Case ID: ny-super-ct_61/html/0074-01.html
Source: Caselaw Access Project
Author: {"author": "By the Court.—McAdam, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

LEROY M. LYON, Plaintiff v. HALSEY FITCH, Impleaded, Etc., Defendants.
    
      Promissory note—Bona ftAe holder—Partnership ; each partner can bind firm within the scope of its business only.
    
    The defendant Whitney made the $4,000 note in suit, May 1, 1889, payable to his own order, thirteen months from its date, and indorsed the note, first by his individual name and next by that of Fitch & Whitney, a firm of which he was a member, and delivered the same to one Hills in consideration of moneys loaned by Hills to Whitney long before the firm of Fitch & Whitney was formed. The plaintiff received the note from Hills before maturity and gave him (Hills) credit'for the amount of the same on an account due to plaintiff from Hills.
    
      Held, that the plaintiff having parted with nothing on the faith of the paper, he did not become a bona fide holder thereof for value under the rules established in this state. The plaintiff simply succeeded to the rights of Hills, subject to all the equities existing between him and the defendants. Hills could not have maintained an action on this note against Fitch, because he knew the note and its endorsement had no connection nor business relation whatever with the firm of Fitch & Whitney, or its firm business. It was exclusively and absolutely the private transaction and personal contract of Whitney, and the plaintiff stands in no better position than Hills stood. Each partner is the agent of the partnership in, and as to all matters within the scope of the partnership business, and can bind the firm by making, endorsing and accepting bills and notes in relation to such business; but a partner has no more authority than a mere stranger to execute such paper in his individual business or for the accommodation of others ; but as every partner has prima facie ■ equal power to execute paper, a note signed by the firm name, although made by a single partner, is presumably a firm note; but when it appears, as in this case, that the note was not indorsed in the course of partnership business, but for the benefit of Whitney, and this fact was known to Hills, then it was incumbent on Hills’ transferee to show that Fitch as well as Whitney assented to the endorsement, that Fitch was a party to the contract. His assent must be proved and will not be implied or presumed.' The exception to this rule exists only in favor of a bona fide holder for value without notice, for the giving of a note in partnership name by a partner, is a virtual representation that it is given in the partnership business and, if negotiable, this representation is deemed in law to have been made to every bona fide holder of the note, and the firm is estopped from denying the authority of the partner to execute and issue the instrument. The admissions made by one of a number of persons sought to be charged as partners, cannot be used against the others. Nothing short of the separate admissions of each is competent to establish a partnership between them.
    Before Freedman and McAdam, JJ.
    
      Decided May 2, 1892.
    The trial judge dismissed the plaintiff’s complaint, and directed that the exceptions be heard in the first • instance at genera,! term. The plaintiff moves for a new trial on the exceptions taken.
    
      Edward S. Clinch, for plaintiff, argued :—
    I. The answer of the defendant Fitch is clearly frivolous. The complaint alleges that the defendant Whitney made a promissory note; that the firm of Fitch & Whitney, composed of the defendants Whitney and Fitch, for a valuable consideration, endorsed the note and delivered it to William Hills; that he, for a valuable consideration, endorsed and delivered it to the plaintiff, and that, when the note became due and payable, it was presented for payment and payment thereof demanded and refused, and that of this demand and refusal of defendants had due notice, and that no part of the note has been paid. Among the things denied upon information and belief by the answer of the defendant Fitch is the allegation of the existence of the firm of Fitch & Whitney. Fitch certainly knew, when he verified his answer, whether he was a member of that firm, and whether the firm had any existence. If he did not know whether the firm endorsed the note for a valuable consideration, it was his duty to set out special facts showing why he did not know it. Thorn v. N. Y. Central Mills, 10 How., 20; Chapman v. Palmer, 12 Ib., 38; Warner v. U. S. Land Co., 53 Hun, 312; Richardson v. Wilton, 4 Sandf., 708. The answer is clearly frivolous. Cases cited above, and also Fallon v. Durant, 60 How. 178; Sherman v. Boehm, 15 Abb. N. C., 258; Edwards v. Lent, 8 How., 28; Mott v. Burnett, 2 E. D. Smith, 50; Lewis v. Acker, 11 How., 163; Hance v. Rumming, 2 E. D. Smith, 48 ; Sherman v. N. Y. Central Mills, 1 Abb., 187.
    II. On the trial, the plaintiff sought to prove, by declarations of the defendant Whitney, that the signature of the maker of the note was Whitney’s signature, and that the endorsement of Fitch & Whitney was the firm’s signature. Objection was made to the Avitness testifying to the conversation between him and Whitney, on the ground that the proposed evidence was not the best evidence of the execution of the note by Whitney. At the time the objection was made, it was conceded that Whitney was the maker, and that Fitch and Whitney Avere partners. The court sustained the objection. This was clearly error. The evidence was certainly competent to prove, by Whitney’s admission, that he made the note. It was better evidence than proof of the handwriting of Whitney, which would have been sufficient to prove the signature. The declaration by Whitney, that the signature was his, and his admission of liability upon the note, as maker, were certainly competent evidence against him. And his admissions, as the admissions of any partner Avith respect to a partnership transaction, are evidence against the firm, though not necessarily conclusive. Lindley on Partnerships, 128.
    III. The sustaining by the court of the objection, made by Fitch’s counsel, to any admissions made by the defendant Whitney, compelled the plaintiff to call the defendant Whitney as a witness, and thus to assume the responsibility for his evidence, and the burden of proof. The plaintiff could have made out a prima facie case, by producing and introducing the note in evidence, and by proving the declarations of the defendant Whitney, that the note was made by him, that the signature of Fitch & Whitney was made by him, and that he was a member of the firm of Fitch & Whitney. Collins v. Gilbert, 94 U. S., 753. The burden of proof would then have been upon the defendant Fitch. The shifting of the burden of proof upon the plaintiff was an error, substantial in its character, and justifying a sustaining of the exception of the plaintiff to the ruling of the court, which excluded the declarations of the defendant Whitney. National State Bank v. Richardson, 20 N. Y. State Rep., 52; Nickerson v. Ruger, 76 N. Y., 279.
    IV. It was competent for the plaintiff to show that the special partner, Pitcher, was consulted by the defendant Whitney, before the firm name was endorsed upon the note. By the act under which limited copartnerships are formed the special partner is given special authority to advise as to the management of the partnership concerns. 3 Rev. Stat., 7th ed., p. 2237, § 17. It was proper for him to consult the special partner, Pitcher, and to be guided by his advice, and if Pitcher did advise the endorsement, and thereupon it was given, the case is relieved of any suspicion that the endorsement was made secretly, or under circumstances which would call in question the honesty of the transaction. It is not necessary for each partner to assent to the issue of every note of the firm. Each partner has the implied authority to make or endorse commercial paper. Tiedemann on Com. Paper, § 95.
    V. It is also competent for the plaintiff to show that William Hills ■ surrendered the note which was due on May 1, 1889, and took the note in suit in reliance upon the endorsement of Fitch & Whitney, and that he would not have extended the time for the payment of the note which then fell due, had not a note been given with the endorsement of the firm, or some other endorsement equally good. The exceptions of plaintiff to the exclusion of testimony to this effect are well taken.
    VI. The plaintiff showed that, before its maturity, the note in suit was sold by William Hills to the plaintiff for $4,000, and that this amount was charged by William Hills to the plaintiff in an open account between them, which had existed for a number of years, and upon which the plaintiff was indebted, at the time of the trial, to William Hills, for a settlement of which account Mr. Hills could have called upon Mr. Lyon at any time. This transaction constituted a valid consideration for the note, and made the plaintiff the bona fide holder for value, and prevented the defeat of the recovery on the note on the ground of want of consideration. Tiedemann on Commercial Paper, § 163, Metropolitan Bank v. Loyd, 90 N. Y., 530, 2 Am. & Eng. Cycl. Law, page 369; Nat. Union Bank v. Landon, 66 Barb., 189.
    
      Harriman & Fessenden, for defendant Fitch, argued :
    I. The plaintiff had not parted with value for the note and was subject to any defences to which Hills was subject. “ Mere discount and credit do not of themselves constitute a bona fide purchaser, for value. To occupy that position a holder must actually have parted with something of value for the note.” Daniel Negotiable Instruments, § 779 b. Giving of credit by entering the amount in the books of a bank and not actually parting with a dollar on the strength of the endorsement, cannot be considered parting with value in the sense which the law contemplates. Central National Bank v. Valentine, 18 Hun, 417; McBride v. Farmers’ Bank, 26 N. Y., 450 ; Note to Clark v. Ely, 2 Sandf. Ch., 166. One who has given his note for a note is not bona fide holder for value, to keep out defects, if, at the time, his own note is in the hands of the seller of the original note. Carver v. Cornell, 75 N. Y., 91; Turner v. Treadway, 53 Ib., 650. The plaintiff in this action had parted with no value and cannot be considered a bona fide holder for value. The evidence showed that he took the note endorsed without recourse from his special partner. It does not appear to have been a transaction connected with his business, for the transaction had no effect on his business. In fact the only thing effected by the transfer was a change in the ownership of the note. No money passed to Hills ; no security was given. Only Lyon became Hills’ debtor by oral understanding between the men. Lyon has not parted as yet with a dollar, neither has he placed himself under a binding obligation to Hills or to anybody. Hills cannot compel Lyon to pay for the consideration if Lyon’s promise had failed. The note which formed the consideration of Lyon’s promise has been discovered to be valueless in a substantial particular, to wit, the endorsement of Fitch & Whitney. Hills in selling the note to Lyon, while he does not guarantee its collection, he does guarantee by implication that the endorsements are genuine and valid. It being shown that the endorsement of Fitch & Whitney is not the act of the firm, Lyon can tender the note to Hills and legally resist any effort of Hills to make him do more. Therefore Lyon has-not parted with value.
    II. The endorsement, Fitch & Whitney, was without consideration; it was not the act of copartnership ; it was void and it was not binding upon Fitch. The authority of one partner to bind his firm springs from the mutual agency of the partners to act for each other in matters pertaining to the business for which they are associated, and a person contemplating a partnership with another cannot bind him by a contract for the proposed partnership benefit without special authority. The partnership having been formed, however, the co-partner can bind his associates only in such transactions as pertain to the partnership business and the co-partnership business must be of such a character that the giving of negotiable paper would be the convenient and proper mode of conducting it in order to create a presumption of agency in a copartner to give a bill or note in the firm name. Persons taking the negotiable paper of a partnership from one partner may presume that he represents his associates, provided that it is in the course of a transaction usually or ordinarily incidental to the business. This paper in suit was taken by Hills with full knowledge of the business of Fitch & Whitney and its incidents, in payment of Whitney’s private debt to Hills, contracted prior to the copartnership association. It is testified, however, that there was another object accomplished by giving the firm endorsement and plaintiff looks to it to sustain the note against a partner ignorant of the note’s existence, that was, to relieve Whitney of using his interests in the firm to pay his own debts and give the firm the continued use of the money. This was not a purpose for which Hills could presume Whitney to be authorized by his general copartnership powers, nor an act sufficiently germane to the purposes of the partnership business to entitle Whitney to bind his partner without his express assent. A partner can bind his firm only in matters which, according to the usual course of dealing, have reference to the business transacted by the firm, and if a person deals with a partner in a matter not within the scope of their business, the intendment of law is that he deals with him on his private account. And this is so even where the copartnership name be used. Edwards Bill and Notes, 97 (2d ed.). Where one partner has a transaction with a third person which is neither apparently nor really within the scope of the partnership business, the partnership is not bound by his declaration or acts in the transaction. He cannot by his declaration make that a partnership transaction which really is not, and which is an individual transaction. In such a case the third person has notice that the transaction is outside of the partnership business and he cannot rely on the partnership credit. Union Bank v. Underhill, 102 N. Y., 340. Where the creditor of one partner receives for his debt an obligation of the firm, the law presumes that it is given and received in fraud, and no demand on the partnership is raised. A firm obligation given for the individual indebtedness of one partner without the express consent of the other partner is, in the hands of one who knew what it was given for, void. Farmers’, etc., Bank v. Butchers’, etc., Bank, 16 N. Y., 125.
    
   By the Court.—McAdam, J.

The action is on a $4,000 note made May 1, 1889, by the defendant Whitney to his own order, payable thirteen months after date. Whitney endorsed upon the note first his individual name, and next that of Fitch & Whitney, a firm of which he was a member, and delivered the note to one Hills, who thereafter transferred it to the plaintiff. The original consideration for the note was moneys loaned by Hills to Whitney, individually, long before the firm of Fitch & Whitney was formed. The plaintiff received the note from Hills before Maturity and gave him credit on account for the amount of it. The plaintiff parted with nothing on the faith of the paper, so that he did not become a bona fide holder thereof for value, within the rule as established in this state. Coddington v. Bay, 20 Johns., 637 ; Stalker v. McDonald, 6 Hill, 93; Farrington v. Frankfort Bk., 24 Barb., 555; Moore v. Ryder, 65 N. Y., 438, and other cases collated in 4 Lawson’s Rights and Remedies, § 1581.

He simply succeeded to the rights of Hills, subject to all the equities existing between him and the defendant. Hills could have maintained no action against Pitch, for he knew the note and the endorsement had nothing whatever to do with the firm business of Pitch & Whitney, and the plaintiff stands in no better position.

Each partner is the agent of the partnership, as to all matters within the scope of the partnership business, and can bind the firm by making, endorsing and accepting bills and notes in such business; but he has no more authority than a mere stranger to execute such paper in his own individual business, or for the accommodation of others, Farmers’ & M. Bk. v. Butchers’ & D. Bk., 16 N. Y., 135; such note can be enforced only against the partner making it, and the fact that the proceeds may have been used for firm purposes, does not render the non-assenting partner liable on the note. Union Bk. v. Underhill, 21 Hun, 178. Hills knew that the endorsement of Pitch & Whitney was not given for a partnership debt, or in the partnership business, but was written by Whitney, one of the firm, in a matter not relating to the firm’s business, but to a private transaction of his own, and it did not bind Pitch, his co-partner. Fielden v. Lahens, 9 Bosw., 445; S. C., 2 Abb. Ct. App. Dec., 111; 6 Abb. N. S., 341; St. Nicholas Nat. Bk. v. Savery, 45 N. Y. Superior Ct. R., 97.

Since every partner has prima facie equal power,, a note signed by the firm name, though made by a single partner, is presumably a firm note, Whitaker v. Brown, 16 Wend., 507, and so with a firm endorsement. Morehead v. Gilmore, 77 Pa. St., 118. But when it appeared, as it did here, that the note was not endorsed in the course of the partnership business, but for the benefit of Whitney, and that this fact was known to Hills, it was then incumbent on his transferee to show that Pitch as well as Whitney had assented to the undertaking. It was his duty on that state of facts to show affirmatively that Fitch was a party to the contract. Wilson v. Williams, 14 Wend., 147; Vallett v. Parker, 6 Ib., 615 ; Austin v. Vandermark, 4 Hill, 259. His assent must be proved and will not be implied or presumed. Mercein v. Andrus, 10 Wend., 461.

The exception to the rule exists only in favor of a bona fide holder for value without notice, First Natl. Bk. of Chittenango v. Morgan, 73 N. Y., 593; Johnson v. Lee, 30 State R., 389 ; for the giving of a note in the partnership name is a virtual representation that it is given in the partnership business, and if negotiable, this representation is deemed in law to have been made to every bona fide holder of the note, and the firm as to him is estopped from denying the authority of the partner to issue the instrument. Farmers’ & M. Bk. v. Butchers’ & D. Bk., 16 N. Y., 135; Griswold v. Haven, 25 Ib., 602. Another exception is to be found in Stenben Co. Bk. v. Alberger, 101 N. Y., 202, where a member of a firm, who had charge of its financial business, took up firm notes by giving in exchange thereof notes of a third person, endorsed by him in the firm name, which endorsement was without the knowledge of the partner, and the court held that the endorsement was within the authority of the partner making it; and that the firm was liable thereon. This upon the ground that the notes sued upon were actually used to retire obligations of the firm, and no limitation was placed upon the power of the financial partner to provide funds for such a purpose.

There was no merit in the plaintiff’s case, and his complaint was properly dismissed. The exceptions taken are without force. The questions put for the purpose of proving a partnership by the admissions of Whitney, one of the partners, were properly excluded, for the admissions made by one of a number of persons sought to be charged as partners cannot be used against the others. Drennan v. House, 41 Pa. St., 30; Currie v. Silloway, 1 Allen, 19. Nothing short of the separate admissions of each is competent to establish a partnership between them. Field v. Tenney, 47 N. H., 510; Bry v. Watson, 16 Me., 261; Pleasants v. Faut, 22 Wall., 116 ; McPherson v. Rathbone, 7 Wend., 216 ; Robins v. Warde, 111 Mass., 244; Dowley v. Hall, 5 Bush., 549. The effort to prove that Hills relied on the firm endorsement was abortive, for he knew it did not relate to a partnership transaction. The questions put to Whitney, as to whether the giving of the note was of any benefit to the firm were also properly excluded. They were not calculated to prove a fact, but to elicit the opinion of the witness founded on the theory that if he had paid his own debt from the assets of the firm, it would have depleted its capital to that extent, and hence the firm was benefited by adopting the course he pursued. The evidence rejected would not have affected the result, and the rule is that a new trial will not be granted where the plaintiff has been non-suited, although there was some evidence to establish the case, if the court is satisfied that the evidence, as well that adduced as that offered and rejected, was not sufficient to warrant a verdict in favor of the plaintiff. Wilson v. Williams, 14 Wend., 147. It follows that the exceptions must be overruled, the motion for. a new trial denied, and the defendant permitted to enter judgment on the non-suit, with costs.

Freedman, J., concurred.