In Henry v. Allen (151 N.Y. 1) the Court of Appeals said (at p. 9): "The general rule that notice to the agent, while acting within the scope of his authority and in regard to a matter over which his authority extends, is notice to the principal, rests upon the duty of disclosure by the former to the latter of all the material facts coming to his knowledge with reference to the subject of his agency and upon the presumption that he has discharged that duty.Summary of this case from DuRoy & Le Maistre, Inc. v. Gillmore
Argued October 6, 1896
Decided December 1, 1896
John G. Milburn and Sherman S. Rogers for appellant. William H. Henderson for respondent.
The learned General Term proceeded to judgment upon the ground that a principal is chargeable with the knowledge acquired by an agent while transacting his business, and that hence the plaintiff had constructive notice of the circumstances under which Monson procured the instruments in question from the defendants. The general rule that notice to the agent, while acting within the scope of his authority and in regard to a matter over which his authority extends, is notice to the principal, rests upon the duty of disclosure by the former to the latter of all the material facts coming to his knowledge with reference to the subject of his agency and upon the presumption that he has discharged that duty. ( Casco National Bank v. Clark, 139 N.Y. 307, 313; Hyatt v. Clark, 118 N.Y. 563; Case of the Distilled Spirits, 11 Wall. 356, 367.) This presumption, however, does not always arise, for there are several exceptions well recognized by the authorities. Thus, when the agent has no legal right to disclose a fact to his principal, or he is engaged in a scheme to defraud his principal, the presumption does not prevail, because he cannot in reason be presumed to have disclosed that which it was his duty to keep secret, or that which would expose and defeat his fraudulent purpose. ( Innerarity v. Merchants' National Bank, 139 Mass. 332; S.C., 52 Am. Rep. 710; Weisser v. Denison, 10 N.Y. 68, 76; Frenkel v. Hudson, 82 Ala. 158; Western M. I. Co. v. Ganzer, 63 Fed. Rep. 647; Hudson v. Randolph, 66 Fed. Rep. 216; Kettlewell v. Watson, L.R. [21 Ch. Div.] 707; Cave v. Cave, L.R. [15 Ch. Div.] 639; Mechem on Agency, § 721.) As Mr. Pomeroy says in his work on Equity Jurisprudence: "When an agent or attorney has in the course of his employment been guilty of an actual fraud, contrived and carried out for his own benefit, by which he intended to defraud, and did defraud his own principal or client, as well as perhaps the other party, and the very perpetration of such fraud involved the necessity of his concealing the facts from his own client, then, under such circumstances, the principal is not charged with constructive notice of facts known by the attorney, and thus fraudulently concealed. In other words, if, in the course of the same transaction in which he is employed, the agent commits an independent fraud for his own benefit, and designedly against his principal, and it is essential to the very existence or possibility of such fraud that he should conceal the real facts from his principal, then the ordinary presumption of a communication from the agent to his principal fails; on the contrary, a presumption arises that no communication was made, and consequently the principal is not affected with constructive notice." (§ 675). Referring to the same subject in Weisser v. Denison ( supra), Judge ALLEN said: "The principle that notice to an agent is notice to the principal is quite familiar, but is only applicable to cases in which the agent is acting within the scope of his employment. Were it otherwise, and did it extend to acts unauthorized and outside of the employment, whether trespasses or even felonies, the master might be made responsible for all acts, whether tortious or otherwise, done by his servant, while in his employ, or acting professedly in his behalf, if he did not act at once by disclaiming the authority. The servant would necessarily have knowledge of his own wrongful act, and within the rule sought to be applied, the knowledge of the servant would be that of his master. * * * He would thus, by a legal fiction, be charged with the tortious, fraudulent or even felonious act of his servant. This is not the law." (p. 77.)
When an agent abandons the object of his agency and acts for himself by committing a fraud for his own exclusive benefit, he ceases to act within the scope of his employment and to that extent ceases to act as agent. ( Shipman v. Bank of New York, 126 N.Y. 318, 331; Welsh v. German-American Bank, 73 N.Y. 424; Allen v. South Boston R.R. Co, 150 Mass. 200, 206.) Monson was an agent to deposit moneys for the plaintiff with the defendants, and to procure their checks therefor, which he was to indorse and deliver to the plaintiff. As a collateral arrangement he also agreed to personally pay interest upon the amount of the deposits, which neither adds to nor takes from his authority as agent. His authorized power over the money ceased when the deposit was made. In agreeing that the checks given should not take effect according to their legal purport, and that they should be returned to the defendants without delivery thereof to any one, he was not acting as agent, but in his own behalf. Both the adverse and the personal character of that act destroys the presumption which would otherwise arise, that he disclosed it to the plaintiff. Not only were the relations of the agent to the subject-matter such as to make it certain that he would not tell his principal that the checks were delivered under an agreement which nullified their effect, but the making of that agreement itself was not done by him in his character as agent, but as an individual, engaged in committing a fraud for his own benefit.
Whether this case should be regarded as an exception to the general rule, because the usual presumption as to disclosure does not exist, or simply as not covered by the rule, because the acts in question were not within the scope of the agent's authority, we think that notice of the agreement between Monson and the defendants, that the checks should have no binding force, should not be imputed to the plaintiff. No question of apparent authority arises, because the defendants did not know Monson, as agent, but supposed he was acting for himself alone. When they invoke his agency for their protection, therefore, they are limited to his actual authority. ( Bickford v. Menier, 107 N.Y. 490.) The plaintiff was, perhaps, chargeable with knowledge that the money was deposited in the name of his agent, not, however, through constructive notice springing from the law of agency, but because he knew from inspection of the checks that they were made payable to the order of Monson. While this may not have been according to the agreement under which the plaintiff intrusted the money to his agent, still, as his object was to secure the liability of the defendants, as guaranteed by Monson, the receipt of the checks, purporting to have that effect, naturally gave him every assurance that a reasonable man could require. Having the precise security that he wanted and that the agreement called for, it became a matter of no apparent importance whether the deposit was made in the one name or the other. He had what purported to be the negotiable instruments of the defendants, payable on demand, for the amount of the deposits, and this apparently placed them under obligation to pay regardless of the name of the depositor. Indeed, it was the most convenient way to have the checks drawn payable to Monson, because the plaintiff required his indorsement, and that form would make him liable as first indorser. At any rate, as the deposit was so made as to accomplish the object that the plaintiff had in view, he had the right to regard and treat it as a substantial performance of his contract with his agent. As knowledge of the secret agreement cannot be imputed to the plaintiff, he must, in view of the findings of the referee, when interpreted in the light of the undisputed evidence, be assumed to have acted in good faith. Upon this assumption it remains to be seen whether the courts below were correct in holding that the checks had no greater validity in the hands of the plaintiff than they had while in the hands of Monson.
If Monson had simply deposited the money to his own credit and had checked it out, the plaintiff would have had no claim upon the defendants. The loss would then have fallen on him; but it cannot be supposed that he would have continued to remit to Monson, unless the earlier remittances were satisfactorily accounted for, so that the loss would have been comparatively light. Monson, however, did account promptly for each remittance by sending the written obligations of the defendants, indorsed by himself. Those obligations were in the nature of cashier's checks, being drawn by the defendants, as bankers, upon themselves. As they were an essential part of Monson's scheme to defraud, it is natural that he should have suggested the form, but it is surprising that the defendants should have adopted it. They were not only negotiable upon their face, but their character was such as to make actual negotiation an easy matter, because they were payable on presentation at a bank, by the bank itself. No one who believed in the responsibility of the defendants and who wanted paper of that kind for any purpose, would hesitate to purchase it in the open market. The defendants, having extreme confidence in Monson, took no precaution to restrict their liability for the double credit that they gave for the same deposit. If they had drawn the checks without words of negotiability, or had written "not negotiable" across their face, it would have accomplished every purpose that Monson claimed to have in view, and at the same time would have protected third persons from imposition and injury. As memoranda, the checks would have been as useful in either of those forms as in that adopted. By action, as imprudent as it was unprecedented, the defendants placed it in Monson's power to defraud. The form of the transaction invited fraud by making it so easy, and it is not surprising that they hesitated and remonstrated before they did it. They thus, in effect, paid the deposit back to Monson and at the same time gave him their negotiable paper for it, trusting only to his word. Armed with this means of defrauding, thus knowingly intrusted to him by the defendants, Monson from time to time delivered the checks to plaintiff, in fulfillment of his contract under such circumstances as could arouse no suspicion. He delivered every check as negotiable paper, with the character and quality that the defendants, over their own signatures, asserted that it had. The plaintiff received it as such, in the honest belief that it was the product of his money deposited with the defendants according to his contract with Monson, and that no one could draw the money out without presenting the checks. There was no occasion for suspicion, and nothing to put a prudent man on inquiry. It was in the usual course of business, for it cannot be termed unusual for an agent to make a deposit for his principal and remit to him the evidence of that deposit in the form of negotiable paper, such as a cashier's check, a certificate of deposit or the check of private bankers upon themselves. He treated the instruments as genuine, and why should he not, since the defendants issued them in such a form as to induce the most careful to believe in their genuineness? They had never been presented or dishonored, and he received them as soon after the dates they respectively bore as the ordinary course of transacting such business by mail would permit. The fact that the plaintiff held them so long without presentation has no bearing, except on the question of good faith, and is fully explained by the agreement made between him and his agent. No check was stale when it reached the plaintiff, and the title that he acquired as each was delivered, if good then continued to be good. He gave full consideration, dollar for dollar, not by concurrent delivery, hand to hand, but by the nearest approach to it that was practicable under the circumstances. The business was done substantially through the mails. It was initiated by a general agreement that Monson should deposit all moneys intrusted to him by the plaintiff with the defendants and remit to him their checks therefor indorsed by himself. Under this agreement the plaintiff, from time to time, mailed checks and drafts to Monson, who deposited the proceeds with the defendants, received their check therefor, which he indorsed and promptly mailed to the plaintiff. This method of doing business, although perfectly legitimate, did not admit of delivery by the right hand and receipt by the left. In the nature of things there could not be mutual delivery, precisely indentical in point of time, when there were three parties to every transaction, each at a distance from the others. We think that the plaintiff parted with his money on the strength of the checks, although they were not in existence at the time, as there was an agreement which in the natural course of events promptly brought them into existence and placed them in his hands. If it had not done so, he could have reclaimed his money to the extent that it had not reached the possession of bona fide holders. ( Roca v. Byrne, 145 N.Y. 182.) The assurance conveyed by the checks naturally prevented any effort at reclamation. Our conclusion is that, according to the record now before us, the plaintiff is a bona fide holder of the checks in question and entitled to recover the amount thereof on that ground. This makes it unnecessary to apply the principle that where one of two innocent parties must sustain a loss from the fraud of a third, such loss shall fall upon the one whose act enabled such fraud to be committed. ( Moore v. Metropolitan Nat. Bank, 55 N.Y. 41, 47.)
The judgment should be reversed and a new trial granted, with costs to abide event.
All concur, except HAIGHT, J., not sitting.