Reid v. Linder , 77 Mont. 406 ( 1926 )

Appeal by the defendants, other than A.J. Wilcomb, from a judgment entered on directed verdict in favor of plaintiff.

The Bank of Twin Bridges closed its doors on May 28, 1922; late in 1923 the receiver of the bank commenced action against A.J. Wilcomb, A.A. Linder, James P. Darnutzer and Carl N. Darnutzer, a copartnership doing business under the name and style of Trout Creek Land Company, upon four promissory notes of date June 1, 1921, each signed, "Trout Creek Land Company, by A.J. Wilcomb," the principal sums of which aggregated $16,828.66. The complaint filed was in the usual form in actions on promissory notes; each note constituting a separate cause of action.

Defendant Wilcomb defaulted; the remaining defendants answered generally to each cause of action, and set up three special defenses to each thereof, but in its entirety the answer alleged, as to all of the causes of action, in effect as follows: That the Trout Creek Land Company was organized in 1913 as a nontrading and noncommercial partnership, for the purpose only of carrying on a farming and stock-raising business, and so continued up to the year 1921, but was not in existence on June 1, 1921; that the making of promissory notes was not within the scope of the firm's business and not necessary for the transaction of such business; that the power to borrow money and execute notes was vested only in the members acting together, with the exception of Carl N. Darnutzer, and no one member had authority to execute a note in the name of the firm; that no one of the answering defendants had any knowledge of the execution of the notes sued upon, by Wilcomb, or authorized or ratified his act in so doing. It was further alleged that no one of the answering defendants nor the firm received any consideration for said notes, but that they were executed for the sole benefit of Wilcomb, who received whatever of value was paid for said notes; that Wilcomb was the president or cashier and the managing agent of the bank; and that the bank had full knowledge of all of said facts, and with such knowledge dealt only with Wilcomb, and paid to him for his sole benefit and personal use any consideration given for said notes. It was further alleged that the receiver paid no consideration for the notes and took them after maturity. The plaintiff replied, denying the affirmative allegations of the complaint, and affirmatively alleged that the firm was a trading copartnership.

The case was finally tried in February, 1926, before Honorable S.D. McKinnon, Judge, with a jury duly impaneled. Both sides having introduced testimony and rested, the plaintiff moved the court to direct a verdict in his favor. This motion was granted, verdict returned, and judgment entered thereon. The answering defendants moved for a new trial, which motion was denied; they then appealed from the judgment.

Hereafter, for the sake of brevity, the Trout Creek Land Company will be referred to as the firm, the Bank of Twin Bridges as the bank, and the answering defendants as the appellants.

1. Specifications of error numbered 1 and 2 are predicated[1] upon the action of the court in sustaining objections to a question asked of one of the directors of the bank, as to who was in active charge of the bank during banking hours for the year prior to its closing, and to an offer of proof that such person was A.J. Wilcomb.

No reversible error was committed by so ruling, as the matter of the management of the bank was fully explained, and the minutes of the board of directors showing action taken as to such question, with the witness present, was placed before the court and jury; the resolution of the board being the best evidence of what was then done. But, assuming that the witness had testified as set forth in the offer of proof, from what is hereafter said, such testimony could not have changed the result reached by the court, and the ruling did not therefore affect the substantial rights of the appellants.

2. Specifications 3, 4 and 5 have to do with the exclusion of[2] testimony to the effect that James P. Darnutzer never had any knowledge to the effect that Wilcomb was gambling on the grain market in the name of the firm, and that the witness never participated, as a member of the firm or otherwise, in buying or selling grain futures. No prejudicial error was here committed, as the facts sought to be elicited were fully brought out on the examination of this and other witnesses.

3. The remaining specifications present only the question as to whether, as contended by the appellants, the record contains evidence which should have been presented to the jury for their determination, and on which the jury could have found a verdict in favor of the appellants, which verdict could not have been set aside by a court, or whether, as stated in the court's ruling on the motion for a directed verdict, the case made by the record presented only questions of law.

The record presents an amazing history of loose business methods and lack of management on the part of the members of the firm, as well as on the part of the officers of the bank. It establishes the following facts:

By oral agreement in 1913, A.A. Linder, A.J. Wilcomb, Dwight Bushnell and the copartnership of J.P. Darnutzer and Carl N. Darnutzer organized the firm for the purpose of raising wheat on lands owned by others, but later it purchased railway lands on contract, the individual members and the Darnutzer brothers sharing profits and losses. During the first year Bushnell dropped out, and the remaining members assumed a one-third interest each. All of the members were raised in the community and were intimate friends from childhood; each had the utmost confidence in the others throughout the period of their business association.

The firm had no capital and, seemingly, nothing to offer as security, but, as Wilcomb was the financial manager of the firm and at the same time the managing agent of the bank, it appeared to have unlimited credit, secured with little formality; all loans extended by Wilcomb being approved by the board of directors of the bank as routine business at its monthly meetings. As a "depositor," the firm started with an overdraft, which soon reached a sum in excess of $2,000; whereupon a note was given and the amount thereof credited to the firm's checking account. Although this left a balance in the red, the firm continued to check against the account, and, as the overdraft became topheavy, the firm periodically executed further notes, which were credited to the checking account, and, as these notes matured, they were paid by renewal notes, and, as payments on land contracts became due, the bank furnished the necessary funds and received notes from the firm. As this first series of notes appear only in the bank records, it does not appear how they were signed, and the appellants have no recollection on the subject. Wilcomb testified for the plaintiff by deposition, and, in answer to a question as to why the notes sued upon were signed, "Trout Creek Land Company, by A.J. Wilcomb," answered, "That was the way the company had of doing business and signing notes."

Later the firm engaged in the business of purchasing, feeding and selling cattle, and this enterprise was financed by the bank either directly or by securing loans from other banks secured by liens on cattle purchased. On one such transaction the firm made a profit of $1,000, but thereafter it lost something like $5,000 on its cattle deals, and throughout the entire period of its farming operations the net result was loss. Receipts from the sale of grain were generally credited to the checking account or on notes, and the bank absorbed the losses.

Many of the firm's notes were sold to other banks, and, after the closing of the bank, it was ascertained that the firm was obligated on outstanding notes to the National Bank of Montana totaling $19,034.65, and to the National Bank of Gallatin Valley in the sum of $6,000, secured by liens upon all of the real and personal property of the firm. In addition to these secured notes, the firm of W.A. Clark Bro., of Butte, held a note for $5,000, Sedenstocker's estate a note for $5,000, and the plaintiff the notes sued on here. In addition to these, a note was found in the bank for $5,000, in all respects like unto the four, but public accountant Lemert found data from which he was led to believe that this note was an attempted renewal of the Clark note, not accepted by that institution, and therefore advised that it be not included in the complaint.

During its period of operation, the firm issued checks upon the bank, signed for the firm by one or more of the appellants, totaling approximately $80,000, and checks signed for the firm by Wilcomb amounted to $1,431. The appellants received no statements of their account at the bank, never checked it up, and had only the most hazy idea of the financial history of the firm; they "figured that Wilcomb was taking care of the business absolutely." Linder testified that he knew nothing of the financial condition of the firm until in 1921 he visited the National Bank of Montana, when he was told by Mr. Marlow that his portion of the firm's indebtedness of $5,000 was not correct; that the indebtedness of the firm was in excess of $25,000. He then visited J.P. Darnutzer and they together went to Wilcomb for a statement, but were put off. He did not tell Wilcomb what he had heard, justifying himself with the statement that he was so deeply indebted to the bank that he did not want to get Wilcomb down on him. Asked what was the extent of his private indebtedness to the bank and that of a partnership consisting of himself and his brother, he demonstrated that he knew no more about his private affairs than he did about those of the firm; he answered, "Probably fifty or sixty thousand dollars, or seventy."

As to dealing in grain futures, it appears that in 1916 the firm sold grain for which it received approximately $1,500. Without regard to its financial standing at the bank, and in spite of the fact that the receipts from grain sales — all of which resulted in loss — were to be turned into the bank, the members of the firm took this sum and "invested" it in wheat margins on the Minneapolis Exchange; a winning of nearly $2,500 resulted, and this "profit" was divided among the members of the firm, and the $1,500 again "invested" in like manner. In this second venture one Marion Mountjoy, an employee of the bank, was permitted to share without contribution, and one Olson, an elevator operator, joined by putting $500 into the pool; the profits from this venture amounted to $5,759, which was again divided among the speculators, and no part thereof credited on the firm's indebtedness to the bank. The $1,500 was then "reinvested," resulting in a winning of $1,000, which was divided four ways, Olson having dropped out. Finally the $1,500 was lost, and with it went an indefinite sum, which was evidently covered by further notes to the bank. After this disastrous venture, according to Linder's testimony, Wilcomb intimated that he did not want the bank to know what had been going on, and did not like to have drafts of this nature coming through the bank; whereupon Linder told him that the speculators were still a little ahead on their gambling transactions and had better quit gambling. Carl N. Darnutzer was sick during all of this time and had no knowledge of what was going on, according to his testimony, and J.P. Darnutzer testified that he never had knowledge that notes were given for money used in playing the market.

Accountant Lemert's investigation disclosed that, during the firm's period of operations, notes were given to the bank totaling $160,000, and that between October, 1916, and April, 1920, the firm remitted by draft on the bank and to brokerage establishments in Minneapolis, a total of $129,813.27, and received return drafts and credits amounting to $79,306.25, all of which was credited on the books of the bank either to the firm or to members thereof, with the exception of $11,000, which he could not trace.

The notes in question were traced by the witness Lemert as renewals and renewals of renewal notes credited to the checking account of the firm, and the deposits thereby made were checked out by the firm on checks generally signed by Linder, heretofore mentioned.

In support of their contention that there is ample evidence in the record to have warranted a verdict in favor of appellants, counsel contend (1) that the record discloses an agreement between the members of the firm that no note should be executed by the firm except it be signed by all of the members, and that the bank had knowledge thereof; (2) that by its dealing with the bank over a long period of time, the firm established a custom within itself, known to the bank, requiring the signatures of all of the members to notes executed by it, and that, by the nature of its business, it was not necessary that the firm execute notes; (3) that the firm was a nontrading and noncommercial copartnership; (4) that neither the firm nor any of its members, other than Wilcomb, received consideration for the notes in suit; (5) that Wilcomb could not alone bind the firm; (6) that Wilcomb received the entire consideration for these notes for his own use and benefit; (7) that the firm did business with the bank, which institution had a regularly functioning board of directors which approved the loans of the firm, and, as Wilcomb was an officer of the bank and a member of its said board, knowledge secured by Wilcomb was imputable to the bank; (8) that the receiver paid nothing for the notes and took them after maturity; and (9) that the firm was dissolved prior to the date of the notes sued upon.

1. The assertion that the record discloses an agreement[3] between the members of the firm regarding the manner of executing the notes which was known to the bank, is based upon the following testimony: Linder and Darnutzer each testified that "Wilcomb said that the bank required the signatures of the different members of the Trout Creek Land Company, and he said he thought that it would be better that each of us sign the notes, and I said that was very satisfactory to me." It is not necessary to determine whether knowledge of this conversation by Wilcomb, as an officer of the bank, was imputable to the bank, for the reason that no agreement was established. It is true that the appellants on the stand attempted to testify that such an agreement was had, but they were required by the court to give the conversation from which they drew their conclusion, and from the evidence of what actually transpired it clearly appears that Wilcomb merely announced a custom or requirement of the bank for its benefit and which it could, if it saw fit, waive at any time. The testimony fell far short of establishing an agreement or of showing that any member of the firm then intended the conversation to constitute an agreement. (See Durlacher v.Frazer, 8 Wyo. 58, 80 Am. St. Rep. 918, 55 P. 306; Cogshall v. Pittsburg Roller Milling Co., 48 Kan. 480, 29 P. 591.)

2. Nor does the evidence establish a custom of the firm known[4] to the bank, requiring that all notes of the firm be signed by all of the members, for the record discloses notes, acknowledged as firm notes and paid or renewed as such, signed only by one or more members of the firm, or signed as were the notes in question and indorsed on the back by the individuals constituting the firm, while the appellants have no recollection as to how many of the notes of the firm were signed.

3. It is contended that the firm was a nontrading[5] copartnership. The question is important, as in such a partnership a partner has no implied power to borrow money and give firm mercantile paper therefor. (George on Partnership, 92.) "The test of the character of the partnership is buying and selling. If it buys and sells, it is commercial or trading; if it does not buy or sell, it is one of employment or occupation." (Lee v. Bank, 45 Kan. 8, 11 L.R.A. 238, 25 P. 196.) "The partnership must be in a trade or concern to which the issuing or transfer of bills is necessary or usual" (Chitty on Bills, 13th ed., 58), and although a firm may ordinarily come within the definition of a nontrading partnership, where the partnership engages in trading requiring capital and the use of credit, the rule as to nontrading partnerships does not apply. (Kimbro v.Bullitt, 22 How. 256, 16 L.Ed. 313; Daniels on Negotiable Instruments, 6th ed., 449.)

Here no question of fact arises; the facts are undisputed. They show that the firm engaged in buying and selling cattle, as well as in farming and selling grain, and that it required capital and the use of credit; in fact, it operated from the beginning on credit alone, and established a custom within itself long prior to the issuance of the notes in question. Whether the firm was a trading or nontrading partnership was but a question of law for the court. It appears that the issuance of negotiable paper was justified by custom and necessity of the firm as well as by the fact that the firm engaged in trading. (National StateCapital Bank v. Noyes, 62 N.H. 35.)

4. As the notes were traced back on the books of the bank as[6] renewals of notes, the proceeds of which were credited to the checking account of the firm, it is apparent that the bald statement made by the appellants, that neither as individuals nor as members of the firm did they receive any consideration for the notes, presents no issue requiring determination by the jury.

5. As the firm was a trading partnership, each member of the[7] firm was the agent for the partnership in the transaction of its business and had authority to do whatever was necessary to carry on such business in the ordinary manner, and for that purpose could bind the partnership by an agreement in writing (sec. 7997, Rev. Codes 1921), and notes executed by one of the partners for the benefit of the firm became partnership obligations, binding upon all of the members of the firm, in the absence of bad faith on the part of the contracting partner and, if bad faith existed, knowledge thereof on the part of the payee. (Sec. 7999, Rev. Codes 1921; Hefferlin v.Karlman, 29 Mont. 139, 74 P. 201.)

6. But it is contended that Wilcomb used the firm credit for[8] the purpose of playing the wheat market, without authority from the other members of the firm, and, in this, acted with bad faith toward his copartners. Even though this be admitted to be true, the borrowing was ostensibly authorized, and, if the bank was a bona fide lender, it was entitled to recover on the notes, even though the partner borrowing was actually obtaining the money for his own use. (Mechem on Partnership, sec. 258;Hayward v. French, 12 Gray (Mass.), 453.)

7. It is contended, however, that the bank was not a bona[9, 10] fide lender as Wilcomb had full knowledge of all the facts regarding the notes and their purpose, and, as Wilcomb acted as agent for the bank in the transaction, his knowledge was imputed to the bank. In passing, it may be said that the record clearly discloses that Wilcomb was superseded as managing agent of the bank three days before the notes were given, but, as the notes were renewals of other notes issued as far back as 1919, this fact may be disregarded.

It is the general rule that knowledge obtained by an officer of a bank while acting for the bank, is imputed to the bank, but knowledge obtained by such officer while acting, not on behalf of the corporation but for himself, or in a manner antagonistic to the corporation, is not imputable to it (Grosfield v. FirstNat. Bank, 73 Mont. 219, 236 P. 250), or, as stated in Fletcher's Cyc. Corporations, section 2248, knowledge acquired by an officer or agent of a corporation is not imputable to it when it is acquired concerning transactions in which the officer's interests are adverse to those of the corporation.

While in some jurisdictions it is held that, where but the single officer of the corporation transacts the business in hand with himself personally or for his firm, without the co-operation of any other officer of the corporation, his knowledge is imputable to the corporation (14a C.J. 442; Gila L. W. Co. v.Brown, 20 Ariz. 400, 181 P. 457; Taylor v. Felder,3 Ga. 287, 59 S.E. 844), there is respectable authority to the contrary (First Nat. Bank v. Foote, 12 Utah, 157, 42 P. 205; Bankof Overton v. Thompson, 118 Fed. 798, 56 C.C.A. 554; Gunster v. Scranton etc. Co., 181 Pa. 327, 59 Am. St. Rep. 650, 37 A. 550). But, whether the rule is sound or otherwise, here we go one step further: The record clearly discloses that Wilcomb's action in making loans and accepting notes did not close the transactions had for the firm; the loans were passed upon and approved by the board of directors. The reason for the rule above is that, where the officer in question is the sole representative of the corporation, there is no one to whom to impart his knowledge and no one from whom he may conceal it (First Nat.Bank of Blaine v. Blake (C.C.), 60 Fed. 78); but here, where there is a board of directors required to pass on the proposed loan, this reason fails. Under such circumstances it seems to be universally held that knowledge acquired by the president or cashier of a bank, as a member of a firm and not as a bank official, is not imputable to the bank. (Amarillo Nat. Bank v.Harrell (Tex.Civ.App.), 159 S.W. 858; Seixas v. Citizens'Bank, 38 La. Ann. 424; Atlantic State Bank v. Savery,82 N.Y. 291. See, also, Camden Safe Deposit Trust Co. v. Lord,67 N.J. Eq. 489, 58 A. 607; Smith v. Wallace Nat. Bank,27 Idaho, 441, 150 P. 21.)

Under the facts shown by the record, knowledge acquired by Wilcomb as a member of the firm was not imputable to the bank by reason of the fact that he was the managing agent of the bank, and there is therefore no evidence in the record which destroys the bona fides of the bank in making the loan.

This discussion also disposes of the assertion that Mountjoy, as an officer or employee of the bank, had knowledge of Wilcomb's actions; he was acting jointly with Wilcomb as a speculator and not on behalf of the bank.

8. That the receiver paid nothing for the notes and took them[11] after maturity does not affect the situation. The receiver was not a purchaser; he merely stepped into the shoes of the bank; his rights are those of the bank, no greater and no less. (Williams v. Johnson, 50 Mont. 7, Ann. Cas. 1916D, 595, 144 P. 768.)

9. It is lastly contended that the partnership was dissolved[12] and the firm had gone out of business prior to the execution of the notes sued upon. The utmost that the record shows is that, in 1920, for the purpose of producing the 1921 crop, the members of the partnership agreed to each furnish his share of the expenses from private funds. The acts of the partners at that time do not constitute dissolution in any manner prescribed in section 8009, Revised Codes of 1921, and, even though a dissolution had then been effected, the liability of the members for the acts of a partner continued, so far as the bank was concerned, until it had personal notice of the dissolution. (Sec. 8012, Rev. Codes 1921.) No such notice was shown. The appellants again rely merely upon the notice which Wilcomb acquired as a partner.

All questions necessary to a final determination of the case were merely questions of law, determinable upon the facts as presented to the trial court by counsel for the appellants, and there were therefore no material issues of facts for the determination of the jury, and the court was justified in directing a verdict. As it correctly determined the questions of law presented, the judgment must be affirmed.

Judgment affirmed.

Affirmed.

JUSTICES GALEN and STARK, HONORABLE C.W. POMEROY, District Judge, sitting in place of MR. CHIEF JUSTICE CALLAWAY, disqualified, and HONORABLE THEODORE LENTZ, District Judge, sitting in place of MR. JUSTICE HOLLOWAY, absent on account of illness, concur.