner indorse the name of the firm on a bill of exchange, and it goes into the world, and gets into the hands of a bona fide holder, who takes it on the credit of the partnership name, and is ignorant of the circumstances, though in fact the bill was first discounted for that one partner’s use, in such case the partnership is liable. By the same judge, in Wells v. Masterman, 2 Esp. Rep, 731. the same point was similarly determined; and the following observation was made : “ If a man who has dealings with one partner only, draws a bill on the partnership on account of those dealings, he is guilty of a fraud; and in his hands, the acceptance by that partner, would be void.” These determinations were succeeded by the case of Shirreff & al. v. Wilks, 1 East 48. Two of three partners, it was decided, who had contracted a debt prior to the admission of the third partner into the firm, cannot bind him without his assent, by accepting a bill drawn by the creditor upon the firm in their joint names; but such security is fraudulent and void as against the third partner, and cannot be recovered on, in an action against the three. “ It is hard enough,” said Lord Kenyon, “for one partner, in any case, to be able to bind another, without his knowledge or consent ; but it would be carrying the liability of partners for each other’s acts to a most unjust extent, if we suffered a new partner to be bound, in this manner, for an old debt, incurred by other persons. The plaintiffs, therefore, ought not, in justice, to have taken this security, by which they were to bind one, who was not their debtor: the transaction is fraudulent upon the face of it." The same principle is recognized in many cases ; nor is there a decision or dictum, within my knowledge, contravening the principles before expressed. Ridley & al. v. Taylor, 13 East 175. 180. Green v. Deakin & al. 2 Stark. Rep. 347. Ex parte Bonbonus, 8 Ves. jun. 542, 3. Williams v. Thomas & al. 6 Esp. Rep. 18. Emly & al. v. Lye & al. 15 East 11, 12. Ex parte Gardian, 15 Ves. jun. 186. In the state of New-York, the decisions on the subject in question, are numerous. The cases of Livingston v. Hastie and Patrick, and of the same person against Tyrie, 2 Caines 246 fully support the principle I have advanced. It was determined, that a note, given in the name of a firm, for the pri — 582 — vate debt of one partner, without the knowledge or consent of his copartner, is void in the hands of the creditor, as against the firm. When delivering the opinion of the court, it was said, by Livingston, J.—“ It is certain, that the power of one partner to bind the other, is very great; and for the purpose of trade, it should be so. When there is a known partnership, it is right that any one dealing with either of the partners, as such, should have recourse to all of them for his contracts ; and if he abuse the confidence, which his associates repose in him, strangers should not suffer. But it is not necessary for trade, that this authority over each other, should extend to matters totally unconnected with the objects of their association, and which it is impossible any articles of partneship could have contemplated. Were that the case, it would put an end to these connexions altogether. It can never be the intention of those who form companies of this nature, nor can it be the expectation of the world, that every partner is to pledge the general responsibility for his private debts, contracted before or after the partnership. When any one, therefore, takes a partnership note from one of the company, for what he know to be his particular debt, without consulting or apprising the other members of his intention, or obtaining their consent, there is no hardship in confining his remedy to the one whose debt it was. This rule we adopt, as one that will produce the least mischief ; will prevent an improper use of the partnership firm ; will confine persons, thus associated, within proper bounds; and will destroy every inducement in strangers to obtain, by practice or fraud, a security against the whole company for the individual debt of any member. The plaintiff here knew the note was given for Hastie's own debt ; and it does not appear, that Patrick consented to his name being used. The defendants, therefore, must have judgment.” To this case succeeded Livingston v. Roosevelt, 4 Johns. Rep. 251. deciding, that where there is a special or limited partnership, in any particular trade or business, one partner cannot bind his copartner, by any contract not connected with such trade or business. “ It has been repeatedly ruled,” said Van Ness, J., “ that whenever a partner pledges the partnership funds or credit, in a transaction, which is known to be unconnected with, and not fairly and reasonably within, the compass of the partnership, it is, as to the other partners, fraudulent and void.” The other judges, in substance, expressed the same — 583 — opinion. To the same effect are the determinations in Lansing v. Gaine and Ten Eyck, 2 Johns. Rep. 300. and Dob v. Halsey, 16 Johns. Rep. 34. The cases hitherto cited directly prove, that the taking from one partner a bill or note, drawn or indorsed in the partnership name, for the debt of the partner thus drawing or indorsing, and without the consent or connivance of his copartners, is a fraud; and that the contract, as to them, is void But the principle implied invalidates every contract of a partner with another person, not within the sphere of the common connexion, unless it be with the assent or for the benefit of the partnership. There are, however, determinations precisely applicable to the present case. In Hope v. Cust, cited from a manuscript note of Buller, J. 1 East 53. it appears, that Fordyce, who traded very largely in his separate capacity, as well as in the business of a banker in partnership with others, having considerable dealings, in his private capacity, with Hope & Co. of Holland, gave them, and in the names of himself and partners, a general guaranty for the money due from him separately. A bill was filed by Hope Co. in chancery, to have the benefit of the guaranty, on which an issue was directed; and in summing up the evidence to the jury, Lord Mansfield said, that the whole would turn on this ; whether the taking of the guaranty from Fordyce, without consulting the other partners, or having their privity, was not such gross negligence in the Hopes, as would amount to fraud or covin. A verdict was given for the defendant. It is peculiarly observable, that the omission, on the part of the Hopes, to ascertain, by enquiry of the partners of Fordyce, whether they assented to his pledging the partnership as his surety, was considered as a gross neglect, and equivalent to fraud. The same question occurred in Foot v. Sabin, 19 Johns. Rep 154. It was determined, by the court, that where one of two partners subscribes the partnership firm to a note, as surety for a third person, the partnership is not bound ; and the burden of proving the authority or consent of the other partner, lies on the creditor or holder of the note. The two cases last cited are directly in point, and demon — 584 — strate conclusively, that the note in question, so far as relates to the partnership of Bennett, Cady & Co., is utterly void. A new trial must be granted. Peters and Brainard, Js. were of the same opinion. Bristol, J. dissented. New trial to be granted.