Case Name: Henry G. Newhall, Resp't, v. Christopher A. Wyatt, Def't; In the Matter of the Claim of James R. Clark, App'lt, v. C. A. Wyatt & Co.
Court: New York Court of Appeals
Jurisdiction: New York
Decision Date: 1893-10-17
Citations: 54 N.Y. St. Rep. 708
Docket Number: 
Parties: Henry G. Newhall, Resp’t, v. Christopher A. Wyatt, Def't. In the Matter of the Claim of James R. Clark, App’lt, v. C. A. Wyatt & Co.
Judges: 
Reporter: New York State Reporter
Volume: 54
Pages: 708–711

Head Matter:
Henry G. Newhall, Resp’t, v. Christopher A. Wyatt, Def't. In the Matter of the Claim of James R. Clark, App’lt, v. C. A. Wyatt & Co.
(Court of Appeals,
Filed October 17, 1893.)
Paktneeship—Use oe funds of new firm to pat debt of old—Set off.
Appellant, wlio was a creditor of the firm of 0. A. Wyatt & Co., drew drafts upon it, which were accepted hy it, and discounted by certain bankers. Thereafter a new firm was formed under the same name, by taking in respondent as special partner. The drafts were paid out of funds of the new firm, but neither the bankers nor appellant knew of the existence of the new firm at that time. Held, that such payment did not make the appellant a debtor to the new firm so as to authorize a set oil of the amount so paid against a debt due him from the new firm.
Appeal from order of the supreme court, general term, first department, affirming order overruling exceptions taken by James E. Clark, claimant, to the report of a referee appointed to hear certain disputed claims in proceedings for dissolution of a partnership and confirming said report.
James Byrne, for app’lt; L. Laflin Kellogg, for resp’t.
Reversing 52 St. Rep., 456.

Opinion:
Finch, J.
In an action brought by the plaintiff for a dissolution of the partnership of C. A. Wyatt & Co. a receiver was appointed who advertised for the presentation of claims against the firm, as preliminary to the winding up of its affairs. James E. Clark appeared as one of the creditors, and presented a claim for something over $33,000. Upon the application of the receiver, .a referee was appointed to take evidence and pass upon this claim, and his report, awarding the creditor only about $3,000, has been confirmed by the court and approved by the general term on appeal. The creditor comes to this court complaining of the result, and insisting that his claim has been improperly reduced.
Most of the conclusions reached by the referee seem to us justified by the facts, but one of them, involving a serious amount, we deem erroneous and an injustice to the creditor. That error consists in charging Clark with the amount of five drafts drawn by him, amounting to nearly sevén thousand dollars, on the theory that he was debtor in that amount to the firm, and should allow it by way of set-off against his own demand. The facts underlying the question raised are, in substance, the following:
There were two firms bearing the same name of 0. A. Wyatt & Co. The first consisted of Wyatt alone, no one else having an interest with him. The second, formed later, was composed of Wyatt and the plaintiff, iNewuull, as special partner. Clark was a creditor of each firm, which we may distinguish as the old and the new. Before the formation of the latter, he drew five drafts upon the old firm for sums which were concededly due to him, payable to the order of Conway, Gordon & Garnett, bankers, which were accepted by C. A. Wyatt & Co., and discounted by the bankers, Clark remaining contingently liable as drawer, and receiving the proceeds. All this occurred before the formation of the new firm, and was, in every respect, a regular, usual and proper business transaction. These acceptances, the referee finds,, were paid by Wyatt out of the funds of the new firm. The appellant criticizes the finding, mainly because the bank account, of the new firm was a continuation of that of the old, without-break or change; but the proof so far warrants the finding as to make it conclusive upon this appeal. The payees of the draft had no reason to suspect the real source from which the money came. They had no knowledge of the existence of the second firm, and necessarily believed, as they had a right to believe, that the payment was made by the real debtors out of their own funds. They accepted the payment, surrendered up the drafts, and of course canceled and extinguished the contingent liability of the drawer. And yet upon this payment the referee grounds his conclusion that Clark thus became a debtor to the new firm, and that the amount of the drafts which, through the discount, went to his benefit should be applied as a set-off against an equal portion of the debt due him from the new firm.
It is undoubtedly the rule that one partner may not appropriate the property or money of the firm to the payment of his own debt without the consent of his copartners, and that if he does so the property misapplied may be followed and recovered until it reaches the hands of a bona fide purchaser for value. But I think it is equally -well settled that the payment of money to a creditor, who receives it in discharge of an existing debt innocently and without knowledge or means of knowledge that the debtor paying had no rightful ownership of the fund, is good and effectual, and does not subject the recipient to a recovery by the true owner. That doctrine was very explicitly asserted in Stephens v. Board of Education, 79 N. Y., 187. In that case one Gill, who was a member of the board of education of the city of Brooklyn, had converted to his own use the money of the board, and so became indebted to it for the amount abstracted. In order to procure the means of payment, Gill forged a mortgage upon the land of another and sold it to the plaintiff, receiving from him the proceeds and depositing them to his own credit. He then drew a check for the amount of his debt to the board, and with it paid that debt in full, the board receiving the money and expending it in its own business. When the plaintiff discovered tne forgery and fraud he sought to follow his own money into the hands of the board and recover it back, as in this case the new firm seeks to regain its money misappropriated by Wyatt from the hands of Clark as the beneficial recipient. This court held that there could be no such recovery. In the case cited the plaintiff contended that his money had been virtually stolen and could be followed and regained until it reached the hands of an innocent party giving at the time a valuable consideration therefor, and that the discharge of a precedent debt was insufficient to afford protection against the true owner. This court refused to accede to that doctrine, arguing that money has no ear-mark; that while the purchaser of a chattel or chose in action may generally ascertain the title of his vendor, that is not so as to money, the title to which in the possessor cannot usually be traced to its source; and that no case had been referred to in which the doctrine that an antecedent debt is not a sufficient consideration to cut off certain equities had been applied to money received in good faith and the ordinary course of business in payment of a debt, and that such a rule would obviously introduce confusion and danger, into all commercial dealings. This general doctrine was further illustrated and approved upon another condition of the facts in Southwick v. First National Bank of Memphis, 84 N. Y., 434, 435, and seems to me well founded both in justice and the necessities of business.
We may treat the case, therefore, irrespective of the fact that the money could not have been collected back from the bankers, who gave up their drafts, and never fixed the liability of the drawer on the faith of the payment made, and treat the case as if the money had been paid directly to Clark, upon the debt due him from the old firm. "His good faith cannot be questioned. He did not even know that a new firm bad bren formed, or that there could be any possible question as to the ownership of the moneys paid, and he may hold the payment made. A contrary rule would do him great injustice, and without the excuse of fault or negligence on his part. If his drafts had been unpaid, and his debt against the old firm had remained as desperate and valueless, he would not have extended further credit, and suffered an added debt of a large amount to have accumulated. He cannot be restored to his original position. There is no proof that the new firm was insolvent when the drafts were paid, and we fail to discover any ground on which the set-off can be properly allowed.
The order of the general term should be reversed, and the report of the referee and its confirmation by the special term be set aside, and the account restated, with costs of this appeal in this court and the general term.
All concur.