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