Rose v. American National Bank of Beaver Dam

^* Motion for rehearing denied, without costs, on April 24, 1944. [EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.] This proceeding was begun by a petition filed on October 6, 1942. The order appealed from was dated August 26, 1943, and was entered September 10, 1943.

The case is here without a bill of exceptions. The question therefore is, Do the pleadings and findings sustain the order? From the findings it appears that the Beaver Drainage District, hereinafter referred to as the "district," was created July 2, 1904. The order organizing the district levied an assessment of benefits and of cost of construction against the lands and corporations benefited in the sum of $109,396.19. This assessment was payable in fifteen annual instalments commencing on September 1, 1910. The order also authorized the issuance of bonds and bonds were issued and sold in the amount of $109,000. The district having defaulted, all unpaid bonds of the first issue were ordered refunded under the provisions of sub. 6 of sec. 1379 — 31b, Stats. 1921. No additional security or payments were made as an inducement for the exchange of bonds of the first issue the refunding bonds. The exchange was made by the surrender of bonds of the first issue to the commissioners and the holders accepting refunding bonds in their place. The funds raised by the first assessment proved inadequate to complete the work of construction, and additional assessments on the lands and corporations benefited were made and bonds based thereon were authorized and sold and other refunding bonds were likewise authorized and sold. Assessments equaling the total assessment for benefits on the lands and corporations benefited have been duly assessed and levied. of these assessments $70,277 was uncollectible. No bonds of the district have been paid since 1923. All unpaid bonds of the district are past due, the last bonds maturing in July, 1934. The lands of the district were sold for the unpaid drainage assessments free of all drainage liens. The amount realized on the sale was a sum not sufficient to pay the general tax in full. The drainage district has exhausted its power to levy further assessments for the payment of its bonded indebtedness and has no funds other than the special fund hereinafter described.

In January, 1922, the commissioners of the district remitted to the fiscal agent of the district at Chicago where the bonds were due and payable, the sum of $11,500, with instructions first to pay the interest due, second, to pay $2,500 on bonds due January 1, 1921, and, third, to pay the balance on bonds due January 1, 1922. The bonds failing due on January 1, 1922, were subsequently paid out of other bond funds and not out of the $11,500 so remitted. From the moneys so remitted, bonds 125 to 134, both inclusive, were paid, $4,500 was held to pay bond 84 falling due in January, 1918, and bonds 135 to 142, both inclusive, falling due January 1, 1921, the remainder of the fund being used to pay coupons. Bond 84 was subsequently paid. Bonds 135 to 142, both inclusive, were never presented for payment. The aforesaid sum of $4,500 was afterward returned by the fiscal agent to the commissioners and by order of the court was to be placed in a special fund to be distributed on order of the court, such special fund now amounting with accumulated interest to $5,334.37.

The bonds of the district were under seal and, except the date thereof, due date and purpose, are all in identical form.

The plaintiff, Fred Erbes, is the owner of refunding bonds 73 and 74, $500 each, dated July 1, 1921, and due July 1, 1932. Bonds 73 and 74 owned by Erbes refunded bonds 177 and 178, $500 each of the first issue of bonds of the district, the same being dated March 1, 1905, and due January 1, 1923. The refunding bonds were accepted and exchanged for bonds of the first issue at the request of the commissioners of the said district and pursuant to an order of court authorizing refunding bonds of the first issue. Upon receipt of the refunding bonds, Erbes surrendered the original bonds. Erbes demanded payment of his bonds after their maturity at the place of payment, which demand was refused for lack of funds. At the time of such demand, original bonds 179 to 184, inclusive, of $500 each, due January 1, 1924, were outstanding, unpaid, and not refunded.

The respondent, American National Bank of Beaver Dam, Wisconsin, was the owner of bonds 179 to 184, both inclusive, of the first issue of bonds, having purchased the same before maturity for a valuable consideration. The bonds were of the face or par value of $500 each, dated March 1, 1905, and were due and payable January 1, 1924, and bore interest at the rate of six per cent per annum. No part of the principal sum of said bonds has been paid; all interest coupons attached to the said bonds have been paid and interest paid thereon to January 13, 1928. The American National Bank made due demand for payment of the said bonds after maturity at the place of payment and said demand was refused for the reason that there was no fund available to pay said bonds.

Upon these facts the trial court concluded, (1) that the twenty-year statute of limitations bars all bonds not paid within twenty years from the date of their maturity where funds are available for payment; (2) the bonds of the first issue that were surrendered in exchange for refunding bonds were canceled and discharged and the refunding bonds became the only evidence of the debt of the district which the original bonds evidenced; (3) that bonds of the first issue not exchanged and not barred by the statute of limitations have a prior lien over bonds of a later due date; (4) that bonds should be paid in the order of their maturity, and that if there are insufficient funds to pay all bonds maturing on the same date the fund should be prorated; (5) that $500 paid from the general fund to pay bond 84 should be returned to the general fund; (6) that by accepting refunding bonds, the original bonds owned by Fred Erbes were canceled and discharged; and (7) that bonds 179 to 184, inclusive, are payable prior to the payment of refunding bonds 73 and 74, owned by said Fred Erbes.

Other facts are found which are not material to the questions raised here.

An order was entered accordingly in favor of the bank, from which the petitioners appeal. Upon this appeal petitioners contend that, (1) the holders of the first issue of drainage bonds by accepting refunding bonds in lieu thereof did not lose the lien of the first issue in the absence of an express agreement creating a novation; (2) where the taxing power of a drainage district has been exhausted and the district has insufficient funds to pay the existing bonds in full, the fund should be prorated; (3) that under the circumstances of this case the statute of limitations did not begin to run until the trust was repudiated.

Petitioners invoke the doctrine well established in this state that a renewal by the giving of a new note or the extension of time in which to pay a pre-existing debt is not a discharge of the old and original obligation and the creation of a new obligation, but a mere carrying on of the prior obligation, unless and except it appears that the parties agreed that it should be a destruction of the old and the creation of a new obligation. Citing Wisconsin Trust Co. v. Cousins (1920), 172 Wis. 486, 179 N.W. 801; Rosendale State Bank v. Holland (1928),195 Wis. 131, 217 N.W. 645.

The question is whether the principle invoked is applicable to the facts of this case. The first issue of bonds was dated March 1, 1905, and the bonds were issued pursuant to the provisions of sec. 1379 — 25, Stats. 1898, which provided:

"The commissioners may borrow money, not exceeding the amount of assessments unpaid at the time of borrowing, for the construction of any work which they shall be authorized to construct or for the payment of any indebtedness they may have lawfully incurred, and may secure the same by notes or bonds bearing interest at a rate not to exceed six per cent per annum, and not running beyond one year after the last assessment on account of which the money is borrowed shall fall due; which notes or bonds shall not be held to make the commissioners personally liable but shall constitute a lien upon the assessments for the repayment of the principal and interest of such notes or bonds; and the court may, on the petition of the commissioners, authorize them to refund any lawful indebtedness of the district by taking up and canceling all its outstanding notes and bonds as fast as they become due or before, if the holders thereof will surrender the same, and issue in lieu thereof new notes or bonds of such district payable on such longer time as the court shall deem proper, not to exceed in the aggregate the amount of all notes and bonds of the district then outstanding and the unpaid accrued interest thereon. . . ."

As already stated, the district having defaulted in the payment of bonds of the first issue, all unpaid bonds of that issue were ordered refunded under the provisions of subs. 6 and 7 of sec. 1379 — 31b, Stats. 1921. Subs. 6 and 7 are as follows:

"6. The court may on the petition of the commissioners or of the holder of any bond, interest coupon or other district obligation authorize the commissioners to refund any lawful indebtedness of the district by taking up and canceling any or all of its outstanding notes and bonds as fast as they become due (or before they are due if the holders thereof will surrender the same) and issue in lieu thereof new notes or bonds of such district payable in such longer time as the court shall deem proper, not to exceed in the aggregate the amount of all notes and bonds of the district then outstanding and the unpaid accrued interest thereon, and bearing interest not to exceed six per centum per annum.

"7. When the indebtedness of the district has been refunded or is about to be refunded, as provided above, the court may on petition of one or more landowners, or of the commissioners, extend the time in which to pay assessments for construction to September first next before a like portion of the refunding bonds, which are liens thereon, become due, in which event the face of all unpaid past-due assessments so extended together with all interest, penalties and charges shall be a lien on the lands against which the assessments were originally made, and the court may make all orders and do all other things necessary to carry into effect such extension of time."

So far as the applicable provisions are concerned this statute is in substance the same as the statute under which the bonds were issued. For that reason we do not need to consider whether the legislature had power to compel the holders of bonds of the first issue to accept refunding bonds. The legislature did not attempt anything of that kind.

While the statute as it stood in 1905 made the bonds so issued a lien upon the assessments, this court held in In reDancy Drainage District (1927), 193 Wis. 118, 122,213 N.W. 885, that the bonds so issued were —

"a lien upon the entire assessment of benefits and that the holders of such obligations had pledged to them as their security the lands in the district to the extent of the assessment of benefits, it was necessarily a determination and holding that the holders of the first issue of obligations, having had such security pledged to them, were necessarily holders of a paramount right to such security. The full extent of such security being thus pledged, such paramount security could not be altered or lessened by subsequent proceedings or by subsequent issue of other obligations by the district without the consent of the holders of such first issue."

It appears from the findings in this case that prior to the issue of the refunding bonds there were, including the first issue, five issues of bonds. The portions of these various issues remaining unpaid were refunded by the refunding bonds dated July 1, 1921. Attention is directed to sec. 1379 — 31b, 7, Stats. 1921, already quoted, which provides in case of the issue of refunding bonds, for an extension of all unpaid past-due assessments to September 1st next before a like portion of the refunding bonds become due. In this case the time of payment of past-due assessments was extended in accordance with the terms of the statute. The effect of subs. 6 and 7 is to make the refunding operations a mere extension of the time within which the original obligation was to be paid.

Under these facts the question for decision is, What effect did the issuance to and acceptance of refunding bonds by a holder of bonds of the first issue have upon the lien upon the assessment for benefits given by statute? In the solution of this question we are without a guide except such general principles as have been developed relating to securities in other fields.

In accordance with the decision in In re Dancy DrainageDistrict, supra, already referred to, the holders of the outstanding bonds at the time the refunding issue of 1921 was issued had liens upon the assessment for benefits, the holders of the first issue a first lien, the holders of the second issue a second lien, and so on. The bonds of the first issue were not secured ratably by the terms of the bond. They were straight obligations to pay principal and interest at the times specified in each of the several bonds. Nor did the statute contain any provision with reference to the rights of the holders of the respective maturities of bonds. The state is strongly committed to the proposition that, where several notes failing due at different times are secured by the same mortgage, equity requires their payment in the order of their maturity out of the property on which they are secured unless some special equity intervenes to require a different direction. Wood v.Trask (1859), 7 Wis. *566.

In Marine Bank v. International Bank (1859), 9 Wis. *57, *65, in commenting on Wood v. Trask, supra, the court said:

"We were well aware that in some of our sister states, a contrary doctrine had obtained, and that it had been held that the fund arising from the sale of mortgaged premises, in case of a deficiency, should be ratably applied among the holders of the different notes or instruments; but when no special equities intervened to vary the rule, we thought the note or instrument first becoming due, was entitled to priority in payment. And, without enlarging upon the reasons that led us to this conclusion, it appeared to us that this priority must exist, under our statute, as the notes were the principal and the mortgage but an accessory, and the holder of the first note, upon default in its payment, had the right to commence his action, and subject the mortgaged premises to foreclosure and sale for the satisfaction of his debt. It seemed to us, therefore, that the maxim of prior in tempore, potior in jure, rightly applied, in the absence of all equitable considerations between the assignors and assignees, to change this rule, or principle of law.

"It is obvious to every one making the least examination, that the authorities are greatly in conflict upon the subject; and we therefore felt at liberty to adopt that rule which seemed to us most consonant to equity and the nature and meaning of the mortgage contract."

The rule thus laid down has never been modified and has been applied from time to time. In McLean v. Hoehle (1898), 98 Wis. 359, 363, 74 N.W. 120, a foreclosure case, the court said:

"It is needless to discuss the subject of whether the foreclosure was of an indebtedness constituting a separate and distinct mortgage under sec. 3525, R.S. 1878, for if such were the case, there being no stipulation in the mortgage securing the instalments of indebtedness equally, the different instalments took precedence in the order they fell due; and a foreclosure under a prior instalment, completed by the execution and delivery of a deed, cut off all claims under subsequent instalments, the same as the foreclosure of any prior mortgage cuts off all claims under subsequent mortgages."

The rule was adhered to in Shaw v. Crandon State Bank (1911), 145 Wis. 639, 129 N.W. 794, although in that case it was held that there were superior equities as between different holders.

Applying these principles to the case at bar at the time of the issuance of the bonds dated March 1, 1905, bonds 177 and 178 owned by Fred Erbes had priority over bonds 179 to 184, inclusive, owned by the defendant American National Bank, but it is contended that Erbes by surrendering bonds 177 and 178 for bonds 73 and 74 of the sixth or refunding issue, which surrendered bonds were required by statute to be canceled upon surrender, Erbes lost his first lien and thereby his bonds were subordinated to those owned by the bank.

As already stated, this state is committed to the doctrine that the taking of a promissory note either for a preceding liability or a debt incurred at the time is not payment unless agreed to by both parties. There is no contention in this case that the acceptance of the refunding bonds by Erbes was a payment of the bonds of the first issue which he held. This being so the original indebtedness of the drainage district represented by bonds 177 and 178 was not discharged, — the time of payment was merely extended. It is contended on behalf of the bank that the exchange of the refunding bonds for bonds of the first issue extinguished the lien of these bonds for the reason that under the statute upon surrender the bonds must be canceled. While ordinarily an instrument is extinguished or destroyed by cancellation it is considered that cancellation did not have that effect under the applicable statutes. Not only was the time of payment extended but the time of paying the assessments on the lands upon which bonds 177 and 178 were a lien was also extended, and while under the statute the bonds of the first issue were to be canceled and bonds of the refunding issue substituted therefor, there is nothing to indicate that it was the legislative intent to destroy the lien which the holder of bonds 177 and 178 had. The requirement that the bonds of the first issue should be canceled no doubt was for the purpose of preventing a single indebtedness from being represented by two outstanding bonds. If bonds of the first issue had been permitted to remain outstanding it would have been necessary to devise some method of ascertaining to whom the refunding bonds should be delivered. From an early day this court has held that a promissory note is merely the evidence of indebtedness. The substitution of one note for another does not discharge the debt evidenced thereby nor release the security given for its payment.Williams v. Starr (1856), 5 Wis. 534.

In this state a debt secured by a mortgage is the principal thing, the mortgage is an incident and the transfer of the debt carries the mortgage with it. Croft v. Bunster (1859), 9 Wis. *503; Rice v. Cribb (1860), 12 Wis. *179.

In the briefs of counsel the issue in this case is discussed in terms of a novation. We have ignored the terminology of that relationship because a novation under the circumstances of this case would be just another name for payment. Under the law of this state there is no novation unless the original indebtedness is extinguished by the substitution of a new debt. In this state that does not take place unless there is an express agreement to that effect.

At this point in the consideration of the questions involved we are confronted by the fact that a number of bonds of the first issue were exchanged for bonds of the refunding issue and that the holders of these bonds have not appeared in this action. Nor does it appear that an effective attempt has been made to make them parties to this proceeding. An attempt was made to serve the summons by publication. The order directed that notice should be given by mailing a copy of a notice of hearing to all bondholders; by publishing a copy of said notice in the Black River Falls Banner for two successive weeks; by mailing a copy of said notice to the Continental Illinois National Bank Trust Company of Chicago, Illinois; and by publishing a notice in the Chicago Journal of Commerce. This procedure did not conform to the procedure prescribed by sec. 262.13, Stats. The procedure in this case is in the nature of a winding-up action and should have been brought under the provisions of sec. 89.80. While sec. 89.80. is permissive in form it provides a complete scheme for the allowance of claims against a drainage district and the distribution of assets. While under the provisions of that section a composition agreement may be entered into, that is not a prerequisite to a proceeding under the section.

It is considered that the proceeding should be remanded to the circuit court; that upon the filing of the remittitur in the circuit court, the petition should be amended to conform to the provisions of sec. 89.80, Stats.; that when service has been had, the court should proceed to a final disposition of the matter in accordance with the terms of that section.

We have dealt with the matter of priorities so that the court may be advised as to the disposition of the proceeds so far as priorities are concerned. After service has been had the court can then deal with the matter in the light of the claims, including those already filed, which may then be on file.

By the Court. — The order appealed from is reversed, and the cause remanded for further proceedings as indicated in the opinion.