The defendant interposed a demurrer to the complaint upon the ground that it does not- state facts sufficient to constitute a cause of action. The complaint alleges, among other things, that the Metropolitan Eeal Estate Improvement Company is a foreign corporation and that the defendant is a domestic corporation, having power under its charter to act as trustee under a mortgage; that on the 24th day of November, 1905, the Metropolitan Eeal Estate Improvement Company executed and delivered to the defendant, the trustee therein, a mortgage upon a tract of land in the city of Yonkers to secure the payment of 2,000 bonds of $500 each, to be issued by the improvement company, and to be paid for in ten equal annual installments, and that at the time of the execution of the mortgage the property was incumbered by existing mortgages to the amount of $263,400.
The mortgage as pleaded provides that “ Whereas it is desired and intended to pay off the said mortgages, and each of them, out of the proceeds of the sale of the bonds herein described, now, therefore, it is hereby agreed by the said company that during-the third year of the life of this trust mortgage it will pay to the Guardian Trust .Company as trustee the sum of $60,000, and during the fourth year of the life of this mortgage the sum of $100,000, and such further sum or sums as may be necessary to pay the principal and interest due On said mortgage, and to procure the discharge and satisfaction thereof, and the said Guardian Trust Company as trustee hereby agrees to apply such payments when so made to the payment and satisfaction of the said mortgages. ” The mortgage also provides that the bonds secured by the mortgage shall be signed by the president of the company and have the corporate seal affixed and attested by the secretary, and that none of the bonds shall be issued or be of any binding force until the same are authenticated b«y a certificate of the trustee, “that the within bond is one of .the series of bonds described *865in the trust deed0or mortgage therein described.” It further provides that the bonds shall be delivered by the trustee only to the treasurer of the company, and then “only upon the written order of that company, signed by its president; ” that none of them shall be valid until the first annual installment of fifty dollars has been paid to the improvement company, and that all payments “ are due at the Metropolitan Beal Estate Improvement Company’s office, in the city of New York,” and that “upon the payment of each installment on this bond the holder is entitled to receipt signed by the president, the vice-president or treasurer” of the improvement company, which must be attached to the bond and shall be conclusive evidence of such payment and the- amount thereof.
The complaint also alleges that of the 2,000 bonds secured by the mortgage, more than 800 were issued and sold with the knowledge and consent of the defendant as paid-up bonds; that they were certified as paid-up bonds by the defendant as trustee; that there was paid therefor the sum of $400,000; that the defendant was the depositary of the moneys received from the sale of the bonds, and suffered the said Metropolitan Beal Estate Improvement Company to withdraw and misapply the moneys “without applying the same to the payment of said ■underlying indebtedness.”
It further alleges that no part of the principal of the underlying mortgages was paid the defendant except one held by Bandolph Lowerre to secure the sum of $8,400; that in the year 1908 two of the mortgages, on which there was then, due the sum of $80,000, were foreclosed, and the real property described in the trust mortgage was sold for less than the amount due upon the underlying indebtedness, and the defendant as trustee was divested of all right therein; that the Metropolitan Beal Estate Improvement Company is insolvent; that the plaintiffs are the owners and holders of three of the bonds certified by the defendant as paid-up bonds,. and that this action is brought on behalf of all the bondholders who may desire to come in and contribute to the expense thereof.
It is also‘alleged that by and under the terms of the trust mortgage it became- and was the duty of the defendant as trus*866tee, and as the representative of the plaintiffs, to compel the application of the moneys received from said paid-up bonds to the payment of the underlying indebtedness, and that it violated its covenants and agreements by failing to apply the moneys received from the sale of the bonds to the payment of the underlying indebtedness, as provided in the mortgage, and in knowingly suffering and permitting the company to misapply the proceeds and appropriate the moneys without applying the same to the payment of the underlying indebtedness.
' In Davidge v. Guardian Trust Co. (136 App. Div. 78) this court in construing the .mortgage now before us held that the fair intent of the provision for the payment of the prior mortgages was “that after three years’ installments had been paid, the trustee must commence to reduce the prior incumbrances and pay $60,000 thereupon, and after four installments had been paid the trustee should pay such further sum as was necessary to satisfy the mortgage.”-
We still are of the opinion that the use of the words “third year ” and “ fourth year ” in this provision is only important as indicating from which installments the prior mortgages were to be paid and as showing that, according to the scheme of the mortgage, the improvement company could not collect, and was not entitled to receive, more than $200 on each bond without providing for the payment of the prior mortgages.
The charge in the complaint is that the defendant rested under the implied covenant, as well as the legal duty, to apply the proceeds of the bonds deposited with it to the .payment of the prior mortgages, or if it had no right to make such appropriation without the authority or consent of the company to withhold the proceeds and prevent their use or disposition for any other purpose. ■
It. has 1/een repeatedly held that, although a party does not in express terms undertake to do a particular act, a covenant to do it will be implied and read into an ■ instrument, if from the text of the agreement or the surrounding circumstances it is manifest that the--parties so intended, and that for a non-performance of the act an action of covenant will lie. (Booth v. Cleveland Mill Co., 74 N. Y. 15; Morgan v. Mayor, 160 id. 516.) It seems to us clear, from the inference naturally *867derivable from the provisions of the mortgage, the disclosed purposes of the parties in making the mortgage, and the result they sought to accomplish, that it was not intended that the defendant should be a mere dummy, or that it should be charged with no duty in respect to tíre preservation or.protection of the proceeds of the bonds until" they were actually paid to it by the company to be applied upon the prior mortgages.
In accepting the trust and becoming a mortgagee in trust for the benefit of the bondholders, the defendant undoubtedly undertook to discharge the duty and exercise the care and diligence which would naturally be expected of an intelligent person acting in like circumstances to protect his own mortgage. (King v. Talbot, 40 N. Y. 76.) It is conceded that this was not done. The scheme of the mortgage was departed from and 800 of the 2,000 bonds were issued and sold as paid-up bonds, and were certified as paid-up bonds by the defendant. The sum of $400,000, paid therefor, was deposited with the defendant and was in its possession and under its control. It had complete knowledge of the provisions of the mortgage which required the prior liens to be fully paid before the fifth installment became. due. It knew that the payment of the prior liens was one of the purposes for which the mortgage was made and the bonds were issued. It Imew or was chargeable with knowing, not only that it was vested with certain legal rights against the improvement company, but that it had a lien or equity in the .nature of a trust which gave it the right to retain possession of enough of the' proceeds to pay the prior mortgage, and to subject it to that purpose, if it did not have the power to make the appropriation. It would seem too clear for argument that the plainest principles of justice require the implication of a covenant imposing upon the defendant the obligation to exercise ordinary vigilance and intelligence in protecting the proceeds of the bonds, and to see that they are applied to the payment of the prior mortgages. If we are right in this conclusion, it is evident that the complaint states a cause of action for the breach of the covenant.
We, therefore, are of the opinion that the interlocutory judgment should be reversed, with costs, and the demurrer overruled, with costs, but with leave to the defendant tó with*868draw the demurrer and answer upon payment of the costs' of the appeal and of the demurrer.
All concurred, except Houghton,'J., dissenting in opinion; Betts, J., not sitting. . ■ • .