Merchants' Exchange National Bank v. Commercial Warehouse Co.

Majority

p. 317

THE MERCHANTS’ EXCHANGE NATIONAL BANK OF THE CITY OF NEW YORK, Plaintiff and Appellant, v. THE COMMERCIAL WAREHOUSE COMPANY, Defendant and Respondent.

Headnote

Usury—Corporations—Act of 1850, ch. 172.

1. Where property which has been pledged to secure a loan, made upon an usurious agreement, is transferred by the pledgor to a corporation, whether in payment of, or as security for, an antecedent debt, or for a present consideration (the transfer not being made subject to the usurious loan) the corporation cannot in any shape or manner, or in any form of action, avoid the contract of pledge by reason of the usury.

2. The act of 1850, ch. 172, prohibits a corporation from relying on or in any manner taking advantage of. the usury in such a case.*

Before Barbour, Ch. J., Monell and Freedman, JJ.

Decided April 29, 1871.

The facts of the case sufficiently appear in the opinion.

Francis H. DyJcers, attorney and of counsel for respondent made, on the question involved, the following point.

I. By an act of the legislature passed in 1850, it is

*Note by Reporters.—This decision has been overruled by the court of appeals.

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declared that ‘‘No corporation shall hereafter interpose the defence of usury in any action.” This provision prevents corporations from pleading usury in bar of the rights of a party, either as plaintiff or defendant (Butterworth v. O’Brien, 23 N. Y. 275 ; Rosa v. Butterfield, 33 Id. 665).

Owen, Hash & Gray, attorneys for appellant, and S. P. Hash, of counsel, made the following points.

I. The court at special term erred in holding that the act of 1850 governs the transaction before the court. The act was passed April 6, 1850, just after the decision of the court of appeals in the case of the Dry Dock Bank v. Am. Life Ins. and Trust Co., 3 N. Y. [3 Comst.] 344; a decision which finally determined that the Dry Dock Bank could repudiate its banking obligations on the ground that though the transactions were in the form of a sale of exchange, they were usurious loans in fact. This decision was made in December, 1849 (3 N. Y. [3 Comst.] 374, note). It was at once seen that it invalidated railroad bonds and a large class of similar securities, issued by corporations and disposed of below par, and would seriously embarrass the prosecution of corporate enterprises needing borrowed capital (Vide 23 N. Y. 275 ).

The true construction of the statute, therefore, is to make valid contracts to which a corporation is a party, which, but for the statute, the corporation might defeat upon the ground of usury. ¡No decision, except that appealed from, has given the act a broader construction: ' This, however, holds that though the borrower—in the case at bar, a natural person—was entitled to avail himself of the statute of usury and could transfer the property which he had pledged to secure the usurious loan, to a third person, and that such transferee could reclaim the property and avoid the lien of the pledge ; that such transfer being made to a corporation, the

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corporation cannot do this, simply because it is a corporation.

(1.) No reported case sanctions the construction under review. Curtis v. Leavitt, 15 JV. T. 1, was a proceeding by the borrower, to avoid the obligation given for the money loaned. It was, it is true, a proceeding by the receiver of the corporation instead of the corporation itself, and of an affirmative rather than of a defensive character. These features of the case were held to prevent the statute applying. The follow-are some of the dicta in the case :

“The act must be construed as a repeal of the statutes of usury, as to all contracts of corporations stipulating to pay interest.” Comstock, J., p. 85.

“The barrier wall.....which the usury laws

set up between the lender and the borrower, is thrown down, &c., whenever the borrower is 'a corporation.” Brown, J., p. 154. .

In Butter worth v. O’Brien, 28 Barb. 187 , the action was on behalf of the receiver of a corporation to recover usurious premiums it had paid on borrowed money. The court held that the object of the statute was to enable corporations to obtain “pecuniary facilities for the promotion of the objects of their incorporation .....what they have agreed to pay, they'

must pay,” &c. p. 193.

This case was affirmed in 23 N. Y. 275 , and there are some extravagant dicta in the opinions, but the conclusion of the report is that ‘ ‘ all the judges concurred in the result, without committing themselves to the reasoning of either of the proceeding opinions, or in any respect further than necessary to decide the case.” p. 281.

In Rosa v. Butterfield, 33 N. Y. 665 , it was held that sureties upon notes of a corporation were, equally with the corporation itself, precluded, under the act of 1850, from setting up the defense of usury. This was on the ground that the notes and guaranties were

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simply securities for one transaction, the loan for which they were given. The act was held “to have effected a repeal of the usury laws as to the borrowing contracts of corporations; ” (p. 669) “no corporation shall ever allege usury to defeat its contracts.'’’’ p. 670.

In Belmont Branch Bank v. Hoge, 35 if. T. 65, the language of the court is : “The act of 1850 operated pro tanto as a repeal of the statutes prohibiting usury, so far as they were applicable to stipulations for a rate of interest exceeding seven per cent., where a corporation is the borrower.” p. 69.

(2.) In the case at bar, the plaintiffs were not parties to the original contract, neither to the loan of money, nor the pledge of securities. The borrower was Oakley, a natural person, and as to him the pledge was void; any creditor of his, with judgment and execution, could buy in the property, and contest the defendant’s lien. (Dix v. Van Wyck, 2 Hill, 522 ); but, according to the construction adopted by the court below, a corporation could not have this remedy, simply because of being a corporation. It could assign its claim, and have some one else receive the judgment, and thus could contest the usurious loan, but not in its own name. Such a construction, it is submitted, cannot be sustained.

(3.) The act of 1850 permits corporations to pay usurious interest, and prohibits them, and all in privity with them, from setting up the invalidity of the loans ; but it does not permit corporations to exact usurious interest, nor deprive them of the right that other creditors or purchasers have to impeach the transactions of their debtors.

This is an appeal from a judgment at special term in favor of the defendants, upon their demurer to the complaint, on the

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ground that it did not contain sufficient facts to constitute a cause of action.

The complaint alleges that each of the parties is a corporation; that in December, 1869, one Cornelius Oakley was the owner of two hundred and four hogsheads of tobacco, which were in the possession, or under the control of the defendants; that such owner sold the same to Edward J. Oakley, and- the latter, on the same day, sold and assigned the property to the plaintiffs ; that, in January, 1870, they requested the defendants to deliver the tobacco to them, and at the same time, offered to pay all the legitimate charges which the defendants had incurred in the way of storage. cartage, insurance, &c., and that the latter refused to surrender the same; and the plaintiffs claim a judgment against the defendants, “as for a wrongful conversion of the said tobacco, and damages to the amount of one hundred thousand dollars, and costs.”

Thus far stated, the complaint contains all the facts necessary, under our present system of pleading, to constitute what was in former times known as an action of trover and conversion, and those facts, if established, would have been sufficient to entitle the plaintiffs to a recovery.

The complaint, however, further alleges, that, prior to the sale by Cornelius Oakley, the original owner, and in February,1868, he placed the tobacco in the hands of the defendants, by a pledge of the warehouse receipts, which had been given to him therefor, as security for a loan of money; that, from time to time, up to the 17th of ¡November, 1869, the defendants loaned and advanced to him, further sums on the pledge of such receipts ; that for such advances, the notes of Oakley were given, payable at sixty days or shorter periods, which were consolidated and renewed from time to time, and that upon such renewals, a charge of one per cent, was made-to Oakley upon the debt, in addition to the legal inter

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est; that on the last named day, the company claimed that there was due to them, on account of those transactions, a balance of $56,733.38, and required Oakley, as a condition of forbearing payment for thirty days, to, and he thereupon did, execute and deliver to them his promissory note for that sum at thirty days, and, also, an instrument in writing, which is set forth in the complaint.

By that instrument, Oakley, after stating by way of recital that he had confided the two hundred and four hogsheads of tobacco to the management, custody, and charge of the defendants, and that they had advanced to him upon it the sum of $56,733.78, for which he had given them his note, stipulated and agreed that for such advance, together with the interest, commissions and charges therein mentioned, the defendants should have a li.en upon the tobacco ; that in case the said advance, with the interest thereon, should not be paid within thirty days, the defendants should be at liberty to sell the property pledged, without notice, and apply the proceeds to the payment of the debt; or, if no sale should be made, the advance should be refunded to them with, interest, and, also, a commission of one per cent, upon the amount of the advance, as a compensation for all management and charge of the property while in their custody, over and above all charges for storage, and all disbursements made by them on account of the same. The complaint further alleges and claims that the defendants never had and were not intended to have any care or actual custody of the property, and that those dealings between the* pledgor and them, as well as the said note 'and agreement, were usurious and contrary to the provisions of the Revised Statutes in relation to usury.

If the plaintiffs’ pleader had contented himself with stating in the complaint such facts only, as were necessary to constitute a cause of action in replevin or for con*

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version, the defendants would have found it necessary to set forth, in their answer, the fact that the property in question had been placed in their hands by Oakley, and was held by them as a pledge for the payment of the moneys advanced by them ; in which case, the plaintiffs, if they had desired to avail themselves of the statute of usury, would have been compelled to def end themselves against that claim of the defendants, by an averment of the necessary facts in their reply, and by pleading the statute. But the counsel saw fit to insert in his complaint, not only the facts necessary, in the first instance, to entitle his clients to a recovery, but also the claim of the defendants, and the facts upon which it was founded, with the defense of the plaintiffs to that claim. By their own pleading, therefore, the plaintiffs have brought themselves within the very letter of the statute of 1850, which declares that “no corporation shall hereafter interpose the defense of usury in any ■ action.”

The defendants might, probably, have maintained a motion to strike from the complaint all the allegations relating to the transactions between Oakley and themselves, on the ground that those facts did not tend to constitute a cause of action in favor of the plaintiffs. So, too, a motion to strike out the special averment that the dealings and agreements between the defendants and Oakley were contrary to the provisions of the statute of usury, and void, would no doubt have been granted, because of the statutory prohibition against the interposing of a defense of that character by a corporation. Bat I see no necessity for such a course. The statute was, undoubtedly, intended to exclude corporations not only from pleading usury, but from availing themselves of the law in regard to usury in any k manner, as a defense.. The defendants, therefore, might' safely admit, as they did by their demurrer, that their transactions with Oakley were usurious, because, al

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though true in fact, that defense on the part of the plaintiffs to the defendants’ claim was not good in law.

For these reasons, and without discussing here the further questions raised by counsel at the hearing, the judgment below should be affirmed with costs.

Cases cited

Butterworth v. O'Brien 28 Barb. 187 N.Y. Sup. Ct. 1858-09-20 p. 319
Rosa v. Butterfield 33 N. Y. 665 N.Y. p. 319