Smith v. South Royalton Bank

Bennett, J. This is a case of very considerable importance; and we have endeavored to give it a careful consideration. We havé no doubt, from the testimony, that the bond and mortgage in question in this case were delivered conditionally to Rolfe; to be delivered by him to the State treasurer, when the orator, Spencer Smith, should be indemnified from all loss and damage which should be occasioned to him by reason of the same, and not before. No precise form of words is necessary to make an instrument an escrow, and an escrów has been wjell defined to be the conditional delivery of an obligation or deed, which is to take effect upon the happening of some event consistent with the instrument, and not a condition of delivery repugnant to the contract and varying its terms. It is laid down in our elementary writers, that an escroto can never take effect as a deed till the performance of the condition, even though the grantee gets possession of it before such performance; and in Hinman v. Booth, 21 Wendell 267; it was held that the condition must be literally fulfilled, and that where.the 'condition was that the grantee was to give a bond for the support of a third person, and such bond had not been given, the deed could not take effect, although the support had been in fact furnished such third person during his life, and he had deceased. Until the condition is performed the deed is of no more force than it would have been if the grantor, after signing and sealing the instrument, had deposited it in his own desk.. The delivery is a part of the-execution of the instrument, and is essential to its vitality; see 1 Shep. Touchstone 59 ; 2 Hilliard on Real Property 303, secs. 131 and 132. It is not in fact seriously contested in this Case, but that the bond and mortgage were delivered to Rolfe as escrows, and that they were delivered over to the State treasurer by Rolfe without authority, and in fraud of the rights of the orators, inas — 348 — much as Pierce’s bond of indemnity had never béen procured, and .the case is put upon the ground that the State treasurer, under the banking law of 1851, took the bond and mortgage in good faith for value paid, and that he has a good right to have them enforced, that the same may become assets of the bank in the hands of the receiver for the benefit of the bill holders of this insolvent institution. We are not disposed to question the fact that the bond and mortgage were received by the treasurer in good faith and for value, and that one of the two innocent parties must suffer, and the question now is, which it must be ? In the case of an escroto the estate does not pass, but remains in the grantor until the condition has beeú performed and the deed delivered over, and if the deed be delivered over without a performance of the condition, it cannot be an operative delivery to pass the estate. In this case Rolfe was the special agent of the grantors to hold the bond and mortgage till the condition was performed, and no presumption can arise of his having a general agency, if that should be thought to be of any importance. The deed not j having been delivered it was a nullity and Void, or m'ore properly j speaking, never existed, and must be tainted with the fraud of j Rolfe, which goes to the very existence of the instruments, into ( whosesoever hands they may come. It is not like the cases where the fraud is collateral, as where the instrument has become a perfect one, and it is appropriated fraudulently to a use different from the one for which it was created. It is then the important question in the case, whether from the facts disclosed there. is any good ground to hold that the grantors cannot avail themselves of the want of a delivery of the bond and mortgage ? It is said on the part of the defence that the orators ought to be bound by the delivery of the bond and mortgage by Rolfe, although he has been guilty of a. gross fraud and has transcended his authority, because the orators have enabled him to mislead an innocent party, and that the maxim of natural justice well applies to this case with its full force, “ that he who, though without any intentional fraud, has put it in the power of another person to do an act which must be injurious to himself, or to another innocent party, shall himself suffer the loss, rather than the other party who has placed confidence in him.” — 349 — Though this position may seem specious, yet we think, as applied to this case, it is not sound. The authority delegated to Rolfe was to do a singlo act, and his agency was of the most special hind, requiring him only to perform a single act, strictly ministerial in its character. Mr. Smith, in his treatise on Mercantile Law, a work of great accuracy, on page 59, 2d edition, after defining a general agent, proceeds to say, “his authority cannot be limited by any private order or direction not known to the party dealing with him. But the rule, he says, is directly -the reverse concerning a particular agent, that is, an agent employed specially in one single transaction, for it is, he adds, the duty of the person dealing with such a one to ascertain the extent of his authority, and if he does not do it he must abide the consequences.” So in Raley on Agency by Lloyd, 3d edition, 199, note, after stating the rule applicable to general agents, and the assumptions to be made that they have an unqualified authority to act in all matters within the scope of their agency, it is said, “in the case of a particular agent, that is, one employed specially in that single instance, no such assumption can be reas* onably made, and it becomes the duty of the person dealing with him to ascertain by inquiry the qaturo and extent of his author* ity, and if it be departed from he must be content to abide the consequences.” This distinction, says, will explain all the cases in the text. See also Smith’s Mer. Law, 3d ed. 107, 108; Wooden v. Burford, 2 C. & M. 395; Jordan v. Norton, 4 M. & W. 155; Sykes v. Giles, 5 M. & W. 645. Where one of two innocent persons must suffer from the fraud of a third person, the inquiry naturally arises, which gave the credit ? Smith is not chargeable with holding out Rolfe as pos* sessing larger powers than he in fact had; and the State. treasurer, not having ascertained the true extent of his powers, though this may be without any personal fault in him, must, as between Smith and himself, be regarded as having trusted to Rolfe rather than Smith, or in other words, the State treasurer, or rather those in whose behalf he was acting, must sustain the loss occasioned by the fraud of Rolfe rather than Smith. If an agent in dealing for his principal, strictly within his authority, — 350 — commits a fraud in the sale of property, the principal must answer for it, unless he chooses to repudiate the fraud and restore the dealer to his former situation. He cannot adopt the dealing and repudiate the fraud. The maxim in relation to which of two innocent persons shall suffer from the fraud of a third person, is not to be so extended as to make the principal responsible for the want of the general integrity of his agent, and for his acts attended with fraud which are not included within the power conferred upon him. Such an application of the maxim would break down well settled principles, and would prevent the principal from defending upop the ground that it was the fraud of the agent, even in cases where the agent acted in a matter beyond the extent of his powers. The maxim was first applied by Lord Holt, in an action for a deceit in the sale of some silks by an agent who had authority to make the sale; 1 Salk. 289. In such a case the application of the maxim is well enough, but here Rolfe was a special agent to deliver the deed upon a special condition, and ¡the fraud consisted in his doing an entire act which he had no authority to do. It might have been better, if the law had required that it should appear upon the face of a deed that it was delivered as an escrow, and if such had been the rule grantees might have been more secure against fraud, but as was well said by Ch. J. Marshall, “ the law is settled otherwise, and it is not to be disturbed by the court;” 4 CraneK222. The position that an agent with limited powers cannot bind his principal when he transcends his powers, and that the person dealing with him is bound to know the extent of his powers, is too well established to be questioned ; 1 Peters 290. The bond and mortgage then was a nullity in the hands of the treasurer for the want of a delivery, and he cannot escape this consequence by an application to the case of the maxim which is sometimes applied, as between two innocent parties.v.^his is not like the case of Pratt v. Holman et al., 16 Vt. 530. There the deed was delivered to .the agent appointed by the grantee to procure it. In such a case the delivery to the agent was effective to pass the title, although it was delivered upon a condition which had not been performed; 1 Selden 238; 8 Mass. 238. In legal effect it was a delivery to the grantee. Besides, the court in Pratt v. Holman put the ease upon the — 351 — ground that the agent was satisfied with the promise to pay the money, and if not paid, an action might be had on the promise. This was clearly a case where the deed took effect from the time it was delivered to the agent. The case at bar is one that does not fall within the law merchant as to negotiable paper. The general rule of the common law is that an assignee takes a chose in action, subject to all the equities that existed between the original parties. In the case of The Mechanics’ Bank v. N. Y & N. H. R. R. Co., 3 Kernan 599, the plaintiffs were bona fide holders of the certificates of stock for value advanced at the time, and Schuyler was, at the time the certificates were issued, president of the company, and also transfer agent, whose business it was, on the transfer of stock on the books in his charge, and the surrender of certificates, to issue new certificates of stock to the transferee, and the certificates in that case issued to Kyle were in the usual form, and were duly transferred by Kyle to the plaintiffs. Kyle and the transfer agent of the company were both parties to the fraud, and yet it was held that the railroad company could not be made liable to the bank on the ground that Schuyler was their transfer agent. The certificates not being commercial paper, the ordinary rule was applied. See also Grant v, Norway, 70 Com. Law 665; Coleman v. Riches, 29 Eng. Law & Equity 323 ; The Schooner Freeman v. Buckingham et al., 18 Howard U. S. 182. The case of The Farmers & Mechanics’ Bank v. The Butchers & Drovers’ Bank, 2 Smith (N. Y.) 125, where the paying teller had certified a bank check to be good, in violation of his duty, the drawer having no funds in bank, was decided purely upon, the ground that a bank check was negotiable paper, and governed by the law merchant. Ve think the orators are not precluded from urging in their defence a want of authority in Rolfe to deliver the bond and deed, by reason of their holding him out as having such authority. The only pretence for this arises from the naked fact that the orators consented that the assignment might be made upon the papers, and the deed put on record, while Rolfe held them as escrows. This, it seems, was done simply to expedite the business. In Maynard v. Maynard, 10 Mass. 456, it was well held that the grant; — 352 — or’s putting a deed upon record did not constitute a delivery of the deed to the grantee. No title could pass out of the grantors j of course by the force of its being recorded, but still the question ] remains, what shall be the effect of putting such apparent title on record, so far as the rights of the treasurer are concerned, who acts as a trpstee ? Tarbell, who negotiated with the morti gagors for this mortgage to the bank, was at the time one of the directors in the bank, and was a party to the transaction, and privy to the conditic upon which the papers were put into Rolfe’s hands, and the object of having the deed put on record while in the hands of Rolfe. Notice of these facts to Tarbell, a director, in the very transaction itself, was notice to 'the bank. The mortgagors should not in this case be estopped from insists ing upon a want of the delivery of the deed by reason of the! record. To hold this would only be asserting in another form, thsA, fraud, where the act is one of pretended agency, is no defence. It would subvert the settled doctrine that the assignee takes subject to all equities between the original parties. Besides, the putting the deed upon record was not by implication a representation of any other fact, and not designed to influence the treasurer to accept the deed without any valid delivery, but it was consented to to facilitate the completion of the whole business. No question can be had but what the bond and deed were a nullity in the hands of the bank, and both Tarbell and Rolfe were guilty of a gross fraud in passing them off to the treasurer. The bond and the mortgage then being, as between the orators and-the bank, of no more force than so much blank paper,' and utterly void, they are incapable of confirmation, so as to confer a title to the assignee of the bank. It is no doubt true that there is a radical distinction, as it respects the rights of a bona fide purchaser or assignee without notice, between a void and a voidable instrument. If, for instance, a voluntary and covinous deed of lands is made to a grantee, and he conveys to a bona fide purchaser without notice, the purchaser shall be preferred to the creditors of the fraudulent grantor. In such a case the deed is valid as between the parties, and voidable only by the creditors pf the vendor. It may be conceded as a sound principle of law that- in cases of voidable deeds and obligations the bona fide assignee — 353 — or purchaser stands in a bettor situation than the participant in the fraud, but not so if the instrument was void. In the case of Martin v. Miller, 4 Term 320, it was held that an unauthorized alteration in a bill of exchange, after acceptance, by which the time of payment was shortened, avoided the instrument,-and that no action could afterwards be maintained on it, even by an innocent holder for value. The case of Awde v. Dixon, 5 Eng. Law & Equity 512, seems by the court to be put upon the ground that the note never became a perfect instrument, as against the defendant, inasmuch as there was no authority, express or implied, from him for a delivery of the note. But let the principle be as it may in regard to commercial papers, no question can be made as to a void deed. The case of Van Armage v. Miller, 4 Wharton 382, is ruled expressly on the distinction between a void and a voidable deed, and it was theré held that a bona fide purchaser for a valuable consideration from the person holding a void deed stands in no better situation than such fraudulent holder. The distinction is fully recognized in Price v. Yunkin, 4 Watts 85, and the case decided upon that distinction. So in Arrison v. Harmstead, 2 Barr 191, 195, it was held that a deed having been rendered void by an alteration, a purchaser without notice and for valuable consideration was in no better situation than the original parties. The case in the 4 Wharton, as in the case at bar, was one where there had been no valid delivery of the deed. So in the case of Pawling v. United States, 4 Cranch 219, there had been no delivery of the deed. It hardly need be remarked that if a deed wants delivery, it is void ab initio. Where a bona fide purchaser for value holds under a vendee, who holds by a voidable deed, though he and the creditors of the vendor have equal equities, yet the purchaser has also the legal title and shall be preferred. In the case at bar, though the bill holders of the bank represented by the treasurer and the orators have equal equities, yet'as the bond and deed are void, the legal title remains in the orators and they should be preferred tinder the common rule, that where the equities are equal, the one having the legal title prevails. It becomes necessary to see whether in this case there was a — 354 — subsequent recognition of the delivery of the bond and deed by the orators, or something done by them which enabled Rolfe and Tarbell to deceive the assignee, and should exclude the orators from relief. We think, from the evidence, there is no ground to find the fact that Smith subsequently ratified the delivery of the bond and mortgage. When he found the papers had been fraudulently delivered by Rolfe, he had a right to try to extricate himself from loss. If he had accepted some other security in the place of Pierce’s bond, it might have operated as a recognition of the delivery, but his willingness to take other security should have no such operation; and as to the reception of the seventy dollars, which by the contract he was to have for the use of his farm, for putting it in for banking purposes, as it was called, he accepted it, not under the original agreement, but under a new agreement, that it should be treated as money lent unless Tarbell should, subsequently indemnify him against the bond and mortgage. The omission of Smith to give earlier notice to the treasurer of his defence cannot be construed into a ratification of the delivery of the papers, and though, if the treasurer had had earlier notice, he might have been enabled to make all things right with the bank, yet that should not throw the loss upon Smith. Both the treasurer' and Smith no doubt supposed the bank amply, safe, and there was at that time nothing to cause alarm in the minds of either, and no sufficient reason in law or fact is shown why Smith should have been required to give earlier notice to prevent a waiver of his defence to the bond and mortgage. We think that the treasurer cannot claim to take this case out of the ordinary rule upon the ground that he has been misled as to the extent of the authority of Rolfe, by the act of Smith. The bond and mortgage were, it is true, put into the hands of Rolfe, and by him carried to the treasurer in company with Tarbell, and though Rolfe and Tarbell passed them to the treasurer professedly in behalf of the bank, yet this was in no way the act of Smith, and it do.es not appear that they exhibited any authority from the barik so to do, andno inquiries were made of Rolfe as to his powers, andnot only Rolfe and Tarbell acted in fraud of the rights„of Smith, bpt the bank also are phargable with participating in the fraud, — 355 — inasmuch as notice to Tarbell, a director in the bank, is to be regarded as notice to the bank, of the terms upon which Rolfe held the possession o.f the papers. It may be conceded, perhaps, that this is a hard case for the bill holders, but would it not be much harder for- the orators if they are to be visited with the fraud of Tarbell, of the bank, and of Rolfe, through whose wrongful conduct claim is made ? No doubt fraud may he committed on an innocent purchaser, hut had we not better encounter that risk rather than attempt to give effect to a void deed, simply on the ground that the grantors should he estopped from contesting it, for the reason that they consented that it might he recorded, before it was delivered, for an honest and laudable purpose. In the ordinary case a deed purports upon its face to 'be an absolute deed, and purports to have been signed, sealed, acknowledged and delivered, yet the law is well settled that it may be shown by parol that it was delivered as an escroto, and if it has also been recorded, still it may he shown to be only an escroto, and the fact of its having been recorded is of itself no evidence that the person who held the instrument as an. escrow in his hands after it was recorded, held it With enlarged powers, as to his agency, and the principles of law applicable to a case of special agency must apply and govern this case. 'J'he decree of the chancellor is affirmed with additional costs.