Boe, A. Pershing

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UND Scholarly Commons (University of North Dakota)

North Dakota Law Review Volume 23 Number 2 Article 9 1947 Contracts - Security Obtained in Violation of Scale-Down Agreements under Federal Loan Acts A. Pershing Boe Follow this and additional works at: https://commons.und.edu/ndlr  Part of the Law Commons Recommended Citation Boe, A. Pershing (1947) "Contracts - Security Obtained in Violation of Scale-Down Agreements under Federal Loan Acts," North Dakota Law Review: Vol. 23 : No. 2 , Article 9. Available at: https://commons.und.edu/ndlr/vol23/iss2/9 This Case Comment is brought to you for free and open access by the School of Law at UND Scholarly Commons. It has been accepted for inclusion in North Dakota Law Review by an authorized editor of UND Scholarly Commons. For more information, please contact und.commons@library.und.edu. BAR BRIEFSCASE NOTESCONTRACTS-SECURITY OBTAINED IN VIOLATION OF SCALE-DOWN AGREE-MENTS UNDER FEDERAL LOAN ACTS. S obtained a loan from the FederalFarm Mortgage Corporation under provisions of the Emergency FarmMortgage Act of 1933. 12 U.S.C. §1016. H. a creditor, agreed to scale-downan unsecurred $2,983.13 debt due him from S to $900.00 in order to makeS eligible for said loan. S gave the Federal Farm Mortgage Corporationa first mortgage, and secretly gave a note to H for the difference betweenthe amount originally due and the amount H had agreed to accept underthe scale-down agreement. H subsequently brought action on his note,recovered judgment thereon, and transferred the judgment for a cashconsideration to N. N sought enforcement of the judgment on S's property,and plaintiff Mortgage Corporation brought suit to have the judgmentdeclared void. Held, the note given contrary to the scale-down agreementwas void as between the parties and a nullity against the federal loanagency. Federal Farm Mortgage Corporation v. Hatten et al, 210 La. 249,26 So. (2d) 735 (1946).Federal loan acts commonly provide for scale-down agreements andmaximum debt limitations. Emergency Farm Mortgage Act. of 1933, 12U.S.C. § 1016; Home Owners' Loan Act of 1933, 12 U.S.C. §1461 et seq;National Housing Act, §203 (b), as amended, 12 U.S.C. §1709 (b). The realpurpose of loans made by these federal agencies is to constitute oneagency the sole creditor, thereby eliminating by way of compromise allother creditors. Kniefel v. Keller, 207 Minn. 109, 290 N.W. 218 (1940). Theloan acts contemplate helping a debtor who has demonstrated his inabilityto operate under his previous load of debts. Secret security given in violationof a scale-down agreement would rebuild the very debt structure which wasreduced by the scale-down agreement. Federal Far-m Mortgage Corporationv. Hatten et al, 210 La. 249, 26 So. (2d) 735 (1946). Moreover, the loanagency itself has an interest to protect. It would find its financial positionweakened by allowing secret security to be given by the debtor. O'Neil v.Johnson et al, 29 F. Supp. 307 (1939). With the foregoing reasoning evidentin nearly all decisions, the courts have without exception held that securitygiven contemporaneously, prior, or subsequent to the execution of such ascale-down agreement is void. Federal Land Bank of St. Paul v. Koslofsky,67 N.D. 322, 271 N.W. 907 (1936). Such security may be in the form of achattel mortgage, International Harvester Company v. Young, 288 Mich.436, 285 N.W. 12 (1939) ; a second mortgage upon real property, LocalFederal Savings & Loan Ass'n of Oklahoma City v. Sheets et ux, 191Oklahoma 439, 130 P. (2d) 825 (1942); or a note or other advantage,Anderson v. Nelson, 110 Colo. 374, 134 P. (2d) 1053 (1943). A party whohas made payments on a contract in violation of a scale-down agreementis entitled to reimbursement for payments made. Anderson v. Nelson, 110Colo. 374, 134 P. (2d) 1053 (1943). The loan agency may, with a fulldisclosure of the facts, consent to a second mortgage upon property onwhich it holds a first mortgage. However, it must clearly appear that theagency has knowledge. Thus, the alleged knowledge of a fee attorney forthe federal loan agency was held not imputable to the agency in F. S. T.Corporation v. Onorato et al, N. J. 50 A. (2d) 467 (1947).From the foregoing it may be observed that a seemingly inflexiblerule has been universally followed with respect to security-violating, scale-down agreements. The knowledge of an agency must be unmistakably shownin order to render such contracts valid. Public policy necessitates holdingsuch security void, for the loan acts were intended solely for the benefit ofhomeowners and farmers, and any benefit to creditors is "purely incidental,"Campbell v. Sutton, 62 Cal. App (2d) 621, 145 P. (2d) 91 (1944).A. PERSHING BOE.

Contracts - Security Obtained in Violation of Scale-Down Agreements under Federal Loan Acts

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Contracts - Security Obtained in Violation of Scale-Down Agreements under Federal Loan Acts

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