Warrener v. Federal Land Bank of Louisville

• Citation: 266 Ky. 668,99 S.W.2d 817
• Parties: WARRENER v. FEDERAL LAND BANK OF LOUISVILLE.
• Decision Date: 18 December 1936
• Court: Kentucky Court of Appeals

99 S.W.2d 817

266 Ky. 668

WARRENER v. FEDERAL LAND BANK OF LOUISVILLE.

Court of Appeals of Kentucky

December 18, 1936

Appeal from Circuit Court, Warren County.

Action by E. B. Warrener against the Federal Land Bank of Louisville. Judgment for the defendant, and plaintiff appeals.

Reversed.

John L Stout and R. H. Lee, both of Bowling Green, for appellant.

Chas R. Bell, of Bowling Green, and Martin R. Glenn and Roger D Branigin, both of Louisville, for appellee.

STANLEY Commissioner.

In the mortgage executed by E. B. Warrener to the Federal Land Bank of Louisville to secure an indebtedness for a loan of $10,800, he covenanted and agreed to keep the buildings insured in the sum of $6,300. The bank expressly reserved the right to take out the insurance itself for the purpose of protecting the parties if he should not do so, the policies to be delivered to it, and the premiums if not paid by the mortgagor to be charged as a lien on the land similar and to the same effect as the original loan. At the time the loan was made the mortgagor had $8,000 insurance on the dwelling, and $2,000 on several barns. On September 24, 1934, that insurance was canceled, as he was later advised, and on October 17th the bank wrote Warrener as follows:

"By reason of our failure to receive insurance in connection with the above loan, it has become necessary for this bank to secure a policy covering your property in accordance with the requirements of your mortgage.

"The policy covers as follows, with a premium charge of $48.30:

"Fire and Windstorm

"On Dwelling $4800.00

"On Barn 300.00

"Insurance expires 9/17/37

"Please forward your check at once for the above premium. By the payment of this amount your insurance is paid in full for a period of three years.

"Yours very truly,

"G. C. Hays,

"Manager Insurance Division

"In case of loss notify us immediately--giving estimate of damage and which building is involved."

On January 4th following, the dwelling was destroyed by fire. Shortly afterwards the bank advised Warrener that he was insured and instructed him to indorse the checks in settlement and send to it for credit. Thereafter the bank billed him for $48.30 premium, and he paid that sum to it. Warrener relied on the statements of the bank that there was insurance on his property and that it held the policies as the mortgage required, with a lien on the property to secure the payment of the premium under its terms. He made no effort to provide fire insurance on the buildings, as he would have done. In the exercise of its rights, as set forth in the mortgage, the bank had entered upon the performance of the service and procured a policy of windstorm insurance on the dwelling for $4,800, and on the barn for $300. It had also procured a $2,000 policy of fire insurance on the dwelling. The dwelling was of greater value than $4,800. In violation of its contract and its agreement, assurance and promises to the mortgagor, the bank had negligently failed to take out the fire insurance on the dwelling and had negligently allowed it to go unprotected. As the proximate cause of that negligence Warrener had suffered a loss of $4,800. Warrener had relied upon the statements contained in the letter quoted above and was misled to his damage by its representations and the failure to perform the services the bank had undertaken, entered upon and partially done.

The foregoing is a synthesis of a petition, and amendment, filed by Warrener against the Federal Land Bank, in which he prayed judgment for $4,800, with interest from the date of the fire. A demurrer challenging the sufficiency was sustained, and in the absence of further pleading it was dismissed. Warrener prosecutes an appeal.

In short, it is alleged that the bank under a contract right had undertaken to protect fully the property by insurance, but through negligence had done so only partially; nevertheless, it had advised the mortgagor that it had procured fire insurance on his dwelling for $4,800 for three years for their mutual protection, and had called for and received payment of the premium by the mortgagor. He had relied upon that statement and had not protected his property. The bank, however, had not done what it represented, and this resulted in the mortgagor's loss. The suit seems to be based upon both negligence and deceit.

1. We may dispose, first, of the proposition that the appellee is not suable and cannot be held liable as an insurer or otherwise.

Federal Land Banks were created by Congress by the Federal Farm Loan Act of 1916 (39 Stat. 360, see 12 U.S.C.A. §§ 671-734). It was adopted in response to a national demand for such a rural credit system. Federal Land Bank v. Gaines, 290 U.S. 247, 54 S.Ct. 168, 78 L.Ed. 298. The constitutionality of the act was sustained on the ground that the banks were made fiscal agencies of the government, in that they may be depositories of public moneys and purchasers of government bonds, although they have been granted banking powers of a limited character, particularly to facilitate the making of loans upon farm security at low rates of interest. Smith v. Kansas City Title & Trust Co., 255 U.S. 180, 41 S.Ct. 243, 65 L.Ed. 577. In Federal Land Bank v. Priddy, 295 U.S. 229, 55 S.Ct. 705, 709, 79 L.Ed. 1408, a real estate broker sued the bank to recover a commission, and obtained an attachment. The bank pleaded its immunity from mesne process of attachment by virtue of its organization and functions under the statutes of the United States. The Supreme Court of Arkansas denied the claim of sovereign immunity (189 Ark. 438, 74 S.W.2d 222), and the case went to the Supreme Court of the United States. The court pointed out that section 4 of the Federal Farm Loan Act (12 U.S.C.A. § 676) provides that Federal Banks "shall have power *** to sue and be sued, complain, interplead, and defend, in any court of law or equity, as fully as natural persons," and said that although concededly they were federal instrumentalities, yet they possessed characteristics of private business corporations. The decision was that when such a bank acts in a nongovernmental capacity, or as a private corporation, there is an express waiver of immunity by Congress, and it is "subject to the incidents of suit, including attachment and execution," as fully as natural persons.

Therefore, in such a suit as the one at bar, the defendant bank must be held to the same accountability as would an institution having no relation to the federal government, although the terms, conditions, and limitations of the Federal Farm Loan Act should control where there is any conflict between them and the state law. Missouri, K. & T. Ry. Co. v. Walston, 37 Okl. 517, 133 P. 42; Federal Land Bank of Berkeley v. Warner, 42 Ariz. 201, 23 P.2d 563.

The act merely provides that every borrower shall undertake to keep his buildings insured, with the insurance made payable to the bank as its interest may appear. 12 U.S.C.A. § 771, subsec. 9. We find nothing therein which restricts such a bank from entering into a contract giving it the option to procure such insurance at the expense of the borrower or from exercising that right. Whether a federal land bank could insure property and assume the obligations of an insurer is a question not involved. This action seeks no recovery from it as an insurer. It is a tort action. The basis upon which recovery is sought is (1) misfeasance in its undertaking, and (2) deceit. We are of opinion that the appellee is not exempt from responsibility by reason of its corporate nature or any limitations in the act by which it was created and under which it exists. Cf. Elkhart County Nat. Farm Loan Association v. Heilman (Ind.App.) 196 N.E. 350.

2. The mortgage placed no duty or obligation upon the bank to insure the property. That duty rested upon the mortgagor, and he could not as a matter of legal power under the contract shift the responsibility to the mortgagee. But there was an option given the mortgagee "to buy said insurance and pay the premiums therefor," the same being payable by the mortgagor immediately, or, in default, chargeable as a further lien debt. It is elementary that a duty is a prerequisite to a liability. So long as there was but an unaccepted optional right there was no duty. It was for the bank to choose to exercise or not to exercise that right. Mammoth Garage v. Taylor, 220 Ky. 499, 295 S.W. 429; McQuilkin v. Ford, 101 Neb. 474, 163 N.W. 763; Spokane Merchants' Association v. Parry, 60 Wash. 204, 110 P. 991; Southern Building & Loan Association of Knox County v. Miller, 110 F. 35, 49 C.C.A. 21; Schafer v. Jackson, 155 Iowa 108, 135 N.W. 622. Upon the failure of the mortgagor to keep his contract in this respect, the bank had, it seems to us, the right of election to (1) waive the omission and let the property remain uninsured; (2) procure the insurance itself or (3) pursue some other course stipulated in the contract for its breach. If and when it elected to procure the insurance at the expense of the mortgagor, it must have been done in accordance with the terms of the contract. Those terms are that the policy should provide for the loss being payable to the mortgagee as "its interest may appear at the time of the loss." Any sum received in settlement of the insured loss, according to the mortgage, could be applied by the mortgagee "to discharge any portion of the indebtedness secured hereby, whether or not the same be due and payable, or to the reconstruction of the building destroyed or damaged." When the mortgagee made its election it was not to be and was not for its sole benefit, but for the mutual benefit of the parties--for the mortgagor, in the reduction of his debt or replacement of his building; for the...