Case Name: Ernst Henken and Christina Henken, Appellants, v. Frederick Schwicker and Katie Schwicker, his Wife, Respondents, Impleaded with Others
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1901
Citations: 67 A.D. 196
Docket Number: 
Parties: Ernst Henken and Christina Henken, Appellants, v. Frederick Schwicker and Katie Schwicker, his Wife, Respondents, Impleaded with Others.
Judges: 
Reporter: Appellate Division Reports
Volume: 67
Pages: 196–211

Head Matter:
Ernst Henken and Christina Henken, Appellants, v. Frederick Schwicker and Katie Schwicker, his Wife, Respondents, Impleaded with Others.
Principal and agent — a broker securing a mortgage loan, who received the money from, the mortgagee and failed to pay off prior mortgages, held to be the agent of the mortgagor.
One Schwicker, who owned real estate incumbered by three mortgages, amounting respectively to $1,600, §1,000 and §400, applied to one Dreher, areal estate broker, to procure a loan of §3,200, to be secured by a bond and a mortgage upon the property, with the intention of using §3,000 to pay the outstanding' mortgages and the balance to pay Dreher’s commissions. Dreher -induced one Henken to make the loan, and the latter, fór that purpose, gave Dreher his check for the §3,200. Henken understood that he was to have a first mortgage, and Dreher assured him in effect that he would search the title and see to it that he obtained such a mortgage.. Thereafter Schwicker executed a mortgage to secure the loan, and after Dreher had procured the mortgage to be recorded the papers were delivered by him to Henken. At the time Schwicker executed the bond and mortgage to Henken he took from Dreher a receipt for the latter’s commission of §200 and instructed him to pay off the three outstanding mortgages with the balance of the money, Dreher having informed him at the time that he had the money but was obliged to hold it to protect Henken. Dreher only paid off the §400 mortgage and appropriated the rest of the money to his own use.
In an action brought by Henken to foreclose the mortgage given to him, as a lien subsequent to the two prior mortgages which Dreher had failed to discharge, it w:as
Held, that the whole sum of §3,200 was recoverable;
That Dreher was Schwicker’s agent, and that the latter must bear the loss resulting from Dreher’s breach of trust;
That the evidence did not warrant a finding that the mortgage was delivered upon the express condition that Henken was to pay the outstanding mortgages and that the mortgage in suit was valid only to the extent of the §600, to wit, the amount Of the mortgage actually paid and Dreher’s commission.
Goodrich, P. J., and Woodward, J., dissented.
Appeal by the plaintiffs, Ernst Henken and another, from a judgment of the Supreme Court in favor of the defendants, Frederick Schwicker and Katie Schwicker, his wife, entered in the office of the clerk of the county of Queens on the 26th day of July, 1900, upon the decision of the court, rendered after a trial at the Queens County Special Term, directing a sale in foreclosure, which adjudged that the sum of $600 was the only sum secured by the mortgage sought to be foreclosed in the action.
Andrew F. Van Thun, Jr., and Walter G. Rooney, for the appellants.
John A. Straley and Carl J. Heyser, for the respondents.

Opinion:
Hirschberg, J.:
There is practically no dispute about the facts. The defendant Frederick Schwicker, desiring to borrow the sum of $4,000, applied to a real estate agent named Dreher to procure the loan for him. It was agreed between them that the application should be made for $4,200, the additional $200 to be applied in payment of Dreher's commission for services in the transaction. Of the money to be borrowed, $3,200 was to be secured by bond and mortgage upon the real estate in question in this action, and with that amount alone are we concerned. That real estate was then incumbered with three mortgages, amounting respectively to $1,600, $1,000 and $400, or $3,000 in all, and it was Schwicker's intention that they should be paid and discharged with the borrowed money so that whoever loaned him the $3,200 should have a first lien upon the property.
Dreher applied to the plaintiff Ernst Henken to make the loan, and after they had visited the property together, the plaintiff agreed to lend the money and for that purpose gave Dreher his check for the $3,200. Thereafter the defendant Schwicker executed the bond and he and his wife executed the mortgage to secure the money to the plaintiffs, Henken and wife, and after Dreher had procured the mortgage to be recorded the papers were delivered by him to Henken. Henken understood that he was to have a first mortgage and Dreher assured him in effect that he (Dreher) would search the title and see to it that he got a first mortgage. At the time Schwicker executed the bond and mortgage to the plaintiffs he took from Dreher a receipt for the $200 commission, and instructed him to pay off the three mortgages with the balance of the money, Dreher informing him at the time that he had the money, but would have to hold it to protect the man who loaned it. Dreher paid off the $400 mortgage only, appropriating the rest of the money to his own use and leaving the other two mortgages, amounting to $2,600, still unpaid and outstanding.
The plaintiffs and defendants never met in the transaction, it being all consummated by Dreher. He testified that he actéd "solely as agent for Schwieker and not at all for Henken, unless his engagement to search the title be so regarded. He already knew all that the record would disclose, having been informed by Schwieker of the facts in relation to the three mortgages at the time he was employed to procure the loan. He did not inform Henken, however, that the property was then incumbered, nor is there any evidence that Henken. knew at that time of the existence of the three mortgages. Schwieker paid Henken the interest on the $3,200 mortgage regularly through Dreher for a number of years and until shortly before the commencement of this action. The action is brought to foreclose the $3,200 mortgage, not as a first mortgage as the parties intended it to be, but as one subject to the two prior mortgages, which Dreher was expressly instructed'by Schwieker to discharge, but which he failed to do.
The answers allege that the plaintiffs withheld from the mortgage money the sum of $2,600 for the purpose of satisfying and discharging of record the two prior mortgages, and that they, the plaintiffs, failed to pay off, satisfy and discharge the same, but retained and still retain this" money in their possession.
Upon these facts and that issue the learned trial justice at Special Term has found that " the mortgage sought to be foreclosed in this action and the bond accompanying the same were executed and delivered to the plaintiff herein by the defendants Schwieker upon the express understanding and agreement that the same: were to be held by these plaintiffs upon condition that they apply three thousand dollars toward the payment of existing liens upon said premises described in said mortgage, and two hundred dollars towards the payment of the fees of one Christian W. C. Dreher, and that these plaintiffs applied six hundred dollars only of said thirty-two hundred dollars for the purpose of said contract and in pursuance to their agreement, whereby to the extent of twenty-six hundred dollars, there was a failure of consideration as to these defendants Schwieker, and the said bond and mortgage- were valid and effectual as against defendants Schwieker to the extent of said six hundred dollars actually advanced with interest from the first day of May, 1899, and no more."
There is not only no evidence to sustain this finding, but no possible intelligent inference can be drawn from the evidence in support of it. The plain and undisputed truth is that Schwieker having sent Dreher out into the world to borrow $3,200 for him, Henken, when applied to, at once and without any security whatever loaned the money and paid it over, every dollar, into Dreher's hands. The allegations in the answers that $2,600 of the money was withheld by the plaintiffs, and that they still retain the same in their possession, are disproved not only by the production of the check, but by the evidence of every witness examined on either side» Henken paid all the money into the hands of the agent, whom Schwieker had hired and paid to demand and receive the same. It was precisely the same as though Henken had given it directly to Schwieker. Dreher promised nothing which Schwieker would not have promised and nothing which Schwieker had not expressly instructed him to promise. Schwieker intended that the mortgage should be a first lien and that to that end the money when he received it should be used . in paying off his existing mortgage debts. He expressly instructed Dreher accordingly at the time the bond and mortgage in question were executed, and when he knew that Henken had already supplied his agent with the necessary money. Henken trusted Dreher to apply the money honestly should a search disclose the existence of any liens just as he might have trusted Schwieker, had the money been paid directly to him instead of to his duly authorized agent. But the fact that Dreher misapplied the money and betrayed the trust no more supports a finding that Henken kept back the money and did not pay it over, than would the fact of direct payment to Schwieker personally had that been the course of the transaction. And no witness even hints in the most remote degree that the bond and mortgage were executed and delivered upon the condition found by the court or upon any other condition whatever. The only possible condition in the case was that Henken should have a first mortgage. This Schwicker's agent promised him and received the money on the strength of the promise. The moment the money was paid to Dreher it became the property of Schwieker which he only could apply to the payment of the prior liens. He so understood, and personally ordered the application. When the money was misappropriated it was his loss, with the incidental injury to the plaintiffs that they received for the money loaned only a questionable security instead of the first mortgage for which Henken bargained.
It may be conceded that in such dealings as these one man is often for certain separable purposes the agent of either party. In such cases the measure of the trust generally marks the limit of. the •risk. In the most favorable view possible to the defendants, Dreher might be regarded as Henlten's agent to search the title and to see to it that the plaintiffs got a first mortgage. In that view the limit of any possible legitimate adjudication would be that Dreher had failed him in the confidence reposed, and that as a consequence, as is the admitted fact, Henken would have only a third and doubtful mortgage in the stead of the adequate first lien for which he had contracted and paid. But in no view can Henken .be prohibited from collecting the bond which Schwicker gave him for the money paid to the individual who was admittedly Schwicker's agent for the purpose of receiving it, or from resorting as a third lien to the mortgage security which was executed with full knowledge of all the facts, until truth and honesty shall cease to be factors in business dealings and judicial determinations.
It is needless, perhaps, to add that no decision of the courts of this State has been presented or found which tends to justify the finding upon which the judgment herein is based.
The case of Rapps v. Gottlieb (142 N. Y. 164) is not authority in support of this, finding. There the bond and mortgage were executed and delivered upon the express understanding that they should be " invalid, void and of no effect " until the mortgagee advanced the consideration. The mortgagee did not advance the money, but assigned the invalid securities, and it was held that no debt whatever was created, and that the assignee stood in no better position than the assignor.
The learned counsel for the defendants cites three cases, none of which tends in any degree to support the judgment. It is sufficient, to say of Josephthal v. Heyman, (2 Abb. N. C. 22) that it is directly opposed to the defendants' contention. The facts were similar in many respects to the case at bar, excepting that in that case the -lender did hire the agent as his attorney to search the. title. The court held, however, that this did not make him the lender's agent to discharge existing liens; that the duty or obligation to pay off such debts was that of the borrower who owed them; that such duty was included in the latter's engagement to give the lender a first mortgage, and that where the agent under such circumstances . misapplied the mortgage moneys received from the lender, the loss should fall upon the borrower. In Plass v. Brusie (21 Wkly. Dig. 562) the agent was first employed by the lender to invest the money which was the subject of controversy ; the latter was informed by the agent of the existence of the prior mortgages, and in undertaking to retain out of the mortgage money a sum sufficient to pay them off, acted under the instructions of the lender alone, the borrower not assuming in any way to give directions as to their payment and cancellation, but intending on the contrary that they should be assigned to the lender as additional security. In Graves v. Mumford (26 Barb. 94) the agent was in possession of his principal's money to loan. The borrower ajjplied to the agent for $3,000, stating at the time that the property was incumbered for $2,200. The agent took a bond and- mortgage for $3,000, on which he paid. $800 only, retaining the balance of the loan to discharge the prior incumbrances. The court sustained a finding that the agreement made by the agent Of the lender to pay off the prior incumbrances was " part and parcel of the contract of loan," and that the lender was bound by it, and must be held responsible for the fidelity of his agent in its fulfillment. In that case the lender did not intrust either the borrower or his agent with the entire fund as here, and until the prior mortgages were, actually paid the lender retained the money to that extent in his own possession unloaned. It was precisely as though Henken had given Dreher a check for $600 only, keeping back $2,600 for the purpose of clearing the record,, and without doing so had still attempted to foreclose for the full' $3,200.
The case of Lipman v. Noblit (194 Penn. St. 416) is somewhat analogous to the case now under consideration. There a vendor of land was bound to pay off a mortgage upon it before he would be entitled to the purchase money. The vendee, however, was ready to pay before the vendor was ready to perform, and it was arranged between the parties that the vendee should take the deed, and that Ms attorney should retain from the purchase money the amount of the mortgage until it should be satisfied, and that then he should pay it to the vendor. It was held that as the vendee had done all that was required of him to complete his title, the duty unfulfilled being that of the vendor, the custodian of the money pending the delay must be regarded as acting in the latter's behalf, and that the vendee, therefore, could not be held liable for the attorney's embezzlement of the money.
' It follows that the judgment should be reversed and . a new trial granted.
Jenks and Sewell, JJ., concurred; Woodward, J,, read for affirmance, with whom Goodrich, P. J., concurred.