Story Case

Percy Halloway, a partner in the wholesale glove business with Harrison Marley, indorsed the firm name of Marley & Halloway upon a note which his son, Frank Halloway, had made, payable to a creditor of his. It was indorsed by the creditor, and was held at maturity by the Sampson Construction Company. Suit was brought against the firm of Marley & Halloway. Liability was denied on the ground that a partner could not bind the firm by an accommodation indorsement. Sampson Construction Company made its defense by the production of a letter written by Marley to Halloway, telling him that he believed in the boy Frank Halloway and giving his permission to have the firm name indorsed upon his notes up to a limited amount (which did not exceed the amount of this note).

Does this letter affect the situation, and is the firm liable upon the indorsement?

Ruling Court Case. Fielder Vs. Lahens, Volume 2 Abbot's Decisions Of The New York Court Of Appeals, Page 111

Pierre Lahens, Edward Lahens, Edward Gaudard, and Louis Lahens, were company-partners in mercantile business in Havre, France, and also in the city of New York under the firm name of J. Lahens & Company. Louis Lahens was the only one of the partners who was in the United States. One Alexander Caselli drew certain notes, which Louis Lahens indorsed in the name of J. Lahens & Company for the accommodation of Caselli, but no consideration was received by J. Lahens & Company for them. After Louis Lahens indorsed them, they were returned to Caselli, who indorsed them over to Fielden, the plaintiff in this case. When the notes were not paid by Caselli, an action was brought against the partnership of J. Lahens & Company. It was contended that the partnership was not liable upon these accommodation notes, because they were given without authority.

Decision: It is no part of partnership business to sign or indorse accommodation paper, so a partner has no implied authority to bind the firm by such paper. Therefore, when a person takes accommodation paper of a partnership, knowing it to be such, he must show that it was authorized by the partners. In this case, Fielden had notice that this was accommodation paper, and, therefore, cannot recover upon these notes against the firm.

Mr. Justice J. M. Parker, who delivered the opinion of the court, said in part: "The note being held by the maker, and put into circulation by him, in his own business, and for his own advantage, is evidence to the party taking that whatever indorsement may be upon it was made for the maker's benefit, and not in the ordinary course of business; for in the ordinary course of business it would have passed from the maker to the payee and indorsed. The party, therefore, receiving it from the maker, in payment of the maker's debts, assumes the risk of being able to show that the indorsement was in the usual course of business, and that the partners all consented to the act of the one who made the indorsement." Judgment was that no recovery could be had against the partnership of J. Lahens & Company.

Ruling Law. Story Case Answer

A member of a partnership has no implied power to bind the firm, by signing a negotiable instrument for the accommodation of some third party. It is said that it is no part of the business of a partnership to act as accommodation party for the benefit of strangers. It is evident, then, that a person who takes a negotiable instrument, upon which the name of a firm appears as an accommodation party, and such fact is known to the person taking it, he assumes a risk. He must show that the accommodation signature was authorized by the firm. But a bona fide purchaser of a negotiable instrument, who does not know that the name of the firm appears as an accommodation party, does not take an instrument at his peril. He may enforce the paper even though it appears that the accommodation signature of the firm was unauthorized.

Since the firm of Marley & Halloway was an anoma Ions indorser, the Sampson Constrnction Company-had notice that it was an accommodation party. As pointed out in the last case, this knowledge or notice would not prevent a recovery in the case of an individual accommodation party, but again there is a question of authority when the accommodation party is a partnership. Unlike the corporation, it is not a matter of power, because a partner can do everything the firm agreement permits. But the ordinary partnership carries authority only to conduct the business of the firm, and giving accommodation paper is not a customary incident of a business carried on for profit. But if all the partners consent to the unusual transaction, there is no reason to restrict their liability. The Sampson Construction Company took the note at its risk, but if it was at the same time put in possession of the letter, there was very little risk involved. Halloway performed the act of signing the firm name, and Mar-ley expressly authorized it to be done, in writing. There is, therefore, clear proof that both partners sanctioned the obligation, and it can be enforced against the firm. Judgment should be given for the Sampson Construction Company.