Zastrow v. Knight

Decision Date21 March 1930
Docket Number6915.
Citation229 N.W. 925,56 S.D. 554
PartiesZASTROW v. KNIGHT et al.
CourtSouth Dakota Supreme Court

Appeal from Circuit Court, Brookings County; J. H. Bottom, Judge.

Action by August Zastrow against W. W. Knight and others. From an order overruling a demurrer to the answer, plaintiff appeals.


Danforth & Barron, of Sioux Falls, for appellant.

Cheever Collins & Cheever, of Brookings, for respondents.

W. W Knight, of Brookings, S. E. Anderson, and John A. Anderson pro se.


Plaintiff instituted this action against defendants in July, 1928, to recover a principal balance of $2,500, together with some interest, upon a promissory note executed and delivered by defendants to plaintiff July 29, 1919, bearing interest at 6 per cent. per annum, payable July 29, 1922.

The answer of the defendants admits the execution of the note, plaintiff's ownership thereof, and the balance due thereon, and, by way of defense, alleges substantially as follows:

First. That as a part of the same transaction with the execution of the note and as security for the payment of the note defendants duly executed, acknowledged, and delivered to plaintiff a second mortgage upon certain real estate by defendants then owned.

Second. That very shortly thereafter defendants, with full knowledge and consent of plaintiff, sold and conveyed said mortgaged realty by warranty deed to one Hoy, who assumed and agreed to pay said mortgage.

Third. That Hoy in turn conveyed said realty to another grantee, and Hoy's grantee to another, and so on for several successive conveyances, each of the grantees respectively, by the express terms of the conveyances to them, taking the premises subject to said mortgage, but none of said grantees after Hoy assuming or agreeing to pay the mortgage.

Fourth. That Hoy or his grantees made all interest payments accruing to the maturity of the note, and that, when the note became due, the realty in question was owned by Clear Lake Security Company, a corporation, one of the grantees subsequent to Hoy; the legal title thereto being for the convenience of said corporation in the name of one E. E. Walseth, secretary of the corporation, the title of said corporation being subject to the mortgage aforesaid, but said corporation not having assumed or agreed to pay said mortgage.

Fifth. That on September 1, 1922, the realty being then owned by Clear Lake Security Company as aforesaid, plaintiff, without the knowledge or consent of defendants or any of them, orally agreed with the said corporation and its secretary Walseth as follows, to wit: That the plaintiff would extend the time of payment of the mortgage debt one year, that is, to July 29, 1923, in consideration whereof said corporation would immediately pay to the plaintiff, to apply on the principal of said mortgage debt, the sum of $500, together with interest thereon at 6 per cent. from July 29, 1922, to September 1, 1922, and that said corporation would pay to plaintiff on July 29, 1923, the sum of $2,500, being the remaining principal of the mortgage debt, together with interest thereon from July 29, 1922, to July 29, 1923, at 7 per cent., being 1 per cent. in excess of the amount specified in the note representing the mortgage debt, and that, pursuant to and in execution of said oral agreement, said corporation did pay to the plaintiff on September 1, 1922, the sum of $502.50 on said mortgage debt, being $500 on the principal and $2.50 on the interest.

Sixth. That at the time of making such payment the said E. E. Walseth, acting for himself and for said corporation, made a written memorandum of such payment and extension agreement in duplicate, one copy of which was delivered to and retained by plaintiff; said written memorandum being in the following form:

"No. 6357 Incorporated March, 1892.

"First National Bank, Capital and Surplus, $50,000.00. Clear Lake, South Dakota. J. A. Thronson, President, J. E. Walseth, Vice President, E. E. Walseth, Cashier, C. W. Force, Ass't Cashier, Arnold E. Berg, Ass't Cashier.

"Remittance Letter.

"Clear Lake, So. Dak., Sept. 1, 1922.

"Aug. Zastrow, City.

"Letter No. _____.

"We report collections and remit as follows: _____.

"Our No. 9316

"Your No.

"Name, W. W. Knight et al.

"Principal End 500.00

"Int. or Disc. 2.50

"Collection $502.50

"Int on 400 7/1 to 9/1

"2500 Bal Extended 1 yr. 7%

"Our Charges: Commission _____.

"Our _____. We Credit your a/c $502.50

"Respectfully yours,

"E. E. Walseth, Cashier.

"Special attention by Bank Attorney if desired."

Seventh. That pursuant to said agreement said corporation and Walseth continued to pay interest on the balance of $2,500 principal of said mortgage debt at the rate of 7 per cent. per annum from July 29, 1922, to July 29, 1926, and made some partial interest payments thereafter computed at the rate of 7 per cent. per annum.

Defendants further alleged "that by reason of the facts aforesaid, defendants are not liable for the payment of said note or any part thereof," and prayed for the dismissal of the action, with costs.

To this answer plaintiff demurred upon the ground that the same did not state facts sufficient to constitute a defense to plaintiff's cause of action, and, the matter coming regularly on for hearing, the learned trial judge duly made and entered his order overruling said demurrer, from which order plaintiff has now appealed.

The rights and liabilities of the first grantee, Hoy, who assumed the mortgage, or of the intervening grantees between Hoy and Clear Lake Security Company (which for convenience will be hereinafter referred to as "the corporation"), are in no manner involved at the present time in this case. So far as the present proceeding is concerned, the rights and liabilities of plaintiff and respondents with reference to each other are exactly what they would have been if respondents, after the execution and delivery of the note and mortgage, had conveyed the premises directly to the corporation with the knowledge of appellant, the corporation taking title in the name of Walseth for convenience, and taking the premises subject to the mortgage, but not assuming or agreeing to pay the same, and thereafter the same transactions had been had between appellant and the corporation as are pleaded in the answer.

Though perhaps comparatively modern in origin, it is nevertheless to-day an established and universally accepted doctrine of the law of suretyship that a binding agreement between the creditor and the principal debtor, whereby the creditor extends the time for payment or performance, or agrees for a definite period to forbear or postpone the enforcement of his remedy, entirely discharges the surety, whether he is harmed thereby or not. Williston on Contracts, § 1222; Stearns on Suretyship (3d Ed.) § 81. This equitable doctrine is also applied to a number of situations which are not in any strict sense suretyship, but which partake in equitable nature of the suretyship relation. It is the clear weight of authority in this country now that, when a mortgagor conveys mortgaged realty to a grantee, who agrees with the mortgagor to assume and pay the mortgage, a quasi suretyship relation arises between such parties, and as between them the liability of the grantee upon his covenant of assumption is primary and the liability of the mortgagor becomes secondary. The equitable rights between the parties so situated are substantially the same as those between principal and surety, and, if the creditor (mortgagee) receives notice of the existence of such situation, then from that time forward he must observe the equities therefrom arising. If, after knowledge of such situation, the mortgagee, without the consent of the mortgagor, extends time to the assuming grantee, the mortgagor, upon the equitable principle above set out, is entirely discharged. See Stearns on Suretyship (3d Ed.) § 90; 15 Harv. L. Rev. p. 398. This doctrine of discharge of a mortgagor by the action of a mortgagee with knowledge entering into a valid agreement for extension of time with an assuming grantee without the consent of the mortgagor has had the approval of this court directly or indirectly in at least the following cases: Dillaway v. Peterson, 11 S.D. 210, 76 N.W. 925; Miller v. Kennedy, 12 S.D. 478, 81 N.W. 906; Hull v. Hayward, 13 S.D. 291, 83 N.W. 270, 79 Am. St. Rep. 890; Iowa Loan & Trust Co. v. Schnose, 19 S.D. 248, 103 N.W. 22, 9 Ann. Cas. 255; Hampe v. Manke, 28 S.D. 501, 134 N.W. 60; Fry v. Ausman, 29 S.D. 30, 135 N.W. 708, 39 L. R. A. (N. S.) 150, Ann. Cas. 1914C, 842; Mundt v. Messenger Publishing Co., 42 S.D. 608, 176 N.W. 740; John Deere Plow Co. v. Tuinstra, 47 S.D. 555, 200 N.W. 61; Smith, Superintendent, v. Blackford (S. D.) 228 N.W. 466.

Respondents maintain that the foregoing doctrine, which is settled as the law of this state as above pointed out, is applicable to the instant case, even though the corporation did not assume and agree to pay the mortgage, but merely took subject to the mortgage. Appellant, on the other hand, contends, first, that there is no valid or binding extension agreement shown by the facts in this case between appellant and the corporation; and, second, that the foregoing doctrine has no application in any event, because the corporation merely took subject to the mortgage without assuming the payment thereof, and is a stranger to the mortgage debt, and an extension agreement between appellant and the corporation, even if valid as between them, would in no manner discharge respondents or affect appellant's rights against respondents on the mortgage debt.

We will consider, first, the matter of the agreement for extension of time between appellant and the corporation.

In this...

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