Ashland Bldg. & Loan Co. v. Kerman

The original action was commenced by the Ashland Building Loan Company to recover an amount claimed to be due on a promissory note and mortgage; the first cause of action being founded on a note for $12,500, and the second cause of action seeking a foreclosure of the mortgage. The cause was tried without the intervention of a jury and resulted in a judgment and decree in favor of the plaintiff in the amount of $10,618.50, besides interest. Notwithstanding the rendition of the judgment for the above amount in favor of the plaintiff, it prosecutes error, claiming that the judgment should have been for the full face of the promissory note and interest thereon.

No one of the controlling facts in this case is in controversy. On September 14, 1922, the defendants Mary S. Kerman and Arthur S. Kerman, her husband, borrowed of the Cleveland Discount Company the sum of $12,500 and executed their promissory note and mortgage for that amount to the company, and they were then constructing a dwelling house on the premises covered by the mortgage. Up to February 12, 1923, the Cleveland Discount Company had advanced to the Kermans, on their note and mortgage, the sum of $10,618.50 only. On that date the company sold the note and mortgage to the plaintiff, with a proper indorsement on the back of the note and a proper assignment and transfer of the mortgage. The amount remaining unadvanced by the Cleveland Discount Company to the Kermans was never in fact paid to them. That company, however, did execute and deliver to them its check for the remaining balance, but this check was never paid; the company going into the hands of a receiver almost immediately after the execution and delivery of the check to the Kermans.

The parties to this action have entered into a stipulation, which recites, among other things, that the plaintiff is the owner and holder of the note, having purchased the same before maturity, in due course and in good faith, except as noted, and for a valuable consideration. The stipulation contains an agreement that no payments had been made on the note, except interest to December 15, 1922, and that the plaintiff is the owner of the mortgage securing the note, having acquired it in the same manner and at the same time as the note. The stipulation further recites an agreement that neither the Ashland Building Loan Company or its agents had any knowledge, until subsequent to the purchase of the note and mortgage, of the nonpayment in full by the Cleveland Discount Company of the entire amount of the note and mortgage. The exception as to good faith contained in the stipulation relates solely to the point of completion of the building, and matters incident thereto.

The testimony relating to the completion of the building shows that at the time the plaintiff purchased the note and mortgage the interior finishing of the house was not complete; that the plumbing was not installed; that only 6 radiators out of 16 were connected; and that the electric fixtures and wiring were incomplete. The testimony also shows that certain officials of the plaintiff company inspected the premises from the outside, but did not alight from the automobile in which they were riding; nor did they see the inside of the building.

Only three questions arise in this case, and they all involve a determination of the rules of law applicable to the facts.

First: It is insisted that the promissory note is not negotiable in form, and, therefore, that plaintiff is not entitled to the protection bestowed on a bona fide purchaser for value before maturity. This contention is based on the following clause contained in the note:

"In case of default in the payment of any installment of principal or interest of this note, or any part thereof, when due, or within 10 days thereafter, or in case of default in any or either of the covenants, terms, or conditions as stipulated in the mortgage deed securing this note, the principal shall become due and payable at the option of the holder hereof without notice."

Although a certified copy of the record of the mortgage is attached to the transcript of the docket and journal entries, neither the original nor a copy of the mortgage was offered in evidence, or attached to the bill of exceptions, or by averment made part of any pleading. Therefore this court cannot take knowledge of the terms or conditions of the mortgage, except such parts as are set out in the pleadings. Looking then to the record we have before us, we construe the language above quoted as amounting merely to an agreement to accelerate the payment of the note in case of default in the performance of certain conditions of the mortgage, and, as so construed, the language is of no more consequence than a recital that the note was secured by mortgage.

The case of Thorp v. Mindeman, 123 Wis. 149, 101 N.W. 417, 68 L.R.A., 146, 107 Am. St. Rep., 1003, is a very carefully considered case, which discusses these questions. In that case the note provided that if default should be made in the payment of interest, or in case of failure to comply with any of the conditions or agreements of the mortgage, then the principal should become due at the option of the mortgagee, without notice. The clause is almost identical in phraseology and is identical in legal effect with the one in the note on which the first cause of action in the instant case is based.

We find nothing in this language which prevents the promissory note from being negotiable. Counsel for defendant rely on KingCattle Co. v. Joseph, 158 Minn. 481, 198 N.W. 798, 199 N.W. 437, but that case is not inconsistent with the conclusion above reached, for in that case the entire deed of trust which secured the bonds was expressly made a part of the bonds.

Second: Under the agreed statement of facts the plaintiff became the holder of the note and mortgage before maturity, in due course, for a valuable consideration, and in good faith, unless that good faith is impeached by the circumstances attending the examination of the uncompleted building. The stipulation recites that neither the plaintiff nor its agents had any knowledge until after the note and mortgage were purchased that the full amount had not been advanced by the Cleveland Discount Company, and the mere fact that the building which the defendants were erecting was not at that time fully completed could not in any sense affect the good faith of the purchase by the plaintiff. Certainly the entire amount of a lien may be advanced by the mortgagee before the building in course of erection is fully completed, and the fact that the plaintiff failed to make a thorough investigation of the building may be evidence of lack of caution, but does not even tend to show bad faith in making the purchase.

Third: It is further insisted on the authority of Baily v.Smith, 14 Ohio St. 396, 84 Am. Dec., 385, that the indorsement of the promissory note to the plaintiff does not entitle it to the benefit of the mortgage free from equities, even though the note be negotiable. The decision in the case just cited is in conflict with the holdings of nearly all of the states and must not be extended beyond the facts involved. In that case both the note and mortgage were obtained by fraud, while in the case at bar there is not any claim of fraud in the execution and delivery of the note and mortgage. The most that is contended is that the Kermans had a latent equity, in that the entire amount represented by the note had not been advanced to them by the Cleveland Discount Company. The rule of law in such case is clearly stated in First National Bank v.Brotherton, Trustee, 78 Ohio St. 162, 84 N.E. 794, and under the authority of that case this court is of the clear opinion that the plaintiff, having purchased the note and mortgage for value, in due course, before maturity, is entitled to the benefits of a bona fide holder, not only as to the note, but as to the mortgage, which is a mere incident to the note.

From what has been said it results that the judgment of the common pleas court must be reversed, and, there being no controlling fact in dispute, this court, proceeding to render the judgment which should have been rendered in the trial court, finds and adjudges that the plaintiff is entitled to a judgment and decree for the amount of $12,500, with interest.

Judgment reversed and judgment for plaintiff in error.

WILLIAMS and YOUNG, JJ., concur.

Judges of the Sixth Appellate District, sitting in place of Judges LEVINE, SULLIVAN and VICKERY of the Eighth Appellate District.