Opinion
December 14, 1929.
E.M. Green, of New Bern, N.C., for Willis, trustee in bankruptcy.
Duane R. Dills, of New York City, and L.I. Moore, of New Bern, N.C. (Moore Dunn, of New Bern, N.C., and Dills Towsley, of New York City, of counsel), for intervener Commercial Credit Co.
In Bankruptcy. In the matter of Clyde Eby, bankrupt. On exceptions to and appeals from the report of the referee by the trustee and the Commercial Credit Company. Reversed in part, and affirmed in part.
The findings of fact and conclusions of law of the referee follow:
Findings of Fact.
From a consideration of the evidence offered, the referee finds the following facts:
(1) That the petitioner, Commercial Credit Company, is a corporation, created and existing under the laws of the state of Delaware, with its principal office and place of business in Baltimore in the state of Maryland.
(2) That at the date of the adjudication in bankruptcy in this proceeding Clyde Eby was and for several years had been engaged in the business of selling lumber at New Bern in the state of North Carolina.
(3) That on or about the 13th day of March, 1922, negotiations were entered into between the Commercial Credit Company and Clyde Eby looking towards the execution of a certain contract, and that as a result of these negotiations a contract for the sale and purchase of certain book accounts of the said Eby was entered into by the parties on the 14th day of March, 1922. That a copy of the contract so entered into is attached to the petition in this proceeding. That the contract was signed by Eby in New Bern, N.C., but by its terms was not binding until accepted by the company in Baltimore, Md., where it was in fact accepted on the date stated above.
(4) The course of business was as follows: Eby would list the names of the debtors (customers to whom Eby sold lumber), the amounts and dates when owing by the debtors, on a schedule (Exhibit C of petition) hereinafter called "schedules," and at the bottom of the schedules would execute the assignment with respect to the accounts assigned. Eby would mail from New Bern, N.C., to the company at Baltimore, Md., the said schedules together with Eby's invoices to the debtors and the bills of lading for the lumber shipped. The company would investigate the credit ratings of the debtors and determine which of the accounts it would purchase, and then the company would mail from Baltimore, Md., to Eby at New Bern, N.C., its check for 80 per cent. of the amount of the accounts so purchased or selected. Eby always noted in his books of account by rubber stamp that the accounts had been sold or transferred to the company, and this notation is found on the bankrupt's book now in possession of the trustee. Eby, under the terms of the contract was permitted and did in fact collect from the debtors the accounts assigned, but this right in Eby to so collect could be terminated at any time by the company. As Eby made collections, he would mail to the company at Baltimore, the payments received from the debtors in their original form, whether checks, money orders, or other forms of payment. When Eby made collections and sent them forward to the company, the original report of collections and one copy, and an original report of remittances (Exhibits D and E in petition) were sent to the company. The company would then deposit the payments to its own account and then mail to Eby a check for the remaining 20 per cent. less any charges and adjustments. The terms of the original contract as to advances, etc., was thereafter changed to the terms stated above.
(5) Since the adjudication in bankruptcy and Eby's trustee has qualified, certain collections on these accounts have been made by the trustee in the sum of $_____, and this fund is kept separate from the other assets of this case, pending the determination of petitioner's rights in the premises.
(6) The company prays that the trustee be ordered to pay this sum over to it, and hold all other accounts for its use, but makes no tender of payment into court of the remaining 20 per cent. due on such accounts.
Conclusions of Law.
Upon the above findings of fact the referee concludes that the important matter for determination is whether the claim of the petitioner is tainted with usury and if so what the rights of offset or counterclaim in the nature of penalties are which the trustee may assert.
In the outset the petitioner asserts that the trustee's answer is insufficient in allegations to support the plea of usury. A reading of the answer, however, in light of the allegations of the petition and the attached written instruments which form the entire basis of the petitioner's rights in the premises, disclosed, in the referee's opinion, that the allegations are sufficient to raise the defense and support the claim of usurious charges.
Whatever may be the rule in other jurisdictions, it is well established that in North Carolina the right to plead usury is one which passes to the trustee in bankruptcy. Ripple v. Mortgage Co., 193 N.C. 422, 137 S.E. 156.
The petitioner further contends that the transaction between it and Eby was a sale and purchase of accounts and not a loan, and therefore there can be no usury. It is certain that, unless it is in effect a loan, there can be no claim of usury.
"Usury is taking an illegal profit for the use of money." MacRackan v. Bank, 164 N.C. 24, 80 S.E. 184, 49 L.R.A. (N.S.) 1043, Ann. Cas. 1915D, 105. "Usury is taking more than the law allows upon a loan or forbearance of a debt." Harmon v. Lehman, 85 Ala. 379, 5 So. 197, 2 L.R.A. 589; 27 R.C.L. 203.
It is obvious from the terms of the contract that the transaction as between the petitioner and Eby was in effect a loan, with the assignment of the accounts by way of collateral, rather than a sale. In the fifth paragraph of the "Covering Contract" Eby was required to warrant that the debtors were solvent and would remain solvent; that the accounts would be paid in full. The care of the petitioner in requiring Eby to make warranties not only as to condition then existing but as to a continuance of the debtor's financial ability evinces a clear purpose to look to Eby for payment, and the warranty that they will be paid amounts to a guaranty of payment. It is not the incidental liability assumed by the indorser who in ordinary practice indorses a negotiable instrument for the purpose of transfer of title.
"Open accounts may be the subject of sale at any rates agreed on by the parties without becoming subject to the taint of usury if the transaction is made in good faith and not as a cover for a loan. In the latter event, of course, usury attaches." Dorothy v. Commonwealth Commercial Co., 278 Ill. 829, 116 N.E. 143, L.R.A. 1917E, 1110 and note.
In our system of a dual sovereignty, the courts of the federal government always respect the decisions of state courts within the same territorial jurisdictions, unless to do so violates some positive law or decision of the forum. Unless such comity prevailed, we would have the anomalous situation of a citizen's rights being dependent upon the chance of which forum he was called into to assert or defend his legal rights. In considering the effect of the contract as well as the willingness of the court to enforce a contract which would offend the usury laws of North Carolina, the referee follows the court outlined above of deciding this matter as if the law of the forum was the same as the law of the state tribunal. The citizen should be allowed the same substantive rights when he is forced to assert them in federal courts as he would have in the courts of his state, especially where that state includes the referee's district.
Under the decisions of the Supreme Court of North Carolina, the highest state court in the territorial extent of this district, the transaction between the petitioner and Eby was in effect a loan.
In the opinion in the case of Sedbury v. Duffy, 158 N.C. 432, 74 S.E. 355, written by Mr. Justice Hoke, we find the rule stated as follows: "It has been repeatedly held in this state that while one may buy a note from another, at any price that may be agreed upon, the bargain being free from fraud or unlawful imposition, if the purchaser requires the indorsement of the seller as a guaranty of payment, the transaction, as between the immediate parties thereto, is in effect a loan and will be so considered, within the meaning and purport of our laws against usury." To the same effect is the case of National Bank of Gloversville v. Johnson, 104 U.S. 271, 26 L. Ed. 742.
The form of the contract is immaterial where the real purpose is to disguise a loan so as to avoid laws against usury. The court will strip it of its flimsy disguises and decide according to its substance, and its tendency and effect, when the purpose and intent of the lender is unmistakable. Bank v. Wysong, 177 N.C. 380, 99 S.E. 199, 12 A.L.R. 1412; Lumber Company v. Trust Company, 179 N.C. 211, 102 S.E. 205; Ripple v. Mortgage Co., 193 N.C. 422, 137 S.E. 156.
The referee concludes that the transaction as between petitioner and Eby was in effect a loan.
Without attempting to compute with exactness the rate of interest charged by the petitioner, it is sufficient to observe for our purposes that the rate is in excess of 6 per cent. per annum, permitted under the laws of North Carolina.
The petitioner relies upon the position that, even if the transaction be deemed a loan, it is not usurious for that the contract is to be construed either as a Delaware or Maryland contract. It appears that neither of these states fix any maximum interest rate which would apply to the facts in this case, nor allow any defense or counterclaim based upon the fixation of a rate by contract on excess of any specified sum. This position makes it necessary that we determine whether or not the contract is to be construed, or its validity determined under the laws of North Carolina. If it is, the transaction is usurious, and the trustee would be entitled to assert the defenses and insist upon the penalties provided in the North Carolina statutes against the imposition of an interest rate in excess of six per centum per annum. Consolidated Statutes of North Carolina, §§ 2305 and 2306.
This question must be answered in the negative. The last act necessary to create the obligation was enacted at Baltimore, in the state of Maryland; the loans made were by the terms of the contract and were in fact made in that state; all payments to petitioner were made in that state, usually in the same form as they were received by Eby, for purposes of convenience. If there was no provision in the contract purporting to show an intent of the parties to make the laws of Delaware applicable, there would be no hesitance in holding that the present contract is a Maryland contract. All the usual earmarks which are relied upon by the courts in reaching a decision are present to support the conclusion that it is a Maryland contract, except the one test of the intent of the parties as expressed in the contract provision that the laws of Delaware, the state of petitioner's incorporation, should prevail. 5 R.C.L. 931 et seq., Gist v. Western Union Tel. Co., 45 S.C. 344, 23 S.E. 143, 55 Am. St. Rep. 774; 99 Am. Dec. 668; Copeland v. Collins, 122 N.C. 619, 30 S.E. 315; Davis v. Coleman, 33 N.C. 303; Houston v. Potts, 64 N.C. 33. The case of Ripple v. Mortgage Company, 193 N.C. 422, 137 S.E. 156, relied upon by the trustee, is not controlling, as the findings of the jury in that case clearly found that such acts were done in this state as would operate to make it a contract of this state.
If the intent of the parties as expressed in the contract provision is to govern, then it would be a Delaware contract.
"The parties may readily adopt any law as that of the contract and if the adoption is bona fide and devoid of fraud, the entire transaction will be governed by such law in accordance with the intent of the parties, regardless of where the contract is actually made." 5 R.C.L. 940; 19 Ann. Cas. 35; Blackwell v. Mutual, etc., Life Ass'n, 141 N.C. 117, 53 S.E. 833, 5 L.R.A. (N.S.) 771, 115 Am. St. Rep. 677; Coghlan v. South Carolina R.R. Co., 142 U.S. 101, 12 S. Ct. 150, 35 L. Ed. 951.
It follows from the above that the contract is either one of Maryland or Delaware, and that is valid if made in either state.
The doctrine of comity between states proceeds upon the principle that a contract which is valid where made should be recognized as valid and enforced in all other states and jurisdictions. And this broad rule is followed subject only to the restrictions that it will not be followed when to enforce the contract would violate the positive law of the forum, or violate the public policy, or be contrary to good morals, or where the state or its citizens would be injured through its enforcement, 5 R.C.L. 946. Clearly the contract, even if usurious under the laws of North Carolina, does not violate any positive law for such contracts are not declared void, nor is their enforcement prohibited, but simply upon a plea personal to the debtor and his legal representatives certain penalties and forfeitures arise. It is not contrary to good morals, as it would not be seriously suggested that morals are injured by requiring a party to meet his obligations. No citizen would be injured in a legal sense, but would simply be required to discharge his obligations honestly and fairly undertaken.
Does usury then offend public policy? The answer to this question is found in the concise statement in 5 R.C.L. 981, as follows: "Contracts, valid where made, do not offend the public policy of a forum, even tho they provide for a rate of interest which would be usurious with penalizing consequences, even to the extent of forfeiture of principal and interest as to such a contract, if made in state of the forum." Also, see U.S. Savings Loan Co. v. Beckley, 137 Ala. 119, 33 So. 934, 62 L.R.A. 33, 97 Am. St. Rep. 19.
That this is likewise the rule in North Carolina appears from the following decisions: McQueen v. Burns, 8 N.C. 476; Davis v. Coleman, 33 N.C. 303; Houston v. Potts, 64 N.C. 33.
It thus appears that a contract valid where made will be enforced in North Carolina, even though it would be usurious if made in North Carolina.
To summarize:
(1) The transaction between petitioner and Eby was in effect a loan.
(2) The contract is to be interpreted by recourse either to the laws of Maryland or the laws of Delaware and its validity determined thereby.
(3) The contract is valid and enforceable under the laws of either state.
(4) Under the doctrine of comity, the contract should be enforced in this state and in this branch of the federal courts as valid in its entirety, subject to the conclusion that, notwithstanding its form, it is in effect a loan.
(5) The petitioner is entitled to file its claim in this court for all sums advanced Eby under the contract, as a secured claim to the extent of the moneys already collected by the trustee on the assigned accounts, and to the extent of the value of all such uncollected accounts so assigned, and as an unsecured claim as to any balance then remaining unpaid.
(6) The oral motion of the trustee to be authorized to institute an action in the courts of North Carolina against the petitioner, on account of the things here in controversy, is denied.
This cause coming on to be heard before the undersigned United States District Judge, at chambers, in Raleigh, upon the exceptions of the trustee in bankruptcy to the report of the referee, and the appeal therefrom to this court, and upon the exceptions of the petitioner, Commercial Credit Company, to the report of the referee and the appeal from his findings thereon, both appeals being heard at the same time; the court being of the opinion that the findings of the referee and his conclusions of law thereon on the evidence in this case, that the transactions between the Commercial Credit Company and Clyde Eby, bankrupt, on the contract and the exhibits introduced in evidence, was a loan and not a purchase of the accounts is in error — the court upon this question and upon the appeal of the petitioner, Commercial Credit Company, reverses this finding of fact and conclusion of law of the referee, the court being of the opinion that the transaction was a sale by Clyde Eby and purchase of the accounts by the Commercial Credit Company under the evidence and exhibits offered, and is of the opinion that said referee's finding and conclusion of law on this question was in error and the same was not sustained by decisions of this court in the case of Nichols v. Fearson, 7 Pet. (32 U.S.) 103, 8 L. Ed. 623, and Chase Baker Company v. National Trust Credit Company (D.C.) 215 F. 633.
It is further ordered, considered, and adjudged by the court that upon the appeal of the trustee from the decisions of the referee, holding that the contract and agreement in this case was a Maryland contract, it is considered, ordered, and adjudged by the court that the decision of the aforesaid referee in bankruptcy upon this point is sustained and affirmed.
It is thereupon considered, ordered, and adjudged by the court that the trustee in bankruptcy in this cause be, and he is hereby, directed to pay over to the Commercial Credit Company all sums and amounts collected by him or for him upon the accounts which were sold and transferred by the bankrupt to the Commercial Credit Company, and the trustee in bankruptcy will ascertain the amount of such accounts so collected, and pay over the proceeds thereof as herein directed. Except as herein reversed, the judgment of the referee in bankruptcy is affirmed.