Union National Bank of Kinderhook v. Chapman, 169 N.Y. 538 (1902)
A partnership is not liable for the fraudulent acts of a partner when those acts are outside the scope of the partnership’s business and not conducted on behalf of the partnership.
Summary
This case addresses the extent to which a partnership is liable for the fraudulent actions of one of its partners. The plaintiff bank sought to recover funds entrusted to one partner, Bemis, for the purchase of notes. Bemis deposited the funds into the partnership account, but used them primarily to pay debts of a prior, dissolved firm. The court held that the partnership was not liable because the transaction was outside the scope of the partnership’s business, Bemis acted as the plaintiff’s agent, not as the firm’s agent, and the partnership did not knowingly misappropriate the plaintiff’s funds.
Facts
The plaintiff, Union National Bank, entrusted money to Bemis to purchase specific notes on their behalf. Bemis was a partner in the firm of Chapman & Co. Bemis deposited the bank’s money into the firm’s bank account. Bemis used the funds, largely or entirely, to pay debts of a previous firm that had since been dissolved. The other partners in Chapman & Co. were unaware that the funds Bemis deposited belonged to the bank, assuming instead that Bemis was depositing his own money for which he received credit.
Procedural History
The case was initially heard by a referee, who ruled in favor of the plaintiff bank. The Supreme Court reversed the referee’s decision and granted a new trial. The Court of Appeals affirmed the Supreme Court’s order, directing judgment against the plaintiff.
Issue(s)
Whether the partnership of Chapman & Co. is liable for the fraudulent acts of Bemis, a partner, when those acts involved funds entrusted to Bemis for a purpose outside the scope of the partnership’s business, and when the other partners were unaware of the source and intended use of the funds?
Holding
No, because the money was not advanced to or for the defendants or upon their credit, and the notes transferred to the plaintiff were not in fact, and did not purport to be notes of the defendants firm and were not given in their business.
Court’s Reasoning
The Court reasoned that Bemis was acting as the bank’s agent, not as an agent of the partnership, when he received the funds. The transaction was entirely disconnected from the partnership’s business. The court emphasized that the other partners were unaware that the money belonged to the bank; they believed it was Bemis’s money. The court distinguished the situation from one where the partnership knowingly appropriated the bank’s money for its own use. The court cited precedent establishing that a partnership is not liable for a partner’s actions when those actions are outside the scope of the partnership’s business and when the other partners lack knowledge of the fraudulent scheme. The court noted, “Had the money been borrowed for the firm in the ordinary course of business, the defendants would have been liable. But Bemis was the trustee and agent of the plaintiff and having the money in his hands in that capacity, placed it with that of the firm and took to himself credit for it. The other parties were ignorant of the relations between him and the plaintiff, as well as of the source from which the money came. The relation of debtor and creditor as between the plaintiff and the defendants, did not result from that transaction.” The key is that the bank’s relationship was with Bemis as an individual, not with the partnership. The other partners did not knowingly participate in or benefit from the fraud in a way that would create a debtor-creditor relationship between the bank and the firm.