224 N.W. 531 | Iowa | 1929
Lead Opinion
I. The notes in suit were signed by Clark Brothers and the individual members of the firm and their wives. The defendants herein comprised the firm and one partner and his wife. For convenience of discussion, we shall refer to the defendant in the singular number. The affirmative facts relied on as a defense may be stated briefly.
On February 1, 1918, the defendant obtained from the plaintiff a loan of $10,000, to be due in five years from date. The debt was evidenced by a series of promissory notes, and was secured by a first mortgage upon real estate. In January, 1920, the defendant sold the real estate to Dunkin, who assumed and agreed to pay the mortgage. The notes in suit are two of the series which evidenced the loan. After his purchase, Dunkin paid the annual interest until the due date of the mortgage, February 1, 1923. On or about that date, a contract of extension was entered into between him and the plaintiff, purporting to extend the time of payment of the principal debt for five years from February 1, 1923. By such contract Dunkin agreed to pay to the plaintiff the full amount of such debt, with interest, on February 1, 1928. He also executed and delivered to the plaintiff interest coupons for semiannual interest at 6 per cent from February 1, 1923, to February 1, 1928. He paid all accruing interest up to February 1, 1926, and defaulted on February 1, 1927. This action is brought to recover the principal sum of the two notes, with interest thereon from February 1, 1926.
The argument for the appellant is that, by the assumption of *171
the mortgage as a part of the purchase price of the land, Dunkin became primarily liable for the debt, and that, as between the vendor and the vendee, the vendor was secondarily liable only; that the new relation of this defendant to the debt as thus created became fully known to the plaintiff; and that it acquiesced in and accepted the same; that the extension of the time of payment in the manner indicated, without the knowledge or consent of the defendant, operated as a discharge of the defendant from all liability upon the note. The argument has much logical force, and is adopted in the decisions in some states. It would be entitled to much consideration here, if the question were an open one in this state. Such question is fully foreclosed, however, by a long line of our decisions, beginning in a very early day. These are the following: Corbett v.Waterman,
In the Corbett case,
"The cause of action thus created in his favor is a bit of legal grace; it cost him nothing; it simply fell upon him, without effort or knowledge on his part. He is entitled to it, such as it is. He has no ground of appeal to equity, either to expand it or to prevent its shrinkage."
Various phases of the question are considered in the authorities above cited, and we see nothing to be gained herein by an extended review of them.
II. It is contended by the appellant that our previous holdings, as above set forth, have all been superseded by the enactment of Section 9581, Code of 1924, in the Negotiable Instruments Law, which provides as follows:
"9581. When persons secondarily liable on — discharged. A person secondarily liable on the instrument is discharged:
"1. By an act which discharges the instrument.
"2. By the intentional cancellation of his signature by the holder.
"3. By the discharge of a prior party.
"4. By the valid tender of payment made by a prior party.
"5. By a release of the principal debtor, unless the holder's right of recourse against the party secondarily liable is expressly reserved.
"6. By an agreement binding upon the holder to extend the time of payment, or to postpone the holder's right to enforce the instrument, unless made with the assent of the party secondarily liable, or unless the right of recourse against such party is expressly reserved."
It is urged that this section is conclusive of the whole question. The essential ground of this contention is that the defendant was "secondarily liable" only. But the holding of our cases, as already indicated, is that, as between mortgagor and mortgagee, the liability of the mortgagor does not become secondary. The liability of the assumptor is upon his covenant in the deed. An action against him must be predicated upon such covenant, whether brought by vendee or by mortgagee. Such is *173 the clear purport of our past holdings, and they are not affected by the enactment of Section 9581.
III. It is further urged by the appellant that our previous cases should be deemed overruled by a decision of the Supreme Court of the United States, or else that we should overrule the same in deference to such decision. The case cited is Union Mut.Life Ins. Co. v. Hanford,
The judgment of the district court was properly obedient to the rule long established in this state. It is, accordingly, —Affirmed.
ALBERT, C.J., and STEVENS, FAVILLE, MORLING, and WAGNER, JJ., concur.
De GRAFF and KINDIG, JJ., dissent.
Dissenting Opinion
I respectfully dissent to the affirmance of this cause. I feel that an injustice is done to the rights of the appellants by reason of a misinterpretation and misapplication of the law in reaching the conclusion announced by the majority opinion. Until a question is settled authoritatively, it is never settled, but remains a controversy, and as such, *174 gives rise to continuous litigation, the very thing that the court should seek to avoid.
Briefly, the facts in this case show that, on February 1, 1918, the defendants (appellants) executed a series of notes, aggregating $10,000, made payable to the plaintiff or its order, on February 1, 1923, with interest thereon at the rate of 6 percent, the said notes being secured by a mortgage upon certain lands, and providing, inter alia, for interest at the rate of 8per cent after maturity. In the meantime, on January 3, 1920, the defendants (mortgagors) sold the lands described in said mortgage to O.H. Dunkin, who, by deed, assumed and agreed to pay the mortgage indebtedness. On February 1, 1923, when the mortgage obligations became due, Dunkin (assuming grantee), joined by his wife, and without the knowledge, consent, or concurrence of these defendants (mortgagors), entered into with, and did execute, acknowledge, and deliver to, the plaintiff, mortgagee, a written agreement, wherein the said Dunkins did "promise and agree" to pay the plaintiff (appellee) in five years thereafter, to wit, on February 1, 1928, the said mortgage indebtedness, with interestthereon after February 1, 1923, at the rate of 6 per cent, and tokeep and perform all the conditions of the mortgage; and the said Dunkins did make, execute, and deliver to the plaintiff, made payable to the plaintiff or its order, coupon interest notes atthe rate of 6 per cent, which notes were accepted by the plaintiff (mortgagee), and upon which coupon interest notes the said Dunkin and his wife have made payments to, and the same were accepted by, the plaintiff. On February 4, 1928, plaintiff filed his petition in the lower court, declaring upon the express contract found in two of the original notes of $750 each, being a part of the $10,000 series of notes above described, asking forjudgment thereon at the rate of 6 per cent, being $180 of interest on the said $1,500 for two years, and $
The defendants, by separate answer, pleaded these facts relating to the giving of the notes and mortgage and the agreement by the said Dunkins with plaintiff, and after alleging that the *175 said notes and the said mortgage were signed, executed, and delivered as of "one and the same transaction," pleaded the transaction, and relation of principal and surety existing, between the defendants and Dunkin, and claimed a release, by reason of the said new arrangement, "promise, and agreement" made by the said Dunkin (assuming grantee) and his wife with plaintiff. This separate defense was stricken, on motion of the plaintiff, as not defensive, and judgment rendered against the appellants, from which judgment this appeal is taken. Around the correctness of the lower court's decision on this motion this controversy gravitates.
The petition declared upon an express contract shown by the notes, making no mention of the mortgage, other than as mentioned and referred to in the notes themselves. These notes show, however, that the terms and conditions of the mortgage are made a part of said notes. The notes also provide, inter alia, forinterest at the rate of 8 per cent after maturity, from February1, 1923; yet the plaintiff sought and obtained judgment in thetrial court at the rate of 6 per cent, being in accord only withthe contract made by and between the plaintiff and the saidDunkins, to which these defendants were not parties. It will, therefore, be seen that, although the plaintiff declares upon an express contract originally made by the defendants, providing for8 per cent interest after maturity, it obtained judgmentaccording to a contract made by the Dunkins, providing for 6 percent interest; and thus these defendants were sued, not upon and according to the original contract as made by them, but upon and according to the contract made, as aforesaid, by the Dunkins with the plaintiff.
This state of affairs should not be disregarded in this case. It is universally recognized, as due process of law, that one person cannot be held on, or bound by, a contract made by another. The remedy of the plaintiff is limited strictly and solely to the allegations found in the petition. The prayer for relief forms no part thereof. Clearly, under the law of our state, as declared by this court, it was erroneous for the lowercourt to have rendered judgment against the defendants upon acontract contrary to that declared upon, and one not made bythese defendants. In Bottorff v. Lewis,
"* * * we do not understand the theory on which the court awarded plaintiff seven-thirtieths of the land when she admitted she had but * * * one-tenth interest therein * * *. The relief granted must always be consistent with the case made by the petition * * *." (Citing Tice v. Derby,
This section (11573) provides, among other things, that "the court may grant him [plaintiff] any relief consistent with the case made by the petition and embraced within the issue." See, also, Watt v. Robbins,
As the notes refer to the mortgage, and embody the terms and conditions thereof in the notes, this mortgage instrument is a necessary element, not only showing what the contract was between the parties, but also necessary to state the plaintiff's cause of action, if any, even at law, against these defendants; so that a severance of these two instruments was, in itself, an alteration of the contract, and for this reason the lower court should not be sustained. See Smith, v. Eals,
The defendants have set up sufficient facts of the deed to, and an assumption by, Dunkin to show the relation of principal and surety existing at the time of the "promise and agreement" made between the assuming grantee, Dunkin, and his wife, and plaintiff. This brings the case clearly within the line of the decisions of our court that, as between a creditor who extendsthe time of payment to an assumptor of a debt evidenced by anote, and the makers of a note who are known by the creditor tobe secondarily liable for the obligations, or who are shown, asbetween original parties to the instrument, to be sureties, by *177 parol evidence or otherwise, aliunde, the Negotiable Instruments Law applies, in that it is provided (now Section 9518, Code of 1924), that, as between original parties to the instrument, or as to instruments in the hands of any holder other than a holder in due course, as in the instant case, such instrument is subject tothe same defenses as if it were a nonnegotiable instrument. SeePiper v. Newcomer Campbell,
The Fullerton Lbr. Co. case, supra, being one of the first cases, if not the first case, decided on this phase of the Negotiable Instruments Act, and being a controversy between original parties over a note dated January 1, 1905, given subsequently to the Negotiable Instruments Act, is authority for the holding that while, as between a bona-fide purchaser and a maker of a note, secondary liability of a maker could not be shown, yet, as the suit in said case was between the original parties, just as it is between the original parties in the instant case, this secondary liability could be shown. This court said:
"As we understand it, the entire scope and purpose of the act [Negotiable Instruments Act] so far, at least, as it affects the question before us, is to fix the rights of holders in due course and make it uniform in the several states. This, we think, is apparent from the act itself. Thus, Section 3060-a58 [now Section 9518] in terms says: `In the hands of any holder other than a holder in due course, a negotiable instrument is subject to the same defenses as if it were nonnegotiable.'"
Therefore it was held, under the Negotiable Instruments Act, that, if a maker shows suretyship, or it is known to the holder that such maker is surety, as between original parties, he will have every defense as if the instrument were nonnegotiable; andthe court also held that, where the time of payment was extended,as was done in the Fullerton case, and as shown in the instantcase, and such extension was made without the knowledge, consent,or concurrence of the party secondarily liable, such party isthereby released.
The Fullerton Lbr. Co. case is clearly applicable to the instant case, and is controlling, because of the fact that, before the *178 extension of time was made in said case (as in the instant case, between Dunkin and the original mortgagors), the various parties (grantors and grantee) were liable as principals; but when an extension of time was made to one of these principals, as to Dunkin, in the instant case, with the knowledge that Clark Brothers were, as to Dunkin, sureties for the debt, or that the relation of principal and surety existed between them, this extension of time, under the authority of the Fullerton Lbr. Co. decision, released the defendants, because they were surety, aswell by their own act as by the act, and with the knowledge, ofthe plaintiff; and it would be a misinterpretation and amisapprehension of the law and decisions of this state to holdotherwise, and especially to revert to decisions based uponinstruments made prior to the enactment of the NegotiableInstruments Law, even if those decisions were not in harmony with these later decisions of this court.
Moreover, this is especially true in view of the decision in the case of Malanaphy v. Fuller Johnson Mfg. Co.,
"Now, as a creditor for whose benefit a promise is made, takes [the benefits of an assumption of the debt] subject to the equities existing between the principal parties, it followsconclusively that, if he accepts of such promise, he becomesbound to observe the relationship of principal and suretyexisting between the principal parties, and must act inrecognition thereof."
This decision was rendered subsequent to, and therefore controlling over, the decision in the case of Iowa L. Tr. Co.v. Haller,
"As between Steele, the mortgagor, and Coffeen, his grantee, who assumed the mortgage, Coffeen became the principal debtor;and the liability of Steele to pay the debt became secondary."
And then this court cited with approval the Malanaphy case, supra, holding that this principle applied to the creditor, requiring him to act in recognition thereof.
And without specific reference to this line of authority, although it is necessarily comprehended therein and obedient thereto, it was held, in the case of Union Cent. Life Ins. Co. v.Mitchell,
"We are quite familiar with the rule that extension of time on an indebtedness, without the consent of the surety, releases the surety; but that doctrine has no application to the situation before us in this case. It is fundamental that, to make a valid extension of time such as would release the surety, there must be a consideration therefor; and there is no showing whatever in this case that, if this matter were to be treated as an extension of time, there was any consideration therefor; and further, there was no fixed time of extension. To our minds, this was not, in reality, such an extension of time as the law contemplates, but simply gave additional security for unpaid interest."
With reference to the decision of Corbett v. Waterman, supra, it is well to have in mind the following statement found therein:
"* * * until he [mortgagee] has done some act, or it in some manner sufficiently appears that he recognizes the purchaser or vendee as the principal and the original mortgagor as surety *180 merely, both of them will, as to such mortgagee, be treated as principals."
It is clear, in the instant case, that the "promise and agreement" of Dunkin was the very "same act" contemplated in theCorbett case, by which the relation of principal and surety maybe established as against the creditor, as in the Malanaphy case, supra, where it became the established rule of law of this state, subsequent to the Negotiable Instruments Act, that, wherever themortgagee, having knowledge of the relation of principal andsurety existing, acts with regard to the parties thereto, he"becomes bound to observe the relationship of principal andsurety existing between the principal parties, and must act inrecognition thereof." This is just and proper, and this is just exactly what occurred in the instant case; for, when the plaintiff received the "promise and agreement" of Dunkin and his wife to pay the obligations at the end of another five years, on February 1, 1928, with interest at 6 per cent, instead of 8 per cent, as provided in the notes, and did accept from the said parties new coupon interest notes, which it continued to collect upon, in payment of the advance interest, it did such with knowledge of this relation and of the secondary liability of defendants; and therefore it cannot be held that plaintiff did not materially change the original contract, nor deviate from the original position of parties, with respect to the plaintiff, then knowing the relation of the parties to be that of principal and surety. Now to revert to and hold the original mortgagors, not upon the contract as originally made, but according to theagreement of Dunkin and wife with the plaintiff, is nothing short of a destruction of the legal rights of defendants.
Legally and logically, until the contract between the plaintiff and Dunkin and wife was made, there could be no question in regard to the right of the plaintiff to hold either or both Dunkin and the original mortgagors, as principals, for the obligations. This is true because, while Dunkin was principalbefore the new agreement, he was not principal under the newagreement until it was made; and when this new "promise and agreement" was made, he became principal to the plaintiff underit, together with his wife, as a new party, and under it alonecould the plaintiff sue the assuming grantee and his wife; and, *181
concomitantly, the plaintiff could not sue these defendantsthereon, first, because they were not parties to the transaction,and second, because there would be a misjoinder of the parties tosuch a suit. I know of no compounding of remedies such as is necessarily and contrariwisely supposed in the majority opinion, and it is clear, therefore, under these conditions, that, as theMalanaphy decision holds, the mortgagee is "conclusively * * *bound to observe the relationship of principal and surety * * *,and must act in recognition thereof." Furthermore, the mortgagors, by reason of the change and alteration in the original contract as to the time of payment, the rate of interest, and the parties liable thereon, became released from all obligations thereunder; and this principle has been carried forward with approval, so far as applicable, in the case of Boicev. Coffeen,
Even if the Negotiable Instruments Act does not apply restrictively to the instant case, then all the more reason forthe release of the defendants; because these defendants have shown, and indeed the plaintiff admits (by demurrer), the facts in the separate answer showing that the defendants were known by the plaintiff to be sureties, and that their liability for the mortgage obligations was secondary at the time of the promise and agreement with the Dunkins, as was held in the Malanaphy andBoice cases. This being true, then all the more reason why the mortgagors should be released, because it is a general principle of mortgages, well settled (see Jones on Mortgages [7th Ed.], Sections 741, 742, citing a long line of authorities, including the case of George v. Andrews,
The Maryland court, in George v. Andrews, supra, held, and properly so, that any material alteration of the mortgage contract will discharge the mortgagor, and that the court will not inquire whether the alteration be beneficial or injurious, if it be a material one. And to like effect, and for the same reason, the Supreme Court of the United States, in the case ofUnion Mut. Life Ins. Co. v. Hanford,
"The general rule is that granting time to any of the parties to a note or bill is a discharge of every other party who, on paying it, would be entitled to sue the party to whom the extension is granted."
These authorities are comprehensive of the present case. The notes sued and declared upon are negotiable instruments in form. Therefore, the Negotiable Instruments Act applies, comprehensively of this defense between the original parties. The plaintiff knew of the secondary liability of these appellants, and it is obvious, under the decisions cited herein, that Section 9581, Code of 1924, applies in relation to the discharge from such instrument of one secondarily liable. This section reads:
"A person secondarily liable on the instrument is discharged: * * *
"6. By an agreement binding upon the holder to extend the time of payment, or to postpone the holder's right to enforce the instrument, unless made with the assent of the party secondarily liable, or unless the right of recourse against such party is expressly reserved."
Why should we ignore this statute? Primary and secondaryliability relates to the remedy, and not to the character andlimits of the obligation itself. 8 Corpus Juris 43. 1 Joyce on Defenses to Commercial Paper (2d Ed.), Section 517, states:
"* * * it has been decided that a drawer of a bill may set up, in defense to an action against him, an extension of time so given [to an assumptor] * * * between the original parties." (Citing Auld v. Walker,
There is no reason why we should in this case differentiate between or ignore the express statutory provisions governing negotiable instruments, or even nonnegotiable instruments to which defenses might be made under the terms of the Negotiable Instruments Act. The cases decided subsequent to 1902, cited by the majority opinion, are not applicable to or controlling of the law in the instant case. Let us examine the cited cases. InClarinda Nat. Bank v. Kirby,
The last case cited in the majority opinion is Baldwin v.Munger,
Thus we come to the conclusion, derived from the facts in the instant case and the application of the law to those facts involving the relation of principal and surety existing as between the mortgagors and Dunkin, of which it should be said that, until Dunkin and wife made the agreement with the plaintiff, the latter could maintain a suit against both the mortgagors and the assuming grantee, as principals, but when, on February 1, 1923, with knowledge of the relation of principal and surety so existing, a new "promise and agreement" was accepted by plaintiff from Dunkin and his wife to pay to it the principal sum and interest thereon at the rate of 6 per cent, instead of 8 percent, and upon the giving therefor of new coupon interest notes, the instant plaintiff did, under the Fullerton Lbr. Co. andMalanaphy decisions, treat the said Dunkin and wife as principalobligors, and therefore could not thereafter maintain suit as against the mortgagors, but it was confined in its remedy, under the arrangements made by it with Dunkin and wife, to that agreement, and no other, and could not revert back to and hold the original mortgagors. And especially is this true by an action at law declaring upon the original obligations, and seeking and obtaining judgment according to the contract of the said Dunkin and wife, and not according to the original contract with defendants. We have heretofore recognized the correct rule, and we should follow it.
The rule herein stated is in accord with the authoritative rule prevailing in the majority of the states of the Union. It is *184 the only uniform, true, and authoritative rule, and should be followed in and applied to this case. I would reverse.
KINDIG, J., joins in this dissent.