
    Gertrude M. Randall, and Others, Respondents, v. Sherman W. Knevals, as Assignee of William R. Bunker and Charles B. Caldwell, and of the Firm of Caldwell & Bunker, Appellant, Impleaded with The Bank of America and Others.
    
      A firm, taking securities held by one of its members as trustee, to secure a loan made to such member, is not a bona fide holder—admissibility of declarations made by the borrowing partner that the securities belonged to the trust ^- distinction between securities and money.
    
    
      Semble, that a firm which takes, as collateral security for a loan made by it 'to one of its members, out of the firm money, bonds held by the borrowing partner as trustee, is not a bona fide holder of such bonds, as the knowledge of the borrowing partner concerning their ownership is imputable to the firm.
    
      In any event, in an action by the cestuis que trustent to recover possession of the bonds from a bank which holds them as collateral security for a loan made to the firm, to which action the firm’s assignee for the benefit of creditors is a party defendant, the bad faith of the borrowing partner, if not conclusively imputable to the firm’s assignee as matter of law, throws upon such assignee the burden of showing good faith and the absence of notice as matter of fact.
    In such an action, declarations of the borrowing partner, made to the representative of the cestuis que trustent, at that partner’s residence, at a time when the firm was in existence and was transacting its ordinary business, to the effect that the bonds in question, Which were then in the possession of the firm and were treated by it as a portion of its general assets, belonged to the trust estate, ■ are admissible against the assignee.
    The distinction between the fraudulent transfer of trust securities by a trustee to a firm of which he is a member, and the fraudulent transfer to the firm of trust moneys, considered with reference to the cestui que trusts right to recover therein.
    Appeal by the defendant, Sherman W. Knevals, as assignee of William R; Bunker and Charles B. Caldwell, and of the firm of ■ Caldwell & Bunker, from a final judg'ment of the Supreme Court in favor of the plaintiffs, entered in the office of the clerk of the ■county of New York on the 5th day of June, 1897, upon the report of a referee."
    The plaintiffs in this action seek, in effect, to recover fourteen bonds for $1,000 each, in the possession of the Bank of America. The bank held these bonds as security for certain notes of the ■firm of Caldwell & Bunker. No claim is made against the bank. Its right to the bonds as pledgee in good faith is not questioned. The bank, however, held other securities for the notes in question, and the plaintiffs’ claim is that these other securities should be first applied to the pajunent of these notes, and that thereupon the fourteen bonds, or what is left of them after such payment, be delivered to their trustee. In other words* the plaintiffs claim these fourteen bonds as against Caldwell & Bunker, and the defendant Knevals,.as assignee of that firm.
    The complaint alleges that the' bonds in question were part ■of the estate, of one" Mary H. Holley, who married William R. Bunker, one of the members of the firm of Caldwell & Bunker. Mrs. Bunker died in August, 1891, leaving a will, by which. she left her residuary estate to her husband, William R. Bunker, in trust for her two daughters for life, with remainders to her chib dreti. The plaintiffs are her daughters arid their -children. ■ William R. Bunker was the executor and trustee under his wife’s will, and letters testamentary were issued to him. The action .is brought by the beneficiaries under Mrs. Bunker’s will, because the trustee Bunker neglected and refused to take steps for the recovery of the bonds and because the misappropriation, which is the basis of this action, was his act. The assignee of Caldwell & Bunker defended, denying the plaintiffs’ title, and claiming thát the firm was a ~bona fide holder of the bonds, for value, and that he,-as assignee, had succeeded to its rights. The issue on this head was" referred to a referee, who reported in favor of the plaintiffs, holding, in substance, that as the firm of Caldwell & Bunker received - the bonds from one of its members, the fraudulent acts of that member were imputable to it, and that, consequently, the firm did not take the bonds in good faith. From a judgment rendered upon the referee’s report the assignee appeals. Other facts are stated in. the Opinion.
    
      Walter. S. Logan, for the appellant.
    
      Philip C. Bartlett, for the respondents.
   Barrett, J.:

Two questions are presented by this appeal: First, whether the declaration of William R. Bunker, made to the plaintiffs’ agent Randall in the month of February, 1894, was admissible as against the assignee; second, if it' was, whether Caldwell & Bunker were holders of the bonds in good faith.

The declaration was in writing and was signed by Bunker upon the 23d day of February, 1894. It-is quite an elaborate statement, giving a history'of the conversions and misappropriations which ultimately resulted in the possession of .the bonds -by his 'firm. The part of it which is material in this action is a statement, in substance, that these bonds were pledged by him to Caldwell & Bunker at various times during the existence of the firm as collateral security for loans to himself individually; that they belonged'to Mrs. Holley, or Mrs. Bunker or her estate, and that Ins use of them in the manner indicated was without her knowledge, authority or assent. The firm failed and made a general assignment to the defendant Hueváis' in November, 1894. It was in existence and conducting its ordinary .business-in February,- 1894, when the admission was made. The •circumstances attending the admission were that Mr. Randall, who was acting for the beneficiaries under .Mrs. Bunker’s will, conferred ■with Bunker at his residence on the 22d day of February, 1894, with respect ■ to the securities in his possession as executor of the estate. But a few words passed between them. Bunker asked whether he could see the adult beneficiaries, and Randall said no ; that he and one Brooks represented them. . The next day Bunker called at Randall’s office and delivered to the latter a paper authorizing Brooks and Randall to take jiossession of the securities belonging to Mrs. Bunker’s estate. Three days later Bunker handed to Randall the admission.'

When this admission' was made, and when the conversation between Randall and Bunker, which followed, took place, the bonds .were in the possession of the firm of Caldwell & Bunker. This fact was proved by competent evidence, apart from Bunker’s admission. In fact, the assignee, in his answer, admits that, in October, 1894, the firm of Caldwell & Bunker was in possession of the bonds as alleged in the complaint. He also admits that the firm had obtained loans from the Bank of America upon these securities. The transactions between the firm of Caldwell & Bunker and the Bank of America were proved by the assistant cashier and the loan clerk of the bank. It was also proved by •entries-in the books of the firm that Caldwell & Bunker received the bonds from William R. Bunker, and that they held them as collateral security for loans made to- him. Part of Bunker’s individual loan account was put in evidence and showed the transaction between him and the firm. It thus appeared, by evidence aUimde the admission, that Bunker delivered these bonds to his firm as collateral security for an individual loan, and that the firm thereafter treated the securities as a portion of its- general assets, and used them •for its business purposes in the same-manner as it- used its other property. Upon this state of facts we think it quite clear that Bunker’s declaration with respect to-the true ownership of the bonds was admissible.

It was a declaration made by one member of a partnership, during its continuance, with regard to partnership affairs and property. It is well settled that such a declaration is -evidence’ as against the firm. It is in legal effect a firm declaration. (Fogerty v. Jordan, 2 Robt. 519 ; Klock v. Beekman, 18 Hun, 502; Gay v. Bowen, 8 Metc. 100; Lindhjen v. Mueller, 42 Minn. 307; Lucas v. De la Cour, 1 M. & S. 249; Cunningham v. Sublette, 4 Mo. 224; Hoboken Bank v. Beckman, 36 N. J. Eq. 83; Doremus v. McCormick, 7 Gill, 49 ; Munson v. Wickwire, 21 Conn. 513.) It was not a declaration relating to concerns foreign to the partnership, nor with regard to a matter outside of the scope of the partnership business, as in Heffron v. Hanaford (40 Mich. 305); nor was it with regard to a transaction on its face individual, as in Thorn v. Smith (21 Wend. 365) and Uhler v. Browning (28 N. J. Law, 79).

We agree with the appellant that the declaration to be admissible must have relation to the joint business or the joint property. Here, however, the bonds were in the possession of the firm. Its possession was the possession of each of its members. So, too, were the apparent ownership and title. The' declaration related to the joint possession and . the joint ownership. In Lucas v. De la Cour (supra), where partners sued for the loss of property, the . statement of one of them that he was the owner and not the firm was admitted to defeat the action. The rule was applied in the same manner' in Lindhjen v. Mueller, (supra). There the court ■said that statements made by one of the members of the firm, ■that an account which they were seeking to recover was his individual property,' and consequently not firm property, ■ “ were properly received in evidence as declarations and admissions made against interest, by a member of the firm which was attempting in this proceeding to recover an account alleged to be due the partnership.” So, too, a statement fiy a partner that he had received from a debtor the money claimed by his firm as due, was held admissible against the other partner. (Munson v. Wickwire, 21 Conn. 513.) In Odiorne v. Maxcy (15 Mass. 39) Ohief Justice Parker observed that “ the confession of one member of the copartnership of any fact tending to bind the whole m a matter of jovnt concern is unquestionably good evidence against the whole.” The text writers sum the rule up in substantially the same language. (Story Part. 107; Whart. Ev.. §§ 1192, 1194; Coll. Part. [Wood’s ed.] § 775; Phill. Ev. [4th Am. ed.] 496; Jones Ev. §■ 249.) The admissions of one partner f says -Mr. Jones, “ have been held admissible against all to prove * * * the ownership of goods in possession of the f/rmP This is the logical sequence from the fact of the joint possession and the rights which flow therefrom. As Chief Justice Shaw said in Bridge v. Gray (14 Pick. 55), “each has a right to the custody of the partnership goods and effects, and to the apjplication of them to any of the purposes of the partnership P

The appellant advances the somewhat singular notion that the admissibility of such declarations depends upon the attitude and situation of the individual partner when the declarations are made. But surely a statement which would have been admissible if made by Bunker in Caldwell & Bunker’s office, in answer there to a direct inquiry as to the partnership rights with regard to the bonds, is equally admissible though the declaration fell from his lips or pen when he was addressed as a trustee in his private residence. As Lord Ellenborohgh said in Jacaud v. French (12 East, 317), it is impossible to sever the individuality of the person.” The admissibility of what the man Bunker said or wrote depended solely upon its relation to the partnership affairs or property, not in the least to the particular incident which called out the statement. The admission was, in effect, that the fourteen bonds in question, then in the custody and control of the firm of Caldwell & Bunker, and of each of its members, under claim of ownership, were in truth and in fact the property of others and not the property of the firm. Any such statement, no matter how made, during the continuance of the firm, by either Bunker or Caldwell, was clearly admissible as against the firm.

Another peculiar suggestion is that the declaration was inadmissible because it incidentally pointed to Bunker’s individual guilt. It is the firm’s knowledge of the real ownership of property-—imputable to it because of the knowledge of one of its members — which concludes it on the question of good faith. Whether notice of the real ownership thus comes to it from external sources or from the individual member’s personal knowledge, derived from his own acts, the firm’s imputed knowledge is precisely the same both in fact and in 'law. A single illustration will make .this clear.' Suppose, the firm of Caldwell & Bunker had loaned money to A. upon the security of these bonds, and A. had informed the individual member of the firm with whom he negotiated the loan that the bonds were not ■his, but were held by him as trustee of the estate of B., would not the declaration of that member of the firm to whom A. communicated these facts have been admissible- in an action against the firm by the estate of B. to recover the bonds? It is - not doubted that it would. And yet it is suggested that the -declaration is here inadmissible because Bunker had the guilty knowledge in his own breast. How that guilty knowledge reached him is surely immaterial. He had it, and that suffices to make his declaration as to the true ownership of the property admissible. Such a declaration, too, is against interest. This is denied upon the somewhat subtle refinement that it may have been more to Bunker’s interest to help the estate to secure the bonds than to have his firm retain them. That is a. consideration, however, which relates to the probative value of the -declaration, not to its admissibility. The law cannot speculate as to the possibilities of such an indirect counter interest. If it did, the fact that the declaration was an admission of actual crime would certainly outweigh any consideration of possible pecuniary advantage to the estate. Bunker would hardly admit away his firm .property, and in doing so probably confess himself into a jail merely to aid the trust estate in securing the restoration of property which he had misappropriated. We think the ruling of the learned referee upon the point under consideration was correct, as was also his ruling with regard to Bunker’s declaration, to the same effect, on oath in the Surrogate’s Court. The governing principle is the same whenever or wherever the admission is made.- It is still an admission made during the continuance of the partnership by a member of the firm with regard to the firm property and affairs.

(2), It follows, the trust ownership of the bonds being thus proved, .that Caldwell & Bunker were not purchasers thereof in good faith ..and for value. To some extent, it is true, they parted with value, although some of the bonds were taken as security for an antecedent debt-. They took none of them, however, -in good faith. Bunker’s guilty knowledge was clearly imputable to the firm. He ■turned these bonds over to the firm knowing that they-were the /property of Mrs. Holley, or Mrs. Bufiker or her estate. The statement that he obtained an individual-loan from, his firm thereon is, ■perhaps, the business way of looking at the transaction, but it is lacking in precision. What he actually did was to draw from the ■ firm’s bank account, for his own use, firm money, that is, money which he owned jointly with his copartners, and to substitute therefor securities which he knew belonged to others. It has’always been permitted to the real owners, under such circumstances, to trace and identify their securities and récover them.

- A distinction has been made in the cases on this head between securities and money. ¡Money cannot well be ear-marked.. Commercial convenience and business 'policy require that it shall pass freely from hand to hand without danger of reclamation. As it cannot be identified or specifically traced in specie, the courts have assumed that it can only be recovered upon the theory of a debt; and it has been held that it cannot be recovered upon that theory. It can only be recovered, under these authorities, when the other partner has had actual knowledge of its source. (Jaques v. Marquand, 6 Cow. 497; Willett v. Stringer, 17 Abb. Pr. 153.) But the rule as to specific securities has always been the other way. There the notice is constructively imputed to the firm, and the true owner is permitted to identify, trace and recover his' property. ( Weetjen v. St. Paul & Pac. R. R. Co., 4 Hun, 529 ; Marietta & Cincinnati R. R. Co. v. Mowry, 28 id. 79 ; Ruckmam, v. Decker, 23 N. J. Eq. 283; Tucker v. Bradley, 33 Vt. 324; Cunningham v. Woodbridge, 76 Ga. 302 ; and see Quinn v. Fuller, 7 Cush. 224; McClurkan v. Byers, 74 Penn. St. 405; Stockdale v. Keyes, 79 id. 251.)

In the Weetjen case the action was to restrain the diversion of certain iron rails by. the trustee of a railroad mortgage. The rails had been purchased by the firm of which the trustee was a mem-. ber to secure advances made thereon to the railroad. It was held that the knowledge of the trustee was the knowledge of this firm, and that the latter could not claim to hold the iron as a bona fide purchaser without notice. Daniels, J., said;'“ The fact that he (the trustee) did not directly participate in the active management of the business of those firms can make no difference in- the case. He was one of the partners, and for that reason actual notice to him was constructive notice to his associates. It was his duty to communicate what he knew on these subjects to them, and if he did ' not, they, and not innocent third persons, must sustain the consequences resulting from the want of it.” For this proposition the learned judge cited Lindley on Partnership (3d ed.), 304, 305..

: In the Mowry case one Keys' was a member of two 'firms. As a member of. one of these firms he purchased certain bonds, which were void in his hands and in the hands of that. particular firm. Subsequently that, firm sent the bonds to Kéys’ other firm as collateral security for the payment of a debt. It was held that, as Keys had actual- knowledge of the defective title of the one firm, his partners in the other firm were charged with constructive knowledge thereof, and acquired no better title to the bonds than their pledgor had. The cases cited in support 'of this doctrine by Béady, J. (Jacaud v. French, 12 East, 311; Matter of Worcester Corn Ex. Co., 3 De G., M. & G. 180, and Steele v. Stuart, L. R. [2 Eq.] 84), seem to- be directly in point.

In Tucker v. Bradley (supra) it appears that, one partner who was a trustee for a married woman, for the purpose of the management of a fund to be kept free from the husband’s control, loaned the trust money to his firm, and payments were made by the .firm to the husband without the wife’s authority. It was held that the knowledge of the trustee of the husband’s disability to control the property was the knowledge of the firm.

In Ruckman v. Decker (supra) one Wilson sold certain property ■ to the defendants, with whom he was a partner. Wilson had misap-. .propriated the property, and the defendants, the Deckers, contended: that they did not know of the misappropriation, and that' they had ' paid Wilson for the property in good faith. The court said : The • three defendants in this case are partners, and are sued-as such.. They were partners at the time of the alleged taking of these oysters.' The doctrine of partnership' applies t.o them, and by that tióctrine notice to one partner is notice to all; and if Wilson knew, at that time that these oysters were in part the Complainant’s, his; knowledge was that of the firm. Be may have defraibded his. partners / it is probable that he did, yet the severe but necessary, loan-of partnership makes them liable for his acts a/nd knowledge.”

In Cunningham v. Woodbridge (supra) á partner who had misapr propriated certain negotiable bonds carried them into the firm as its assets, and the bonds were used by the firm as collateral security in the bank from which they were borrowers. The court said that the question was, did the knowledge of the misappropriating partner bind the firm of which he was a partner, and “ was the firm a bona fide holder of this negotiable bond without notice and its title good against the true owner ? 1. If the bond had not been negotiable, but a mere personal chattel, it is clear that the conversion of it by the firm, and their liability, for it, would be made out.completely. * * ■* Being a negotiable bond, if they bought it without notice,they would be protected against the true owner, but did the firm buy without notice or Imowledge when one of them lenew all about it, a/nd fraudulently, as to the true owner, put it in the business of the firm, a/nd they used it as collateral ? Notice to one partner is notice to all and binds the firm. Knowledge of one is knowledge of all and binds all. * * "" Therefore, the firm procured this bond with full knowledge to whom it belonged, and the plaintiff is entitled to recover it.” This is certainly a just principle, and we have not been referred to any authority in which it has been deviated from. Indeed, the authorities, so far as our research goes, are all-one way upon the question.

The appellant relies mainly upon the .case of Bienenstok v. Ammidown, lately decided by the Court of Appeals (155 N. Y. 47). We find nothing in this case, however, which conflicts with the general rule upon this . head. In that case Ammidown committed no fraud upon the plaintiffs as a member of the firm of Ammidown & Co. The plaintiffs were defrauded of their goods by' a corporation of which Ammidown was the president. Ammidown knew that this corporation had committed the fraud, but that knowledge was his as president of the company, not as member of the firm. The goods were not brought into the firm, nor did the firm exercise any' acts of' ownership with regard thereto. They did not become the jovnt property of the two pmdners by the fraudulent acts of one. It is just there that that case' differs essentially from the present. Ammidown, as president of the corporation, obtained a loan upon the goods from a bank, and the check which represented the loan was drawn to the order of the corporation. The only connection of the firm with the entire transaction was the indorsement .of that check by Ammidown, as the president of the corporation, and its temporary deposit in the firm’s bank account for the convenience; substantially, to the use, of the corporation. This deposit was not in any way or manner for the benefit of the firm. It had no interest therein, nor did it use the nominal credit.thus obtained, directly or indirectly, for. its own purposes. The deposit was solely .for the convenience of the corporation under an arrangement between it and the firm. ' By that arrangement the deposit was subject to the immediate draft of the corporation, and the whole amount thereof was turned over to the corporation before the firm had any notice of the plaintiffs’ claim..

. The firm was simply a gratuitous depositary for the company. It had, in substance, no partnership connection with either the goods or their proceeds. What the court, held was that under such circumstances the firm was .not liable because of .Ammidown’s knowledge (when the gratuitous deposit was made) that the corporation had purchased the goods fraudulently.- The substance of this decision is that the transaction' was not within the sphere of the partnership; was not essentially a partnership transaction • at all, and consequently that the principle of imputed knowledge did not apply. . .. - • '

If Ammidown had taken the goods and turned them over to his firm as a substitute for firm moneys contemporaneously withdrawn by him for his individual use, and the firm had thereupon treated the property as its own, and for its own benefit had exercised acts of ownership over it, we apprehend that the result would have been different. The goods in that, case would have become part and parcel of the partnership assets, and the firm as a unit would have taken them with the imputed knowledge of each of the joint owners.

There are other points of a subsidiary character which are pressed upon us in support of the referee’s conclusion; but, in the view which we have taken of the case, they need not be specially considered. Suffice it to say that,, in our judgment, the burden was upon the assignee, as it would have been, upon the firm of Caldwell •& Bunker, to show something more than the mere withdrawal ■of moneys from the firm by Bunker upon the turning in of the bonds. This probably tended to show that the firm of Caldwell & Bunker were holders, for value, but it did not necessarily show that they were holders in good faith. The burden was upon the firm to show good faith, and that called for proof on its part of the circumstances attendant upon the transaction between Bunker and itself. No such proof was given. The bad faith of Bunker was beyond peradventure. Even if that bad faith was not conclusively imputable to the firm as matter of law, it at least threw upon the firm, or its assignee, the burden of showing good faith and the absence of notice as matter of fact.

It also appeared that a part of Bunker’s indebtedness to his firm was for losses in • speculation, and that the bonds in question were applied to this indebtedness as well as to the main sum originally withdrawn from the firm. Then, too, at a later period some of the original securities were withdrawn, and other securities belonging to Mrs. Bunker’s estate substituted therefor. Additional securities' belonging to the estate were added to the collateral to fortify the general indebtedness, as that was increased, by the speculative loss. We find, also, that Mrs. Bunker, when she was Mrs. Holley, had an account in the firm books showing the ownership of two of these bonds, and that the following entry in red ink was made in that connection : “ Transferred to W, R. B. Loan account.” These are certainly suggestive circumstances. We do not, however, place our judgment upon them as independent facts. . Apart from these and all other minor considerations, our conclusion is, that the plaintiffs, having traced their specific' property into the hands of Caldwell & Bunker — property which the firm had not received in good faith and for value — are entitled to have such property restored to their trust estate as against the firm and against its assignee.

The judgment should be affirmed, with costs.

Van Brunt, P. J., Rumsey, O’Brien and Ingraham, JJ., concurred. ' ’

Judgment affirmed, with costs.  