Case ID: ny-st-rep_9/html/0641-01.html
Source: Caselaw Access Project
Author: {"author": "Bradley, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

John H. Ward, as Assignee, etc., of Howard & Co., App’lt and Resp’t, v. Henry B. Higgins, App’lt and Resp’t.
    
      (Supreme Court, General Term, Fifth Department,
    
    
      Filed June 25, 1887.)
    
    1. Trust property—misappropriation of—May be followed—Limit of THE RULE.
    A partnership made to this plaintiff a general assignment for the benefit of creditors of the firm, March 23, 1885. About July 1, 1884, this defendant placed in the hands of one of the members of the partnership a sum of money to invest for him in a manner specified. The investment was not made, and at the request of the defendant a portion of the money was repaid. The partners in whose hands the money had been placed having subsequently been requested to make a further payment on March 7, 1885, sent his check for the amount requested, which, on presentation, was dishonored for want of funds to his credit, and returned to the bank, where this defendant had deposited it for collection. Shortly after, and on or about Mar'bh 13th, the latter bank was advised by the bank on which the check was drawn, that it had funds wherewith to pay the check, the return of which was requested for that purpose. Upon its return the check was paid. The funds out of which this check was paid were supplied by a check payable to the order of the firm, obtained by the member above mentioned for firm property, sold to the drawer of the check, and left by him at the bank, with directions to pay his check to the defendant with the proceeds. The firm was at that time insolvent, and within ten days thereafter made the assignment. A portion of the money left for investment with a member of the firm as above stated, was by him used for the purposes of the firm, and the rest not repaid was appropriated to his own use. He is insolvent, and has made an assignment to this plaintiff This action was brought to recover the sum used for the payment of the check to the defendant, and the defendant set up a counter-claim for the money appropriated to the use of the firm. Held, that the partner had no right to use the funds of his firm to pay his individual debts, and that when such illegal appropriation is made by a partner, the firm, or its representatives or creditors, may follow and reclaim the funds or property until they reach the hands of a holder in good faith.
    2. Same—Rule how limited when applied to money.
    
      Held, that the purchaser of property is required to ascertain the title of his vendor, apparent or real," to protect his purchase, while the recipient, of money is not put upon inquiry, and his want of knowledge that the use made of it by the act of payment to him is illegal, gives protection to-his title.
    3. Same—Bona fide receiver op money in course op business not within THE RULE.
    
      Held, That the defendant having no notice that the money paid to him. upon the check of the parties was derived from the sale of firm property, and. receiving such money in good faith and in the regular course of business in payment of an amount due him, was not responsible for the fact, that the application of the funds to that purpose was a fraud upon the firm creditors.
    4. Same—Misappropriation by members op a pirm—When will not' MAKE THE OWNER A CREDITOR OP THE PIRM.
    
      Held, that the fact that the partner holding the defendant’s money in trust for certain purposes wrongfully appropriates some of it to the payment of debts of his firm and took credit upon its books for the sums so paid, his co-partner being ignorant of the source from which the funds were derived, did not make the defendant a creditor of the firm.
    5. Same—When impressed with the trust.
    
      Held, that if the money received from the defendant had been deposited in the bank, it or the account representing credit to the partner to whom it was entrusted would have been impressed with a trust, and that the same result might have followed had it been placed to the credit of the firm while it so remained, and thus far it might be followed for the purpose of equitable relief, but that in the absence of such circumstance or of its going into any specific property of the firm which passed to the assignee, no balance to the credit of the firm could be treated as representing any of the defendant’s money for the purposes of a trust in his behalf.
    Appeal from judgment entered upon decision of the court-at G-enessee circuit, a trial by jury having been waived. Charles H. Howard and Henry I. Glowacki, partners doing; business at Batavia, ¡N". Y, in the firm name of Howard. & Co . made to the plaintiff a general assignment for the benefit of the creditors of the firm March 23, 1885. About the first of January, 1884, the defendant placed in the hands of Howard $2,852, to invest for him in a manner specified. The investment was not made. At the request of the defendant Howard repaid to the defendant $200, and afterwards being requested by the defendant to let him have $500 more, Howard, on March 7, 1885, sent his check for that amount on the Farmers’ Bank of Batavia to the defendant, which on presentation was dishonored for want of funds to the credit of Howard to pay it and returned to the bank where the defendant had deposited it for collection. Shortly after and on or about March thirteenth, the last named bank was advised by the Farmers’ Bank that funds were there to pay the check, and requested its return for that purpose, which was done, and the check paid.
    It appears that this supply of means to pay the check was provided by a check payable to the order of Howard & Co., obtained by Howard for firm property sold to the drawer of the check, and by him left at the bank with direction to pay his check to the defendant with the proceeds. The firm was then insolvent, and within ten days thereafter made the assignment. This action is brought to recover of the defendant this sum of $500, used for the payment of the check which had been given to him by Howard. It further apgears that a portion of the money left by the defendant with toward was by him used for the purposes of the firm, and the rest of it not repaid to the defendant was appropriated by him to his own use, and that he is insolvent and has also made an assignment for the benefit of his creditors, with but very small amount of assets to pay them. And that the plaintiff is also his assignee. The defendant, by his answer, alleges the violation by Howard of the trust in respect to the funds placed in his hands, by appropriating them to the use of the firm, and to his own use, and demands judgment that the plaintiff, as such assignee, be directed to pay to the defendant the amount of the moneys so appropriated. The trial court determined that the defendant was not entitled to such relief, and that the plaintiff was not entitled to recover against the defendant, and directed judgment of dismissal of the complaint upon the merits. Both parties appeal from the portions of the judgment against them respectively.
    
      Myron H. Peck, for pl’ff; J. B. Adams, for def’t.
   Bradley, J.

The partner, Howard, had no right to use the funds of his firm to pay his individual debts. And when such illegal appropriation is made by one partner, the firm or its representative or creditors, may follow and reclaim the funds or property until they reach the hands of a holder in good faith. But for the purposes of such remedy and re-the rule in its application differs somewhat as to money and property other than money, and necessarily so for obvious reasons, having relation to commercial and other business transactions.' while the former has an identity and (excluding bills and notes), is without negotiability, money, as such, has no ear-mark, and has the negotiable quality essential to trade. In the one case the purchaser is required to ascertain the title of his vendor, apparent or real, to protect his purchase, while in the other the recipient of money in good faith is not put upon inquiry. And his want of knowledge that the use made of it by the act of the payment to him is illegal, gives protection to his title. Dob v. Halsey, 16 John., 34; People v. M. and M. Bank, 78 N. Y., 269; Stephens v. Board of Education, 79 id., 183.

The defendant had no notice that the money paid him by the Farmers’ Bank upon Howard’s check, was derived from the sale of the firm property, or that the proceeds of such sale supplied the credit of Howard at the bank for the amount requisite to pay his check. He received the money in good faith and in the regular course of business, in payment of such amount due him from Howard. The plaintiff, who was the cashier of the Farmer’s Bank, was in no sense the agent of the defendant, so as to charge the latter with his.knowledge. It is also claimed that this was a fraud upon the creditors of the firm, and therefore relief should be given in their behalf. This was a diversion of the firm assets from its creditors, and it was then insolvent.

In that sense it was a fraud upon them which the defendant is no more responsible for or chargeable with than would be the merchant to whom one partner should pay for goods the money taken from the funds of his firm. The cases to which reference is made by the plaintiffs counsel do not support his contention as applied to the facts here. Geery v. Cockroft (1 J. & S., 146), had relation to property not money, and Johnson v. Hersey (70 Me., 74, 35 Am. Rep., 303), was a case of attempted diversion of partnership funds with knowledge of the bank to charge, which as trustee the proceeding was taken. The complaint was properly dismissed, and we fail to see any support for the defendants alleged counter-claim. Howard holding the defendant’s money in trust for certain purposes wrongfully appropriated some of it to the payment of debts of his firm, and took credit upon its books for the sums so paid. His co-partner had not knowledge of the source from which the funds were derived. This diversion did not make the defendant a creditor of the firm. Jaques v. Marquand, 6 Cow., 497; Dounce v. Parsons, 45 N. Y., 180. When the money received from the defendant was deposited in the bank, it or the account representing credit to Howard for it was impressed with the trust, and the result we think may have been the same if it had been placed to the credit of his firm while it so remained to its credit there, and thus far it might be followed for the the purposes of equitable relief. Pennell v Deffell, 4 De G M. & G., 373. Knatchbull v. Hallett, L. R. 13 chap , div. 696., 36 Eng Rep., (Cook) 779, Dows v Kidder 84 N. Y., 121. But none of this money went into the bank to the credit of the firm, so that no balance to its credit can be treated as representing any of the defendant’s money for the purpose of trust in his behalf, nor has it gone into any specific property of the firm which passed by the assignment to the plaintiff as assignee. There seems therefore in the view taken no opportunity to charge the firm assets in the hands of the plaintiff with any trust in behalf of the defendant. Ferris v. Van Vechten, 73 N. Y., 113. The case cited of People v. Bank of Rochester (96 N, Y., 32), has no application. There the money was paid into the bank for a specific purpose to which it was not applied, and the assets or funds of the bank in the hands of a receiver, were charged with the trust arising out of the fraud on the part of the bank and from which it could not be permitted to profit. No other question seems to require consideration.

The judgment should be affirmed.

Smith, ¡P. J., and Haight, J., concur.