Before Mr. Austin made his advance to Bennett Avery and received the deed from them and Mrs. Bennett as security, the elevating association dividends had been assigned by them to Stewart Co. for the specific purpose of being applied to the payment of the notes indorsed by them for Bennett Avery, for indemnity against which indorsements the Stewart mortgage had been given. Stewart Co. were also authorized by the terms of the assignment to apply *Page 329 the dividends on prior incumbrances, and thus protect their mortgage.
Whether the dividends in question were or were not rents is not very material. The object of the arrangement with the elevating association appears to have been to place the several elevators in Buffalo under a single control and to stock their earnings. For this purpose the owners executed leases of the elevators to the association, who thereby acquired the right of possession, and of sending grain to them for storage and handling, and of receiving the storage. The owners, however, retained the actual possession of the elevators and operated them under contracts with the association, receiving from it a certain amount per bushel for their labor and the expenses of running the elevators. The profits were divided by the association among the several owners, and constituted the dividends in question.
The lease of the elevators now in controversy was for three years from 1869, and, assuming its validity, bound the property for that term.
The Stewarts were not strictly mortgagees in possession, though it was declared in the assignment of the dividends that it was intended to give them the rights of mortgagees in possession to receive the rents and profits. The object of this clause was to confer upon them as perfect a right to receive the dividends as they would have if they were actually in possession and had themselves leased the elevators to the association. Their rights under their mortgage were subject to the existing lease to the association, and they were assignees of the dividends or rents to accrue under that lease. Bennett Avery retained the actual possession under their agreement with the association, and operated the elevators for the purpose of earning the dividends.
Stewart Co. had no right to divert these dividends from the purposes for which they were assigned and to which they had thus been specifically appropriated. They could not lawfully have applied them to any other claim which they might have had against Bennett Avery, nor to the reduction of *Page 330 junior liens; nor could they rightfully have assigned them independently of their mortgage. If they had done either of these things, equity would, notwithstanding, have applied the amount realized from dividends, to the reduction of the Stewart mortgage, or rather of the liabilities against which the mortgage was designed to indemnify them, and when the sums realized from dividends reached an amount sufficient to satisfy these liabilities, the lien of their mortgage would have been discharged.
The dividends assigned, thus constituted a fund specifically appropriated to the payment of the indorsements secured by the Stewart mortgage.
Bennett Avery, as well as Stewart Co., had an interest in the application of this fund to the purpose to which it had thus been appropriated. It stood as a protection to them against the foreclosure of the mortgage. Mrs. Bennett, who in respect to her interest in the property was a mere surety for her husband, had the same equity.
This appropriation being prior in point of time to the mortgage given to Austin, and he having full notice of it when he took his mortgage, his lien was subject to that appropriation, as well as to the lease to the elevating association.
He, without lawful right, but by setting up the apparent title conferred upon him by the deed which he held as security merely, and by indemnifying the elevating association against the claim of Stewart Co. to the dividends, and by other means hereafter mentioned, obtained possession of the property and of the dividends, withheld them from Stewart Co., and applied them to his own use, leaving the Stewart lien to accumulate, and thus brought about a foreclosure of the Stewart mortgage. After decree, he, by arrangement with them, obtained control of the sale and became the purchaser, and his devisee now sets up that purchase as a bar to the right of Mr. and Mrs. Bennett to redeem from the mortgage given to him by them in the form of a deed.
The main question on this appeal is whether Austin could *Page 331 in equity avail himself of a title thus obtained, to defeat the equity of redemption of his mortgagors.
Upon the facts already stated I am of opinion that he could not. There are further facts in the case which require consideration. But the question presented by those now referred to lies at the foundation of the case and must be disposed of before the others are reached.
The grounds of my conclusion on this first and fundamental point are, that when Austin, by his own act, and without the consent of either Bennett and wife or Stewart Co., but by asserting a title to the premises which he is found not to have had, and by indemnifying the elevator association, possessed himself of the fund in question, it had, to his knowledge, been and then was, lawfully appropriated to keeping down the liabilities secured by the Stewart mortgage. Bennett and wife as well as Stewart Co. were entitled to have the purpose of that appropriation carried out. It is contended that it was a matter of indifference to Bennett and wife whether the dividends were applied in reduction of the lien of Stewart Co., or of that of Austin, inasmuch as in either event the dividends went in reduction of the aggregate amount of the incumbrances on the property, and consequently the rights of no one but Stewart Co. were violated by the diversion, and that Stewart Co. having been satisfied by the sale of the mortgaged premises, no one now has any right to complain. I think this position fallacious. When Bennett assigned the dividends, he had a perfect right to direct to what purpose they should be applied, and that purpose having been fixed by agreement between him and his assignees, he was entitled to have it carried out until changed with his consent. He did not, by his mortgage to Austin, who took with notice of, and consequently subject to, the assignment of the dividends, consent to any change in their destination. He hypothecated only that which he had not previously disposed of or appropriated, and these dividends he had already appropriated to the payment of his paper indorsed by Stewart Co. It cannot truly be said that when a debtor creates or appropriates a fund for the payment *Page 332 of a particular debt or lien, the purpose of the appropriation is carried out, and the duty of the holder of the fund is performed, by applying the fund to the payment of another debt, on the ground that the aggregate indebtedness of the debtor is reduced to the same extent as if the fund had been applied according to its original appropriation. The answer is that the debtor has the right to determine to what debt or lien the fund shall be applied, and to have the appropriation, when legally made, carried out; and it is not for others to judge what different disposition of the fund will be equally to his interest. The right of Mrs. Bennett, who had assigned her interest in the dividends as a mere surety for her husband's debts, to have it applied to the purposes for which she had assigned it, was indisputable.
Austin knew, when he seized these dividends, that they had been specifically appropriated to the payment of the paper indorsed by Stewart Co. If, instead of obtaining possession of them in the manner in which he did, they had been assigned to him by Bennett for the express purpose of being applied to the payment of the Stewart notes or mortgage, I apprehend that there would be no difference of opinion between counsel or judges on the point that equity would not have permitted Austin to withhold the dividends from Stewart, and thus bring about a foreclosure of the Stewart mortgage, and then purchase at the foreclosure sale and hold for his own account as against Bennett. The case would then have been analogous to that of a person who, being furnished by the owner of lands with funds to pay the taxes thereon, leaves the taxes unpaid, and on the sale of the lands for the unpaid taxes, himself becomes the purchaser. It has been held that in such a case he cannot hold the property as against his principal, but equity makes him trustee.
The principle which lies at the foundation of this and all similar cases is, that equity will not allow one to profit by a violation of his own duty. Where a duty rests upon a party in respect to the property of another, the violation or omission of which will result in a sale of the property, the person owing *Page 333 that duty is absolutely disqualified from becoming a purchaser at such sale for his own account. This rule removes all temptation to commit secured frauds whereby persons whose duty it is to protect the property of others may profit by allowing it to be sacrificed, and relieves the injured party from the burden of furnishing proof of actual fraud. It is not confined to cases of express or actual trusts, but applies wherever, either by contract or by law, a person is charged with a duty to another with respect to property, with which duty a design to purchase the same property on the most favorable terms for his own account would be inconsistent. So where one owes a duty to protect a junior mortgage, he cannot purchase the mortgaged premises for his own account on a foreclosure of the senior mortgage, for whatever he may do in the matter should be in the direction of preventing the sale or enhancing the price to be obtained thereon, and the purpose of becoming purchaser for his own account creates an interest hostile to that duty. (Van Epps v.Van Epps, 9 Paige, 237.) It is not even necessary, in order to disable one from purchasing for his own account, that he be charged with any trust in respect to the identical property which is sold. It is sufficient if the situation is such that a sale of that property for less than its value will diminish another fund which he holds in trust. (Fulton v. Whitney, 66 N.Y. 548.) In all these cases the disqualifying circumstance is that a design to purchase on his own account creates an interest hostile to his duty to another, and if Austin held the fund in question in trust to keep down the Stewart mortgage, the character of a purchaser on the foreclosure of that mortgage was inconsistent with his duty so to apply the fund as to prevent such foreclosure.
In the present case a duty on the part of Austin to apply the dividends to the payment of the Stewart indorsements was not created by any express contract between Austin and Bennett and wife, but the great question in the case is whether the law did not impose that duty as a consequence of Austin having assumed the management of the property, and possessed himself of the fund arising from the dividends, in the *Page 334 manner in which he did. If such was the case, the duty was just as imperative as if created by express contract, and the disability to profit by a violation of it, as complete.
It has already been shown that the dividends were expressly appropriated to the purposes stated in the assignment, and that this appropriation was prior to all claims of Austin, and that he had full notice of it. It further appeared in the evidence that before he took his deed from Bennett Avery he conceded that if he made the advance asked, these dividends would have to be applied, for a time, on the Stewart mortgage. Bennett and wife had an interest in having the purposes of the assignment carried out, and a legal right to their execution.
Such being the position, Austin, immediately after having received the mortgage (in form a deed) from Bennett and wife, without their consent or that of Stewart Co., applied to the elevating association, and by assuming to be the owner of the elevators, and threatening to take them out of the association if it refused to comply with his demands, and by indemnifying the association against liability to Stewart Co., obtained the substitution of an agreement between the association and himself for operating the elevators, in place of the subsisting agreement with Bennett Avery, and thus obtained possession of the elevators, and thereafter Austin and his devisee continued in the possession and management of the property and in the receipt of the dividends, which amounted before the foreclosure sale to a very large sum, and before the commencement of this action to a sum probably sufficient to have paid off the Stewart mortgage and his own.
By thus obtaining, without legal right, the control of the property and of the fund which had been lawfully appropriated to keeping down the Stewart mortgage, I think that Austin assumed, or rather that the law cast upon him, the duty of applying the fund to the purpose to which it had been appropriated, and he became ex maleficio, constructively a trustee of the fund for that purpose. One who, without authority, assumes the management of property in which others are beneficially interested, becomes in equity a trustee by construction *Page 335 for their benefit, and during the continuance of such management is subject to the same rules and remedies as other constructive trustees. (Perry on Trusts, § 245; Hill on Trustees, 173.) There are many cases in which this principle has been applied. One somewhat analogous to the present case is Mulvaney v. Dillon (1 Ball Beatty, 409). A testator devised certain leasehold estates to his children and left two executors. The defendant, who held farms in the neighborhood and possessed great influence there, wrongfully intermeddled with the property by cautioning tenants not to pay rent to the executors, entered upon the lands and prevented the executors from managing them, and by colluding with one of them and intimidating the other by threats, induced them to surrender the lease to the landlord, and afterward procured a new lease of the same lands to be made to himself. It was held that he was liable to account as trustee, and the children were entitled to the new lease. That by his interference with the property he assumed the position of an executor or trustee, and as such could not take a new lease for his own benefit. The necessity for the application of this principle is greater in the present case than if Austin had obtained control of the fund with the aid or connivance of Stewart Co., for in that case the Bennetts might have set up against them, as a defense to their foreclosure, their misappropriation of the fund which he had provided for the payment of the liabilities secured by their mortgage. But they were in no way parties to or responsible for such misappropriation. It was brought about by the act of Austin alone, and unless he could be compelled to apply it to the purpose to which it had been dedicated, there was no remedy for his wrong. That Stewart Co. might have enforced that application is clear, but he satisfied them, when they asserted their rights, by placing in their hands $40,000, to be applied toward their mortgage if he should elect to pay it off without a sale, or toward the amount of his bid if he should elect to purchase at the foreclosure sale, and they agreed that he should control the sale. This, however, did not help Bennett and wife. The property was left exposed to a sale which *Page 336 would deprive them of their equity of redemption, if made to a stranger. By the acts of Austin, Bennett and wife were deprived of the protection of the proper application of the fund, which, it may be presumed as against the wrong-doer, would have averted a sale under the Stewart mortgage.
If I am right in the conclusion that Austin became, constructively, a trustee of the fund arising from the dividends, and that it was his duty to apply it to the payment of the Stewart claims, the consequence follows, necessarily, that he could not take advantage of his violation of that duty by becoming purchaser at the foreclosure sale for his own account; and that such purchase did not cut off the right of Bennett and wife to redeem. The argument is that Austin should be allowed the benefit of that sale, because he might have cut off the equity of redemption by a sale under his own mortgage. The circumstance that the Bennetts were thus in his power may have deterred them from taking active measures at the time to compel him to apply the dividends on the Stewart mortgage, but it did not absolve him from his duty to do so. He did not foreclose his own mortgage, but on the contrary, took the position that he had an absolute title under his deed. His devisee, being defeated in that position, cannot sustain the defeasible title, obtained under the Stewart foreclosure, by the claim that he might have obtained an absolute title by the foreclosure of his own mortgage.
It is further contended, that Bennett, by not defending against the Stewart foreclosure, is concluded as to its validity and the title obtained under it. This argument I think untenable. Bennett had no defense against Stewart Co. As before remarked, the misapplication of the dividends which would have paid their mortgage, was not their act, and did not, consequently, affect the lien of their mortgage. The question here is not as to the validity of the Stewart mortgage, or the propriety, so far as they were concerned, of foreclosing it, but whether Austin, who had become charged with the duty of applying a fund in his hands to the payment of that mortgage, could purchase at a sale, brought about by a wrongful retention *Page 337 of that fund, and hold for his own account, as against Bennett and wife, to whom the duty to apply it was owing.
Again, it is urged that Bennett Austin, having both been parties to the foreclosure, and the decree containing the usual clause that any party to the action may become purchaser at the sale, Bennett and wife are estopped, by that provision in the decree, from now questioning the right of Austin to purchase for his own account, and hold as against them. The equities between Bennett and wife and Austin, which are the subject of the present controversy, were not involved, and could not have been passed upon in the Stewart foreclosure suit, and the clause in question had no reference to them. It is true that in the complaint in the foreclosure suit, the facts relative to the assignment of these dividends to Stewart Co., and the subsequent acts of Austin in respect to them, are set forth, and an injunction and receivership are prayed for as against him. But these allegations are introduced only as the foundation of the claim by Stewart Co. against Austin, for the dividends. The equities which would arise between Austin, Bennett and wife, should Austin become the purchaser, were not involved. It would have been foreign to the subject of that action to litigate the matters now in controversy between Bennett and wife and the devisee of Austin, and it would be exceedingly unjust now to hold Bennett and wife concluded by a clause of the decree therein, which simply pursues the ordinary formula of decrees in foreclosure cases. As is said by Chancellor WALWORTH, in Torrey v. The Bank of Orleans (9 Paige, 661), the provision in a decree of foreclosure, that any of the parties to the suit may become purchaser at the sale, is not intended to permit one defendant to bid in premises belonging to another defendant, and to hold against the latter contrary to equity. It is inserted merely to avoid the effect of a supposed technical rule, that a party to a suit cannot be a purchaser under the decree without special permission. And to this it may be added that it enables the mortgagee, notwithstanding the general rule to the contrary, to purchase at a sale controlled and conducted by himself. The same point was decided in Fulton v. Whitney (66 N.Y. 548). *Page 338
It appears that Austin was the owner, in his own right, of one-third of one of the elevators in question. This circumstance does not change the principle to be applied to the case, but would merely reduce the amount which he was bound to apply to the Stewart mortgage.
It is also claimed by the appellant, that the allegations of the complaint show that it was agreed that Austin should receive the earnings of the elevators, to be applied upon his advances; but these allegations are coupled with the further allegation that he was to pay the notes on which Stewart Co. were indorsers. There is nothing in the complaint or in the evidence, sanctioning the idea that Austin was to receive the earnings, leaving the indebtedness to Stewart Co. unpaid, and the property exposed to a foreclosure by them. This would have been contrary to the whole spirit of the arrangement, the object of which was to relieve Bennett Avery from their financial embarrassments.
The testimony of Mr. Sherwood is referred to as showing that Austin required a deed instead of a mortgage, so that he might control the property and collect the dividends. But taking the whole of the testimony of that witness, it shows that Austin conceded, at the same time, that Stewart Co. had the first lien on the dividends. Mr. Sherwood, the witness, was the holder of prior mortgages on the elevators, amounting to $34,000, and testified that Austin proposed to him to join in making the advance of $50,000 to Bennett Avery, explaining the urgency of the case and the circumstances of pressure under which Avery, Austin's son-in-law, was laboring. That Austin had then present a statement of the earnings of the elevators, showing them to be from $40,000 to $50,000 per annum; and he asked witness to extend the mortgages he held, for three years, saying that within that time Bennett Avery would be able to pay back the $50,000 they wanted to borrow, out of the earnings, and in the same conversation said that the dividends, for a time, had got to be paid to Stewart Co., to go on their mortgage, and that they had an assignment of them. The witness did not join in the loan, but granted the extension *Page 339 asked, and it was not until after Austin got his deed, that the idea seems to have occurred to him of diverting the earnings from the Stewarts before their lien was satisfied.
It is also urged that no part of the earnings or dividends which accrued before the substitution of the new agreement with Austin were paid over to him by the Elevating Association, and that consequently there was no misapplication of any fund which had been assigned to Stewart Co. The evidence on this point is not very precise, but we think it justifies the inference that such previously accrued dividends were paid to Austin. It does not appear that any dividends were paid to Stewart Co., and the testimony of Mr. Sherman, the secretary of the association, is, that Austin came to him and demanded the dividends, and he told him they had an order from Bennett Avery to pay the dividends to Mr. Stewart; that the president of the association was then called in and made the same answer, and Austin then said, that if he could not have the dividends on his property, he would take it out of the association; that Williams suggested that Austin might give a bond of indemnity, and Austin said he would do that, and the witness testified that he thought it was all paid. The finding of the court is, that on the 2d of February, 1870, Austin took possession of the elevator property, and received the rents and profits of the same, which during the season of 1870 amounted to at least $35,000. Whether these receipts included dividends accruing before Austin took possession, is not stated, nor is it very material. The agreement with the elevating association was for three years, and, assuming its validity, which is not brought in question here, it bound the property for that time. The dividends to accrue under it constituted a fund which was assignable by the parties entitled to receive it, and was separable from the ownership of the land. All subsequent grantees or mortgagees, with notice, were bound by the agreement and assignment, and took subject thereto, and were to that extent deprived of the beneficial enjoyment of the property. The dividends to accrue, whether regarded as rent or otherwise, were as capable of being appropriated to a specific *Page 340 purpose, as the dividends already accrued, and if a subsequent mortgagee obtained control of them without lawful right, a court of equity was competent to hold him to the obligation of applying them to the purpose to which they had been appropriated. It is contended that the elevating association could have been compelled to pay them according to the original contract, and resort to Austin on his bond of indemnity; but if so, this did not preclude the court from adopting the more direct course, of holding Austin as trustee ex maleficio of the fund of which he had assumed control, to the obligation of making the proper application of it and subjecting him to the same consequences as if he had been intrusted with it for the purposes to which it had been dedicated. Although his position as junior mortgagee did not preclude him from acquiring in a fair and lawful manner an outstanding title paramount to that of his mortgagors, yet it did not protect him against any liability or disability which would have ensued from his unlawful assumption of the control of the property, had he not been such mortgagee.
It is not necessary to impute to Mr. Austin any wrongful or dishonest motive in all these transactions. He was not living at the time of the trial and his explanation of them could not, therefore, be heard. It is not unreasonable to suppose, that, notwithstanding his assumption of the control of the property, and his purchase at the foreclosure sale, he did not intend to deny to Bennett and wife the right to redeem if they should become able. He may have been doubtful of their ability to do so, and have desired to exercise full control of the property to protect his advances. The language of his agreement with Stewart Co., under which he paid them $40,000, is not inconsistent with that theory, for it provided that the money should be applied on the mortgage, if he elected to pay it off without a sale, and on his bid if he purchased at the sale. This shows that he had not at that time finally concluded which course to pursue; and the stipulation that, in case of a sale, he should have control of the sale, was one which a lawyer, as Mr. Austin was, would hardly have deemed it prudent to introduce, *Page 341 if he had contemplated purchasing at the sale, and holding in hostility to his debtors, under the circumstances surrounding this case, though entirely proper if his intention was that their right to redeem should continue.
There are some other matters to be considered on a final disposition of the case, but on the main question I am in favor of affirming the judgment of the Supreme Court.
ANDREWS, J., concurs; EARL, J., concurs in opinion of RAPALLO, J.; FOLGER, Ch. J., and DANFORTH, J., not voting.
Judgment modified in accordance with closing paragraph of opinion of MILLER, J.