Blackmon v. Hale

Supreme Court of California · 1970 · Corporations

463 P.2d 418 (1970)

Updated August 22, 2026

CorporationsPartnership liabilityTrust accountsBank liabilityCotrustee liabilityUniform Partnership Actapparent authorityscope of partnership business

Facts

Plaintiff hired Adams, a lawyer practicing with Hale in the firm of Adams and Hale, to assist with a proposed purchase of a Nevada note and mortgage, and at Adams' direction plaintiff sent a cashier's check payable to "Adams and Hale Trust Account." Adams deposited the check into the firm's existing trust account at California Bank titled "Adams, Hale, and Lee Trust Account," which Adams and Hale continued using after Lee had left the firm. After Adams and Hale dissolved their partnership, Hale signed a check transferring $21,386 from that trust account to a new "J. C. Adams Trust Account," and Adams then diverted the money to his own use. Plaintiff later recovered only $1,000 of the $24,500 and sued the banks, Hale, and Lee for the remaining $23,500.

Issue

Whether the banks were liable for accepting and paying the cashier's check and later honoring withdrawals from the trust account, and whether Hale and Lee were liable for Adams' misappropriation as partner and/or cotrustees. More specifically, the court had to decide whether Adams acted within the apparent scope of the law partnership's business and whether Hale or Lee negligently enabled the diversion of trust funds or failed to account for them.

Rule

Under Corporation Code sections 15014 and 15015, a partnership is liable, and each partner is jointly and severally liable, when a partner acting within the scope of his apparent authority receives a third person's money and misapplies it, or when the partnership in the course of its business receives the money and it is then misapplied by any partner. Apparent authority is judged by the partnership's conduct and what it causes third persons reasonably to believe, and the partnership is not bound only if the third person knows the partner lacks authority or is acting individually. A bank receiving trust funds is not liable for a trustee's misappropriation absent actual or constructive knowledge of the breach and may honor checks that conform to the signature card. A cotrustee is responsible for a cotrustee's wrongful acts to which he consented or which his negligence enabled, and trustees must fully account for trust property, with presumptions against them when accounts are lacking.

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In Sacramento, Maya Ortiz met with Victor Sloan in the offices of Sloan & Kerr, a two-lawyer firm with a street sign reading "Sloan & Kerr, Attorneys at Law." Victor agreed to handle Maya's commercial lease dispute and told her to wire $18,000 to the firm's trust account to hold settlement funds, but he later diverted the money to himself. Nina Kerr says Victor had an internal agreement forbidding him from handling matters over $10,000 without her approval.

Is Nina most likely jointly and severally liable for Maya's loss as Victor's partner?

Explanation. A partner is jointly and severally liable when another partner, acting within the scope of apparent authority, receives a third person's money and misapplies it, or when the partnership receives the money in the course of business and a partner misapplies it. Apparent authority turns on what the partnership's conduct would cause a reasonable third person to believe. Here, the firm office, firm sign, legal representation, and instruction to use the firm's trust account all support a reasonable belief that Victor was acting for the partnership. The internal restriction does not protect the partnership absent notice to Maya.