ACCELERATION BY DEFAULT OF INSTALLMENTS OR INTEREST

Another type of provision generally recognized as valid at common law, and under the Bills of Exchange Act 58 and the Negotiable Instruments Law 59 accelerates payment on default of an installment of principal 60 or even an interest payment.61 Sometimes, several notes are issued, arranged to fall due on successive dates, and each stating that if one note is dishonored the whole series is payable at once.62 It is clear that such instruments are not entirely certain as to amount or time, but the law plainly holds that they do not possess the kind of uncertainty which renders the paper unsuitable for circulation.

While the Negotiable Instruments Law recognizes such paper as negotiable, it does not decide certain difficult questions which arise about the operation of the acceleration clause. The first problem involves its meaning, whether or not it gives the holder an option to waive default.

1. Automatic Acceleration on Default.-Several cases hold that by its definite language the instrument automatically becomes due upon default, although the holder might prefer to overlook the failure to pay. The provision is said to exist for the benefit of obligor as well as obligee, and the courts refuse to make a new contract different from the expressed words of the parties.63 If this

58 89 (1) (c); like the N. I. L., except for the omission of the words "or of interest." 5982 (3): "The sum payable is a sum certain within the meaning of this act, although it is to be paid . . . by stated installments, with a provision that upon default in payment of any installment or of interest the whole shall become due."

The act does not expressly allow acceleration by default of interest in noninstailment notes, or acceleration of series notes, but they are clearly negotiable under the act. See cases in notes 61 and 62.

60 Carlon v. Kenealy, 12 M. & W. 139 (1843); Miller v. Biddle, 13 L. T. R. 334 (1895). The American cases are in notes 63 ff., infra.

61 Gillette v. Hodge, 170 Fed. 313 (Minn., C. C. A. 8th, 1909); Belloc v. Davis, 38 Cal. 242 (1869); and many cases in notes 63 ff., infra. Contra, Meyer v. Weber, 133 Cal. 681, 65 Pac. 1110 (1901), 3 JJ. dissenting; Bell v. Riggs, 34 Okla. 834, 127 Pac. 427 (1912), statutes prior to N. I. L. Under N. I. L., held valid, First National Bank v. Garland, 160 Ill. App. 407 (1911); Newbern v. Duffy, 153 N. C. 62, 68 S. E. 915 (1910). Oklahoma now has N. I. L., also California.

62 Chicago Ry. Equipment Co. v. Merchants' Bank, 136 U. S. 268 (1890), is an example. Under N. I. L., Schmidt v. Pegg, 172 Mich. 159, 137 N. W. 524 (1912); Bright v. Offield, 81 Wash. 442, 143 Pac. 159 (1914), semble.

63 Moline Plow Co. v. Webb, 141 U. S. 616 (1891), semble, construing Texas Statute of Limitations in view of Texas State case infra; Ryan v. Caldwell, 106 Ky. 543, 50

construction is correct the effect on all holders with notice of the default is clear. The Statute of Limitations begins to run at default; the holder must give notice to secondary parties or discharge them as to the whole amount due,65 and the paper is thenceforth subject to equities.66 The holder must bring one action for the whole amount due; and if he sues for one portion only, judgment will bar further suits for the other portions.67

On the other hand, if the instrument is in the hands of a purchaser ignorant of the default, the fixed date is maturity for all purposes, and the acceleration is disregarded. While no cases precisely in point have been discovered, it is clear that this result must follow if the instrument is to circulate freely. Furthermore, we have the analogy, already mentioned, of Dunn v. O'Keefe.68 A

S. W. 966 (1899); Buss v. Kemp, 170 Pac. 54 (N. M. 1918); Banzer v. Richter, 68 Misc. 192, 123 N. Y. Supp. 678 (1910); Harrison Machine Works v. Reigor, 64 Texas, 89 (1885); Kelly v. Kershaw, 5 Utah, 295, 299, 14 Pac. 804 (1887); Hodge v. Wallace, 129 Wis. 84, 108 N. W. 212, N. I. L. (1906).

The same absolute effect was given to a mortgage securing serial notes and providing that default of one note should mature all, in First National Bank v. Peck, 8 Kan. 660 (1871); Snyder v. Miller, 71 Kan. 410, 80 Pac. 970 (1905); Green v. Frick, 25 S. D. 342, 126 N. W. 579 (1910); San Antonio, etc. Association v. Stewart, 94 Texas, 441, 61 S. W. 386 (1901); and to other default clauses in a mortgage in Moore v. Sargent, 112 Ind. 484, 14 N. E. 466 (1887); Lewis v. Lewis, 58 Kan. 563, 564, 50 Pac. 454 (1897), semble; Spesard v. Spesard, 75 Kan. 87, 88 Pac. 576 (1907); and other Kansas decisions, Manitoba Mortgage, etc. Co. v. Daly, 10 Man. 425 (1895); McFadden v. Brandon, 8 Ont. L. Rep. 610 (C. A., 1904). And see Pierce v. Shaw, 51 Wis. 316, 8 N. W. 209 (1881), that if all the notes are accelerated, the first note does not have priority, but shares pro rata. If the note gives the holder an option, but the mortgage is absolute, the note will prevail. Kennedy v. Gibson, 68 Kan. 612, 75 Pac. 1044 (1904). And if the note is absolute, but the mortgage gives an option, the mortgage will prevail. Moline Plow Co. v. Webb, 141 U. S. 616 (1891).

Absolute effect was given to a simple contract for repayment of a loan. Hemp v. Garland, 4 Q. B. Rep. 519 (1843); Reeves v. Butcher, [1891] 2 Q. B. 509 (C. A.).

64 Cases in note 63, except Hodge v. Wallace, Kelly v. Kershaw, and Pierce v. Shaw. 12 L. R. A. (N. s.), 1190, note; 51 L. R. A. (N. s.), 151, note.

65 No authorities have been found, but the principle is clear.

66 First National Bank v. Peck, 8 Kan. 660 (1871); Lewis v. Lewis, 58 Kan. 563, 564, 50 Pac. 454 (1897), semble; Hodge v. Wallace, 129 Wis. 84, 108 N. W. 212 (1906); Merchants' Bank v. Brisch, 154 Mo. App. 631, 136 S. W. 28 (1911). But in Re Goye & Co. [1900] 2 Ch. 149, it was held that where a debenture accelerated by winding-up of the corporation was negotiated thereafter, the purchaser was not subject to equities. The decision seems to rest on the express language of the instrument. Cf. Hynes v. Illinois Trust, 226 Ill. 95, 80 N. E. 753 (1907).

67 Banzer v. Richter, 68 Misc. 192, 123 N. Y. Supp. 678 (1910); Kelly v. Kershaw, 5 Utah, 295, 14 Pac. 804 (1887).

68 51
5 M. & Sel. 282 (1816); see page, 761, supra.

bill of exchange is absolutely accelerated by nonacceptance; the holder has no option to waive the dishonor; yet the acceleration does not affect a subsequent purchaser ignorant of the nonacceptance. Therefore, the purchaser of an installment note after the date of one or more installments has passed should not be forced at his peril to inquire whether it has been dishonored, so long as he is without notice. Whether the absence of indorsements of payment on the instrument subjects him to notice will be considered presently. Although some of the objections caused by uncertainty of time are thus absent from these instruments when construed as absolutely accelerated, the possible uncertainty of value may cause trouble. If the interest-rate is high, the instrument would normally command a premium, but a purchaser would not pay a business premium if the obligor can default an early installment of interest or principal, pay up in full next day, and deprive the holder forthwith of a supposedly long-time investment. The acceleration would be practically at the option of the obligor, who could take profitable advantage of his own wrong by cutting short his duty to pay high interest. One reply to this very serious objection is that the obligor is not necessarily wrongful. He may in fact have a defense to any and all liability on the instrument, and default the first payment of interest in order to bring the dispute to an early decision.69 It is certainly a clumsy method of ascertaining rights; the law ought to allow the obligor to ask for a declaratory judgment as soon as the dispute arises, 70 without waiting till maturity, or having to break his contract and destroy the holder's investment. A much better reply is, that the holder need not lose his high interest in spite of the default. Suppose that an installment note provides for ten per cent interest, and the legal rate is six per cent. In some jurisdictions, interest continues to run at ten per cent after maturity until payment; " the holder could simply wait after default of the first installment, although the note then matured, and sue at the date originally fixed for the last installment, getting the

69 San Antonio, etc. Association v. Stewart, 94 Texas, 441, 446, 61 S. W. 386 (1901). 70 Edson R. Sunderland, "A Modern Evolution in Remedial Rights, - the Declaratory Judgment," 16 MICH. L. REV. 69, 77: "To use a homely figure, prior to 1883 the English courts were employed only as repair shops; since that time they have been operated as service stations."

71 The authorities on both sides will be found in 1 SEDGWICK ON DAMAGES, 9 ed., § 325 ff.

interim ten per cent interest in his judgment. Even jurisdictions which ordinarily allow only the legal rate after maturity on the ground that the contract simply fixed a rate until maturity, ought in the installment cases to use the contract rate as the measure of damages, since the instrument provided for that rate until the maturity of the last installment. The loss of the stipulated high interest is an element of the damage caused by the maker's breach of contract which ought to be included in the judgment. The acceleration provision in installment notes is like a clause in a contract for the delivery of goods by installments, agreeing that on nondelivery of any installment, the whole contract may be canceled. The buyer can then recover for the loss of the future benefit which he would have received, if it had not been for the breach of contract. If this reasoning be sound, the holder of the ten per cent note of which the first installment is defaulted will recover just as much interest in his judgment as he would have received if all installments had been regularly paid, subject of course to discount if the judgment is obtained before the date of the last installment. Consequently, he is not really deprived of his investment by the default, and the value of the note is certain. Therefore, automatic acceleration on default does not impair negotiability.

2. Optional Acceleration on Default. -The weight of authority and the better view construe the acceleration provision as giving the holder an option to declare the whole sum due, which he can exercise by demand, suit, foreclosure, and similar acts. Since the provision is primarily for his benefit, he can waive it if he wishes. Waiver may be shown by the subsequent acceptance of interest or by mere inaction. The obligor cannot take advantage of his own wrong and cause an automatic change of maturity, which would subject the paper to equitable defenses and start the Statute of Limitations running.73 Such reading of an option into the instru

72 2 SEDGWICK ON Damages, 9 ed., § 636 b; Cherry Valley Iron Works v. Florence Iron River Co., 64 Fed. 567 (C. C. A., 6th, 1894). Another analogy is damage for failure to accept a draft: 2 SEDGWICK, Ib., § 707.

73 Chicago v. Merchants' Bank, 136 U. S. 268, 284 (1889), semble; Nebraska, etc. Bank v. Nebraska, etc. Co., 14 Fed. 763 (Neb. 1883); Gillette v. Hodge, 170 Fed. 313 (C. C. A. 8th, Minn., 1909); Belloc v. Davis, 38 Cal. 242 (1869); Watts v. Hoffman, 77 Ill. App. 411 (1898).

A similar provision in the mortgage was construed as giving only an option in Richardson v. Warner, 28 Fed. 343 (Neb. 1886); Keene Five Cent Savings Bank v. Reid, 123 Fed. 221 (C. C. A., 8th Kan., 1903), certiorari denied, 191 U. S. 567 (1903); Mason v.

ment is analogous to the interpretation of the usual clause in a lease, that the term shall cease and be absolutely determined or void upon a default in the payment of rent. It is well settled that the landlord waives the forfeiture by subsequent acceptance of rent, and that the tenant will not be allowed to say that he is discharged from his covenants by his own default, unless the landlord chooses to take advantage of the condition.74 The word "void" in an insurance policy is also construed to render it voidable at the option of the insured. This construction of the acceleration clause reaches a just result. The interest and other terms of the loan are ordinarily arranged with reference to the normal life of the instrument with the expectation that the obligor will carry out his promises. The default clause does not give the obligor the right to break his contract. It is merely incidental to the main contract, affording the holder the right to take rapid action, at the first sign of trouble, to protect his entire investment instead of running future risks. He should be free to decide whether such protection is necessary under the circumstances of the default. Moreover, it is also for the benefit of the ordinary obligor to construe the provision as permissive and not mandatory. Extended credit has been given him because of his inability to pay in a short time from his usual resources. The dates for payment are adapted to his ability to pay. If every default automatically brings the whole loan down on his head at once, he will often be unable to remain solvent. The holder could not overlook even a slight delay of interest, but would

Luce, 116 Cal. 232, 48 Pac. 72 (1897); Watts v. Creighton, 85 Iowa, 154, 52 N. W. 12 (1892); Lowenstein v. Phelan, 17 Neb. 429, 22 N. W. 561 (1885); Cox v. Kille, 50 N. J. Eq. 176, 24 Atl. 1032 (1892); Core v. Smith, 23 Okla. 909, 921, 102 Pac. 114 (1909); Batey v. Walter, 46 S. W. 1024 (Tenn., 1897); First National Bank v. Parker, 28 Wash. 234, 68 Pac. 756 (1902).

The holder's option need not be exercised immediately upon default. Wheeler v. Howard, 28 Fed. 741 (Mo. 1886). Bringing suit is exercise of the option without other notice to the debtor. Swearingen v. Lahner, 93 Iowa, 147, 61 N. W. 431 (1894); Coad v. Home Cattle Co., 32 Neb. 761, 769, 49 N. W. 757 (1891). It is held that even if foreclosure proceedings were instituted and then dismissed, maturity was not accelerated, and the Statute of Limitations did not begin to run. California Savings Soc. v. Culver, 127 Cal. 107, 59 Pac. 292 (1899).

The Federal courts need not follow state decisions on the application of the local Statute of Limitations to these instruments. Keene Five Cent Sav. Bank v. Reid, 123 Fed. 221 (C. C. A., 8th, Kan., 1903), certiorari denied, 191 U. S. 567 (1903); contra, Moline Plow Co. v. Webb, 141 U. S. 616, 625 (Texas, 1891), semble.

74 Belloc v. Davis, 38 Cal. 242, 250 (1869); Rede v. Farr, 6 M. & S. 121 (1817).