Henken v. Schwicker, 174 N.Y. 293 (1903)
When a borrower delegates the responsibility of discharging prior liens to a broker, that broker acts as the borrower’s agent for that specific purpose, and the borrower bears the risk of loss if the broker misappropriates funds intended for those liens.
Summary
Henken sued to foreclose on a mortgage. Schwicker defended, claiming failure of consideration because a broker, Dreher, misappropriated funds meant to pay off prior mortgages. Schwicker argued he only owed $600 (amount actually used). The trial court agreed, but the Appellate Division reversed. The Court of Appeals addressed whether Dreher acted as Henken’s or Schwicker’s agent when he defaulted. The court held Dreher acted as Schwicker’s agent when he was entrusted to pay off the prior mortgages and misappropriated the funds. Thus, Schwicker bore the loss.
Facts
Schwicker owned land with three mortgages held by Baker. He sought a loan to buy a farm. Schwicker engaged Dreher to secure two loans: $1,000 (for the farm) and $3,200 (to pay off existing mortgages, with Dreher receiving $200 commission). Henken agreed to the $3,200 loan, issuing a check to Dreher after Dreher assured Henken it would be a first mortgage. Schwicker signed the $3,200 mortgage. Instead of paying off the existing mortgages as agreed, Dreher misappropriated $2,600. The $400 mortgage and Dreher’s commission were paid. Henken was left with a third mortgage instead of a first, and Schwicker appeared to owe $5,800 instead of $3,200.
Procedural History
The trial court held the mortgage was a valid lien only for $600 plus interest. The Appellate Division reversed this decision. The New York Court of Appeals reviewed the Appellate Division’s order, which was presumed to be based solely on questions of law, since it was silent on the facts.
Issue(s)
Whether Dreher acted as the agent of the lender (Henken) or the borrower (Schwicker) when he misappropriated the funds intended to discharge prior mortgages, thereby determining who bears the loss.
Holding
No, Dreher acted as the agent of Schwicker (the borrower) because Schwicker delegated the duty to pay off prior liens to Dreher; thus, Schwicker bears the loss from Dreher’s misappropriation.
Court’s Reasoning
The court reasoned that initially, Dreher was Schwicker’s agent to procure the loan. However, when Henken gave Dreher the check, Dreher became Henken’s agent. The critical point came when Schwicker, instead of ensuring the prior liens were paid himself,