
    Edward La Montagne, Jr., and Others, Respondents, v. The Bank of New York, National Banking Association, Appellant.
    
      Limited partnership — liability of a bank, in which the amount contributed by the special partner is deposited the day before the certificate is filed, and is on that day withdrawn by one of the general partners to pay a debt of a firm whose assets are taken over by the limited partnership — such withdrawal is not a misappropriation of the fund—who may sue therefor — liability of the limited partnership for the ■ debts of the prior firm—pleading the existence of such debts — truth of the certificate as to the limited partnership determined as of the date of its filing.
    
    An agreement for the formation of ¿limited partnership provided that the special partner should contribute §200,000 to the capital, and the general partners, who were then in business, should contribute §100,000; that the contribution of the general partners should consist of the property, assets and good will of the business formerly conducted by them.
    The partnership agreement and the certificate which the statute (1 B. S. 764, §§ 4, 6) directs shall be filed with and recorded by the county clerk when a limited partnership is formed, were executed June 22, 1892, and provided that the partnership business should commence June 23, 1892, and continue for a period of ten years. The certificate in question was not filed until June 23, 1892.
    The special partner paid his contribution on June 22, 1892, and it was deposited to the credit of the special partnership in a bank in which the old firm had a running account. At the time of the deposit the bank was informed that the statutory certificate would not be filed until the next day.
    On the afternoon of June 22, 1892, one of the general partners drew a check for §60,000 against the account of the special partnership and deposited it to the credit of the old firm. The sum so deposited was applied in satisfaction of the debts of the old firm; the new firm made no objection to this check for §60,000 when returned as a proper charge against its account.
    In an action brought by the general partners of the limited partnership (the new firm) against the bank to recover the sum of $60,000, on the theory that the bank was indebted to the special partnership in that sum, it was
    
      
      Held, that the special partnership was responsible for the payment of the debts of the old firm, to the extent, at least, of the amount which it realized from the. assets of the old firm which had been transferred to it;
    That the use of the §60,000 check in payment of the obligations of the old firm prior to the filing of the certificate of the formation of the special partnership did not constitute a misappropriation of the funds of the special partnership and did not render the bank liable to the special partnership for that sum;
    That the defendant was entitled to prove under the defense of payment, that the §60,000 had been applied in satisfaction of obligations for which the special partnership was liable and was not obliged to separately plead that fact;
    That the truth of the certificate of the formation of the special partnership should be determined as of the time that it was filed with the county clerk;
    . that if at that time it was true, and the- special partner had actually paid the money to the general partners so as to part with all control over it, the certificate fulfilled the purpose for which the law was enacted;
    That the fact that at the time the certificate was filed §60,000 of the funds contributed by the special partner'had. been used to pay the debts of the old firm, did not render untrue the statement in the certificate as to the amount which the special partner had contributed to the capital of the special partnership and render the special partner liable as a general partner.
    
      Semble, that, assuming that the bank was liable, the special partnership might maintain an action to recover the fund in question, even though one of the general partners was an active participant in the transaction by which the fund had been diverted.
    Yan Brunt, P. J., and Hatch, J., dissented impart.
    Appeal by the defendant, The Bank of New York, National Banking Association, frdm a judgment of the Supreme Court in favor of the plaintiffs, entered in the office of the clerk of the county of New York on the 22d day of June, 1903, upon the report of a referee.
    
      Wheeler EL. Peohham, for the appellant.
    
      A. O. Brown, for the respondents.
   Ingraham, J.:

The facts in this case are stated in the opinion of Mr. Justice Hatch, in which in the main I concur. I do not, however, agree with him so far as he holds that any use by the general partners of the capital contributed by the special partners after its actual payment to the general partners, but before filing the certificate, would make the special partner liable as a general partner, or render the statement contained in the certificate, that the contribution of the special partner had been fully paid in cash, untrue. Undoubtedly the truth of the certificate is to be determined as of the time of its being filed with the county clerk; but if then true, it fulfilled the purpose for which the law was enacted. (White v. Eiseman, 134 N. Y. 101.) If at the time the certificate was executed and filed the special partner had actually paid the money to the general partners, so as to part with all control over it, the statute was complied with. (Durant v. Abendroth, 69 N. Y. 148.) The certificate which was required to be filed with and recorded by the county clerk, provided for by the Revised Statutes (1 R. S. 764, §§ 4, 6) which were in force at the time this partnership was formed, must state the amount of the capital which each special partner shall have contributed to the common stock, and section 8 (1 R. S. 765) provided that if any false statement be made in such certificate all persons interested in such partnership shall be liable for all engagements thereof, as general partners. The certificate .is not required to contain a statement that the amount of capital which the special partners have contributed remains intact in the hands of the general partners at the time the certificate is filed; and where a special partner has in good faith paid to the general partners the money which he is to contribute to the partnership in cash so that he has no further control over it, and the amount that he has so contributed is correctly stated in the certificate, the statute is complied with, and the special partner is not responsible for any act of the general partners in relation to the money after he has actually paid it to the general partners. (Metropolitan National Bank of N. Y. v. Sirret, 97 N. Y. 320.) Having once actually and in good faith paid to the general partners the amount of cash which he was to contribute to the partnership, any interference with that money by the special partner is expressly prohibited by the statute and such an interference would make the special partner liable as a general partner. (1 R. S. 766, § 17, as amd. by Laws of 1857, chap. 414.)

Take a case where the special partner actually paid to the general partners his contribution in cash upon the day that the copartnership articles were executed and the certificate actually signed, and the general partners in good faith, without the knowledge or consent of the special partner, on the day of its receipt applied a part of the contribution of the special partner in the purchase of a warehouse in which, or other property with which to conduct their business which was to commence on the following.day, such a use by the general partners of the contribution of the special partner would not be a violation of the statute, making the certificate whene it was filed on the following day a false certificate, and making the special partner liable as a general partner. And this is, it seems to me, what was done in this case. Prior to the organization of this special' partnership, the general partners had been conducting a business in the city of New York. A special partnership was formed to take over that business and to carry it on, and the contribution of capita,! by the special partner was made for that purpose. On the 22d day of June, 1892, the copartnership articles were executed. They provided that the limited partnership should begin on the 23d day of June, 1892; that the special partner should contribute as his share of the capital of the limited copartnership the sum of $200,000; that the members of the old firm should contribute to the capital stock of such copartnership the sum of $100,000, which should be so contributed by transferring to said limited copartnership all of the property, assets and good will of the former copartnership of La Montagne, Clarke & Co.; that the old firm covenanted that such property and assets so transferred by them were worth, and within one year would yield in cash, over all the liabilities of the old firm, the sum of $100,000. On that day the certificate required by the statute to be filed was executed, and at the time these copartnership articles and certificate were executed the special partner actually paid to the general partners the sum of $200,0001 The whole- capital of the new firm was to consist of the $200,000 contributed by the special partner and the assets of the old firm contributed by the general partners; and on June twenty-second after these papers had been executed, the contribution by the special partner was deposited in the defendant bank to the credit of the new copartnership. It was proved that it was stated to the officer of the bank at the time of the deposit that the firm was not to commence business until the following day, when the certificate would be filed ; but there was no restriction upon the general partners, or the new firm which prevented a withdrawal of that deposit from the bank, upon the. same day on which it was deposited or before the new firm did business.

By the deposit there was created the relation of debtor and creditor between the bank and the new firm, and the bank was bound to honor the drafts of the new firm upon it to the extent of the deposit. By the execution of these copartnership articles the new firm became the owner of the assets of the old firm as transferee of the assets of the old firm, and the new firm was responsible for the payment of the debts of the old firm to the extent, at any rate, of the amount that it had received of the assets of the old firm. To protect those assets it was essential that the debts of the old firm should be paid, and there is no allegation that the assets of the old firm were not more than sufficient to pay its obligations and furnish the capital which the general partners were bound to contribute by a transfer of the assets of the old firm to the new, and to protect those assets the members of the new firm had the right to apply the capital contributed by the special partner as his contribution to the new firm. Neither the defendant bank nor the special partner was liable for any misappropriation of the special capital so contributed by the general partners, if there had been a misappropriation ; but the evidence in this case, as I view it, is undisputed that there was no such misappropriation. They applied a portion of the capital contributed to the new firm to the payment of the debts of the old firm, as they were bound to ’do as assignees of the assets of the old firm; and as a result of such a payment they acquired the assets of the old firm, discharged from the obligation to pay that sum. When, therefore, they withdrew from the account of the new firm the sum of $60,000 and deposited it to the credit of the old firm, to meet in part an indebtedness of the old firm to the defendant bank on the afternoon of June 22,1892, and subsequently applied the balance thus deposited to the credit of the old firm in meeting the obligations of the old firm, there was no misappropriation of the capital contributed, but, on the contrary, a payment by the new firm on account of an indebtedness of the old firm and which discharged the assets which they received from the old firm from the obligation to pay .such indebtedness. The evidence is . undisputed that this new firm subsequently received all of the assets of the old firm, paid all its obligations, and continued the business with the capital and assets that it had received from the old firm to August 11, 1893, when it was found that the new firm had become insolvent, and that all of this $60,000 was used in paying the indebtedness of the old firm. The account of the old firm shows that this deposit of $60,000 was made on June twenty-second, leaving a balance due the old firm, after paying the drafts presented to the bank during the day, of $9,406.21, and this balance was subsequently drawn out of that account by the old firm, and the account was finally balanced and closed. The referee has found, and it is not disputed, that the bank acted in good faith in the usual course of business in paying these checks drawn upon it by its depositors; and in all the transactions there is not the slightest evidence to show that this capital contributed by the special partner was used for any other purpose than in paying the debts of the old firm, and which the new firm was bound to pay if it received the assets of the old firm, and that it was with the assets of the old firm that the business was transacted that the new firm was organized to conduct. Upon no principle can this defendant be liable to the new firm, or to its surviving partners, for the deposit that it received on the twenty-second of June to the credit of the new firm, and which it has paid out upon checks of the new firm.

It is true that the limited copartnership was to commence on the twenty-third day of June and to continue for ten years; and that fact was stated in the certificate which was duly filed on the morning of June twenty-third. Assuming that notice of that fact was given to the bank when the deposit of $200,000 was made, I can see no authority for holding that such a notice tied up that, deposit until the special copartnership had been actually performed. I assume that if, for. any reason, the certificate had not been -filed on the following day, somebody would have been entitled to this, money, and the bank-would not have been justified in refusing to-pay it out upon a check signed by the firm in whose name it was deposited. The bank owed these individuals who had associated themselves together to carry on this business. When the deposit was made there was no limitation of the power of the depositors to withdraw the amount to. their credit in the- bank, and when they drew that amount to pay an indebtedness of the old firm, the assets of which had been transferred to the new'firm, the new firm certainly could not recover the amount so paid from the creditors upon the ground that it was a misappropriation of the capital of the new firm; and the fact that such a sum had been paid the night before the new firm was to commence business could not at all affect the question.

The rule that property or money of a copartnership cannot be given to discharge the individual indebtedness of one copartner or for any other than copartnership purposes has no application to this case, for here the money that was paid was to discharge the indebtedness of the old firm, whose assets had been transferred to the new firm, and whose successor in business the new firm was. Assuming that on the morning of the twenty-third of June this deposit of $60,000 to the credit of the old firm had not been made, and that the old firm was indebted to the bank in the sum of $60,000 for overdrafts which the bank had paid, on the morning of June twenty-third, when the new firm took over, under the copartnership agreement, all of the assets of the old firm and applied them to its own use, the new firm would have been bound to pay to the bank the amount of the indebtedness of the old firm. If it would, then the fact that there was a credit on the books of the bank to the old firm and a debit on the accounts of the new firm on the night of the twenty-second could not affect the rights of either of the parties. The new firm ratified the act of the bank in accepting the check on the twenty-third of June by acquiescing in the balancing of the account of the new firm in the bank in which'the check for $60,000 was charged as a debit and was returned to the new firm as a proper charge upon its account. If the bank was entitled to demand of the new firm the payment of the old firm’s indebtedness to it on the twenty-third day of June, the fact that the members of the new firm paid the debt to the bank on the dajr before, and that the new firm subsequently ratified that act by receiving without objection the voucher for that payment which had been charged to the new firm in the account of the bank, discharged the bank from any obligation to the firm for the money of the new firm which it had received and applied to the payment of an indebtedness for which the new firm was liable. The new firm got all the benefit of this payment. It received the assets of the old firm, discharged from its obligations to pay the indebtedness to the defendant, and, having received the benefit of the payment, it is precluded, while retaining that benefit,>jfroflii>Lque§tiqning.i.thet.:;validity, -of that payment,. ., , . , ... .......... . t I agree with Mr. Justice Hatch that, under the pleadings, the - defendant, was entitled to. prove this defense, anffthat, it was error for the referee to. hpld that, to be available,, thin defense must be , separately pleaded. I do Hot agree, however,, that ¿upon this record there isj no proof that the ¡balance of this check for. $p0,p00> after payment of the amount due the defendant, on June twenty- ,, second, was applied to the indebtedness pf the old.firm.. On the . contrary, it appeared from the account between the. bank and. the old firm^ introduced in evidence by the plaintiffs, that on the twenty-second and twentydhird of J¡une thejiank, hafl. paid [put on checks of the old firm an amount which, after crediting the old firm, with this $60,000, left it indebted to the bank ,on. July, twenty^ , rourth in the sum of..$351A8,. which was made good .by.the dpposit on that day pf another check of the new firm for that amount and then the account was- closed. This proof being ..offered, by the:.,, plaintiffs, it was sufficient to show that the bank had».paid.,puf.pn.,; account of .and on the order of the, old firm, an amount .exceeding the sum of $60,000 that ¡was .deposited. by the firm tp the cred.it ..qf, ,. ■the old firm on the" night pf , Jpne;. twenty-second..- Upon the undis- , puted facts, therefore,think-the plaintiffs failed to-..establish any , cause of action against the ,defendant, and that the. defendant was entitled to judgment, and in this state qf the record it.spems to be ; unnecessary to. send the case, back for a neve trial.. ", ,

-The . judgment should, therefore, be reversed _and,_judgment, y directed for the defendant dismissing the complaint, with posts in this court .and in the court below., . . ._

O’Bbién and McLaughlin,' JJ., cóhcurred-'yYÁN-UBüNT/P. J., and Hatch, J., dissented. • ■ J' ..... - -■

Hatoh, J.

(dissenting) :

This is an action at law, brought by the general partners, of a limited partnership against the defendant,t a national, banking association, to recover the sum of $60,000 alleged to be due from the defendant as a balance of deposits made by the plaintiffs. The facts are as follows: On and prior to June 22,1892, three of the plaintiffs,. Edward La Montague, Jr., Herman Clarke and Wallace B. Smith

were carrying on business, as brokers, under the firm name of La Montague, Clarke & Co. On the 22d of June, 1892, the three plaintiffs above named together with Elisha M. Fulton, Sr., and Elisha M. Fulton, Jr., entered into written articles of copartnership for. the .formation of a limited partnership under the laws of the State of New York to do a general brokerage business. ' The articles recited the facts that the members of the. old firm, together with Fulton,, Jr., were to be general partners, and Fulton, Sr., a special partner; that the limited partnership should, begin upon the 23d day of June, 1892,. and unless sooner dissolved would continue for the term of ten years; that the special partner, should.contribute as his share of the capital of the limited partnership $20.0,000; that the partners La Montague, Clarke and Smith should contribute to the capital of such limited partnership the sum.of $10.0,000. which should be so contributed by transferring to said limited partnership all of the .property, assets and good will of the former partnership of La Montagne,. Clarke & Co., and in these articles ..the three members of the old firm covenanted that such property and assets,.so transferred by them, were worth, and within one year would .yield in cash, over all the liabilities of the old firm the sum of $100,000» On the same day all the partners of the new firm united in a certifi-. cote as required by the laws of .the State of New York to form a limited partnership; that the same would commence upon the 23.d. day of June, 1892, and terminate upon the 1st day of July, 1902. Elisha M. Fulton, Jr., also, made an affidavit upon the same day, which was filed with the. certificate, that the sum of $200,000, specified in said certificate to have been contributed by Elisha M. Fulton, Sr., had actually been paid in in cash. Upon the same day all the partners of the new firm.met. at the office of the old. firm,. which office was thereafter to be. the office of the new firm, and Elisha M. Fulton, Sr., the special partner, delivered his certified check for $200,000, payable to the order of La Montagne, Clarke & Co. to Mr. Clarke, who indorsed it “ for deposit ” and signed the firm name thereto. Thereafter and about two o’clock in the afternoon of this, day Clarke and Fulton, Jr., went to the banking house of the defendant, taking the certified check with them, and they there had an interview with Mr. Mason, the cashier. The old firm had a running account at the bank and Mr. Clarke introduced Mr. Fulton, Jr., to the cashier as a new member of the firm, arid said to Mr. Mason that the $200,000 check was the capital of the special partner, Mr. Fulton’s father. An account was then and there opened' with the new firm by depositing the check to its credit, and the cashier informed one of the bookkeepers that the new firm was to take the place of the old firm and that the latter’s account would be eventually closed out. The signature book was then brought in and Mr. Fulton, Jr., signed therein the firm and his name also. Mr. Fulton, Jr., then said to Mr. Mason that they were making the deposit that day, although the firm did not expect to commence business until two or three days thereafter; that they had'just signed the papers, but that the certificate could not be filed until the next day, as it was too late, and the firm really would not commence to do business until several days thereafter. Mr. Fulton, Jr., also told Mr. Mason that he was going in as a general partner, but that his father, whose check they had just deposited, was to be merely a special partner. At the close of the banking business upon the same day,June 22, 1892, the old firm had overdrawn its account $50,593.79, and a messenger from the bank was sent to the place of business of the old firm, who notified the firm to make good its account. Thereupon one of the general partners of the new firm, other than Fulton, Jr., drew a check upon the new firm for $60,000, which was sent to the bank with a deposit slip, made out by the general partner Smith, and a deposit made of it to the credit of the old firm, thereby giving the old firm a- balance on hand in its account of $9,406.21. In August, 1893, the new firm made an assignment of all its assets to the plaintiff Fulton, Jr., in trust, to collect the same and pay the debts of the firm, and in such assignment they authorized him in such collection to use the name of the firm and to maintain and continue the bank account in the name of the firm, and otherwise to absolutely control the same. The account was finally' closed on October 16, 1893; the pass book had been balanced and vouchers returned therewith by the bank fifteen different times between the time of opening and closing the acount. The $60,000 check was not found by the plaintiff, Fulton, Jr., with any of the returned vouchers, although it was shown to have been returned, and Fulton, Jr., did not learn of the giving of the $60,000 check until several years after he had closed the account. After .lune 22, 1892, the account of the old firm was carried for three days and was then closed, the balance being checked out.

The principal question between the parties hereto is whether the defendant bank is entitled to credit for the $60,000 paid to it upon the 22d day of June, 1892, and deposited to the credit of the old firm of Clarke, La Montagne & Co., under the circumstances above stated. The learned referee found that the bank was not entitled to such credit and found in favor of the plaintiffs, and from the judgment entered thereon this appeal is taken.

We agree with the learned referee that the bank was chargeable with notice of the fact that the certificate for the formation of the limited partnership would not be filed until the day after the deposit of the $200,000 check, made by the' special partner, and having notice of such fact, the bank was not authorized to pay out either upon the order of the special partnership or any member of it the moneys on deposit to the credit of the special partnership, in the absence of the assent of the special partner to such act. The bank was chargeable with notice of the fact that any depletion of the fund, of $200,000, contributed by the special partner prior to the filing of the certificate, would have the effect of rendering the statement contained therein, that the contribution in cash by the special partner had been fully paid in in cash, untrue, and, as a consequence, its legal effect would be to make the special partner liable as a general partner for the payment of the firm debts. The law in relation to limited partnerships as it existed at the time of this transaction (2 R. S. [9th ed.] 1845, § 8) provided thát “If any false statement be made in such certificate or affidavit, all the persons interested in such partnership shall be liable for all the engagements thereof as general partners.” The interpretation which the courts have placed upon this statute is that the statement, must be true at the.time when the certificate and affidavit are filed. ( White v. JEiseman, 134 N. Y. 101.) The legal effect which flowed from the transaction by which the fund was depleted to the extent of $60,000 was to make the special partner liable as a general partner for the firm debts. All persons taking part in the depletion of this fund without the knowledge or consent of the special partner did so at the peril not only of making good the fund to the extent the depletion, buhalso liable for "such damages to the special partner as fiowedrfr:dnr the. act: ■x If,- therefore, this case is to be considered as one in the interest of'the" Special partner solely to make good the- depletion of the' fnrid; :or to charge the bank with' liability for damages Sustained’"by the "spécial" partner in cónséqúe’nc'é 'of the diversion of a part'of the deposit, the' judgment is clearly right, as the bank riot only ha'd notice of the character "of the''deposit arid the purpose'"for which it was placed in its hands, "but- "It also" had notice that, it must remain intact until the certificate and -affidavit required by law were "filed. (See 2 R. S. [9th ed.] 1844, 1845, §§ 4-8:)' Having 'shch' notice of the' legal1 "results which flowed •from a diverson of -the fund, the payment Operated ás a fraud upon the special partner,-'.and the consequences for’such act would be propeidychargeable upon the-'bank 'in paylngthe check. Wé also agree-with the learned'-referee^ and fór tire reasons assigned by hirii,

that the‘special partnership" has- ‘a’ •right' to “maintain an action for- a diversion ofr this'l-un# ih' its name, even" though 'one of the general partners was ah -active5 participant iii"the: transaction by which the deposit was'depleted. ' «The 'Cases cited 'by-thedéárnéd referee sup-. port his conclusion1 in this respect. f " ’

We also agree that'theproperty of 'the firm’coúld’ not be' used for-the payment Of'individual debts of' the 'general partners of the old'- firmi p If this action,'therefore, is 'to 'bé' treated o's one' to recover, based solely upon "a 'diversion of the moneys deposited by the' special pártner,''tlisássO'eia'ted from any other act ‘or transaction had between the tw© firmspand'the nroiicywas' diverted and -used for the payment Of debts of individual-members''of the old firm, and not of the débts'or ‘obligations ’of> 'the'' special partnership, then, we- think, the actiOri'was'projlefly brought iri the- names"of the special partners, arid a recovery'therehnderwotild'be "'easily sustained. Such, however; as -we "View it is:!;hot tbihíactión; The cbm plaint herein avers : First, that Elisha M. Fulton;"Sr., became With La Montague, Clarke & Co. the plairitifis, copartners in a limited copartnership, pursuant to the laws New York, Elisha M. Fulton Sr., being the special partner ai#; ¡the -others' generaL partners"sScórid, that such'limitód partnership carried on a'stock'brokerage business from the 23d -day of Time, 4892;'to'the'Ltb''d'ay'''df'G'ctóber,n1893f when it: -was dissolved by •Miitual conséñ'baád iño-aeco'rdán'oe With tile fetatuté in such case made and provided; thvrd, that * during the existence of such copartnership, the defendant was a banking corporatian, Organized and. existing under the laws’ of"the'" United States; fourth-, -that ion- the 23d day ’of June,": 1892', "’the' defendant was indebted-to, the - copartnership in the sum of $200,000 for 'moneys collected and received by it upon a "Certified'" Check of tlié'bpecial partner, which was-deposited'with, the def efidant ■ to the'credit of such partnership ^ fifth, that between" the 23d"'day "of ’ June; 1892, and. the close of - business- on the 16th day-of’ October, 1893, “the defendant bad received for ''the' Usó of ’Said"limited:"partnership a given sum of money"; sixth, tbat'betweefi the aforementioned dales "the defendant" paid to'"the order Of the limited partnership" on its checks or orders a given" suin' Of mtiney; ’seventh, that Oil the close of business on the l"6th "day of October, Í893," the defendant was indebted" tó the limited partnership In the sum Of $60,000 up'on a balance in its favor of the moneys-specified in paragraphs "Nos. 4, 5 'and 6" of the complaint,' and that the same' remains due and unpaid.- The "complaint demands judgment for 'this süm," with interest thereon from the 16th day of October,’ 1893. '" r""

It is apparent, therefore, "that" the cause of - action set' forth in this complaint is one- at law"fOr the recovery of "a debt dueUi-om the defendant to. the limited" partnership as stibh.'" " There is" not a suggestion ln;the complaint that the plaintiffs wete insolvent at tíie time the action- was brought, orprior or subsequent "thereto. There is hot a suggestion that-thespecial partner "haS suffered any loss on account of any transaction alleged - ifi' the "complaint, "Or that be has been charged with" any greater liability than such as lié assumed" as the special partner of the firm. " Upon the pléading, "therefore, we come to consider This’causé of action" as* resting in the right of the plaintiffs as general- partners, and for the benefit off the special" partnership to recover a "debt due by the "déféhdant to such" partnership. The answer in tobsta,uce>aud effect avers"páymeiít of the $60,000 to

the partnership. The issue is, therefore,,of debt and payment,"

; The plaintiffs proved, in order to "establish their cause of" action, the articles of Copartnership "which were entered into and which formed = "the"-basis-in establishment of the limited'partners'hip. These articles '■•provided, as the referee found, that fthe'special partner should contribute" as his special "Capital the sum of $200,000; that La Montagne, Clarke & Co. should contribute $100,000 in specified proportions; .that the said sum of $100,000 so to be contributed by these general partners'was to be made by transferring to such limited partnership all the property, assets and good will of the general copartnerships, composed of La Montagne, Clarke and Smith, then existing and doing a brokerage business under the firm name of La Montagne, Clarke & Co. It seems to have been the view of the learned referee that as the special partnership was to take over all of the property of the old firm of La Montagne, Clarke & Co. that its effect was to impose upon the special partnership the obligation of paying the debts of the old firm, and such, undoubtedly, is the law. (Arnold v. Nichols, 64 N. Y. 117.) The assets of the old being transferred to the new firm, the same principle applies as obtains between creditors of the firm and the surviving partners, the property in all such cases being made liable for the payment of debts. (Adams & Co. v. Albert, 155 N. Y. 356; Bush Co. [Ltd.] v. Gibbons, 87 App. Div. 576.) There is no evidence in the present case which shows, or tends to show that the old firm was insolvent, and the evidence, it seems to us, was sufficient for the court to find that the assets of the old firm equaled its debts and liabilities, and in the absence of proof to the contrary, or controlling authority, we should be disposed to hold that the assets of the old firm were enough to discharge its debts and liabilities and produce a surplus to the amount of the contribution of the general partners. But however this may be, it is clear as a legal conclusion that when the new firm took over all of the assets of the old, it took them cum onere, chargeable with the payment of the debts and obligations of the ol(d firm. That the new firm recognized this liability is made' to appear from the fact that it subsequently paid, the debts and obligations of the old firm, due and owing to this defendant, as it paid all of the obligations to it and took. over from it the collateral which it held as security for some, at least, of the indebtedness, and finally closed out the account by giving a check for the balance found to be due the defendant from the old firm. It is undisputed that upon the day of the transfer of the $60,000 from the new firm to the credit of the old, the indebtedness then due and owing by the old 'firm to the defendant was $50,593.79. This debt to this extent was a demand -held by the defendant against the old firm, which it could have enforced by action against the new firm on the day that the latter filed the certificate and affidavit constituting the special partnership. It was an indebtedness which the new firm was obligated to pay by the terms of the agreement which it had made, and the transfer of the $60,000 discharged such debt. As the obligation to pay this debt was assumed by the new firm, and as it was in fact discharged by the defendant, as having been paid by the check which it received, may it make the discharge of such obligation operate as a payment in answer to an action against it for debt ? The learned referee in his opinion briefly considered this subject in these words: The question is, has the bank discharged its obligation to pay out the moneys deposited by the new firm on its order. If it has not, it cannot justify the payments. If in fact the payments irregularly or improperly made inured to the benefit of the depositor, this may be an equitable defense; that is, .the defendant may perhaps show that by its breach of contract the plaintiffs sustained no damage. (Shipman v. Bank, 120 N. Y. 331-333.) No such equitable defense is set up in the answer. No attempt is made to prove it.” That the plaintiffs had the benefit of this sum of money to the extent of the obligation then existing in favor of the bank is a conceded fact in the case. That the defendant discharged the obligation which it held and for which the new firm was liable is undisputed. The legal liability resting upon the new firm to pay was established by the plaintiffs the moment they introduced the articles of the special partnership in evidence, and whatever legal results flowed therefrom as constituting a defense to this action for debt, the defendant is entitled to its benefit. (Looby v. Village, of West Troy, 24 Hun, 18.) It was, therefore,' proved by the plaintiff that the defendant was entitled in answer to the claim of debt asserted against it to the benefit of the proof which the plaintiffs made, and this without regard" to the state of the pleadings. It must, therefore, be regarded as established that the defendant applied for the benefit of the plaintiffs moneys in discharge of an obligation for which the plaintiffs were liable, and in an action for debt to recover back that sum of money we are of opinion that the proof as given by the plaintiffs in the case entitled the defendant to be credited therefor as a payment made for and on áceoiint' of thé plaintiffs," arid this without regard tó the "technical ’question of pleading, as the fact’ having been established by. the pláiritiffs thémselves'they cannot be heard to say that'ERe defendant shoiild not h§vé"the benefit' of wháí their own proof’’shows. It might bA‘otherwise if" the""" plaintiffs’- claim weré baked'”""upon’ any other consideration' than'ári attenipt "to enforce thé payriíént óf a 'debt;'1 but in the preserif form" of action the rightsarid liabilities of the" parties áre "to'be considered solely upon'the'basis bf ári issue 1 frained"'to" enfoióé'in ordinary course ¿'money demand.

Brit aside from this consideration We think the" defense" was available ■'■’trader the pleadings. "’The pleá of the ahswer-is pay merit,"arid while 4 payment "in its "strictest sense imports the satisfaction of a pecuniary " obligation by flle "delivery "óf'riiotiéy, yet in" a géneiril" sensé'it is. much Milargé'd arid" embraces any thing which operatés-’ás'a discharge óf "a ?p'ecüñiáfy dbligátiori", "dr" anything"which is" accepted "by the ": creditor as the equivalent of -money arid" in satisfáetibri thereof. '(22 Am. & Eng. Ency; of Law [2d ed.], 517.) In Beals v. Home Ins. Co. (36 N. Y. 522) the court adopted this definition":' “ Tó pay,'is "defined by lexicographers,"'-to" discharge a debt, to' deliver a creditor " tlié value óf'a débtp either in money dr in "gbod!s,""to: his" acceptance, by which the debt is" "discharged.” There cari be-rió'difféferice in thé discharge of a debt" by operation of law, where the'facts "out of " which arises the fiúíé féqúire such operation, and wlieré'thé payment ■' is by agreement; ''"Where7 It" appears in ah action to -fecóver a 'debt 'that the "párties''séékirig-to" enforce it liavé'hád the moriey which "they" ‘seék to "raeóvér '"applied "in discharge of an ;■ obligation upon 'which"they""were liable,' the law imports an acceptance "upon the "part"óf the creditor bf the thing which? operates as á discharge of tlie demand, "arid' where sucli fact áppeársdf" will be an fexceptiotial cáse where'réóóvery’df the moriéy-so applied will bé permitted1. In Farmers & Citizens Bank v. Sherman (33 N. Y. 69) 'it was'held ' that' new"'riiatter might'be given" in evidence Which. amounted in ' law "tora--satisfáctión "óf'tiié" claim. "Théreiri"fliéactí'óri was upbii a promissory', noté,' made by the "defendant fóf th'e "accommodation "of One'"Pomeroy. Pomeroy, after the:'delivery' of the rióte to the plaintiff érifered Bteriári 'agréetaérif-by which" lió wás to deliver to the plaintiff in discharge) of an indebtedness which he owed to it, including the note in question, a quantity of lumber at a specified time and for specified prices, and, upon the delivery of such lumber, paper to the amount and value of the lumber as Pomeroy might require was to be returned. The whole amount of his indebtedness tó the bank was $13,000. Ho delivered thereafter $8,840.20' worth of lumber and then requested" the surrender of the note, which the bank refused, and it thereafter brought action thefebn. When he’ sought to show the transaction objection was interposed that under a plea of payment the evidence of the agreement was inadmissible. The court upon this subject said : “ The answer simply alleged payment, which, as it iscláimed, in legal contemplation, means payment in money, and evidence to prove payment in any other way than by cash, did not sustain the allegations of the answer; that the answer gave no notice of the defendant’s intention to prove payment in any other way than by cash ; it did not set forth or disclose the particulars of the transaction between Pomeroy and the plaintiffs, and hence, the unexpected admission of proof of the transaction, under such a pleading, surprised them. There is nó force in these objections, considered as a question of pleading. The answer alleged payment, and it was competent, under the pleading, to prove that payment had been, in fact, made either in cash or in some other way. If payment be relied on as a defense, it would be bad pleading to allege the evidence of the fact instead of thefact itself ; and wh’én the fact of payment is pleaded, there is no rule requiring the evidence, or a concatenation of evidence, establishing payment, to - be alleged in the pleading to render such proof legally admissible." In this case it was not required that the particular facts relied on as amounting to payment, should have been set forth in the answer. It was enough, if those facts sustained the plea of payment.” In McLaughlin v. Webster (141 N. Y. 76) the court said: “But the defendants had pleaded payment generally, and under that defense were entitled to give proof of any agreemént between the patties in the lifetime of the testator that operated to discharge the debt. It is not necessary generally to state the particular manner in which the .obligation was extinguished. Any valuable consideration moving from the debtor to the creditor which the parties agree shall operate "to satisfy’the debt wilfbe given that effect, In the absence 'fl'.'l lili aV rAiclólr a a pin á ivi o Í1 ir i yi a Ann a A-P of froua or híis'íake, egpé&laily in the basé °of ‘debts Unsettled and unliquidated. When parties agree that a debt shall be deemed paid and satisfied by a provision in favor of thé creditor in a will, and that provision is made ánd the creditor has received the benefit of it, I see no reason to doubt that the facts may be shown under a pleading alleging payment or satisfaction generally.” (Stirna v. Beebe, 11 App. Div. 206; Quin v. Lloyd, 41 N. Y. 349.) In the present case the articles, of copartnership constituting the special partnership contained an agreement by virtue of which the partnership obligated itself to discharge the debts, of the old firm. They were, therefore, under an agreement to pay those debts, and when the obligation being in existence was discharged by the creditor, a debt, as such, ceased to exist in favor of the partnership which had received the benefit .of the money applied in its discharge. The defendants, therefore} had the right to prove such facts, and as their legal effect was to operate as a payment in discharge of the claim to the extent of the obligation, to that extent there was -no debt to enforce at the instance of these plaintiffs in this action. The defendant was not, as we have already observed, called upon to make such proof as the plaintiffs proved all of the facts essential to make the doctrine of payment applicable. The referee found that the new firm became insolvent prior to its dissolution. There was no proof to establish such fact, save that given by Elisha M. Fulton, Jr., when he was recalled by the plaintiffs and permitted to testify over ,the objection and exception of the defendant that they were insolvent, the liabilities of the firm over the assets being $115,000. The agreement of dissolution did not state that the firm was insolvent, the sole statement upon that subject' being that the partnership “found itself in embarrassed financial circumstances, and whereas, in endeavoring to extricate the said partnership from embarrassment,” William P. Whitlock had advanced large sums of money. Then follows the agreement for dissolution. Insolvency was not within the issue raised by the pleadings, and evidence to' prove it was inadmissible, and as it was objected to it was improperly received, but it cannot now be availed of as furnishing any basis upon which to found the,-present action. (M. Groh’s Sons v. Groh, 177 N. Y. 8.)

These views, however, do not lead us to the conclusion that the judgment should be reversed in its entirety. The indebtedness of the old firm to the defendant, as we have seen, was overpaid by the sum of $9,406.21. For this sum there was no indebtedness due by the old firm to the defendant, or to any one else, for which the new firm, so far as appears by this record, was liable. Bor has it been made to appear that such sum was applied for the benefit of the new firm. For aught that appears it was used exclusively for the benefit of the old firm, so that to that extent the defendant has failed in its defense, as payment of that sum of money is not shown to have been made by the bank, either in the discharge of obligations held by it, for which the new firm was liable, or otherwise. We are of the opinion, therefore, that to this extent the plaintiffs are entitled to recover. So far as the other questions which were . raised and argued upon the present appeal are concerned, we think they were properly disposed of by the referee, and as each question .was fully and completely discussed by him in the learned opinion which he delivered it renders further consideration here unnecessary.

It follows that the judgment should be modified by striking from the recovery the sum of $50,593.79, with interest thereon from the 13th day "of December, 1895, and as so modified the judgment should be affirmed, withorit costs to either party in this court.

Van Brunt, P. J., concurred.

Judgment reversed and judgment directed for defendant dismissing complaint, with costs in this court and in the court below. 
      
      
        Shipman v. Bank S. N. Y. (126 N. Y. 331-333).— [Rep,
     