Keene Five Cent Sav. Bank v. Reid

123 F. 221, 59 C.C.A. 225, 1903 U.S. App. LEXIS 3981

• Court: Court of Appeals for the Eighth Circuit
• Decided: April 6, 1903
• Docket: Nos. 1,795, 1,796
• Status: Published

Opinions

THAYER, Circuit Judge,

after stating the case as above, delivered the opinion of the court.

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 sL-*' 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, § 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 Atl. 1032; Mason v. Luce, 116 Cal. 232, 48 Pac. 72; Richards v. Daley, 116 Cal. 336, 48 Pac. 220; Lowenstein v. Phelan, 17 Neb. 429, 22 N. W. 561; First Nat. Bank of Snohomish v. Parker (Wash.) 68 Pac. 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 Fed. 763; Phillips v. Taylor, 96 Ala. 426, 11 South. 323. We are constrained, by the reasons stated in the foregoing decisions, to hold that such a provision as-the one now in question is not self-operative; that it did not render the principal note, secured by the mortgage, due and payable in advance of the time specified on its face, unless the creditor or holder elected in some way to treat it as due at an earlier period, in consequence of a default in the interest payments or in the payment of taxes. We are of opinion that this view of the case is altogether the most reasonable, the one which is most in accord with the presumed intention of the parties, and the one that is the best supported by authority. The previous decision of this court in Brewer v. Penn Mutual Life Ins. Co., 36 C. C. A. 289, 94 Fed. 347, was only to the effect that where a mortgage contains a provision in substance like the one now involved, and a default occurred in the payment of the interest, such default gave the holder of the note the right to declare the same due, and to, collect it by a suit in the ordinary form, as well as to enforce payment by an action to foreclose the mortgage.

It is strenuously urged, however, that a different view has been taken by the Supreme Court of Kansas touching the effect of such a provision as we have been considering; that the court of last resort in that state holds that such a provision is self-executing, and that in case of a default it operates to mature an indebtedness without any affirmative action on the part of the mortgagee or creditor; and that these decisions are binding on this court, especially in view of the above-quoted clause, which is found in the note, declaring that it and the coupons attached should “be construed by the laws of the state of Kansas.” It is not to be denied that in one case (First National Bank v. Peck, 8 Kan. 660) it was held, in a case involving the construction of such a clause as the one now before us, that, while such clauses are “usually inserted for the benefit of the mortgagee,” yet that the mortgagor may likewise insist upon it, and that in the case then under consideration the occurrence of a default caused a note to become due in advance of the time specified on its face, in such a sense that one who acquired it after the default could not be esteemed a purchaser before maturity. The authority of this case has been recognized in two subsequent cases, to wit, Lewis v. Lewis, 58 Kan. 563, 50 Pac. 454, and Douthitt v. Farrell, 60 Kan. 195, 56 Pac. 9, both of which cases were decided long after the mortgage in suit was executed. Conceding that these cases, in effect, hold that the occurrence of a default in the payment of interest or in the failure to pay taxes under a mortgage containing the clause in question does cause a note to mature and start the statute of limitations from the time of the default, we turn to inquire how far, if at all, these decisions are binding upon this court.

It will be observed at the outset that these decisions do not deal in any respect with the construction of a local statute of the state, but exclusively with the meaning, scope, and effect of a provision found in a private contract; the question considered and decided being, when did a certain indebtedness mature, in view of all the provisions of the contract between the parties relative to the time of payment? No construction or interpretation of the local statute of limitations was required in either of these cases, or attempted. The statute on that subject was plain, and its application obvious, when the time that the indebtedness became due or accrued was ascertained; and that depended entirely upon the meaning, purpose, and effect of the provision of the mortgage which we have already quoted. Now, it is a well-settled doctrine that the proper interpretation of a private contract presents a question of general law, concerning which the federal courts are entitled to express an independent judgment, unless the contract is one relating to the sale or conveyance of real or personal property, and it contains words or phrases that, in virtue of local decisions, have acquired a definite meaning, and have thus become rules of property within the state. When such is the case the federal courts will interpret a contract as the state courts would interpret it. Jackson v. Chew, 12 Wheat. 153, 6 L. Ed. 583; Suydam v. Williamson, 20 How. 427, 15 L. Ed. 978; Burgess v. Seligman, 107 U. S. 20, 2 Sup. Ct. 10, 27 L. Ed. 359; Bucher v. Cheshire R. Co., 125 U. S. 555, 584, 8 Sup. Ct. 974, 31 L. Ed. 795. But in ordinary cases which involve the meaning and effect of a contract a federal court will interpret it in accordance with general rules of law governing the construction of contracts, and will never hold itself bound to adopt a construction which has been placed upon the contract, or one like unto it, by the courts of a state, unless such construction appears to be sound and just. In a word, the federal 'courts have a right to express an independent judgment with respect to questions of commercial law, with' respect to the construction of private contracts, and with respect to the liability of persons charged with the commission of torts, when the questions are not dependent on local statutes modifying the common law, but are to be adjudged in accordance with its principles. Swift v. Tyson, 16 Pet. 1, 10 L. Ed. 865; Henning v. Insurance Co., 2 Dill. 26, Fed. Cas. No. 6,366; Baltimore & Ohio R. Co. v. Baugh, 149 U. S. 368, 13 Sup. Ct. 914, 37 L. Ed. 772; Bucher v. Cheshire R. Co., and Burgess v. Seligman, supra; Casserleigh v. Wood et al. (C. C. A.) 119 Fed. 308, 313. See, also, note to Griffin v. Overman, 9 C. C. A. 542, 548.

It is claimed, however, that in,the present instance, by a clause inserted in the principal note, which has heretofore been quoted, the parties expressly agreed that their rights should be determined according to the laws of the state of Kansas, and that this means that the decisions of the Supreme Court of that state must be followed in determining the meaning and effect of all the provisions of the mortgage. There are two answers, we think, to this contention:

In the first place, the agreement relied upon is very explicit that “this note and the coupons * * * are to be- construed by the laws of the state of Kansas.” Nothing was said about the construction of another and very different instrument, to wit, the mortgage, whereby certain property was pledged to secure the payment of the note; and it would be an unwarranted extension of the scope of this clause to say that the parties stipulated that all the provisions of the mortgage should be construed by all courts as the Supreme Court of Kansas had or might thereafter construe it. Statutes have been enacted by the several states defining what are negotiable instruments, how they shall be drawn, what words of negotiability they shall contain, and the rights and liabilities of the parties thereto. vThe state of Kansas has enacted such a statute. Vide Gen. St. Kan. 1901, c. 14. Indeed, the statute of Anne, as re-enacted in this country, varies somewhat in the different states, and an instrument which might be deemed negotiable and that would impose certain liabilities in one state, or by the law merchant, would not have the same effect in another. In our opinion, the clause now under consideration was inserted in the note with reference to this well-known fact, for the purpose of making it plain that its negotiability and other qualities must be tested by the laws of Kansas, should any controversy arise.. The language found in the note, therefore, does not constitute an agreement between the parties that the mortgage must perforce be construed as the local courts would construe it.

In the second place, the agreement was that the note should be construed “by the laws of the state of Kansas,” and this means the statutes of the state lawfully enacted, and there was no local statute declaring what effect should be given to such a provision in a mortgage or other agreement as the one now under consideration. The language employed does not comprehend the decisions of local courts construing contracts like the one in hand, that had been or might thereafter be announced, for such decisions were subject to revision or modification or to be overruled by subsequent adjudications, so that judicial decisions were in no sense laws of the state, such as the parties to the note had in view. Since the decision in Swift v. Tyson, 16 Pet. 1, 18,10 L. Ed. 865, it has never been supposed that the phrase “laws of the states” comprehends decisions of the local tribunals, unless they are decisions placing a construction on express statutes, or establishing rules of property, as heretofore explained; and there is no greater reason for supposing that the expression “laws of the state of Kansas/’ as used in the note now under consideration, was intended to include all local decisions, and make them, so far as they had any application to questions that might arise, a part of the contract. That view, in our opinion, is entirely untenable.

Holding therefore', as we do, that it is for this court to determine, by the exercise of an independent judgment, what the provision in the mortgage means, and that the provision, when properly construed, is not self-operating, and that it did not and could not cause the note to mature in advance of the period of maturity mentioned on its face, and set the statute of limitations in motion, unless the holder of the mortgage elected to treat the debt as due before that date, in consequence of a default, and manifested such election in some appropriate way, the decree below must be, and it is hereby, reversed, and the cause is remanded to the lower court for further proceedings in accordance with this opinion.