Mecutchen v. Kennady

[236] The opinion of the court was delivered by The Chief Justice. This action was brought upon a promissory note, drawn in the partnership name of Tomlin-son & Kennady to Samuel C. Bell, and by him endorsed. Judgment by default was entered against the endorser, and against Tomlinson, one of the makers. Kennady the other maker, alone defends the action. The evidence shows that, at the time of the transaction, Tomlinson and Kennady were partners in trade. The note was drawn by Tomlinson, one of the partners, in the partnership name, and, at his request, was endorsed by Bell, as a matter of accommodation. The note, thus endorsed, was offered at the Medford Bank for discount for the accommodation of the firm, but was not discounted. It was subsequently delivered to Mecutehen, the plaintiff, by Tomlinson, one of the partners, in payment of his individual debt due to Mecutehen, without the knowledge or consent of Kennady, the other partner-. The case presented is that of a partnership note made to a third party, and by him endorsed, and delivered by one of the partners to a ereditoi', in payment of his individual debt. The authority of the individual partner to bind the firm by the drawing or endorsing of negotiable paper extends only to the trade or business of the firm. Where such paper is in the hands of an innocent endorsee or bona fide holder, the law presumes that it was given for the benefit of the partnership, and the firm are held liable. Story on Partnership 102. And though such paper be negotiated by one partner in fraud of his co-partner, it is nevertheless binding on the firm in the hands of án endorsee without notice of the fx-aud. Coll-yer on Part., § 447. It is equally well settled, thá-t where one partner employs the funds of the fix;m in payment of his individual debt, the creditor, knowing that fact, will be deemed to act in bad faith and in fraud of the partnership. And where the funds or the paper of the firm is taken in pay [237] ment of the private debt of one of the partners, the law charges the creditor with a knowledge of the fraud, and imposes upon him the onus of repelling that presumption. And the rule is founded on the obvious truth that the employment of the partnership funds by one of the partners for his private benefit isa fraud upon the partnership, and the creditor participating in the transaction is a party to the fraud. These familiar principles are not drawn in question; and it is admitted that if the note in question had been made directly by one of the partners, in the name of the firm, to the plaintiff, in payment of his individual debt, the plaintiff could not recover. But it is sought to distinguish this case, and to take it out of the operation of the rule, on the ground that although it was a partnership note, given by one partner in payment of his individual debt, yet it was not drawn directly to the creditor, but had previously been drawn to a third party, and was by him endorsed, and may have been the individual property of the partner by whom it was transferred. It was not, therefore, necessarily the property of the firm, and the creditor is not chargeable with notice of that fact. There is no proof that the note in question had ever been negotiated. It is in evidence that it was made and endorsed as mere accommodation paper, and was in the hands of the individual partner by whom it was drawn, and by whom arid for whose individual benefit it was fraudulently transferred. Is the plaintiff who received the paper, not from the endorser, but directly from the partner, chargeable with knowledge of fraud ? As against the creditor, the presumption of law would be, that the note, in the hands of the partner, at least before maturity, was mere accommodation paper, endorsed for the benefit of the firm, and not the property of the individual partner. If the note was transferred to the plaintiff after maturity, he holds it subject to every defence which would he available against the partner from whom he received it. [238] If it be shown that the paper has been in the market, and has been once negotiated, the presumption might be, that it had been purchased by the individual partner, and was held by him as his private property.. But, in the absence of such proof, the note is presumed to be the pvoperfy of the firm. It may be, it is true, the individual property of the partner, and that fact, if shown by the holder of the paper, will entitle him to recover. But the burthen of showing that fact ought, upon principle and on grounds of policy, to rest upon the plaintiff. The delivery of the partnership note by Tomlinson in payment of his own debt was a fraud upon his partner, and if Mecutclien is not chargeable with a direct and positive knowledge of the fraud, the circumstances were at least such as to put him on inquiry, and to throw upon him the burthen of proof as to the real nature of the transaction. Where partnership property is transferred by a partner in payment of his individual debt without the consent of his co-partner, it vests no property in the creditor, whether he knew it to be the property of the partnership or not. Rogers v. Batchelor, 12 Peters 221. The case of Ridley v. Taylor, 13 East 175, is not recognized as law in this country, so far as it imposes the burthen of proof in relation to the fraud upon the partnership. That case, moreover, is made to rest, in some measure, upon the ground that there was no proof that the appropriation of the partnership property was unknown to or unauthorized by the other partner, though such evidence was within the power of the defendant. The recent case of Williams v. Walbridge, 3 Wend. 415, was in principle like the present, and rules the point now in question. The note was drawn by one of the partners of the firm to a third party, by them endorsed, and was delivered by the partner who drew the note to the plaintiffs in payment of an individual debt. The court held that no title to the paper passed by its delivery to the plaintiffs, and that the defence was available in an action [239] against the endorsers as well as against the drawers. The facts are precisely the same as in the present case. It does not appear in that case, more than in this, that the plaintiffs saw the note written, or that they knew that it was drawn and endorsed for the express purpose of paying their debt. Upon the evidence in the ease, Kennady is not liable upon the note, and according to the agreement stated in the case, the verdict should be entered for the defendant. The Circuit Court should be advised accordingly. Cited in Craig v. Hulschizer, 5 Vr. 364.