Johnson v. Crichton

Alvey, J., delivered the opinion of the Court. This was an action brought by the plaintiffs as partners against the defendant on open account. The pleas were, never indebted, payment, and set-off. The whole question of contest would seem to be in regard to the right of — 112 — the defendant to he allowed on account with the plaintiffs as partners, certain credits growing out of separate, individual transactions, between the defendant and Pitt, one of the plaintiffs, and which, hy agreement1 with the individual partner, as it is claimed, were to he charged to the firm, and allowed on account. Some of the items for which claim is thus made hy the defendant, relate to transactions that occurred before the iormation of the partnership between the plaintiffs, and were subsequently charged to the partnership account hy the defendant. Under the rulings of the Court below these claims of credit or discount were allowed, as against the claim of the partnership sued on; and the question is, whether such rulings were proper. 1. It is a fundamental principle in the law of partnership, that the authority of each partner to dispose of the partnership funds and effects, strictly and rightfully extends only to the partnership business. If therefore partnership securities, funds, credits or effects, are taken from one partner, without the previous knowledge and consent of the others, for a debt which the creditor knew at the time was the private debt of the particular partner, whether that debt he created at the time, or has antecedent existence, all the authorities concur in holding such transaction to he fraudulent, and therefore clearly void in respect to the partnership. 3 Kent’s Com., 42; Shirreff vs. Wilks, 1 East, 48; Ex parte Bonbonus, 8 Ves., 540; Rogers vs. Batchelor, 12 Pet., 221; Livingston vs. Roosevelt, 4 John., 251; Sto. on Part., sec. 132. In Parsons on Partnership, page 116, (2nd Ed.,) the rule is stated, as the result of a large number of authorities cited, “ that whenever a party receives from any partner, in payment for a debt due from that partner only, whether the debt he created at the time or before existing, or hy way of settlement of, or security for, a debt, or in-indebtedness or obligation of the firm in any form, the — 113 — ■presumption of the law is, that the partner gives this, and the creditor receives it, in fraud of the partnership, and has consequently no demand upon them. And upon the same principle, if one partner releases a debt due to his firm, in consideration of a release to him of a debt due by him solely, the presumption will be that the transaction was fraudulent.” It is true, the presumption of fraud or mala fides in such cases is never absolute or conclusive. It may be rebutted by proof of the authority given by the other partners, or of their knowledge and consent, or their ratification of the transaction; and this may be inferred from the usual mode or course of conducting» the business, or the special circumstances of the case, if sufficient to raise a fair and reasonable implication of such authority. The burthen of proof, however, is upon the party dealing with the partner, in respect to their separate affairs, to show circumstances sufficient to repel every presumption of fraud, collusion, misconduct or negligence, on his part, as against the partnership; and if he fail in this, the transaction by which the funds, securities, credits or effects of the partnership have been obtained will be treated as a nullity. Sto. on Part., secs. 132, 133, and the authorities cited; Williams vs. Brimhall, 13 Gray, 462, 467. In the case of Rogers vs. Batchelor, 12 Pet., 221, to which we have already referred, Judge Story, in delivering the opinion of the Court, stated, “ that the true principle to be extracted from the authorities is, that one partner cannot apply the partnership funds or securities to the discharge of his own private debt without their consent; and that, without their consent, their title to the property is not divested in favor of such separate creditor, whether he knew it to be partnership property or not.” Whether the fact of knowledge on the part of the separate creditor that he is dealing in respect to partnership property, be material or not, is a question that we are — 114 — not called upon to decide in this case, and in regard to which we express no opinion; hut with respect to the correctness of everything else stated hy the learned Judge in the passage quoted, we entertain no douht.. In the very recent case of Cotzhausen vs. Judd, 43 Wis., 213, it was held that one partner, without the consent, express or implied, of his co-partners, could not apply a claim of the firm to the payment of his individual debt, even to retain the custom of the debtor to the firm. And, in that case, it was said- by the learned Judge who delivered the opinion of the Court, that “ In the absence of such assent or ratification, such act of the debtor and partner cannot affect the firm or its assignee. The debt thus attempted to be discharged remains a debt as well after as before the attempted discharge; and the individual debt of the partner remains a debt owing by him, unaffected by his unauthorized attempt to apply the assets of the firm to its payment. This seems to be the result of the best considered cases on the subject.” With respect to the question of notice to the party dealing with the individual partner, of the partnership rights or ownership, that is often determined upon the face, and by the nature and showing, of the transaction itself. If the partner dealing on individual account delivers a promissory note of the partnership in payment of his private debt, this of itself carries notice to the party receiving it, that it is a partnership security. And so if one partner releases, or agrees to apply, a debt showing on its face to be due the partnership, in satisfaction of a private debt of his own, or agrees that the partnership account against the partnership debtor shall be credited with his individual account due such debtor ; such transactions at once convey notice, and devolve upon the individual creditor, seeking the benefit of such agreements, the burthen of showing that the other partner or partners authorized or assented to what, without proof of such — 115 — authority or assent, would clearly appear to be a misappropriation of the partnership funds, and therefore a fraud upon the partnership. This is both in accordance with the dictates of common sense and of settled judicial decision. Locke vs. Lewis, 124 Mass., 1. The question of the authority or assent of the other members of the firm to the transaction involved, is one for the jury; and it should he submitted under proper instructions from the ■Court. 2. The question still remaining to he decided, and which is somew.hat embarrassed by conflicting decisions, is, whether a suit at law may he maintained in the partnership or firm name, for a debt from which one of the joint plaintiffs has, before action brought, discharged ■the defendant, notwithstanding such discharge may have been a fraud upon the partnership, in which the released debtor was a participant ? In other words, whether one of the partners, after he has agreed to apply the partnership funds or credits in liquidation or discharge of his own individual debt due to his creditor, without the authority •or assent of his co-partners, can he joined in an action at law for the recovery of the partnership demand, notwithstanding such agreement for its application ? It may perhaps be conceded that, according to the English decisions made prior to the existing Judicature Act, the present action, upon the assumption of the agreement as set up by the defendant, could not be maintained for the recovery of the partnership demand covered by the agreement for its liquidation or discharge by the private debt of the individual partner. The case of Jones vs. Yates, 9 B.& Cr., 532, though quite unlike the present case in its facts, would seem to embrace it in thé principle applied. In "that case, S. & B. being partners, S. fraudulently gave the bills of the partnership in discharge of his private •debt, and also applied part of the partnership funds to the same purpose. The question raised for decision was, — 116 — whether the partners, S. & B., could recover in a joint action, suing as partners, the amount of the hills and of the money, in a Court of law, hy an action of trover for the hills, and of assumpsit for the money ; and.it was held that they could not so recover. The reason assigned in support of the decision is, that it would not consist with legal principles to allow such recovery; that there was no. instance in which a person had heen allowed as plaintiff, in a Court of law, to rescind his own act for his own benefit, on the ground that such act was a fraud on some other person ; and that it made no difference whether the party seeking to do so, sue in his own name only, or jointly with another. This decision was followed, and apparently sanctioned, by the cases of Wallace vs. Kelsall, 7 M. & W., 264, and Gordon vs. Ellis, 7 M. & Gr., 607. The principle of those decisions has heen followed hy some of the Courts of this country; but others of very high authority have adopted a different rule of decision. The reason assigned for the decision in Jones vs. Yates proceeds, manifestly, upon purely technical grounds. It allows full legal effect to the act of appropriation by the individual partner; and the fact that the right upon which the action was founded was purely a joint right, and that the joinder of the delinquent partner was a legal necessity, as well for the protection of the other partners as the creditors of the partnership, seemed not to have weighed with, or to have been considered by, the Court, as against the technical objection upon which the whole stress of the decision was placed. Whether the case of Jones vs. Yates can be reconciled with the previous decision of Lord Ellenborough, in Henderson vs. Wild, 2 Camp., 561, and the subsequent decision of Lord Denman and his associates, in Farrar and others vs. Hutchinson, 9 Ad. cfr El., 641, certainly admits of serious question ; and we are not aware of any more recent English cases, than those cited, upon the subject. — 117 — In the case of Henderson vs. Wild, just referred to, it was held, that, after a dissolution of a partnership between A. & B., and notice given that all debts due the partnership should he paid to B., A. having collusively given to a debtor of the firm a receipt dated anterior to the dissolution, the receipt was void, and an action might still he maintained against the debtor in the joint names of A. & B. And in the case of Farrar and others vs. Hutchinson, which was an action by partners to recover a debt due the firm, and where the defendant, to prove payment, gave in evidence a receipt signed by one of the plaintiffs, for cash and goods received in discharge of the partnership debt, it was held that the partners were not concluded by it, hut that they were at liberty to show that it was given under circumstances which made it a fraud on the partners not signing it; and, succeeding in the proof, the plaintiffs took judgment for the partnership claim. It is conceded by all the authorities, including Jones vs. Yates, that in an action against partners the technical objection does not apply. There, it is said, the partners who may suffer by the attempted fraud of their co-partner and co-defendant, may, without any inconsistency, he permitted to say in a Court of law, that although the partner may for some purposes hind them, yet, that he has no authority to do so by accepting a hill or making a promissory note in the name of the firm for his own private debt. It is then because the act is totally beyond the authority of the partner, and consequently a fraud, and therefore utterly null and void, as against the partnership, that the partners are permitted to defend against it; and that being so, we can perceive no substantial reason for the distinction, in the right to resist the fraudulent act of the partner, by the partnership, between the position of being plaintiffs and being defendants on the record. The present action is not founded upon a claim originating in.fraud, or that involves in its establishment even — 118 — the suggestion oí mala fides on the part of either of the partners ; but it is for a claim contracted with the firm in the regular and usual course of its dealing ; and there is,, therefore, no act or transaction required to be rescinded to entitle the plaintiffs to recover. The question of fraud or mala fides does not arise until the defendant, by way of defence, seeks to obtain the benefit of an act of one of the partners, said to he wholly unauthorized, and therefore not binding upon the firm. If this act or transaction of the individual partner has not been authorized or assented to by the other partners, it is simply void in respect to the partnership, and does not, therefore, operate to discharge the partnership debt, or to change the relative liability of any of the parties concerned. As was said by the Supreme Court, in Rogers vs. Batchelor, already referred to, “ The true question is, whether the title to the property has passed from the partnership to the separate creditor. If it has not, then the partnership may re-assert their claim to it in the hands of such creditor.” And, as we have already stated, it was held in that case, that, without the authority or assent of the other partners, the title to the partnership funds did not pass to the separate creditor of one of the partners. Upon the whole, it would seem to be clear, both upon reason and authority, that if the partnership funds or credits have been appropriated by one partner to the payment or settlement of his own private debts, without the authority or consent of. his co-partner, the separate creditor knowing, or having sufficient reason to know, that such funds or credits belong to the partnership, such attempted appropriation can form no bar to an action instituted in the name of the partnership against the separate .creditor for the recovery of the partnership funds or credits in his hands: And as fully supporting this proposition, we may refer to the cases of Rob vs. Halsey, 16 John., 34; Gram vs. Cadwell, 5 Cow., 489; Evernghim — 119 — vs. Ensworth, 7 Wend., 326; Noble vs. McClintock, 2 Watts & Sergt., 152; Purdy vs. Powers, 6 Penn. St., 492; Cotzhausen vs. Judd, 43 Wis., 213; Burwell vs. Springfield, 15 Ala., 273; Hall vs. McIntyre, 31 Ala., 532; Perry vs. Butt, 14 Geo., 699; Buck vs. Mosley, 24 Miss., 170; McNair vs. Platt, 46 Ill., 211; see also, Pars, on Part., (2nd Ed.,) 306. (Decided 18th March, 1881.) It follows that there was error in the Court’s ruling in the first exception. The plaintiff Johnson ought to have been allowed to show that he had never authorized or consented to the application of the partnership assets by his partner Pitt, as claimed by the defendant. There was also error in refusing the plaintiffs’ second and fourth prayers, upon the principles we have already stated. And the three prayers granted on the part of the defendant should have been refused, because inconsistent with the principle of this opinion; and for the further reason, that they ignored the evidence furnished by the defendant’s books, and his testimony as elicited on cross-examination, the judgment will he reversed, and a new trial ordered. Judgment reversed, and new trial awarded.