Ohlandt v. Craven

This is an action for the foreclosure of a mortgage given by the defendant to one John H. Kohnke, of whose will the plaintiffs are executors. The defendant pleads payment in full of the bond secured by the mortgage, and relies upon payments made by her to one A.A. Kroeg, an attorney of Charleston, which in fact never reached the mortgagee John H. Kohnke. The vital question in the case is whether Kroeg was authorized, as an agent of Kohnke, to accept and receipt for the payments made by Mrs. Craven to him, on account of the principal. It appears that Kroeg embezzled the payments made to him by Mrs. Craven, and the issue is, Upon whom shall the loss fall?

It appears that in November, 1910, Frederick C. Kohnke, brother of the testator, John H. Kohnke, was the owner of two houses and lots in the City of Charleston, Nos. 10 and 12 Chinquapin Street. On November 15, 1910, he conveyed both lots to one Tollner, who executed to him a mortgage upon both lots to secure his bond of $3,000. Tollner conveyed both lots to Berkley Investment Company, apparently subject to the $3,000 mortgage. The Berkley Company conveyed lot No. 12 to one Von Oven, and F.C. Kohnke released that lot from the lien of his mortgage, leaving $1,500 due thereon secured by the mortgage upon the other lot, No. 10. The Berkley Company conveyed lot No. 10 to one Petit, subject to the $1,500 balance due on the Tollner mortgage to F.C. Kohnke. On November 15, 1917, Petit conveyed lot No. 10 to the defendant Lillie V. Craven, subject to the same incumbrance.

In the meantime, F.C. Kohnke had died, in 1912, leaving a will under which his brother, the testator, succeeded to the title to the bond and mortgage, which Tollner had given, in 1910, to F.C. Kohnke.

It does not distinctly appear, but I assume that, when lot No. 12 was released from the Tollner mortgage, by F.C. Kohnke, it had been reduced to $1,500.

After Mrs. Craven had purchased lot No. 10, subject to this balance due on the Tollner mortgage, the testator, for some reason not explained, preferred to have a new bond and mortgage executed by Mrs. Craven. Accordingly, on February 9, 1918, she executed her bond for $1,500, payable 12 months after date, to the testator, John H. Kohnke, with interest from date at 7 per cent., payable quarterly, and the executors of F.C. Kohnke executed a release, discharging lot No. 10 from the lien of the mortgage executed by Tollner to F.C. Kohnke.

The new bond and mortgage, at the request of Mr. Craven, was carried by Kroeg to the home of Mrs. Craven, where they were executed; he and Mr. Craven being the witnesses to the mortgage. Kroeg had the mortgage recorded, and on March 1, 1918, transmitted it by mail to John H. Kohnke, with the insurance policy.

Mr. Craven testified that shortly before the execution of the new papers, he received a letter from Kroeg, asking him to come down and see him; that he went, and was told that a new mortgage had to be executed; that John H. Kohnke was settling up the estate of F.C. Kohnke, and that he would have to make a new mortgage to John H. Kohnke; that he asked Kroeg to bring the papers to his house, which he did, and they were executed there.

It appears that Kroeg was the regular attorney for Craven; had prepared other papers for him, and it was to Kroeg that Craven applied to push through the negotiations for the purchase of the house and lot which had been consummated in November, 1917, prior to the date of the execution of the new papers, in February, 1918. That deal was closed by the payment in cash by the Cravens, of $400, a loan by Kroeg for his mother of $400, secured by a second mortgage, and the assumption of the $1,500 balance due on the original Tollner mortgage to F.C. Kohnke, which made up the purchase price to Petit from whom the Cravens, through Kroeg, were purchasing, of $2,300.

As the execution of a new bond and mortgage was to the interest of John H. Kohnke (if to the interest of any one, certainly a matter of indifference to Mrs. Craven), it is reasonable to assume that John H. Kohnke took the initiative in the matter, and doubtless communicated his desire, through Kroeg, to Mrs. Craven. It does not appear who prepared the new bond and mortgage, or who was paid for the preparation of them. But, if Kroeg was employed by John H. Kohnke to prepare and procure the new papers, had done both, and had been paid by John H. Kohnke therefor, this would be very far from establishing the material issue in the case, that Kroeg was authorized to collect andreceipt for payments upon the principal of the debt. The transaction was at best not a loan negotiated by Kroeg for John H. Kohnke, but a substitution of "new lamps for old," which was completed when the new papers were executed, recorded, and delivered to John H. Kohnke.

In his decree, his Honor, the Circuit Judge, says:

John H. Kohnke "no doubt had requested Kroeg to obtainhis new mortgage for him in order to effect his purpose. At any rate, the testimony reveals that Kroeg prepared this newbond and mortgage and took it to Craven's house in the City of Charleston, with the request that Mrs. Craven sign it. * * * For his own convenience, and for his own purpose, Kohnke saw Kroeg and requested him to preparefor him a new mortgage from Mrs. Craven, and to haveit executed by her. Kroeg, acting at the request and onthe authority of Kohnke, prepared this new mortgage from Mrs. Craven to Kohnke, made an appointment with her at her home, and had her execute these new papers in accordancewith Kohnke's request, and these papers were recorded by Kroeg and turned over to Kohnke. It seems to me that, as to this transaction, Kroeg unquestionably was Kohnke's active positive agent." (Italics added.)

There is not a particle of direct evidence to sustain these statements. There is only an inference that, because the execution of the new papers was to gratify a whim of John H. Kohnke, or redounded to his interest, if to that of any one, John H. Kohnke must have suggested it; but, as to his having engaged Kroeg to carry it through, or that Kroeg prepared the papers, the evidence is absolutely silent.

If the statements of his Honor should be sustained by the evidence, his further statement, "* * * As to this transaction, Kroeg unquestionably was Kohnke's active, positive agent," would unquestionably be true; but how that particular agency clothed Kroeg with the authority to collect and receipt for payments upon the principal, is more than I can understand.

In the case of Cogswell v. Cannady, 135 S.C. 365;133 S.E., 834, the Court, citing the cases of Bacot v. Loan Trust Co., 132 S.C. 340; 127 S.E., 562. Morris v. Carlisle,128 S.C. 417; 122 S.E., 511. Bank v. Cook, 110 S.C. 99;96 S.E., 484, and Wilson v. Brabham, 126 S.C. 273;119 S.E., 829, declares:

"The cases cited hold, without doubt, that, because an agent negotiates a loan, that fact alone gives him no implied authority to receive payment, unless he has possession of the evidence of the indebtedness. They further decide that payment is an affirmative defense, and that, where payment to agent is alleged, such agent's authority to receive payment must be shown. Again, these cases are authority for the view that an agent may have the right to collect the interest without like right to collect principal."

This case decides three very important principles applicable to the case at bar:

(1) The fact alone that an agent may have negotiated a loan gives him no implied authority to receive payment of the loan unless he has at the time possession of the loan papers.

(2) That, when the debtor claims to have made payment to one other than the record creditor, the authority of such person to receive payment must be shown.

(3) That the authority to receive payment of the principal of the debt, or a part thereof, cannot be implied from the authority of an agent to receive payment of the interest upon the debt.

In the first place, if the law were otherwise than as declared in subdivision 1, just stated, there is not the slightest evidence in this case that Kroeg negotiated a loan for John H. Kohnke or for Mrs. Craven. Assuming that, in the novationof the debt, Kroeg was acting as agent of John H. Kohnke, the transaction amounted to nothing more than a substitution of one security for an existing one, and presumably spent its force with the completion of the substitution.

It is conceded that, immediately upon the recording of the new mortgage, it was transmitted by Kroeg to John H. Kohnke and remained in his possession continuously as long as he lived. Kroeg never had at the time of a single payment on the principal by Craven, possession of the "evidences of indebtedness," and their presentation was never requested by Craven.

The rule appears to be established in this State that the declarations of an alleged agent may be received in corroboration of other evidence along that line as admissible upon the issue of agency.

As is said in Cogswell v. Cannady, 135 S.C. 365;133 S.E., 834:

"It is true that agency may not be established by the declarations and conduct of the alleged agent alone, but such declarations and conduct are admissible as circumstances in connection with other evidence tending to establish the agency. Bass v. American Products, etc., 124 S.C. 346;117 S.E., 594; 30 A.L.R., 168. Watkins v. Railroad Co., 97 S.C. 150; 81 S.E., 426. Buist Co. v. Lancaster MercantileCo., 73 S.C. 48; 52 S.E., 789."

This rule is applicable only where there is other evidence of the agency. In the case at bar, there is not a circumstance outside of the received testimony of Mr. and Mrs. Craven of declarations of Kroeg, which tends to establish Kroeg's agency to receive the payments of principal.

It was conclusively established that Kroeg had never represented Kohnke, that the transaction under consideration was a single, isolated transaction, and that there was no general course of dealing between the parties, as was found to exist in Land v. Reese, 136 S.C. 267; 134 S.E., 252, in which last case Barron was the general agent of Land. There is no element of waiver or estoppel present, nor is there any evidence of ratification, as was held to be the case in Cogswell v. Cannady. I think, therefore, that the testimony should not have been received.

In the circuit decree it is declared:

"It seems to me that, as to this transaction (referring to the preparation and execution of the new bond and mortgage), Kroeg unqestionably was Kohnke's active, positive agent. The relation between Kroeg and Craven had ceased and terminated in November. The renewal of relations between Kroeg and Craven, in February, was for and on behalf of Kohnke solely. Therefore when Kroeg told theCravens, at the time they signed these papers, that theycould make payments to him, he was Kohnke's agent, and his statements are admissible, under the cases cited, to bindthe mortgage and his executors." (Italics added.)

Assuming that Kroeg was the agent of Kohnke for this purpose, and of Kohnke alone (although Mr. Craven directed him to bring the papers for execution to his home), the responsibility of Kohnke for the declaration of Kroeg was limited to such as were connected with the subject of the agency, the preparation and execution of the papers; it could not be extended to an entirely extraneous matter, as was the payment to him of installments upon the principal debt.

I think that, at the best, Kroeg could be considered as the agent of both parties, and that neither was bound by his declarations or assurances.

The statement relied upon, as having been made by Kroeg, testified to by Mr. Craven, was:

"Mr. Kroeg told me that he was Mr. Kohnke's attorney, and that we could make payments on interest periods total not less than $100." (As a matter of fact, not a single one of the payments made by Craven to Kroeg on the principal was made upon an interest period.)

Testified to by Mrs. Craven, the statement was:

"Mr. Craven asked him how he was to pay this money, and Mr. Kroeg told him in any amount he wanted to, and in any amount but not less than $100."

The testimony was inadmissible upon two grounds:

(1) It tended to vary the terms of the bond which declared the maturity of the bond to be twelve months from date.

(2) It was entirely disconnected from the agency claimed to have existed — the preparation and execution of the new bond and mortgage.

In Tiffany, Agency, p. 282, it is said:

"It is not enough, however, to show that the relation existed when the statement was made. It must appear that he was acting as such in making the statement. * * * In other cases it must appear that the statement was made while the agent was engaged in transacting some authorized business for his principal, and had reference to and was connectedwith that business, so as to be a part of the pendingtransaction."

In U.S. v. Gooding, 12 Wheat., 460; 6 L.Ed., 693, Justice Story quotes with approval, the following from 2 Stark. Ev., 60:

"Where * * * the fact of agency has been proved, either expressly or presumptively, the act of the agent, co-extensivewith the authority, is the act of the principal, whose mere instrument he is, and then, whatever the agent says,within the scope of his authority, the principal says, and evidence may be given of such acts and declarations, as if they had been actually done and made by the principal himself."

See, also, Packet Co. v. Clough, 20 Wall., 528;22 L.Ed., 406.

"The power of an agent to speak for his principal is confined strictly within the scope of his authority. 1 Greenl. Ev., § 113. Any statements concerning matters beyond this are hearsay and inadmissible." Fogg v. Pew, 10 Gray (Mass.), 409; 71 Am. Dec., 662.

In Pratt v. R. Co., 102 Mass. 565, it was held that the declarations or admissions of an agent, not accompanying or forming part of any official act, and not within the scope of his authority, are mere hearsay, and are inadmissible against his principal.

"It is a recognized principle that an agent can bind his principal while acting within the scope of his authority."Williams v. Tel. Co., 138 S.C. 281; 136 S.E., 218.

"Principal is bound by declarations of agent made withinthe scope of his employment." Ragsdale v. R. Co., 72 S.C. 120;51 S.E., 540.

"The rule of law is that the admissions of an agent bind the principal if made during the agency and within its scope as to a matter then depending." Tenhet v. R. Co., 82 S.C. 465; 64 S.E., 232 — citing Meinhard v. Youngblood,41 S.C. 325; 19 S.E., 675. Ragsdale v. R. Co., 72 S.C. 124;51 S.E., 540. Crawford v. R. Co., 56 S.C. 144;34 S.E., 80. Stroud v. R. Co., 79 S.C. 452; 60 S.E., 963Lipscomb v. R. Co., 65 S.C. 156; 43 S.E., 388. R. v.Howell, 79 S.C. 288; 60 S.E., 677.

"The general rule is that declarations or admissions of the agent, within the scope of the agency, are admissible in evidence in a suit against the principal. But in this case the alleged admissions of the agent was not within the scope of the agency, which was to operate the railroad." Rookardv. R. Co., 84 S.C. 190; 65 S.E., 1047; 27 L.R.A. (N.S.), 435; 137 Am. St. Rep., 839.

In Moore v. Dickinson, 39 S.C. 441; 17 S.E., 998, the Court said:

"While the rule is well settled that, after the agency is established, the acts, declarations, or admissions of the agent, within the scope of his agency, are competent evidence against the principal, yet it is equally well settled that such acts, declarations or admissions, as to matters not within the scope of the agency, are not competent evidence against the principal. 1 Greenl. Evid., §§ 113, 114; 1 Am. Eng. Enc. Law, 410. Now, while in this case there is abundant testimony to show that Colton was the agent of Dickinson in managing and carrying on the work of constructing the railroad in North Carolina, we do not find any testimony tending to show that Colton was agent for collecting the money from the Massachusetts Southern Construction Company, and, therefore, any declaration or admission made by Colton as to what Dickinson had said to him in reference to such collections, was merely hearsay, and as such incompetent. It seems to us that the only just inference that can be drawn from the testimony is that Dickinson, residing in New York, attended to that himself, and that Colton had nothing to do with it. Colton's declaration as to what Dickinson may have said to him, in relation to a matter which does not appear to have been within the scope of his agency, should have been held incompetent."

It would be different if Kroeg, while the agent of the mortgagee, had made such statements in order to induce the execution of the new papers and the mortgagor had acted upon such statements. Of this there is not a particle of evidence.

I have given little weight to the suggestion of a custom existing in the City of Charleston for debtors to pay the attorney who negotiated a loan the principal thereof, without the assurance that the loan papers were in the possession of the attorney for collection, or of some express authority upon his part to collect, for two reasons:

(1) In view of the very clear and reasonable testimony of Mr. Moffett, in whose integrity and ability I have the utmost confidence, I do not believe that such a custom ever existed.

(2) There was no negotiation of a loan in this case by Kroeg. The loan had existed for years, and all that he had a hand in was the substitution of the new papers for the old.

Applying the familiar rule that, where one of two parties, both innocent of actual participation in the fraud of a third person, must bear a loss, it should fall upon the party whose active conduct or passive negligence has supplied the opportunity for such fraud, I have not a doubt as to what the decision should be.

Kroeg was never the attorney for Kohnke, except possibly (and that is not clearly established) as an intermediary in the single transaction of a substitution of the securities. On the other hand, he was the trusted counsellor of the Cravens, had transacted much business as their attorney, "I did all of my business at that time through Mr. Kroeg" (testimony of Mr. Craven).

Craven, it appears, relied upon Kroeg's declaration that he was authorized to collect the principal of the debt, without the slightest effort to have that statement confirmed by Kohnke, who he knew was the mortgagee, and without exercising the slight care of ascertaining that Kroeg had possession of the mortgage, which the evidence shows had been recorded and delivered to Kohnke.

I cannot see that Kohnke was in the slightest degree derelict in the matter. After Kroeg had collected the several payments on account of principal, he continued to remit to Kohnke the interest upon the whole principal as if no payments had been made, lulling Kohnke into the assurance that none had been made. The fact that Kohnke accepted these payments of interest from Kroeg should not be charged against him, as he could reasonably have inferred that in such remittances Kroeg was acting for Craven.