Guillou v. Peterson

Mr. Justice Paxson

delivered the opinion of the court, May 7th 1879.

The court below having entered a judgment of nonsuit against the plaintiffs upon the trial, we have but to consider the single question whether there was sufficient evidence to entitle the case to go to the jury.

The case of the plaintiffs as presented was this: On the seventh day of November 1866, the defendants, Edward W. Gould, Theodore R. Strong and Jesse White, Jr., of the city of New York, and Pearson S. Peterson, of the city of Philadelphia, entered into articles of copartnership, under the name of Gould, Strong & Co., for the purpose of “buying and selling stocks on commission, making loans, collecting promissory notes, drafts and bills of exchange.” The partnership was' in the form of and was intended to be a limited partnership, the three gentlemen first named being the general partners, residing in New York, where the business was to be conducted, and the said Peterson being the special partner and contributing the sum of $20,000 as cash capital. The partnership was renewed annually to 1877 inclusive, but by an admitted informality in the renewals Peterson became a general partner at the end of the first year so far as the public are concerned, and continued so until its termination. As between the partners, it remained a *168 special partnership. The agreement further specified that the general partners should not engage in speculations of any kind; that Peterson, the special partner, should not in any event be liable for the debts or obligations of the firm beyond the amount of capital ($20,000) contributed by him, and that ,he should transact no business for the firm, nor be employed for that purpose as agent, attorney or otherwise. Mr. Peterson seldom visited New York, and appears to have taken little if any part in the business.

Theodore R. Strong, one of the partners, was one of the executors of Samuel L. Haven’s will. Mr. Haven resided in New York and died in the autumn of 1865. The other executor, Thomas S. Shepherd, took but little charge of the estate; Mr. Strong was practically the acting executor. In the month of February 1867, Gould, Strong & Co. borrowed from Mr. Strong $28,000 of the United States treasury notes, known as seven-thirties, which he held as executor and which belonged to Samuel L. Haven’s estate. These notes remained in the possession of the firm and were used by them for the purpose of raising money until June 1868, when, having been called in by the government, they were on the 19th of that month converted into other bonds known as five-twenties. Whether the conversion was by Strong or the firm is not clear. In Strong’s account as executor with the firm he is credited on July 6th 1868, with $28,000 seven-thirties at 109, less commission, $31,458.80, and on the same day he is debited with $28,000 five-twenties, new at 108-f, $30,485. Within a few days thereafter $25,000 of these five-twenties were entered on the blotters and ledger of the firm as loans from Strong. They were used for the business of the firm, as stated by Mr. Strong, “ to pay for stocks that we were carrying — stocks for our customers;” and again, “these stocks and bonds were used, during the years they were held by Gould, Strong & Co., as collaterals to raise money. This money was used in our business.” The five-twenties thus loaned to the firm and thus used by them, were never returned to Strong, but weue sold to Jay Cooke & Co. by Mr. Gould, on Dec. 14th 1871, for $28,437.50, and the proceeds used to pay a loan for which they had been pledged by Gould, Strong & Co. For the like purpose of raising money the firm borrowed from Strong, in 1869, 513 shares of the stock of the Pittsburgh, Fort Wayne and Chicago Railway Company, belonging to the said estate, which said stock was continuously used as collateral to raise money until January 8th 1872, when the' firm borrowed the sum of $45,000 from the City Bank upon these 513 shares of stock. The bank was repaid about January 22d of the same year $45,314.09 by the sale of 471 shares of said stock, and the balance thereof, forty-two shares -were delivered to Mr. Shepherd, the other executor, who appears to have then learned for the first time of Mr. Strong’s misapplication of the securities belonging to Mr. Haven’s estate.

*169 Gould and White were cognisant of all these transactions, and were active participants therein. There was- evidence, and for the purposes of this case it must be taken as true, that Mr. Peterson knew of the transaction of the seven-thirties. Strong says: “ He (Peterson) knew of the loan of the treasury notes. He knew they belonged to me as executor. He got that information from either Mr. Gould or myself; we were both present. I don’t know which of us told him. That was in April 1868.”

No question has been made, indeed none could be made, as to the liability of Strong, Gould and White to Mr. Haven’s estate upon this state of facts. Strong, the executor, wras guilty of a fraud upon said estate, and Gould and White were participants therein. It was a misapplication of the assets of the estate, to use the polite and considerate term in general use to express a breach of trust. In the language of the law and of common honesty, it was an embezzlement. It was not the case of a loan of unemployed funds by an executor to his firm, for the purpose of gaining interest for his cesiuis que t?'ustent, but of the loan of interest-bearing securities to enable the firm to carry on its operations. Such breaches of trust have become so frequent and so startling within the last few years, that we would fail in our duty were we to omit to mark them, when they come before us, with the seal of our stern condemnation.

It remains to consider the question of Mr. Peterson’s liability. The right of the plaintiff to waive the tort and sue in assumpsit for money had and received is too well settled to need either argument or the citation of authority. It is alleged, however, that Mr. Peterson is not liable, for the reason, among others, that “by the terms of the partnership articles he was to be liable only to the extent of the capital he had contributed, and the terms of those articles were known to the executor of Haven’s will when the securities were delivered for use.” This position concedes Peterson’s liability to the extent of $20,000. It assumes, however, that the estate of Mr. Haven is in no better position than Strong, the executor, would be. Is this position sound ? I concede that if Strong had advanced his own money or his own securities to the firm, he would be bound by the limitation in the agreement between the partners. But this suit is not by Strong or for his benefit. The securities he loaned the firm were not his property. They belonged to Mr. Haven’s estate. In the ordinary legitimate dealings of an executor with the assets of an estate, the parties in interest are bound by his acts and perhaps affected with notice. In such case he may, in a qualified sense, be regarded as their agent. But surely this principle cannot apply where an executor is acting in fraud of the rights of the estate. It is opposed to every well-settled principle applicable to trust funds. Trust property squandered by a faithless trustee can be followed wherever found, and if earmarked equity will lay its strong hand upon it and restore it to its rightful *170 owner. Such owner is not bound by what his trustee has done or omitted to .do; and may repudiate or rescind his contracts, saving of course the rights of innocent third parties. Mr. Strong was not acting for his eestuis que trustent when he loaned these securities to his firm; he was acting in direct antagonism to them; he was embezzling their securities; he was doing that which was a sufficient cause for his removal by the court having jurisdiction of his accounts. We think that the owners of the securities loaned by the executor to his firm occupy a very different position from the executor himself, and that they are not to be affected with his knowledge of the private understanding or agreement between the partners. That the acts of a trustee in excess of his powers are not binding upon his cestui que trust was decided in Bohlen’s Estate, 25 P. F. Smith 304. Much more so where the act is not a mere excess of power but a clear and fraudulent abuse of it.

It is said, however, that Mr.. Peterson is not liable for the further reason that .the power of one partner to bind the others is at most an implied power; that each partner is the agent of his co-partners only when acting in the scope of his power, and in the usual course of the business of the firm, and that when his agency is denied or forbidden by his co-partner, with notice to the party assuming to deal with him, as the agent of the firm, his act is not that of the firm, but his individual act only. As an abstract proposition this is correct: Story on Partnership, sections 123 and 138, and note 1, p. 218; Parsons on Partnership 95; Gallway v. Matthew, 10 East 264; Spooner v. Thompson, 48 Vt. 259 ; Feigley v. Sponeberger, 5 W. & S. 564 ; Yeager v. Wallace, 7 P. F. Smith 365. It does not apply to this case as it stood before the jury when the judgment of nonsuit was entered. The cause has been argued upon the theory that the securities were borrowed for the purpose of using the money in wild speculations prohibited by the agreement of partnership. The evidence is not so. The money was used in the business of the firm, carrying stocks for their customers, &c. It was true the failure of the firm was caused by speculations in stocks in 1872, but there is no evidence that they were engaged in such speculations at the time the securities were borrowed, or that the securities were used for any such purpose. The borrowing of securities may be regarded as the equivalent of borrowing money so far as the responsibility of the firm is concerned. This has always been considered as among the implied powers of a partnership, and when exercised by a partner in the name of the firm, for the business of the firm, and the proceeds so applied, it has always been held to bind the firm unless actual notice can be traced to the person loaning the money that the partner had no authority for such purpose.

Our own books are meagre in authority upon the question of the responsibility of a firm under such circumstances. It h^s been *171 largely discussed in England, however, in a series of cases growing out of the forgeries of one Fauntleroy, who was convicted and executed for his offence. Marsh v. Keating, 2 Cl. & Fin. 250, is the leading one of those cases. There the stock, the proceeds of which went into the firm, was sold upon a forged power of attorney. The firm of Marsh & Co. had certain certificates of stock belonging to Keating, one of their customers; Fauntleroy, a partner in the banking house of Marsh & Co., forged a power of attorney and caused •the stock to be sold. The receipt of the proceeds of the sale of the stock was not entered in any of the ordinary books of the defendant’s firm, nor did the sum ever come into the yearly balances of the firm. It was entered only to the credit of the bank, in a pass-book kept between them and their agents, Martin & Co., and it was the duty of Fauntleroy, as between himself and co-partners, to have entered the said sum in the books of Marsh & Co., if he intended it for their account. Fauntleroy also continued to make regular entries of credit to Keating for dividends collected on the stock, as if these dividends had been regularly received from time to time. The partners of Fauntleroy were ignorant of the fraud, but the court said they might with common diligence have known it, and held them responsible, though in point of fact the money had not been received by them,' but was embezzled by Fauntleroy. Stone v. Marsh, 6 B. & C. 551, was another case growing out of the same series of forgeries. Here Fauntleroy was one of the trustees of the stock sold, as well as a partner in the house of Marsh & Co. He executed á power of attorney to transfer the stock, and forged the names of his co-trustees. The stock was sold under this forged power and the proceeds received by Marsh & Co. in the same manner as has been described in Marsh and Keating. Lord Tenterden, C. J., 'held that it was tfye duty of the banking house to place the money to the credit of the trustees, and that no ignorance on the part of any of them, nor any neglect on the part of the house arising from a misplaced confidence reposed by them in one of themselves, to which the plaintiffs were no parties, can deprive the plaintiffs of their money. In Sadler v. Lee, 6 Beavan 324, the facts were similar except that there was no forgery. The stock was clandestinely sold upon a genuine power of attorney by one of the partners, and a credit given to the firm for the proceeds. The sale was concealed from the other partners, and the dividends accounted for as if actually received. The plaintiffs’ trustees were not regular customers of the firm, but Lord Langdale held that the difference was immaterial. The partners were held liable, on the ground that the bankers received the proceeds of the sale. It was attempted to distinguish these cases from the one in hand by the fact that in each of them the stocks were received by the firm in the regular course of business. I am unable to see the distinction.

*172 The wrong done here on the part of- the firm was in converting the securities. It is manifest they had the custody of them for Strong, and collected the interest and dividends for him. The account shows this. Afterwards they borrowed the securities from Strong. This did not authorize their conversion. It imposed an obligation to return them in specie. If sold it was the duty of the firm to have carried the proceeds to Strong’s credit as executor. Instead of doing so Gould sold the five-twenties and with the proceeds paid a debt of the firm, while the railway stock went to pay the $45,000 due to the bank. For both these debts Mr. Peterson as a general partner was individually liable. It is entirely in the course of the regular business of the firm to pay its own debts. I regard the case in hand as stronger than those cited, for the reason that the firm got the benefit of every dollar realized from the securities, while in Marsh v. Keating and Stone v. Marsh, Fauntleroy cheated his firm as well as the owner of the stock, by appropriating to his own use the money received from the sale of said stock.

It is not meant to advance the broad proposition, that where one abuses his trust, and thereby obtains the means to advance money to a partnership, he thereby raises a contract between the partnership and the -person whose money has been so used. The rule is thus laid down in Bindley on Partnership, at page 327: “If a partner, being a trustee, improperly employs the money of his cestui que trust in the partnership business, or in payment of the partnership debts, this alone is not sufficient to entitle the cestui que trust to obtain repayment of his money from the firm.” To the same point are Ex parte Heaton, Buck 386; Ex parte Apsey, 3 Bro. Ch. C. 265; Jacques v. Marquand, 6 Cowen 497. If Mr. Strong had sold the securities belonging to Haven’s estate, and placed the proceeds in the firm as his sh&re of the capital, or had loaned it to the firm as his own money, and without knowledge on their part that it was trust money, they would not have been liable to an action by the representatives of Haven’s estate. Here the securities belonging to the estate were sold by the firm, with knowledge of the true ownership, and the proceeds used to pay its debts. This, under the authorities, treating Mr. Peterson as a general partner, which we think he is, would make him liable without notice or knowledge on his part of the borrowing of the securities or their conversion by his partners.

But even if we treat Mr. Peterson as a special partner, so far as Haven’s estate is concerned, this judgment must be reversed. As before observed, the right to recover against the general partners is undoubted. It is equally clear as to Mr. Peterson, if he had notice of these transactions, or might or ought to have known them. There was evidence that he did not know; not as to all, perhaps, or to the full extent of their operations. But he knew in April 1868 that his firm had borrowed $28,000 of the securities of the Haven *173 estate from the executor. Then was the time for Mr. Peterson to speak. Had he spoken then, as he should have done, Mr. Haven’s estate might have been saved from ruin, his firm from its subsequent insolvency, and his own estate from the peril of this litigation. A man who is brought face to face with such an irregularity as this on the part of his firm, cannot shut his eyes and refuse to see it. Whether we regard the transaction as a wrong to the estate, or a violation of the partnership agreement in regard to speculation, it was ample to put Mr. Peterson upon inquiry as to the nature of the transactions of his firm, and if he chose to sleep upon such a disclosure, he has no one to blame but himself. It is no answer to this to say that the seven-thirties were returned, and that he had no subsequent notice. It was for the jury to say whether the alleged return was anything more than a matter of book-keeping, and for any other purpose than that of exchanging the form of the securities. In any event he had a right to examine the books, and after the irregularity referred to it was his duty to have done so. Such examination would have disclosed the conversion of the securities belonging to the Haven estate, and the application of the proceeds to the payment of the debts of his firm. He must now be charged with the knowledge he might and ought to have acquired.

We are of opinion that the case should have gone to the jury, and that it was error to enter a judgment of nonsuit.

The judgment is reversed and a procedendo awarded.