
    BRUCE against DAVENPORT.
    
      Court of Appeals,
    
    
      June Term, 1867.
    Disaffirmance of Contract.—Delay after Discovery of Fraud.—New Trial.—Evidence.
    One who proposes to disaffirm a contract on the ground of fraud, which induced him to enter into it, must do so at once, upon the discovery of the fraud. '
    The defendants, who were partners, employed 'the plaintiffs, as brokers, to sell a note which defendants held, at a discount, without their indorsement and without recourse; but by making false statements to one of the partners, and by concealing the instructions given by the other partner, plaintiffs obtained the indorsement of the firm name on the note,—Held, that if the representation to one partner of what his associate would do if present, be deemed sufficient ground, within the rule respecting fraud, to avoid the contract, the defendants could not take advantage of it after having received and retained the proceeds of the note, and been silent for nearly three months, until the insolvency of the maker occurred. They should, at once, when the real facts were made known to all of them, have tendered the plaintiffs the money received, and demanded a return of" the note.
    On reversing a judgment for error, and ordering a new trial, the court are not authorized to make it a condition that testimony already taken may be read in evidence upon the new trial. The new trial being a matter of right, the party is entitled to it without qualification.
    Appeal from an order for a new trial.
    This action was "brought "by John M. Bruce, William A. Odell, and David M. Farnum, against James S. Davenport, Samuel W. Davenport, and Thomas Davenport. The plaintiffs sought to recover against the defendants as indorsers of a'promissory note for $2,350.62, made "by a firm doing "business under the name of Beale, Mellick & Dewitt. The defense relied upon was that the note in question was, previous to its maturity, delivered "by Thomas Davenport, one of -the defendants, respondents, to the plaintiffs, appellants, to be sold, as it was, by the latter, who were note-brokers, and that the appellants afterward procured the note to be indorsed in the firm name of “Davenport Bros.,” while Thomas Davenport was absent, by James S. Davenport, another of the respondents, who was ignorant of the instructions alleged to have been given to the appellants by Thomas Davenport at the time he delivered the note to them, and that such indorsement was procured by an alleged false representation of William A. Odell, one of the appellants, to' the effect that Thomas Davenport would indorse the note were he at home, and that he usually did indorse notes of that kind left with the appellants for sale.
    The referee found as facts that within a few days after the delivery as aforesaid of the note in question to the plaintiffs, Odell, one of the plaintiffs, called at the defendants’ place of business. Thomas Davenport was then absent.
    Odell found the defendant, James S. Davenport, there, and requested him to indorse this note in the name of the defendants’ firm.
    J. S. Davenport at first declined doing so, saying that Thomas Davenport attended to this part of the business, and that he knew nothing about it.
    Odell then stated to him that Thomas Davenport was in the habit of indorsing the name of his firm on the paper of those makers ; that he invariably did so ; that he would indorse this note if he were' at home, and that if J. S. Davenport indorsed it he would find it all right when Thomas Davenport returned ; that the plaintiffs could sell the note if the defendants indorsed it, but not otherwise. The defendant, J. S. Davenport, induced by these statements of Odell, then indorsed the note in the name of the firm.
    In a day or two after J. S. Davenport thus indorsed the note, Thomas Davenport returned, and on being informed by J. S. Davenport of the representations and of the indorsement,' expressed his dissatisfaction, and said lie would not have indorsed it for five hundred dollars ; and J. S. Davenport expressed indignation at having "been induced to indorse the notes by the statements, as above mentioned, of Odell.
    The defendants did not express dissatisfaction to the plaintiffs as to the indorsement, or the means by which it was obtained, till it was ascertained that the makers were insolvent.
    The referee reported in favor of the plaintiffs for the balance due on the note, after deducting a payment made by the assignee of the maker, holding that the statements made by Odell were not such false representations as would invalidate the contract of indorsement, in that they were promissory; in that the statements contained no warrant of the condition or ability of the makers of the note; in that the statement was not one that a person of ordinary prudence should have relied upon; and in that the representations, in a legal sense, caused no damage to the defendants, as they are in no worse position than if they had not sold the note, but had retained it till maturity.
    The supreme court at general term in the first district reversed the judgment of the referee, and ordered a new trial.
    The decision of the supi’eme court, which was now re • versed, is reported in 36 Barb., 349.
    The order for a new trial directed that the testimony taken on the former trial be read in evidence on the new trial.
    The plaintiffs appealed to the court of appeals, stipulating that, if the order appealed from should be affirmed, j udgment absolute might be entered against them.
    
      James C. Carter, for the plaintiffs, appellants.
    —I. The facts found by the referee are not sufficient to avoid the contract of indorsement, either upon the ground of fraud or mistake. (1.) To entitle a party to relief on the ground of mistake or false representations, the statements made must be so as to a material fact, and of such a nature that the party could not, by reasonable diligence, get knowledge of it (1 Story Eq., §§ 146, 147, 193, and 195). (2.) The mistake or misrepresentations must be of a material fact calculated to mislead persons of ordinary prudence and caution. (3.) The party must sustain damage (2 Kent Com., 637, 639). The facts in this case do not bring the appellants within these well-settled .rules.
    II. The statement made by Odell has caused no damage to the defendants. If the note had not been sold, it would have been worthless in their hands. It is fair to presume that the note could not have been sold without their indorsement. The defendants lost nothing by their indorsement. They received the money on account of the note (1 Story Eq., §§ 146, 147, 193, 195 ; 2 Kent Com., 637, 639 ; 1 Pars. on Cont., 267; Camp v. Pulver, 5 Barb., 91).
    III. The decision of the referee rests upon authorities showing the principle that no contract can be avoided on the ground of fraud or mistake, unless the false representations made under the mistake were of a character to mislead persons of ordinary caution and prudence, or unless the party has suffered damage by such representations. If a party shuts his eyes to the representations made, when, by openpoing them, he might detect their falsity, he shall not be relieved from his obligation to fulfill his contract.
    
      William W. Niles, for the defendants, respondents. respondents.
    —I. We never made any contract of indorsement with them, or asked them to take up the note after protest. They took it not only with constructive, but actual notice ; as to them the indorsement was procured by fraud, and, being our agents from the beginning, they cannot enforce against us any contract procured by their fraud; and we place much stress upon the relation of principal and agent existing between the parties. An agent’s first duty is to obey the instructions of his principal (Johnson v. New York Central R. R. Co., 33 N. Y., 610).
    
    II. It does not matter whether the statements of Odell are “false representations” or not; it is a mistake of the referee that no fraud less than a felony will vitiate a contract. If the fraud of an agent avoids a contract as to his principal, should it not as to himself ? (Bennett v. Judson, 21 N. Y., 238). The statement of an agent without the knowledge of his principal, that a certain fact existed, which does not, though the agent supposed he was stating it correctly, will render the contract void for fraud, if the agent did not know the true state of the case, as will, also, his simple silence (Hill v. Gray, 1 Stark., 352 ; Waldron v. Stevens, 12 Wend., 100 ; Elwell v. Chamberlain, 2 Bosw., 230). These things, however, do not constitute felony. This precise question has been settled in this State, where the court held that it “is error ’ ’ to charge that plaintiffs were bound to make out a case of “ false pretenses.” The contrary is plain enough as to executory contracts not under seal, and the party can even recover back the consideration of a sealed instrument (Cary v. Hotailing, 1 Hill, 311).
    III. That portion of the falsehood relating to what Thomas Davenport would do, “was not promissory.” It was stated as a fact which plaintiff claimed to know from his previous agreement or understanding in this case. Where A. procured a deed from B. by representing that C. was about to foreclose a mortgage, though the case is not within the statute, it will not be pretended that a delivery of the deed would be decreed under an agreement so procured (People v. Williams, 4 Hill, 9 ; Mead v. Bunn, 32 N. Y, 275). The statement that Thomas Davenport invariably indorsed this paper, is a material fact, and not a mere allegation that Thomas Davenport, from some peculiar “ inducements ” had indorsed this piper. It was, in substance, that Thomas Davenport regarded the makers as good—that he did not hesitate to indorse their paper without inducement—that the agreement for the sale of this note was conditioned upon its indorsement by the defendants—and that,- in fact, it was a mere oversight on the part of Thomas Davenport in failing to indorse it, &c. A “material fact” is a fact calculated to influence the defendant’s action (3 Phill. on Ev., 393); and the statements of the plaintiff were such as a person of ordinary prudence should have credited.
    IV. The presumption of the referee as to the "books is in direct opposition to the evidence ; but whether it was so or not is wholly immaterial. The law permits, a vendor, without a penalty upon his credulity, to trust to declarations of the material facts within the knowledge of the other party (Whitney v. Allaire, 1 N. Y. [1 Comst.], 309 ; Mead v. Bunn, 32 N. Y., 275). So where a person purchased real estate on the assertion that there was no mortgage on it, though the mortgagee, at the same moment, told him there was one (Haight v. Hayt, 19 N. Y., 564 ; Elwell v. Chamberlain, 2 Bosw., 230).
    V. The assumption of the referee that the defendants were not “ damnified,” is wholly unsupported. The fact is, though not in proof, that the defendants were not bound to account for the note to Van Syckle until they had sold it, and if they were not, they were, damnified.
   Hunt, J.

—We are not at liberty to deny the finding of the referee, that the defendants’ indorsement of the note in suit was obtained by the false representation of Odell.

The representations were false, but they are not found to be fraudulent. Whether this question of fraud was one of fact which should be found by the referee, or whether it would be held to be a question of law under Bennett v. Judson (21 N. Y., 238), is not, in my view of the case, a material question. Assuming that the transaction' was fraudulent, and that the representations were such as might well have deceived a prudent man ; assuming, also, that a representation to one partner of what his associate would do, if present, comes within the rule on this subject (as to .which see 1 Story Eq. Jur., § 199), there is a further difficulty, which cannot be overcome..

This arises from the failure of the defendants promptly to r epudiate the indorsement, when informed of the means by which it was obtained. The absent partner returned to his place of business within a few days after the indorsement was obtained, and was informed of the means and representations employed by Mr. Odell to obtain it. Great indignation was expressed by the partners, among themselves, at his conduct.

No disaffirmance, however, of the transaction, no offer to return the money and take back the note, or even a disapproval or complaint of the means employed, was made to the plaintiffs. The defendants, on the contrary, received and retained the proceeds of the note, and were content to remain as they were, for a period of nearly three mouths. The insolvency of the maker, at that period, occurred, and for the first time the defendants then communicated to the plaintiffs the complaint that their indorsement had been fraudulently obtained.

This will not do. It is the duty of a party who proposes to disaffirm, as fraudulent, a contract entered into by himself, his partner, or agent, to do it at once, upon the discovery of the fraud.

He must be .ready and prompt in such disaffirmance. It will not do to keep the money in his pocket for three months, to deprive the other party of the opportunity of protecting himself, to await the chances of a successful performance of the fraudulent contract, and only to repudiate when the danger of loss becomes imminent.

Neither honesty, good faith, nor the principles of law, will justify such a coarse.

If the defendants deemed themselves injured by the representations of Mr. Odell, it was their duty, upon the return of the absent partner, when the real facts were made known to all of them, at once to have tendered to the, plaintiff, the money received from them, and to have demanded a return of the note.

For illustrations of these principles, see Minturn v. Main, 7 N. Y. [3 Seld.] 220, 227; Saratoga & Schenectady R. R. v. Row, 24 Wend., 74 ; Lloyd v. Brewster, 4 Paige, 537 ; Conner v. Henderson, 15 Mass., 319 ; Cutler Gilbreth, 53 Me., 176.

Upon this ground, I think, the judgment of the referee should he affirmed, and that of the general term reversed.

That portion of the order directing that the testimony already taken, might be read in evidence on the new trial was unauthorized and irregular. The new trial, as awarded by the general term, was his right. He was entititled to it, without condition or qualification.

A direction that evidence of a certain character should be admitted was not a legal condition.

All the judges concurred.

Order for new trial reversed.  