Opinion
No. 16568.
Decided October 4, 1921.
Partnerships — Authorized and unauthorized acts of partner — Transfer of firm assets — Rights and title of transferee and firm — Partner holds assets in individual name — Assignment in payment of personal debt — Estoppel.
1. One member of a partnership has no authority as such to transfer the assets of the firm except in the course of partnership business; and, in order to bind the firm, acts done by a partner with the firm assets outside the object and scope of the partnership must be done pursuant to some authority, express or implied, beyond that resulting from his character as partner.
2. A transfer of partnership assets by one partner in payment of his pre-existing individual debt does not divest the title of the firm, whether or not the separate creditor had knowledge that the partnership owned the property, unless it is shown that the firm authorized or ratified the transfer or that it was made under circumstances which estop the partnership from asserting its title.
3. The assignee of a non-negotiable chose in action can only acquire such interest as the assignor has. He takes it subject to the prior rights of third persons unless they are estopped.
4. The fact that one partner was permitted to hold in his own name a non-negotiable chose in action owned by the partnership, will not estop the firm from asserting its right, where the sole consideration of the assignment of the non-negotiable chose in action was an antecedent individual debt of the assignor. But that fact will estop the partnership as to an assignment made in consideration of subsequent loans and advancements to such assignor.
ERROR to the Court of Appeals of Hamilton county.
Isadore M. Cohen, defendant in error, brought suit against Henry W. Morgenthaler and Joseph Goldberger in the superior court of Cincinnati to compel an accounting for certain partnership assets in the firm of Goldberger Cohen.
In the petition it is alleged that Cohen and Goldberger entered into a written agreement of partnership on November 6, 1911, for the purpose of conducting a commission business in certain foreign countries for the supply of certain merchandise; that plaintiff agreed to invest $800 in cash to be used in the business; that the interests of the partners in the profits were to be equal and were to continue during the time of the various contracts which should be secured by the firm; that plaintiff did invest the sum mentioned in said business and thereafter invested additional funds; and that on May 1, 1912, a supplementary agreement of partnership was made between them whereby it was agreed in writing that the contract already made should remain in full force except as modified by the supplementary agreement and that in addition to the purposes for which the partnership had already been created certain other business should be conducted. It was agreed that plaintiff should be paid out of the partnership funds certain sums named in the contract; that Goldberger should be paid certain sums on account of his total investment; that whatever commissions might be derived were to be equally divided between the parties; and that Goldberger should be entitled to receive $40 per week for his services. It is further alleged in the petition that pursuant to said contract Goldberger did secure a commission contract with the United States Steel Products Company for the sale of its products in Austria Hungary and other countries, and did sell for said Steel Products Company a large amount of articles, whereby there was earned by the partnership commissions amounting to not less than $30,000. Plaintiff says that Goldberger failed and refused to account to him, or the said partnership, for said money, or any part thereof, but, subsequently, without the knowledge or consent of the plaintiff, and without right or authority, assigned and transferred to Morgenthaler on January 28, 1913, all interest in the amount due from the Steel Products Company, and that thereafter a settlement was made by Morgenthaler and Goldberger with the Steel Products Company whereby the sum of $23,565 was paid to said Morgenthaler on the order of said Goldberger by the said products company and there was reserved and held by the company the sum of $6,435, pending the settlement of certain other claims thereto.
The plaintiff avers that so far as there was any consideration for such transfer by Goldberger to Morgenthaler the same was security for a preexisting debt owing by Goldberger to Morgenthaler, which existed prior to the making of the partnership agreement and was in no way connected with the partnership, or the affairs thereof, or the business transacted by Goldberger for the partnership; that on the 12th of December, 1913, Goldberger was adjudicated bankrupt by the United States district court for the southern district of Ohio; that by reason thereof and by the failure of Goldberger to account to the plaintiff the partnership became dissolved; that plaintiff is a solvent partner of the said partnership, which has not been adjudged bankrupt, and is entitled to administer the partnership estate; and that plaintiff has demanded of the defendant Morgenthaler that he account to him for the funds so received, but he has failed and refused to do so.
For his answer Morgenthaler alleged that he was not acquainted with the facts as to the alleged partnership, and denied the same and demanded proof thereof. He further averred that if any partnership agreement was made or existed between the plaintiff and Goldberger, as set forth in the petition, all knowledge of the existence of the partnership was intentionally concealed from all persons, including this defendant, for the purpose of permitting and enabling the defendant Goldberger to transact all business in his own name. And defendant averred that if any partnership existed, as alleged, such partnership was dissolved and all rights thereunder mutually abandoned by the parties long prior to the date of the transactions referred to in the petition.
He further averred that not being acquainted with the facts as to plaintiff's investment in the partnership, also as to the terms of the partnership, he denies the same.
He further averred that he is not conversant with the facts alleged as to the commission contract with the Steel Products Company, and therefore denies the same and demands proof thereof.
As to the allegations contained in the petition that Goldberger paid to this defendant the sum of $23,565, the defendant admitted that said sum was paid to him, but not in the manner and form as alleged, and he denied that plaintiff has any interest therein. He admitted that the Steel Products Company reserved the sum of $6,435 for the settlement of certain claims, but denied that the plaintiff had any interest whatever in that sum.
The answer further denied the allegations of the petition in the fifth paragraph thereof which related to the consideration of the transfer by Goldberger to Morgenthaler of the claims referred to.
The answer admitted the bankruptcy of Goldberger, but denied that thereby any partnership was broken or that any rights thereby arose to plaintiff.
The defendant denied that he ever heard of the partnership directly or indirectly until the 22d of October, 1914, and denied all the other allegations of the petition.
The answer further alleged that Goldberger was adjudicated a bankrupt, and that all of his assets, including the claims referred to in this case, were adjudicated to belong to his trustee for his creditors, which was well known to the plaintiff.
In the answer of defendant Goldberger the making of the written agreement referred to in the petition of the plaintiff was admitted, but it was alleged that the plaintiff was not the party in interest therein, the real party being B. W. Cohen, and it was denied that plaintiff has any interest in the contract which defendant secured from the Steel Products Company, or that any partnership existed between them at the time of any of the transactions of the defendant with the products company.
The plaintiff replied to the answer of Morgenthaler, and in his reply denied that the existence of the partnership between him and Goldberger was intentionally concealed by him, and denied that the partnership was dissolved, save as alleged in the plaintiff's petition, and denied that all or any of his rights were abandoned. He denied that his counsel appeared in court in connection with the bankruptcy proceedings, denied that any claim was ever asserted against the defendant by the plaintiff; denied that he was a party to the bankruptcy proceedings of said Goldberger and maintains that he was never made a party to said cause and never appeared therein; and denied that any of his rights were ever adjudged or determined in said bankruptcy case.
On the trial in the superior court the issues were found by the court in favor of the plaintiff, and judgment was rendered in his favor for the sum of $8,780.40, with interest. The cause was appealed to the court of appeals of Hamilton county, where it was heard on the pleadings and evidence, and the court found on the issues joined between the parties in favor of the plaintiff; that plaintiff was a partner of the defendant, Goldberger, and had, as alleged in his petition, a partnership interest in the sum of $30,000, which the Steel Products Company agreed to pay in settlement of commissions earned under the contract made with it by Goldberger in his own name; and that the plaintiff was entitled to an accounting from the defendant Morgenthaler.
The court in its entry stated the account between the parties and entered its judgment in favor of the plaintiff against Morgenthaler for the sum of $7,178.48, with interest. This proceeding seeks to reverse that judgment of the court of appeals.
Messrs. Pogue, Hoffheimer Pogue and Messrs. Hunt, Bennett Utter, for plaintiff in error.
Messrs. Kramer Bettman; Messrs. Cobb, Howard Bailey; Mr. Gilbert Bettman and Mr. Oliver G. Bailey, for defendant in error.
In the voluminous bill of exceptions there is included a very large amount of evidence, oral and documentary, much of which is not important in the solution of the material issues in the case. No finding of facts was made by the court of appeals, but it is stated in its entry that the issues joined were found in favor of the plaintiff and that the equities were with the plaintiff. It was the duty of the court of appeals to weigh the evidence, and in obedience to its familiar rule this court will accept the conclusions of the court of appeals on that feature of the case.
In addition to its general finding of the issues in favor of the plaintiff, the court of appeals included in its entry a finding that the plaintiff was a partner of the defendant Joseph Goldberger, and had, as alleged in his petition, a partnership interest in the sum of $30,000, which the Steel Products Company agreed to pay in settlement of commissions earned under the contract made with it by said Joseph Goldberger in his own name. Therefore, in the consideration of the legal questions presented we must proceed on the basis that the material allegations of the petition have been sustained; that the written contracts of partnership were made between Cohen and Goldberger on November 6, 1911, and May 1, 1912; that the plaintiff contributed to the partnership capital the sums alleged in the petition: that the parties entered upon the performance of the partnership agreement; that Goldberger secured the commission contract with the Steel Products Company for the partnership; and that the claim for such services, which was subsequently settled on a basis of $30,000, belonged to the partnership.
It is conceded that Goldberger had obtained the contract with the Steel Products Company in his own name and that Cohen had been informed of this fact. On December 31, 1912, Goldberger made a written assignment to Morgenthaler of the claim for commissions against the Steel Products Company to the extent of $26,866. The consideration was pre-existing indebtedness owed by Goldberger to Morgenthaler. On the same day he assigned to Morgenthaler $3,134 of the claim to secure a preexisting debt owed by Goldberger to the Court House Savings Bank, of which Morgenthaler was treasurer. Subsequently on January 20, 1913, Goldberger executed a new partial assignment of the claim to Morgenthaler. It is conceded that Morgenthaler gave additional consideration for this assignment in the form of loans and advancements which he made to Goldberger. It is not disputed that at the time of the assignments to Morgenthaler he had no knowledge of the interest of Cohen in the claim.
Therefore, the situation presented is: A partnership becomes the owner of a non-negotiable chose in action, to-wit, a claim for services rendered, and one member of the partnership makes an assignment for a part of the claim to a third party in payment of his individual pre-existing indebtedness to that third party, who had no knowledge that the claim was an asset of the partnership. Subsequently a new partial assignment of the claim was made by the same partner to the same person in consideration of new loans. The remaining partner had no participation in or knowledge of these assignments to the third party.
What are his rights in the premises?
It will be noted that the thing assigned was a non-negotiable chose in action and therefore the rights of the assignee are different from those of an innocent purchaser for value of a negotiable instrument in due course and before maturity; that the consideration for the first assignment was a pre-existing individual debt of the partner who made the assignment to the assignee; and that a subsequent assignment was made in consideration of new loans. These differing conditions have frequently had the consideration of courts and writers.
In Lewis v. Anderson, 20 Ohio St., 281, the facts and the holding of the court are stated in the syllabus, viz.: "One partner of a manufacturing firm gave a mortgage on real estate of which he held the legal title, but which in equity belonged to the firm, without any consideration other than to secure his pre-existing individual debt to the mortgagee who had no notice of the partnership or of the liabilities of the firm then existing: Held, that the lien of the mortgage on the premises was not superior to that of such prior liabilities of the firm."
In 30 Cyc., 501, these principles are declared:
"In general. A partnership is under no obligation for the individual debts of its members; and hence a partner cannot use the firm's assets to pay his individual debts without their consent, nor can he pledge the firm credit for such debts. In order that such transactions may bind the firm, the assent or ratification of the other members must be shown, or a case of estoppel must be made against them. When neither assent, ratification, nor estoppel is shown, a transfer of partnership assets by one partner in discharge of his individual obligation does not divest the firm title, whether the party receiving the property knew that it belonged to the firm or not; for it is a case where the recipient takes property from one who is not its owner, and who has no authority to transfer it save in the course of the partnership business."
In N. Rogers Sons v. Batchelor et al., Admrs., 12 Peters, 221, which is a case carefully considered and frequently cited, it is held: "Funds of a partnership cannot be rightfully applied by one of the partners to the discharge of his own separate preexisting debts, without the express or implied assent of the other parties; and it makes no difference, in such a case, that the separate creditor had no knowledge at that time of the fact of the fund being partnership property."
The opinion of the supreme court of the United States in that case was written by Judge Storey, and while as to some of its features this particular case has been criticised yet in the absence of assent, ratification or estoppel it is generally accepted as the established and sound rule. The same proposition is declared and enforced in Cannon v. Lindsey, 85 Ala., 198, 201.
In Porter v. Dunlap, 17 Ohio St., 591, a school teacher assigned a part of his earned and unearned wages to the township treasurer and received pay for the same in full. The school teacher agreed that the treasurer should retain the amount, when earned, out of the school funds in his hands. Afterwards, when the amount was fully earned, the school teacher obtained from the clerk an order on the treasurer for the amount, and then transferred the order to a third party, who paid a valuable consideration for it and had no notice of the former transfer to the treasurer. The right of the third party to sustain an action against the treasurer to recover the amount of the order was involved. In the opinion, at page 595, it is said: "But this assignment of the order by Clark to Dunlap, like his previous transfer of the same claim to Porter, was only an equitable assignment. The order was not negotiable paper, and was invested by law with none of the attributes or immunities of negotiable paper. It was simply an evidence of indebtedness. The assignee of it took it subject to all the infirmities and equities imposed upon it by his assignor, and which would attach to it in the hands of his assignor. The assignee stood in the shoes of the assignor, and could have no better title than he; and what would estop the one to insist upon its payment against the claim of Porter, would equally estop the other."
It is held in Sutherland v. Reeve, 151 Ill., 384: "A purchaser of a claim, which is not negotiable, can only acquire such interest as the vendor has. He will take the claim subject to the equities between the vendor and a third person claiming the equitable title."
To the same effect are Cutts v. Guild, 57 N. Y., 229; Central Trust Co. of New York, as Trustee; v. West India Improvement Co., 169 N. Y., 314, 324; Cowdrey v. Vandenburgh, 101 U. S., 572, 575, and 2 Pomeroy's Eq. Juris. (4 ed.), Sections 708, 709.
Mr. Justice Harlan in People's Savings Bank v. Bates, 120 U. S., 556, points out the distinction between rights of parties in the transfer of negotiable and non-negotiable instruments. Many authorities are examined and the rule as above stated is approved. It is held that the purchaser under such circumstances must be held to have known this distinction. Fairbanks, Jr., v. Sargent, Exr., 104 N. Y., 108; The Elmbank, 72 Fed. Rep., 610.
We think it clear on reason and authority that when Morgenthaler took the assignment of the claim against the Steel Products Company from Goldberger as payment of a pre-existing claim, which Morgenthaler had against him, he, Morgenthaler, took the claim subject to all equities and all interest which Cohen owned; that is to say, Goldberger only had the right to sell to Morgenthaler what he Goldberger owned, and after the transfer Morgenthaler stood in Goldberger's shoes and had no better right than Goldberger had so far as the transaction related to the payment of pre-existing debts. As to the first assignment for the preexisting debt, there are no circumstances which estop Cohen and no assent or ratification is claimed.
In support of his contention that the pre-existing debt constituted a sufficient consideration as against the plaintiff Cohen, the plaintiff in error cites Corwin v. Suydam, 24 Ohio St., 209. We have carefully considered that case and we do not think that the rule there laid down applies to the facts alleged in the plaintiff's petition and sustained by the finding of the court of appeals in this case. The facts in that case are stated in the second proposition of the syllabus, as follows: "Where the sole acting member of a dissolved partnership, with full power to dispose of its property and pay its debts, himself became a creditor of the firm, by advancing his private funds in payment of its debts, and then in good faith and with no intention to defraud the company, disposed of property of the firm to an amount less than the sum so due him, in satisfaction of a debt due from him to a third person, who received the same in like good faith, and in the belief that such sale was authorized by the firm: Held, that this disposition of the property can not be avoided by another member of the firm, it appearing that all the outside debts of the firm are paid or secured, and that there is nothing due to such member from the firm, unless he includes in his account against it a part of the same claim of A upon the firm, transferred by A to him in satisfaction of a debt due to him from A." In that case the thing done by the partner who disposed of property of the firm was in the interest of the firm, which was indebted to him in an amount larger than the value of the property sold, and the whole transaction was in good faith and with full authority. In this case the partnership rights were wholly disregarded.
Now, so far as the assignment of January 20, 1913, is concerned it was made to cover loans made by Morgenthaler afterwards, and as it is undisputed in the record that Cohen knew that Goldberger had taken the contract with the Steel Products Company in his own name, and made no objection to it, and as Morgenthaler had no knowledge of Cohen's interest in that contract, Cohen is estopped to object to the payment out of the claim of such loans as Morgenthaler thereafter made. There is a clear distinction between the claim of Morgenthaler under the assignment to secure the pre-existing debt and his claim to secure subsequent loans. As to the pre-existing debt it was not and could not have been made on the faith of the apparent ownership of Goldberger of the full and undivided interest in the claim. The claim was not then in existence. Morgenthaler can have no equity as against Cohen so far as that claim is concerned. He relied simply and absolutely on the statements of Goldberger concerning the ownership of the claim. It is not claimed that there was any act of Cohen that induced Morgenthaler to surrender anything, and in fact he surrendered nothing.
The application of the doctrine of estoppel must be determined in each case by the particular circumstances of the case, and no satisfactory definition can be given to fit all cases. But it may be said that a person is held to a representation made or a position assumed, where otherwise inequitable consequences would result to another, who, having a right to do so under all the circumstances of the case, has in good faith relied thereon. 10 R. C. L., 689.
An estoppel arises when one is concerned in or does an act which in equity will preclude him from averring anything to the contrary, as where another has been innocently misled into some injurious change of position. Russell, Admr., v. Fourth Natl Bank, 102 Ohio St., 248.
So far as the pre-existing debts are concerned this case lacks the essential elements which must be present before the application of the doctrine of estoppel can be insisted upon.
As to the partial assignment made January 20, 1913, the situation is different. Cohen knew that Goldberger had taken the Steel Products Company contract in his own name and did not object. Therefore, when Morgenthaler gave the new considerations for the new assignment of January, 1913, in the form of new loans, he was a bona fide purchaser for value, and as to those the circumstances are such as to estop Cohen from objecting to Morgenthaler's claim therefor, and the court of appeals in the statement of the account prepared by it allowed Morgenthaler's claim for these items.
It is contended by the plaintiff in error that the bankruptcy proceedings against Goldberger adjudicated the rights to this claim and precluded the assertion by Cohen of any interest therein. Cohen was never made a party to the bankruptcy proceedings, was never served with process therein, and never appeared either in person or by counsel. In a bankruptcy proceeding, as is well known, the court deals with individual assets of the bankrupt. So far as the claim against the Steel Products Company was concerned it had been assigned to and had been collected by Morgenthaler. Cohen was asserting his claim against Morgenthaler for an interest in the commission account. There was no obligation on Cohen to take any notice of the bankruptcy case.
It is elemental that in order that a judgment may be conclusive against a party he must have had an opportunity to be heard. This is a necessary requisite of due process of law.
In Postal Telegraph Cable Co. v. City of Newport. Ky., 247 U. S., 464, it is said, at page 476: "And as a State may not, consistently with the Fourteenth Amendment, enforce a judgment against a party named in the proceedings without a hearing or an opportunity to be heard [citing cases], so it cannot, without disregarding the requirement of due process, give a conclusive effect to a prior judgment against one who is neither a party nor in privity with a party therein." Auglaize Box Board Co. v. Hinton, 100 Ohio St., 505; Haley v. Hanna, 93 Ohio St., 49, and In re Kohl-Hepp Brick Co., 176 Fed. Rep., 340.
The plaintiff in error also contends that his rights in this case must be determined by rules applicable to choses in possession and not in action. He contends that after the collection of the claim by Morgenthaler it became a chose in possession. While there is doubtless a substantial distinction between choses in action and choses in possession, where questions of priority between contending and successive transferees are concerned, we can see no such distinction where the question in issue concerns the validity of the original assignment of the chose in action itself. And no authority is cited in which such a distinction is made.
In the statement of account which the court of appeals included in its entry it charged Morgenthaler with the amount received from the Steel Products Company $23,565, deducted the amount paid to Court House Savings Bank, $2990, and the amount paid to Goldberger to carry on the business, $1510, making a total deduction of $4500, which left a balance of $19,065. Against this balance is charged Cohen's investment of $1017.15, Goldberger's investment of $3378.72, Goldberger's previous services, $1000, Goldberger's salary for 81 weeks at $40, $3240, and $2016 loaned by Morgenthaler at various times subsequent to the assignment of January, 1913, leaving a balance of $8413.13, and from this the amount due Cohen, for which judgment was rendered, was ascertained.
We think the statement of the account made pursuant to the findings of the court on the weight of the evidence and in obedience to the rules of law above stated was correct.
The judgment of the court of appeals will, therefore, be affirmed.
Judgment affirmed.
MARSHALL, C. J., HOUGH, JONES and MATTHIAS, JJ., concur.