Case Name: HENKEN et al. v. SCHWICKER et al.
Court: New York Supreme Court, Appellate Division
Jurisdiction: New York
Decision Date: 1901-12-23
Citations: 73 N.Y.S. 656
Docket Number: 
Parties: HENKEN et al. v. SCHWICKER et al.
Judges: 
Reporter: West's New York Supplement
Volume: 73
Pages: 656–667

Head Matter:
(67 App. Div. 196.)
HENKEN et al. v. SCHWICKER et al.
(Supreme Court, Appellate Division, Second Department.
December 23,1901.)
Real, Estate Agents—Real Estate Loans—Agent for Borrower—Payment to Agent—Mortgages.
Defendant applied to a real estate agent for a mortgage loan. Three unsatisfied mortgages were to be paid with the proceeds of the loan. Plaintiff agreed with the agent to make the loan, and gave the agent a check for the amount, taking a mortgage on the property, the agent assuring him that he would search the title, and see that plaintiff had a first mortgage, but not informing, him of the outstanding incumbrances. On execution of the mortgage defendant instructed the agent to pay off the three outstanding mortgages with a part of the money in his possession. The agent paid off one of the three mortgages only, and appropriated the rest of the money. Held, that the payment of the amount of the loan to the agent was a payment to him as agent of defendant, and a finding that plaintiff had kept back a part of the loan equal to the amount of the two prior unsatisfied mortgages was error.
Goodrich, P. J., and Woodward, J., dissenting.
Appeal from trial term, Kings county.
Suit for foreclosure of a mortgage by Ernst Henken and another against Frederick Schwicker and another. From a judgment of foreclosure, plaintiffs appeal.
Reversed.
Argued before GOODRICH, P. J„ and JENICS, WOODWARD, HIRSCHBERG, and SEWELL, JJ.
A. E. Van Thun, Jr., for appellants.
John A. Straley, for 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 mane)r, 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 tobk 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 acted solely as agent for Schwicker, and not at all for Henken, unless his engagement to search the title be so regarded. He already knew all the record would disclose, having been informed by Schwicker 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. Schwicker 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 Schwicker 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 plaintiffs herein by the defendants Schwicker upon the express understanding and agreement that the same were to be held-by these plaintiffs upon condition that they apply three thousand dollars towards 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 Schwicker; and the said bond and mortgage were valid and effectual as against defendants Schwicker to the extent of said six hundred dollars actually advanced, with interest from the 1st 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, Schwicker 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 Schwicker had hired and paid to demand and receive the same. It was precisely the same as though Henken had given it directly to Schwicker. Dreher promised nothing which Schwicker would not have promised, and nothing which Schwicker had not expressly instructed him to promise. Schwicker 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 Schwicker 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 Schwicker 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 Schwiclcer'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 Schwicker, 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 oí the risk. In the most favorable view possible to the defendants, Dreher might be regarded as Henken'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 Henkenbe 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, co add that no decision of the courts oi 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, 36 N. E. 1052, 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 malee him the lender's agent to discharge existing liens tyhat the duty or obligation to pay off such debts was that of the borrower, who owed them; that such duty was included in the lat ter'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 applied 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 Henlcen 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 Pa. 416, 45 Atl. 377, is somewhat analogous to the case mow 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 his 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., concur.
Judgment reversed, and new trial granted, without costs of this appeal.