First Tennessee Production Credit Ass'n v. Davis

OPINION

O’BRIEN, Justice.

This action originated in the Chancery. Court for Lauderdale County as a suit by First Tennessee Production Credit Association on a series of promissory notes against the defendant Bill Davis. Davis filed a counter complaint against the plaintiff alleging that it was indebted to him. The Chancellor entered a judgment for Davis from which the Credit Association appealed. The Court of Appeals for the Western Section found the Chancellor in error, dismissed the cross-complaint, and awarded the Credit Association a judgment in the amount of $21,903.21. This Court concluded the ruling of the Court of Appeals was premised on the wrong basis and granted an appeal. We now reverse the judgment of that court and reinstate the judgment of the Chancery Court.

The chronology of events leading up to this litigation is simply stated. In 1977 the defendant Bill Davis entered into a formal written partnership agreement with his brother A.R. (Bob) Davis for the continuation of a farming operation they had been conducting for some years under the name of B & B Farms. Bob Davis was a professional farmer who, in a separate operation, was farming between 700 and 1,000 acres in row crops and produce, specifically tomatoes, principally on leased or rented land. The tomato farming was operated on a 173 acre farm owned by Bob Davis and his mother who had a one-third interest in the property. B & B Farms was engaged exclusively in tomato farming on the 173 acre tract. On 10 February 1977 B & B Farms borrowed $29,500 from the Production Credit Association on a demand note. On 19 June 1979 another note was signed for $14,740. Apparently some or all of this money was kept on deposit with the Credit Association and drawn upon by B & B Farms for partnership operations. On 1 May, 1981, after various withdrawals and credits on the B & B Farms account there was a balance of $31,740.87 due on the principal and accrued interest. On that date the individual debt of A.R. (Bob) Davis to the Credit Association was $175,000. Production Credit called upon him for additional security and took a deed of trust for the one-third interest his mother owned in the 173 acre farm. They then granted him an additional line of credit which by June of 1981 totaled $286,000. Although there is some dispute in the evidence about the issue, there is no doubt that the Production Credit Association was fully cognizant that Bob Davis’ farming enterprise and B & B Farms were two separate entities. The partnership agreement had been drafted by their attorney and a copy of it retained in their files since 1977. One of the withdrawals from Bob Davis’ separate account in the sum of $10,000 had been applied, with their approval if not at their request, to defray the interest and a small amount of the principal on the B & B Farm account. In July 1981 when the tomato crop was coming in Bill Davis was in Indianapolis, Indiana, attending to the marketing of the tomatoes. Bob Davis was operating the farm and overseeing the gathering and shipping of the crop to the various markets. During this interval he received a number of checks made payable to the order of B & B Farms which he endorsed and turned over to the Production Credit Association. Five checks totaling $21,106.80 were credited to his individual account. Two of these were endorsed “B & B Farms by Bob Davis.” The other three were signed by him “B & B Farms.” During the same interval Bob Davis gave two checks drawn on the B & B Farms’ account, total-ling $18,000, which was applied on his separate account. Another check drawn to the order of “Bob Davis B & B Farms” in the sum of $2,194.50 was also applied to his individual account. There is no dispute about the application of these two sums. Subsequently an insurance check payable to B & B Farms in the amount of $8,475.71 was applied to the partnership debt with $1,000 going to interest and $7,475.71 applied on principal. In 1982 Bob Davis filed a petition in bankruptcy which was not settled until the end of 1983 when he was discharged in bankruptcy. In January 1984 two trucks were sold at auction for the sum of $11,950 and the proceeds applied to the B & B debt.

The Chancellor found that Bob Davis as an individual farmer and B & B Farms were separate entities which obtained loans from Production Credit Association and in March of 1981 the Association requested additional security from Bob Davis to avoid foreclosure. It was his view that Bill Davis was not responsible in any way for the Bob Davis bankruptcy and was not liable to Production Credit beyond his interest as a one-third partner in B & B Farms. He found that Bob Davis did not deliver any instructions to the Production Credit Association in reference to the application of the proceeds of the checks made payable to B & B Farms and that the association automatically and arbitrarily applied the proceeds of these checks in payment on the personal note of Bob Davis. He found that the various sums received by the plaintiff and applied to the B & B Farm account resulted in an overpayment to Production Credit Association of $9,791.64 which, with adjustments for interest, amounted to an excess of $9,999 and that Bill Davis was entitled to a refund of one-third of that amount.

We are of the opinion that the Chancellor reached the right result. We are satisfied with the calculations upon which he based his judgment for Bill Davis.

Based primarily on the foregoing facts the Court of Appeals ruled that allocation of payments by Production Credit Association was proper under the provisions of the Uniform Partnership Act, T.C.A. § 61-l-108(a), which reads as follows:

Agency of partners. — (a) Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member, binds the partnership unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.

It seems to us that if Bob Davis was acting as an agent of the partnership for the purpose of its business and endorsed the checks made payable to B & B Farms for the purpose of carrying on in the usual way the business of the partnership the Credit Association had no right to apply the proceeds of the checks to his individual account. It is conceded by the Production Credit Association that Bob Davis did not give any instruction to any of its representatives regarding the application of the proceeds of the checks made payable to B & B Farms.

The Court of Appeals also considered the provisions of T.C.A. § 47-3-110(l)(g) of the Uniform Commercial Code which defines an instrument payable to order and provides in the specified sub-paragraph that it may be payable to the order of a partnership ..., in which case it may be endorsed or transferred by any person thereto authorized. This too is a sound principle of law which is not applicable to the circumstances of this case since it merely defines an order instrument and sets out the manner in which it may be negotiated in the ordinary course of business.

The law governing the issue we are involved with here has been of record in the case reports since near the origin of Tennessee as a state and undoubtedly beyond. In Jones’ Case, 1 Tenn. 455, 456 (1809) the Court held that a partner cannot charge his private debt to the firm without the consent of his partners. This rule has been followed in an unbroken succession of cases since that time. Crouch v. Bowman, 22 Tenn. 209, 212 (1842); Foster v. Hall, 23 Tenn. 346, 354 (1843); Scott, Baker & Co. v. Bandy, 39 Tenn. 198, 199 (1858); Venable & Co. v. Levick, Brother & Co., 39 Tenn. 351 (1859); Bancroft Beaver and Company v. Snodgrass, 41 Tenn. 430, 436 (1860); Union and Planters’ Bank of Memphis v. Day, 59 Tenn. 413, 414 (1872); Gavin v. Walker, 82 Tenn. 643, 645 (1885); Rogers v. Betterton & Co., 93 Tenn. 630, 27 S.W. 1017 (1894); Bank of Bellbuckle v. Mason, 139 Tenn. 659, 666, 202 S.W. 931 (1917). The Uniform Partnership Act by Chapter 140 of the Acts of 1917 did not alter the rule stated in the foregoing cases, nor has any subsequent legislation or case law.

The judgment of the Court of Appeals against Bill Davis is set aside and reversed. The judgment in his favor in the Chancery Court is affirmed. Interest upon that sum is awarded him from and after the date of the filing of his cross-complaint against the plaintiff. The case is remanded to the trial court for enforcement of this judgment. Costs against the original plaintiff.

HARBISON, C.J., and COOPER and DROWOTA, JJ. FONES, J., files separate concurring opinion.