
    Eleanor B. King, Resp’t, v. William MacKellar, App’lt.
    
    
      (Court of Appeals,
    
    
      Filed April 10, 1888.)
    
    1. Principal and agent—Investment of trust money in second mortgages improper.
    It is an improper and insecure disposition of moneys by any one acting for another, either as agent, trustee, or in a fiduciary capacity, to invest it upon the bond of an irresponsible obligor, secured by a mortgage upon property already incumbered, with knowledge that the party whose money is invested would not be able to protect such an investment of her money in the event of the foreclosure of the prior mortgage.
    2. Same—Right of principal to treat as null, such investment.
    Where the agent makes such an investment without authority and without informing his principal of the character of the security; Held, that the act is without the scope of the agency and can be treated as null.
    3. Same—Ratification of authority.
    The plaintiff had relied upon the defendant, and was led to suppose that he had faithfully used the authority given him to invest her moneys, and had carried out his undertaking to safely place them upon bond and mortgage. That belief was fostered by the receipt, during seven years, of supposed interest moneys. Defendant had studiously concealed the fact of his having used her moneys for his own benefit and purposes, when she discovered that they never had been invested, but had been retained in defendant’s possession. Held, that she had the right to revoke his authority and to demand the moneys she had entrusted to him. That there was no ratification. That ratification implies a knowledge of the circumstances and of the right to reject or ratify.
    4. Same—Right of action—When it accrues.—Statute of limitations.
    Ho liability to return the plaintiff’s money existed by mere force of the original undertaking. It was the discovery of the true state of affairs, that gave plaintiff the right to revoke her authority to the defendant and to demand back her moneys, and upon a refusal to comply, to commence an action against him. The statute of .limitations did not commence to run until such demand.
    Appeal from a judgment of the supreme court, general term, first department, affirming a judgment in favor of the plaintiff, entered upon the trial of the case, before the court, without a jury.
    
      Herbert T. Ketcham, for app’lt; Frederich R. Coudert, for resp’t.
    
      
       Affirming 38 Hun, 638, mem.
      
    
   Gray, J.

When this case was before this court on a former occasion, the judgment in the plaintiff’s favor was reversed and a new trial granted, on the ground that the action being for a conversion by defendant of moneys entrusted to him by plaintiff, the exclusion of evidence tending to show honesty and good faith in defendant’s disposition of the moneys was erroneous. 94 N. Y., 317. The plaintiff amended her complaint and, as amended, the action proceeded upon the undertaking of the defendant to safely and securely invest her moneys for her benefit upon good bond and mortgage.

The trial judge found as a conclusion of law “that the defendant, in receiving the plaintiff’s money upon an undertaking and promise to invest the same for her upon bond and mortgage, assumed a fiduciary relation and duty towards her; and that he violated such duty in retaining the plaintiff’s money in his own possession, and causing the execution to his wife and the assignment by her of the $3,000 mortgage, as stated in the fifth and eighth findings of fact.”.

The argument of appellant’s counsel on the appeal here, was confined to certain points,-which we shall mention.

He insists that plaintiff, with knowledge of the facts, ratified the defendant’s acts; that her dealings were not with the defendant; that an alleged investment of her moneys was a safe and prudent one; that she received and retained substantial fruits of the alleged investment, and that the statute of limitations in force before January 1, 1877, bars any cause of action she may have.

We think none of these grounds to be tenable for a serious attack upon the plaintiff’s judgment, and that the trial judge’s conclusion as to defendant’s liability -was right. A brief statement of the occurrences makes this clear.

The plaintiff, a woman of limited means and a cousin of the defendant, in a prior transaction in the year 1868, had loaned through him $2,000 upon bond and mortgage. She had received and she held the papers evidencing this transaction until June, 1871, when the loan was paid and she executed a satisfaction piece. At that time and upon the suggestion of another, opportunity offering itself for a secure investment upon bond and mortgage of the sum of $3,000, she entrusted that amount to defendant’s custody for that purpose. When defendant received from plaintiff these moneys, he was engaged in a transaction with one Thomas Sampson for an exchange of real properties. Certain premises in NewYork city, which had been purchased by defendant, but the title to which had been taken in his wife’s name, were conveyed to Mary, wife of said Sampson; and she simultaneously conveyed to defendant’s wife a farm on Staten Island and executed to her a bond, secured by a second mortgage on the Second avenue property conveyed to her, to represent $3,000 of the valuation or purchase moneys of that property agreed upon for the purposes of the trade. There were other details of adjustment of valuations as to the live stock on the farm and the furniture on the city premises; but they are not material to the consideration here. This mortgage' for $3,000 was subject to a prior mortgage to secure the sum of $6,000.

After this exchange of properties had been consummated in its particulars, defendant caused his wife to execute an assignment of the mortgage for $3,000 to the plaintiff. The mortgage was recorded, but the assignment never was. Neither this assignment, nor the bond and mortgage, were ever exhibited or delivered to plaintiff, or information of the transactions mentioned given to or possessed by the plaintiff until some seven years afterwards. Defendant retained the assignment in his possession, and, when an action was brought to foreclose the prior mortgage and his wife was made a party defendant, as the recorded holder of the second mortgage, he still refrained from giving any information to plaintiff of the disposition of her moneys and his wife appeared in the action by their son, a lawyer.

The sale, under the decree in foreclosure, occurred in 1877, resulted in a deficiency, and the lien of the second mortgage was extinguished, except as to about twenty feet of the rear of the lot. Early in the year 1878, when it had come to plaintiff’s knowledge that defendant had pretended to have invested her moneys in a second mortgage upon the lot in Second avenue, he promised to protect her from loss.

He obtained from Mrs. Sampson, a deed, conveying the twenty feet, not covered by the first mortgage, to a relative of plaintiff’s as for her (plaintiff’s) security. This deed, with the bond and mortgage, and the assignment thereof, were first handed over to plaintiff late in the year 1878; but, shortly after their receipt, were returned to defendant, with a demand for re-payment of her moneys, From the time when he received the plaintiff’s moneys, down to 1878 defendant would pay over to her the interest moneys which were paid by the mortgagee Sampson.

The trial judge found as facts, and there is evidence warranting his doing so, that the plaintiff was a woman ignorant of the forms and methods of making such investments, who relied wholly upon her cousin’s, the defendant’s knowledge and experience to make a secure investment of her money; that he knew she was poor and had little, if anything beyond the moneys he had received from her, and that Mary Sampson, the obligor in the bond secured by the second mortgage, had no separate or other estate, except that conveyed to her in the trade. Thus, even if upon the facts we could assume the making of any investment at all, "by the defendant for plaintiff, he made it upon the bond of an irresponsible obligor, secured by a mortgage upon property already heavily encumbered, and with knowledge that the plaintiff would not be able to protect such an investment of her moneys in the event of the foreclosure of the prior mortgage. This would be an improper and insecure disposition of moneys by any one acting for another, either as agent, trustee or in a fiduciary capacity. In Whitney v. Martine (88 N. Y., 535-540), Judge Miller, delivering the opinion of this court, in speaking of an investment of plaintiff’s moneys by her agent and attorney, said '* as a general rule, it may properly be laid down, that it is not prudent or Safe to advance moneys on second mortgage where there are large prior encumbrances and especially where the personal security of the mortgagor is in any way precarious.’’

This rule commends itself to our special approval in cases like the present; where the party, whose moneys are so invested, will probably be unable to protect the investment by advancing enough to pay off the prior encumbrances.

And where, as here, the agent makes such an investment without, authority and without informing his principal of the character of his security, we think the act was without the scope df the agency, and could be treated as null. But we think the assumption that there was any investment of plaintiff" s moneys, finds no support in the case. Defiendant simply retained the plaintiff’s moneys in his own possession, going through the form of procuring his wife to make an assignment of a bond and mortgage, which represented no original loan or investment of moneys, but which had been received as a part of the consideration expressed upon a trade of properties. The investment was, in fact, but amere sham and a form, incompletely gone through with at that, as. doubtless, for some ulterior purpose, the defendant did not even record the assignment. And when the action was brought to foreclose the prior mortgage, to procure the appearance by his wife in the action, as the holder of the second mortgage, was in itself a continuance of a course of deceit and suppression. The scheme, as developed by the case, seems to reveal a plan by which the trade of properties, upon which defendant had entered, was to be made more advantageous to himself in the realization of cash through the use of plaintiff’s moneys. If the Sampson mortgage was ever paid, the money could be used to pay plaintiff; but if it turned out to be valueless, defendant would not be the loser, as he would shift the loss upon the plaintiff under the guise of an investment for her, which had resulted unfortunately. Through his influence over ¡her, and her confidence in him, he might trust to prevent any embarrassing inquiry or examination by her as to the details of his disposition of her moneys. If the plan resulted successfully, and the Sampson mortgage was paid, nothing would ever be known; whereas, if it did not, he would .trust to his ability to find means to fasten the loss upon the.plaintiff. He would get rid of this precarious security that had been taken in the trade, and keep the $3,000 in money. Finding himself confronted with plaintiff’s claim, he now sets up the pretended investment of her moneys and pleads a statutory bar to any claim. It is clear from the evidence, and it appears from defendant’s own testimony, that the plaintiff’s moneys were to be put out upon bond and mortgage, while, in fact, they went to his bank account and there remained; he, as he puts it, giving credit for them to his wife.

Comment seems superfluous. The defendant’s acts were characterized by bad faith and by deceit, and were in flagrant violation of his duty towards plaintiff.

Nor. does the case furnish any support for defendant’s theory of a ratification by plaintiff of his acts. Ratification implies a knowledge of the circumstances and of the right to reject or ratify. Nixon v. Palmer, 8 N. Y., 398; Baldwin v. Burrows, 47 id., 199; Adair v. Brimmer, 74 id., 554; Whitney v. Martime, 88 id., 535, 540.

Here there was no knowledge until after the exposure of defendant’s conduct. Acceptance by the plaintiff of the deed of the twenty feet, not covéred by the first mortgage, was not a fact which defendant can rely upon; for she took it in ignorance of the circumstances and of her rights, and in the desperation caused by the supposed loss of her moneys. When advised of her rights, and within a very short time, plaintiff, showing no indecision, acted promptly in asserting them.

On October 5, 1878, she returned the deed which defendant had advised her taking, and the bond and mortgage, with the pretended assignment thereof, which were sent to her by defendant’s son, and claimed from defendant the return of her moneys. Upon the trial she made tender, without the interposition of an objection, of a deed of conveyance of the twenty feet. ¡Nothing appears in the facts amounting to either ratification by plaintiff, or to a waiver of her right of action, and we think the facts did establish the right to recover back the moneys, unless the statute of limitations has interposed a bar to any recovery.

¡Demand was necessary for the assertion of plaintiff’s right to have her moneys returned to her, and to impose upon defendant, in the event of his non-compliance, a liability to respond in an action. She had relied upon the defendant, and was led to suppose that he had faithfully used the authority given him to invest her moneys, and had carried out his undertaking to safely place them upon bond and mortgage. That belief was fostered by the receipt during the seven years of supposed interest moneys. Defendant had studiously concealed the fact of his having used her moneys for his own benefit and purposes. When she discovered that, in truth, they never had been invested, but, in fact, had been retained in his possession, she had the right to revoke his authority and to demand the moneys she had entrusted to him.

The fact that this action would be controlled by the statute of limitation's in force before the present Code went into effect, by which a limitation of six years for the commencement of actions “upon a contract, obligation or liability, express or implied,” was prescribed, does not affect the plaintiff’s right of recovery. Ko liability to return the plaintiff’s money existed by mere force of the original undertaking; but first sprang into existence when the plaintiff, with knowledge of the facts, elected to revoke her authority to the defendant and to disaffirm his acts, and upon her demand for the return of her money. The present Code of Civil Procedure by section 410, provides “ where a right of action exists, but a demand is necessary to entitle a person to maintain an action, the time within which the action must be commenced, must be computed from the time when the right to make the demand is complete, except—where the right grows out of the receipt or detention of money—by a person acting in a fiduciary capacity, the time must be computed from the time when the person having the right to make the demand has actual knowledge of the facts upon which that right depends.”

This section was a codification of the law as it existed at the time of its adoption and created no new rule of law. The right of action became enforceable against the defendant when the plaintiff discovered that he had never, in truth, disposed of her moneys; but had retained them himself under the pretense of having invested them. We think that there was no investment at all of plaintiff’s moneys, and if what was done by defendant can be assumed to have been in the nature of an investment, it was unauthorized, and was, in any case, not such as the courts will countenance or allow in one acting in a fiduciary capacity for another. When plaintiff discovered the facts, then she had the right to repudiate and disregard the defendant’s acts, and to revoke the defendant’s authority to dispose of her moneys and to reclaim the possession of those-moneys; of which on one theory of the case, no investment had been made and, on the other theory, but a colorable and unauthorized investment was set up. If there was no investment, she had the right to revoke the original authority, and to reclaim her moneys. If there was a disposition of them, by some form of investment, not authorized by the terms of the agency, and not sanctioned by the law, then the matter-stood as if no investment had been made, and she had the right to revoke his authority and to reclaim her moneys. It was the discovery of the true state of affairs that gave her the right to revoke her authority to the defendant, and to demand back her moneys and, upon a refusal to comply, to commence an action against him. Demand was not alleged, in the complaint; but it was proved on the trial without objection. The complaint stated facts sufficient to make out, on defendant’s part, a violation of duty and a breach of faith towards plaintiff in the use of her moneys for his own benefit. Though the complaint might be defective, tested as a pleading, for the failure to allege demand, yet as the demand was proved, without objection, on the trial, and the complaint was not demurred to, it was competent for the court to admit evidence of it on the trial. White v. Spencer (14 N. Y., 247); Simser v. Cowan (56 Barb., 395); Fullerton v. Dalton (58 id., 236, 240).

If objection had been made to the offer of proof of demand, the court could have allowed an amendment to the pleading conforming it to the proof.

That this complaint states matters belonging to the province of" the trial as details of proof showing the sham or mock nature of the alleged investment and the methods adopted by defendant to disguise his retention of the money, does not constitute a material defect.

The judgment appealed from should be affirmed with costs.

All concur.  