Appeal from the Circuit Court of Cook county; the Hon. JULIUS
H. MINER, Judge, presiding. Decree reversed and cause remanded
JUDGE SCHWARTZ DELIVERED THE OPINION OF THE COURT.
This is an appeal from a decree foreclosing a trust deed securing a note for $5000 made by Joseph and Mary Kohout (defendants-appellants, herein called defendants). Their defense is that all interest and principal had been paid to John O. Sykora as the authorized agent of plaintiff to receive payment, although the notes were not surrendered to them. They filed a counterclaim seeking to have the notes cancelled. The issue in this cause is the scope of the agent's authority.
John O. Sykora was named trustee, and both principal and interest were payable at his office or at such other place as the holder of the notes might from time to time in writing appoint. Provision was also made for prepayment on the principal sum upon giving the owner of the notes or the trustee thirty days written notice. The cause was referred to a master who heard the evidence, found that the payments were not made to Sykora as plaintiff's agent and recommended a foreclosure decree and dismissal of the counterclaim. The chancellor overruled exceptions to the master's report and entered a decree as recommended.
The case turns on the legal effect of the uncontroverted testimony describing the character of Sykora's agency for plaintiff. It appears that over a period of fifteen years plaintiff purchased ten to fifteen mortgages through Sykora. She had no personal contact with the borrowers. Sykora would collect payments without having notes in his possession and would write plaintiff or advise her orally that payments had been made, whereupon she would send him the notes. Sykora would keep the payments he received and would give plaintiff his personal checks for whatever had been paid. This was true both as to principal and interest payments. From time to time plaintiff permitted funds to remain with Sykora for the purpose of purchasing other mortgages. Plaintiff estimates that she had a revolving fund with him of between $15,000 and $20,000. In February 1947 when she had a credit of approximately $2500 in the account, she gave Sykora a check for $2486 to be added to her balance and in May 1947 the money was used to purchase the Kohout mortgage. Plaintiff received the trust deed and notes in June 1947.
Defendants first met Sykora in May 1947 when they sought a loan for the purpose of buying a house. There was no contact between plaintiff and defendants until after August 1952 and no written communication between them until November 1952. From 1947 to 1952, defendants made their payments of interest and principal to Sykora and took his receipts therefor. When they made payments of interest, Sykora's secretary informed them that she did not have the coupons and that when they came in from the holder, Sykora would send them to defendants. By July 1952 they had paid $3000 on account of principal and on July 7, 1952, they made a final payment on principal of $2000. Shortly after this Sykora absconded. Defendants did not ask for the production of either interest coupons or the principal note upon which payment was being made nor did they inquire whether Sykora owned the notes or had them in his possession. Sykora did not advise plaintiff of the prepayments of principal nor did he transmit any portion thereof to her.
The practice of holders of bearer notes remaining unknown to borrowers is by no means uncommon in this community. It means, however, that the note holder must create an agency. In this case, as in many others, the mortgage dealer and trustee was the agent. The inevitable conclusion from the uncontroverted testimony is that plaintiff knew and approved of Sykora's receiving payments of principal and interest from borrowers and depositing them to his own account or keeping the money and accounting to her later. She also knew that prepayments on principal were being made by borrowers without production of principal notes. This she had known for years. She not only acquiesced but cooperated in the arrangement. She never sent notes to Sykora in anticipation of payment but would only deliver them to him when he advised her that payment had been made. Apparently this was not due to any caution on her part with respect to Sykora because, as we have said, she would often leave funds with him pending the purchase of other mortgages which he might obtain for her. It was her mode of doing business with him. Her own testimony is that times were good and people were paying off loans so fast it was an annoyance to her. That was her reason for leaving money with Sykora pending his ability to get other mortgages.
It is argued that defendants by their conduct permitted Sykora to commit the embezzlement. Payment to a duly authorized agent is payment to the principal. In such a case any argument with respect to defendants' exercise of care or failure to inquire is irrelevant. The same thing may be said of the argument that defendants cannot rely upon plaintiff's course of dealing with others through Sykora, as they knew nothing about it. The evidence of other dealings was proof of plaintiff's acquiescence and affirmative cooperation in Sykora's method of collecting interest and principal payments on her behalf. It is of no consequence that defendants did not know the course of dealing by which Sykora thus became empowered as plaintiff's agent. Their own course of dealing followed the same pattern as that of others. This is to be distinguished from a case of persons dealing with one who is not an agent but assumes to be such or, being an agent, exceeds his authority. In such a case the facts creating an estoppel should be known to the persons dealing with the agent. In the instant case the agency was proved. The defendants' obligation was discharged when they paid Sykora the money they owed plaintiff.
This conclusion is fortified by the fact that where the owner of a bearer note secured by a trust deed conceals his identity, the trustee appointed for the purpose of securing performance of the provisions of the trust deed starts with an authority from the owner which, while limited in the first instance to seeing that the covenants of the trust deed are performed, is easily expanded to a personal authority to receive payment on behalf of the owner of the notes. The trust deed in itself made this easy by providing that payments should be made at Sykora's office. Perhaps such an arrangement in its primitive sense meant that at the appointed time and place the maker of a note would meet the holder of the note and there make his payment. It does not mean that today when a great many loans provide for payments on installments or prepayments at a time and place fixed in the instrument. In such cases the debtor frequently does not see his note until after the final payment.
Three cases are cited which adequately support our conclusion. Noble v. Nugent, 89 Ill. 522; Linowiecki v. Wisniewski, 249 Ill. App. 474; and Corn Belt Building & Loan Assn. v. Grabe, 295 Ill. App. 135. In the Noble case the vital facts are similar to those in the case at bar. The borrower dealt with the mortgage broker, also named as trustee, and never met the note holder or knew his name. She made payments from time to time, taking the broker's receipts, and when she made final payment she asked for the note but was told the broker was busy. The mortgage broker, as trustee, gave her a release of the trust deed. It appeared that the broker had acted for the lender for more than ten years and had authority to collect moneys owing the lender. The court said the fact that the notes were not surrendered when paid could not avail as against clear proof that they were paid to a person having authority to receive payment, citing Anderson v. Coonley, 21 Wendell 279; United States Life Insurance Co. v. Advance Co., 80 Ill. 549; Harris v. Simmerman, 81 Ill. 413. The court makes the further observation that the authority of an agent may be shown by the usual acts of such agent in the principal's business or by the principal's permitting and acquiescing in such acts when known to him, as well as by express authority and direction, quoting from Doan v. Duncan, 17 Ill. 272, at 275:
"The policy and reason of the rule is for the protection of the innocent, who deal upon the faith of such authority as the principal holds out or permits as being authorized and sanctioned by him. If an innocent party is to suffer, it shall fall upon him who enables the supposed agent, under his authority, to impose on others."
The principle is stated in this way in Restatement of the Law, Agency, ch. 3, sec. 43(2):
"Acquiescence by the principal in a series of acts by the agent indicates authorization to perform similar acts in the future."
To the same effect are the other cases cited. In Linowiecki v. Wisniewski, supra, this pertinent language appears:
"Moreover, the plaintiff by his course of conduct, had agreed to the payment of the notes, without their production, at the office of Weber & Weber by the defendants, as it appears from his own testimony that he would not deliver the notes until he had first received the money ...