Keene Five Cent Sav. Bank v. Reid

• Decision Date: 06 April 1903
• Docket Number: 1,796.,1,795
• Citation: 123 F. 221
• Parties: KEENE FIVE CENT SAV. BANK v. REID et al. RHODES v. SAME.
• Court: U.S. Court of Appeals — Eighth Circuit

123 F. 221

KEENE FIVE CENT SAV. BANK v. REID et al.

RHODES v. SAME.

Nos. 1,795, 1,796.

United States Court of Appeals, Eighth Circuit.

April 6, 1903

W. J Gregg and J. D. Gregg, for appellants.

W. F Guthrie, for appellant Keene Five Cent Savings Bank.

T. F Garver (J. A. Broughten and J. B. Larimer, on the brief), for appellees Gavin Reid and Elmira Reid.

Appeals from the Circuit Court of the United States for the District of Kansas.

This action was brought by the Keene Five Cent Savings Bank, a New Hampshire corporation, the appellant in case No. 1,795, and one of the appellees in case No. 1,796, to foreclose a mortgage on lands situated in Marshall county, Kan. The bill alleged, in substance, that Gavin Reid and Elmira Reid on October 14, 1886, executed a note in favor of Fanny U. Warden in the sum of $6,000, payable 20 years after date, with 20 interest coupons, for $420 each, thereto attached, and that as security therefor they executed the mortgage in question; that the taxes assessed against the mortgaged premises for the years 1889, 1890, 1891, and 1892, were not paid by the mortgagors, but were paid in August, 1895, by the complainant; that the taxes on the property for the years 1893 to 1897, both inclusive, were not paid by the mortgagors or any other person; that the mortgagors had failed to pay any of the coupon interest notes which became due annually on November 1st for the years 1891 to 1898, both inclusive; that the principal and interest notes secured by said mortgage, together with all the mortgagee's rights under said mortgage, were assigned by Fanny U. Warden to the complainant in June, 1889, to secure the payment of an indebtedness owing by said Warden to the complainant; that after such assignment, and in September, 1893, in a suit brought by one King, as receiver of the First National Bank of Frankfort, Kan., in the Supreme Court of New Hampshire, the complainant was garnished, by trustee process emanating from said court, as a creditor of said Fanny U. Warden, and compelled to answer as to the state of its account with her; that it did answer forthwith, showing that it then held the aforesaid notes as security for an existing indebtedness on the part of said Fanny U. Warden in the sum of $3,248.66; that thereupon the complainant was notified by one Harriet R. Warden that she was the owner of and entitled to whatever sum might be collected on said notes over and above the sum of $3,248.66 aforesaid; that a controversy accordingly arose between said last-named claimant and said King as to who was entitled to the surplus, in consequence of which the complainant could not, under the laws of New Hampshire, lawfully send said note and mortgage out of the state of New Hampshire into the state of Kansas until said controversy was determined; that it was not so determined until the year 1898, when T. F. Rhodes, having bought from King, as receiver, all the assets then in his hands as receiver, entered into an agreement with Harriet R. Warden and Fanny U. Warden whereby they released their claim to said notes, and consented that this plaintiff might proceed to collect the notes, and hold any surplus over and above the amount of its claim for the benefit of said Rhodes; and that thereupon the New Hampshire suit was dismissed in the month of July, 1898, and the complainant, being freed from all restraint, was permitted to proceed with the enforcement of the mortgage. The bill averred that during all of the period aforesaid Gavin Reid and Elmira Reid, the mortgagors, had occupied and used the mortgaged premises; that they had not paid any part of the principal indebtedness; and that the defendant T. F. Rhodes had a claim for taxes against the mortgaged premises which was prior in lien to the mortgage, the exact and true amount of which the complainant was unable to state. The complainant accordingly prayed that the amount of its demand might be ascertained and established, and for a decree of foreclosure. The defendant Rhodes filed an answer in which he admitted substantially all of the allegations contained in the complaint. He also filed a cross-bill, in which he asserted a tax lien, and prayed that the priorities of various liens existing against the property might be ascertained, and for general relief. The mortgagors filed an answer in which they admitted substantially all of the allegations contained in the bill, but they averred that the interest notes which matured on the 4th of November in the years 1890, 1891, 1892, and 1893 were not paid when they became due, and for that reason they insisted that the cause of action on which the complainants sue did not accrue within five years before the action was brought, and that the action could not be maintained. On a final hearing the lower court sustained the defense and dismissed the complainant's bill. It also dismissed the cross-bill which was filed to T. F. Rhodes. From this decree the Keene Five Cent Savings Bank and T. F. Rhodes have prosecuted separate appeals.

Before CALDWELL, SANBORN, and THAYER, Circuit Judges.

THAYER Circuit Judge, after stating the case as above.

The question to be determined on these appeals is whether the principal note, secured by the mortgage, together with the accrued interest thereon, became due and payable as soon as there was a failure to pay any one of the interest coupons, so that the statute of limitations began to run at the date of the default as against the entire indebtedness, without any affirmative action on the part of the holder of the notes, and even against its express will and consent. This question arises in the following manner: In the principal note this clause is found:

'It is expressly declared and agreed that this note and the coupons hereto attached are made and executed under and are to be construed by the laws of the state of Kansas in every particular and are given for an actual loan of six thousand dollars.'

The mortgage which secured the note contained the following provision:

'But if said sum or sums of money or any part thereof, or any interest thereon, is not paid when the same is due, and if the taxes and assessments of every nature which are or may be assessed and levied against said premises, or any part thereof, are not paid when the same are by law made due and payable, or if the insurance be not kept up thereon, or if waste be committed, then the whole of said sum and sums and the interest thereon shall and by these presents become due and payable and said party of the second part shall be entitled to possession of said premises.'

It is a conceded fact that a default occurred in the payment of interest on the mortgage debt as early as November 4, 1890; that no interest was paid after that date; and that a statute of Kansas declares (Gen. St. Kan. 1901, Sec. 4446) that an action 'upon any agreement, contract or promise in writing' can only be brought within five years after the cause of action 'shall have accrued.'

It is obvious, therefore, that if the effect of the above-quoted mortgage clause was to render the entire indebtedness secured thereby immediately payable when the first default in the payment of interest, or any default, prior to November 4 1896, occurred, whether the creditor did or did not elect to treat it as due, then the action is barred, and the decree below was for the right party. On the other hand, if the mortgage clause in question merely gave to the creditor an option to treat the indebtedness as due in case of a default, which he might or might not exercise at his pleasure, then the debt sued for was not due until the present action was brought, and the decree below is indefensible. The effect of such clauses as the one in question has frequently been a subject for judicial consideration, and, while the decisions are not entirely harmonious, yet the decided weight of reason and authority is in favor of the view that such provisions are not self-operative; that they are for the benefit of the creditor, and intended to give him, on grounds of convenience, the right to treat the entire debt as matured, if an installment of interest is not paid as and when it should be, or if the taxes on the mortgaged premises are not paid pursuant to agreement. The great majority of the cases treat such provisions, when contained in mortgages, as designed to further constrain and stimulate the debtor to meet his engagements promptly, and to arm the creditor with a right in the nature of a right to declare a forfeiture or to exact a penalty, which he may or may not exercise, and as a right which the courts will never regard as having been exercised by the creditor, or as having any effect upon the period of maturity specified in a note or bond, without some affirmative action on his part, such as a notification to the debtor, by a suit or otherwise, that on account of the default he elects to treat the entire indebtedness as due. Attention has also been called to the fact that to hold such provisions as the one in question to be self-operative would be to confer on the debtor the right to take advantage of his own wrong; that is, to mature an indebtedness which was intended as an investment for a given period, in advance of the time specified on the face of his note or bond, by failing to keep his engagements. Cox v. Kille, 50 N.J.Eq. 176, 24 A. 1032; Mason v. Luce, 116 Cal. 232, 48 P. 72; Richards v. Daley, 116 Cal. 336, 48 P. 220; Lowenstein v. Phelan, 17 Neb. 429, 22 N.W. 561; First Nat. Bank of Snohomish v. Parker (Wash.) 68 P. 756, 757; Watts v. Creighton, 85 Iowa, 154, 52 N.W. 12; Batey v. Walter (Tenn. Ch. App.) 46 S.W. 1024; Nebraska City Nat. Bank v. Nebraska City Gaslight & Coke Co. (C.C.) 14 F. 763; Phillips v. Taylor, 96 Ala. 426, 11 So. 323. We are...