Opinion
No. 32968
Decided January 21, 1953.
Negotiable instruments — Promissory note negotiable, when — Due and payable at specified time — Acceleration provision at holder's option — Breach of provisions of chattel mortgage securing note — Absolute obligation to pay not rendered conditional or uncertain thereby — "Breach" of contract defined.
1. The word, "breach," as applied to contracts is defined as a failure without legal excuse to perform any promise which forms a whole or part of a contract, including the refusal of a party to recognize the existence of the contract or the doing of something inconsistent with its existence.
2. A promissory note, regular on its face and payable in installments and which by its terms is in all events due and payable at a time therein specified, is a negotiable instrument, although it contains a provision that the due date may be accelerated at the option of the holder upon failure of the maker to pay installments when due or upon a breach of the provisions of a chattel mortgage referred to in and securing the note.
3. A provision of a promissory note permitting the acceleration of payment at the option of the holder upon the breach by the maker of the note of the provisions of a chattel mortgage securing the note, which provision does not purport to render conditional or uncertain the maker's otherwise absolute and certain obligation in the earlier parts of the note, does not render the note nonnegotiable.
APPEAL from the Court of Appeals for Mahoning county.
This cause originated in the Court of Common Pleas of Mahoning County.
The parties will be referred to as they were in that court.
The plaintiff-appellee, The National City Bank of Cleveland, is a national banking association under the laws of the United States and has its principal place of business in Cleveland.
The defendant-appellant, Erskine Sons, Inc., is an Ohio corporation with its principal place of business at Lowellville, Ohio.
On May 26, 1949, the plaintiff filed its petition in the short form for judgment on a certain promissory note dated December 15, 1948, claiming that there was due it from the defendant the sum of $16,301.35 with interest, and alleging that "the defendant has failed and refused to pay said note according to its terms and conditions, and that by reason thereof the unpaid principal amount of said note is due and payable forthwith," with interest.
Attached to the petition as exhibit A is a copy of the note, the essential parts of which are as follows:
"$16,529.58 City Lowellville State Ohio Date December 15, 1948.
"For value received, the undersigned jointly and severally promise to pay to the order of The Gibson-Stewart Co. the sum of sixteen thousand five hundred and twenty-nine 58/100 dollars, in 11 consecutive monthly installments of $1,377.47 each, commencing on the 15 day of January, 1949, and a final consecutive installment of $1,377.41, together with interest from maturity at the highest lawful rate, until paid.
"In the event any installment hereof is not paid when due and/or in the event that the chattel mortgage securing this note is breached in any respect, then this note shall immediately become due at the holder's option without demand or notice. * * * [Cognovit clause omitted.].
"Secured by chattel mortgage. Erskine Sons, Inc.
Jas. Erskine, Pres."
By virtue of the warrant of attorney incorporated in the note, an answer was filed entering appearance of the defendant, waiving the issuance and service of process and confessing judgment in favor of the plaintiff in the sum prayed for. In connection therewith, judgment was rendered for such sum and execution issued thereon.
On June 23, 1949, upon motion of the defendant the trial court, pending trial of the cause on the merits, suspended the judgment, preserving all liens and securities obtained thereunder and enjoining the plaintiff from instituting or carrying on any further proceedings in aid of execution.
An amended answer was filed by the defendant containing four defenses which may be summarized as follows:
The first defense constitutes a general denial; the second defense is allegations that the mining equipment for which the note was given to the payee, The Gibson-Stewart Company of Cleveland, was defective, unusable and unsatisfactory, that the plaintiff had knowledge of the facts and was not a holder in due course, and that, by reason of the failure of the equipment sold, defendant was not liable to the plaintiff on the note; the third defense is an allegation of material alteration of the note and chattel mortgage by the payee without the consent of the defendant, to which alteration the plaintiff was a party; and the fourth defense is a charge that the plaintiff took possession of the mining equipment and converted it to its own use, the equipment having been voluntarily returned to the payee of the note by the defendant. The defendant states that the value of the property so converted was $20,000, which was in excess of the note in suit, and prays that the petition of the plaintiff be dismissed and that the defendant recover its costs.
The Common Pleas Court decided that the note is a negotiable instrument and stated that there was "no issue for the jury on the so-called conversion," but submitted to the jury what it deemed the only issue, "the good faith of the plaintiff."
Upon trial the jury returned a verdict for the defendant. A motion for judgment notwithstanding the verdict was overruled and judgment was thereupon entered upon the verdict. A motion for a new trial was also overruled.
An appeal on questions of law was perfected in the Court of Appeals, which court reversed the judgment of the Court of Common Pleas, ordered the original judgment reinstated in full force and effect as of the date thereof, May 26, 1949, and remanded the cause for the allowance of a credit to the defendant in the amount of the proceeds received from the sale of the chattel property made upon the order of the trial court.
The cause is before this court upon the allowance of a motion to certify the record of the Court of Appeals.
Messrs. Harrington, Huxley Smith, Mr. C. Kenneth Clark and Mr. W.J. Papenbrock, for appellee.
Mr. David C. Haynes and Mr. Warren E. Grant, for appellant.
The question presented to this court, as stated by the defendant, is as follows:
Is a promissory note a negotiable instrument under the Ohio Negotiable Instruments Act, where such note is payable in monthly installments commencing on a date therein stated, the final installment being due and payable at a date also stated therein, but contains a clause accelerating the payment of the balance due thereon at the option of the holder where the maker fails to pay any installment when due or where the chattel mortgage securing the note is breached in any respect?
The reference to the chattel mortgage requires consideration of the language thereof to ascertain the meaning and effect of the phrase in the note, "in the event that the chattel mortgage securing this note is breached in any respect." The portion of the mortgage pertinent to a decision of the issues herein is as follows:
"* * * the mortgagor does hereby covenant and agree that said mortgagor is lawfully possessed of said chattels as mortgagor's own property; that the same is free from all encumbrances and that mortgagor will warrant and defend the same unto said mortgagee against all claims and demands of all persons; * * * that the mortgagor will keep the chattels insured at all times against loss by fire and/or other hazards * * * in amounts sufficient to protect mortgagee against loss of or damage to said chattels; * * * that said chattels shall remain at R D No. 2 Lowellville, Ohio, and that mortgagor will not remove or attempt to remove or permit the same to be removed therefrom, nor dispose of, encumber, or misuse said chattels, nor permit the same to be disposed of, encumbered, or misused; that he will pay, when due, all taxes, license fees and other public charges that may be levied against or upon the chattels and satisfy any and all claims and liens that may be assessed or impressed upon the same.
"* * *
"Mortgagor further covenants and agrees that in case default shall be made in the payment of any installment aforesaid, or of any of the covenants expressed herein, or whenever the mortgagee shall, for any reason, deem said indebtedness insecure, the mortgagee may, at its option and without notice, elect to treat the balance remaining unpaid on said note immediately due and payable forthwith, whereupon mortgagor agrees upon demand to deliver the chattels to mortgagee and mortgagee may without notice or demand, with or without the aid of legal process, make use of such force as may be necessary to enter upon, with or without breaking into any premises where the chattels may be found, and take possession thereof and remove the same to such other place as it may deem safe and convenient * * *.
"* * *
"Whenever used herein, the words 'mortgagor' and 'mortgagee' shall include the heirs, successors, legal representatives and assigns of such party." (Emphasis added.)
The determination of the question whether the note is a negotiable instrument involves the application of Sections 8106, 8107, 8109, 8110, General Code, which are as follows:
Section 8106. "An instrument to be negotiable must conform to the following requirements:
"* * *
"3. Must be payable on demand, or at a fixed or determinable future time * * *."
Section 8107. "The sum payable is a sum certain within the meaning of this chapter although it is to be paid;
"1. With interest; or
"2. By stated installments; or
"3. By stated installments; or with a provision that upon default in payment of any installment or of interest, the whole shall become due; or
"4. With exchange, whether at a fixed rate or at the current rate; or
"5. With costs of collection or an attorney's fee, in case payment shall not be made at maturity."
Section 8109. "An instrument is payable at a determinable future time within the meaning of this chapter, which is expressed to be payable;
"1. At a fixed period after date or sight; or
"2. On or before a fixed or determinable future time specified therein; or
"3. On or at a fixed period after the occurrence of a specified event, which is certain to happen, though the time of happening be uncertain.
"An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect."
Section 8110. "An instrument which contains an order or promise to do any act in addition to the payment of money is not negotiable. But the negotiable character of an instrument otherwise negotiable is not affected by a provision which:
"1. Authorizes the sale of collateral securities in case the instrument be not paid at maturity; or
"2. Authorizes a confession of judgment if the instrument be not paid at maturity; or
"3. Waives the benefit of any law intended for the advantage or protection of the obligor; or
"4. Gives the holder an election to require something to be done in lieu of payment of money.
"But nothing in this section shall validate any provision or stipulation otherwise illegal."
It is the contention of the defendant that the Court of Appeals erred in finding that the note was a negotiable instrument in the hands of a holder in due course and that as to such holder the defenses, which the defendant asserted against the payee of the note, are not valid defenses to the plaintiff's claim.
The Court of Common Pleas also found the note to be a negotiable instrument, but, upon what the court deemed the only issue, "the good faith of the plaintiff." permitted the defendant to introduce evidence covering an alleged agreement between the defendant and The Gibson-Stewart Company with respect to a claimed warranty of the mining machinery in payment for which the note in question was given and also evidence relative to the claimed unsatisfactory performance of the machinery.
As was stated by the Court of Appeals in its opinion, the evidence introduced with reference to the machinery purchased and the claimed right of the defendant to return it to the vendor thereof, if it proved unsatisfactory or because of failure to meet the purpose of and requirements for the defendant's use, being entirely without limitation as to the purpose or application thereof could well have led the jury to believe that it was considering a controversy between the vendor, The Gibson-Stewart Company, and the defendant.
The Court of Appeals, from a consideration of the record, stated in its opinion, in which there is unanimous concurrence, as follows:
"Review of the record positively convinces that the plaintiff sustained its right to recover by a preponderance of the evidence. While the record discloses detailed and conflicting evidence, which in all probability would present an issue for submission to and determination by a jury, with respect to the respective rights of defendant and Gibson-Stewart Company, we are unable to discover any evidence of a substantial character tending to prove that plaintiff possessed any knowledge of the details of the transaction between defendant and Gibson-Stewart Company, had actual knowledge of any infirmity or defect in the note if there was any such infirmity or defect, or that plaintiff had knowledge of any facts, as a result of which its action in taking the note could be characterized as bad faith. We are unable to find from the record any proof tending to establish the plaintiff purchased said note under circumstances that would have excited suspicion in the mind of a prudent and reasonable person. The fact that plaintiff paid a substantial consideration for the note has persuasive force militating against such premises. The mere existence of such circumstances would not constitute a defense, unless the proof was sufficient to show that plaintiff acted in bad faith or with want of honesty. Johnson v. Way, 27 Ohio St. 374 et seq.; Kitchen v. Loudenback, 38 Ohio St. 177 et seq."
It follows that the sole question before us is whether the note in question is negotiable. If not, the endorsee thereof took it subject to all equities and defenses between the original parties thereto, and the judgment of the Court of Appeals should be reversed.
It is the contention of the defendant that the note in question is nonnegotiable by reason of the provision therein which, in addition to making the entire amount due at the holder's option if any installment is not paid when due, also permits such acceleration "in the event that the chattel mortgage securing this note is breached in any respect."
The arguments of counsel are directed to the question whether the note is payable "on or before a fixed or determinable time specified therein," as required by Section 8109, General Code.
The principal contention of counsel for the defendant is that the negotiability of the note is destroyed by reason of the reference therein to the chattel mortgage given to secure the note and the authorization therein to accelerate the note at the option of the payee "in the event that the chattel mortgage securing this note is breached in any respect." The contention of counsel is that the note by this reference adopts the provisions of the mortgage, and that the holder of the note is thereby authorized to accelerate payment if he feels his claim to be insecure or that he can exercise his option at his own whim or caprice.
It is true there are many decisions holding that the incorporation of a provision authorizing acceleration of payment, either in the note or by reference to another instrument, if and when the holder deems his claim insecure renders the note nonnegotiable, but there is substantial authority to the contrary. Authorities seem quite uniform, however, in holding that if the acceleration is dependent upon some act or default of the maker the rule against uncertainty of maturity is not violated.
The general rule is stated as follows in Britton on Bills and Notes, 101:
"An instrument payable at a fixed date or before then at the option of the holder, or automatically, conditioned upon the occurrence of specified acts or events, positive or negative, contingent or noncontingent, which acts or events represent some kind of express or implied default by the obligor of such a nature as to indicate an increased risk to the holder that the instrument may not be paid at the date of ultimate maturity, according to most authorities, is negotiable." Many cases supporting the text are cited. See, also, Beutel's Brannan Negotiable Instruments Law (7 Ed.), 275 et seq., and cases cited.
A distinction is made between a situation where acceleration is conditioned upon a failure or default of the maker of the note and a situation where acceleration is authorized if the holder deems his claim insecure. In the latter it is held in many decisions that, because the holder may act upon his own whim or caprice, the note is not payable at a fixed or determinable time and hence is nonnegotiable.
Murrell v. Exchange Bank, 168 Ark. 645, 271 S.W. 21, 44 A.L.R., 1391; Harrison v. Fugatt, 179 Okla. 367, 65 P.2d 1200; American Finance Corp. v. Bourne, 190 Okla. 332, 123 P.2d 671; Moyer v. Hyde, 35 Idaho 161, 204 P. 1068, 28 A.L.R., 695; Guio v. Lutes, 97 Ind. App. 157, 184 N.E. 416; First National Bank v. McCartan, 206 Iowa 1036, 220 N.W. 364. Contra: Dart National Bank v. Burton, 258 Mich. 283, 241 N.W. 858 ; Heard v. Dubuque County Bank, 8 Neb. 10, 30 Am. Rep., 811.
The rule applicable in situations such as that presented in the instant case is well stated in the case of First National Bank v. McCartan, supra, where the court, in construing a note containing an "insecurity" clause, held that, where an election is given to the payee or holder to declare the paper due and payable independent of any fault or control of the maker, the instrument is nonnegotiable.
In support of its decision, the court pointed out that the maker can have no control over the holder's feelings in this regard, and that the election contemplated may arise at any time the whim or caprice of the holder dictates and without default on the part of the maker; thus a maker who has complied in all particulars will find himself in the predicament of a defaulter through an election by the holder over which no one has any control, except the elector.
A distinction is thus made by the court between cases where acceleration results because the maker fails to perform some duty and for that reason is in default and those cases where the due date is advanced, not as a result of the maker's failure but at the mere volition of the holder. The latter situation makes the maturity date uncertain, and, therefore, nonnegotiability results.
In the case of American Finance Corp. v. Bourne, supra, this rule is well stated as follows in the syllabus by the court:
"A promissory note that contains provisions whereunder the holder of the note is empowered to declare the note due and payable before maturity in the exercise of the holder's unrestrained option is by reason thereof nonnegotiable * * *."
The word, "breached," as used in the note, necessarily refers to a default or failure on the part of the maker to keep some covenant contained in the chattel mortgage. The word, "breach," is primarily defined to be "an act of breaking; the violation of a law, contract or any other engagement." Particularly applicable here is the definition, "failure without legal excuse, to perform any promise which forms the whole or part of a contract * * * and may be inferred from the 'refusal of a party to recognize the existence of a contract, or the doing of something inconsistent with its existence.'" Friedman v. Katzner, 139 Md. 195, 114 A. 884; 5 Words and Phrases (Perm. Ed.), 761.
It would be straining the language of the acceleration clause in the note to hold that a reference therein to a breach of the chattel mortgage securing the note constitutes an incorporation of all the terms and provisions of the mortgage. The performance or the failure to perform the covenants of the mortgage is entirely within the power of the maker of the note. Under the terms of the note the acceleration of the payment thereof may occur only by reason of the default of the maker in the performance of those covenants of the mortgage in like manner as upon default in the payment of the installments as provided in the note.
The specific provision permitting the acceleration of the payment of the note at the option of the holder thereof upon breach of the provisions of the chattel mortgage securing the note does not purport to render conditional or uncertain the maker's otherwise absolute and certain obligation in the earlier parts of the instrument and hence does not render the note nonnegotiable. Davis v. Union Planters Natl. Bank Trust Co., 171 Tenn. 383, 103 S.W.2d 579; Thorp v. Mindeman, 123 Wis. 149, 101 N.W. 417; and Continental Natl. Bank v. Conner, 147 Texas 218[ 147 Tex. 218][ 147 Tex. 218], 214 S.W.2d 928.
The judgment of the Court of Appeals is affirmed.
Judgment affirmed.
WEYGANDT, C.J., TAFT, HART and ZIMMERMAN, JJ., concur.
STEWART, J., concurs specially.
MIDDLETON, J., dissents.
The note which is the subject of consideration in this case carries an acceleration clause providing for the payment of the balance due at the option of the holder, where the maker fails to pay any installment when due or where the chattel mortgage securing the note is breached in any respect.
The mortgage contains a covenant to the effect that, "in case default shall be made in * * * any of the covenants expressed herein, or whenever the mortgagee shall, for any reason, deem said indebtedness insecure, the mortgagee may, at its option * * *, elect to treat the balance remaining unpaid on said note immediately due and payable forthwith." (Italics supplied.)
Section 8106, General Code, provides that an instrument to be negotiable "must be payable on demand, or at a fixed or determinable future time."
Section 8109, General Code, provides that an instrument is payable at a determinable future time where it is payable "on or at a fixed period after the occurrence of a specified event, which is certain to happen, though the time of happening be uncertain."
This section provides further that "an instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect."
Under the acceleration clause of the note, a holder can declare the note due only upon some default as to payment or the mortgage covenants. The acceleration provision in the mortgage, relating to insecurity of the mortgagee, not dependent upon default of the mortgagor, is not available to the holder of the note but only to the mortgagee as against the mortgagor; and in my opinion a right of recovery under such provision of the mortgage for acceleration would be subject to all defenses available between the original parties.
In my opinion, this distinction with its legal consequences saves the negotiability of the note from the limitations of the statute.
I concur in the syllabus and in the judgment, although I do not agree that the insecurity clause in the mortgage is not incorporated in the note. I am in accord with the language in Beutel's Brannan Negotiable Instruments Law (7 Ed.), 276, where it is stated:
"A note payable at a fixed date but with a provision that 'this note shall become due and payable on demand at the option of the payee, when it deems itself insecure,' is not negotiable. The word 'contingency' refers to contingency as to time, though it may also refer to other contingencies. First State Bank of Cheyenne v. Barton, 129 Okla. 67, 263 P. 142, 76 U. of Pa. L. Rev., 866; Puget Sound State Bank v. Washington Paving Co., 94 Wn. 504, 162 P. 870. Such a note is not a demand note within secs. 1(3) and 53. Ib.
"It is submitted that these cases holding an instrument payable at a fixed time but accelerable at the option of the payee or holder nonnegotiable are directly contrary to the plain meaning of this section. Such instruments are certainly payable 'on or before a fixed * * * time specified therein,' and to hold them nonnegotiable is certainly a spurious construction of the act. Under a proper interpretation, these cases should be overruled."
In my opinion, a promissory note payable at a fixed time but becoming due at the option of the holder when he deems himself insecure still remains a note payable on or before a fixed date, and the negotiability of the instrument is not impaired by the insecurity clause. See Dart Natl. Bank v. Burton, 258 Mich. 283, 241 N.W. 858.
I concur in the first and third branches of the syllabus but I must dissent from the conclusion reached in the majority opinion and from the second branch of the syllabus.
It seems to be conceded that the note in question would be nonnegotiable if the offensive clause, "or whenever the mortgagee shall, for any reason, deem said indebtedness insecure," were written into the body of the note. The controlling question then is whether that clause of the mortgage is incorporated in the note by reference. The note provides that it shall immediately become due at the holder's option without demand or notice "in the event any installment hereof is not paid when due and/or in the event that the chattel mortgage securing this note is breached in any respect." Then the mortgage contains the covenant and agreement that "whenever the mortgagee shall, for any reason, deem said indebtedness insecure, the mortgagee may, at its option and without notice, elect to treat the balance remaining unpaid on said note immediately due and payable forthwith." If the maker of the note does anything which the mortgagee disapproves, the due date of the note can be immediately accelerated — though the acceleration be effected through mere whim or caprice. The maker of the note may buy an expensive automobile or attend a too merry Christmas party or be seen with associates which the mortgagee disapproves, or may do a host of things not approved by the mortgagee. Under such circumstances the maker of the note, by his conduct, has breached the terms of the mortgage — which bind him by covenant and agreement not to do anything which would cause the mortgagee to deem the indebtedness insecure. The obligation of the mortgagor (maker of the note) to conduct himself in all respects in accord with the mortgagee's ideas and standards of conduct is just as binding as his obligation to make payments when due.
In my judgment the clause in the note, by reference, adopts the objectionable clause in the mortgage. The note, therefore, becomes nonnegotiable just as clearly as though the objectionable clause were written into the body of the note.
Such construction of the note should not greatly disturb banks, finance companies or others engaged in lending and taking mortgage security. The clause in the mortgage is not necessary to afford complete security. So long as it is included it cannot be ignored, and nonnegotiability results. It is a simple matter to dispense with the clause in the mortgage.