Summary
In Santoro v. Osman, 149 Conn. 9, 174 A.2d 800 (1961), the defendant corporation alleged plaintiff's usury in defense to an action on a promissory note. Though the corporation could have raised such a defense under Connecticut law, New York made usury a defense available only to natural persons.
Summary of this case from Solevo v. Aldens, Inc.Opinion
If a note is valid under the law of the state where it is executed and payable, the fact that it carries a rate of interest which would be usurious had the instrument been executed and payable in Connecticut does not invalidate it. Such a note does not contravene an ancient and deep-rooted public policy of this state. The note in suit, payable in New York and executed there by the named defendant as accommodation maker, was utilized by the payee, a Connecticut corporation, to obtain a loan from the plaintiff, a resident of New York. The face of the note made no mention of interest, but in the endorsement of it to the plaintiff the payee undertook to pay interest at the rate of 2 percent a month. Held: 1. The Connecticut statute ( 37-8) providing that no action may be brought to recover principal or interest on any loan prohibited by our usury laws had no bearing since our usury laws were inapplicable to the transaction. 2. The controlling law was a New York statute prohibiting a corporation from interposing the defense of usury, and that statute operated to make the note collectible from the payee corporation according to its terms. 3. As the interest provision was inapplicable to the maker and was not usurious as to the payee, and as there was no basis for a finding that the parties intended to evade the Connecticut usury laws, the maker could also be held liable.
Argued October 5, 1961
Decided October 31, 1961
Action upon a promissory note, brought to the Court of Common Pleas in Fairfield County, by transfer from the Court of Common Pleas in New Haven County, and tried to the court, Wall, J.; judgment for the defendants and appeal by the plaintiff. Error; judgment directed.
Gerald Kolinsky, for the appellant (plaintiff).
John F. Kearns, with whom, on the brief, was Bernard E. Francis, for the appellees (defendants).
This case, in which recovery from the accommodation maker and the payee-endorser of a promissory note is sought, was tried on the admissions in the pleadings, implemented by a stipulation of facts. No evidence was presented. The only issue was the efficacy of the special defense, which read as follows: "Said instrument on its face reflects [that] a usurious rate of interest was charged and . . . said rate of interest is against public policy in the State of Connecticut, as well as in violation of the criminal statutes of this State."
The court made a finding which contains a few subordinate facts which were not included in the pleadings or stipulation. Such of these as were not attacked we have treated as additions to the agreed facts.
On March 30, 1956, the defendant Harris Osman executed a promissory note in the amount of $5000, payable to the order of the defendant Traffic Associates, Inc., one year after date, at The County Trust Company in Mount Vernon, New York. The face of the note made no mention of interest. On its reverse side, the note was endorsed by the defendant corporate payee to the order of the plaintiff "with interest at 2% per month." Following the typewritten name of the defendant corporation was the handwritten signature "Richard M. McDonnell," with "Pres.," in typewriting after it. Beneath appeared the typewritten word "Approved:" followed by the handwritten signature "Harris Osman." In return for the note, the plaintiff gave a check for $5000 to the defendant corporation, which deposited the check in a bank account which it then had in the Mount Vernon office of The County Trust Company. All of this took place on the day the note was executed.
The defendant corporation was at all times a Connecticut corporation with its principal office in Orange, Connecticut. The residence of Osman on the date of the transaction does not appear, but on July 2, 1958 (apparently the day after the return day of the action), he was a resident of Orange, Connecticut. The plaintiff on the date of execution was, and still is, a resident of Mount Vernon, New York.
The parties stipulated that subsection (1) of 374 of the New York General Business Law provides: "No corporation shall . . . interpose the defense of usury in any action. . . ." The note in suit was executed in the state of New York and was payable there. Therefore, under our own rule, the law of New York governs its validity as far as usury is concerned. This was early established in Rose v. Phillips, 33 Conn. 570, 576, a decision which was foreshadowed in Nichols v. Cosset, 1 Root 294, 295; in Philadelphia Loan Co. v. Towner, 13 Conn. 249, 257; and in Beadle v. Munson, 30 Conn. 175, 178. The modern general rule is even more liberal, in that the validity of a note, as far as usury is concerned, depends upon the law of the place where it is payable. 6 Corbin, Contracts, p. 959, citing, inter alia, Seeman v. Philadelphia Warehouse Co., 274 U.S. 403, 407, 47 S.Ct. 626, 71 L.Ed. 1123. Under either rule, the law of New York governs the legality of the interest rate in the present instance, and it provides that usury is not a defense available to a corporation. Therefore, the note is collectible against the corporate defendant according to its terms. There is nothing in Ciampittiello v. Campitello, 134 Conn. 51, 54 A.2d 669, in which we refused to enforce a gambling contract legally entered into in Rhode Island, or in Catalano v. Catalano, 148 Conn. 288, 170 A.2d 726, in which we refused to recognize a marriage legally entered into in Italy but incestuous under our law, which in any way strengthens the defendants' position. On both authority and principle, it is unsound to claim that a note, valid where it was executed and was payable, but carrying a rate of interest which would be usurious had the note been executed and payable in Connecticut, "contravenes the ancient and deep-rooted public policy of this state." See Ciampittiello v. Campitello, supra, 56. Such a claim would be directly opposed to our holding in Rose v. Phillips, supra, as well as to the settled law in other jurisdictions. The mere fact that a type of conduct is prohibited in Connecticut by a statute carrying a substantial criminal penalty (see General Statutes 37-7) does not establish that such conduct is contrary to a "deep-rooted public policy" in this state.
Section 37-8 of the General Statutes provides that "[n]o action shall be brought to recover principal or interest, or any part thereof, on any loan prohibited by . . . [our usury statutes] or upon any cause arising from the negotiation of such loan." Clearly, this statute has no bearing on the present case, since the loan was not "prohibited by" any of our usury statutes. Our usury statutes were inapplicable to it.
It is obvious that the peculiar form which the transaction took was for the purpose of obtaining a rate of interest from the corporate defendant which, under New York law, would be usurious as applied to the individual defendant, the maker. But there is no justification in the facts for the court's conclusion that there was an intent by the parties to the note to evade the usury laws of Connecticut. Unless the settled law was to be overturned, there was no need for any such intent, since our usury laws were inapplicable to the transaction.
There is no claim, of course, that the terms of the note purported to call for usurious interest from the maker. As to him, the interest provision was inapplicable. Under our law, an accommodation maker can utilize usury as a defense in a suit on an ordinary note. General Statutes 37-8; Finance Discount Corporation v. Hurwitz, 138 Conn. 636, 640, 88 A.2d 385; Whalley Motors, Inc. v. Kesselman, 145 Conn. 342, 346, 143 A.2d 158. Whether this rule would apply to a case where, as here, the interest rate clearly applied to the payee-endorser only, we need not determine, since the rate was not usurious. It follows that the accommodation maker's liability is clearly enforceable. The parties have stipulated that if the plaintiff is entitled to judgment against the maker, the judgment should include 6 percent interest on the note from the date of its execution. The court was in error in rendering judgment for either of the defendants.
In view of the stipulation, we have no occasion to determine whether, in the absence of any provision calling for any interest, the maker would be liable for interest, eo nomine, prior to maturity. See cases such as Perry v. Cohen, 126 Conn. 457, 460, 11 A.2d 804, indicating, although not deciding, that only where "with interest" or some similar phrase is used will interest, as such, be allowed prior to maturity under General Statutes 37-1. Under 37-3, after maturity, interest at 6 percent is allowable, not as interest, but "as damages for the detention of money after it becomes payable."