Citizens Nat. Bank of Orange, Va. v. Waugh

• Decision Date: 03 June 1935
• Docket Number: No. 3854.,3854.
• Citation: 78 F.2d 325
• Court: U.S. Court of Appeals — Fourth Circuit
• Parties: CITIZENS NAT. BANK OF ORANGE, VA., et al. v. WAUGH.

78 F.2d 325 (1935)

CITIZENS NAT. BANK OF ORANGE, VA., et al. v. WAUGH.

No. 3854.

Circuit Court of Appeals, Fourth Circuit.

June 3, 1935.

E. H. DeJarnette, Jr., of Orange, Va. (H. E. DeJarnette and John R. Pendleton, both of Princeton, W. Va., on the brief), for appellants.

James S. Kahle and George Richardson, Jr., both of Bluefield, W. Va., for appellee.

Before PARKER, NORTHCOTT, and SOPER, Circuit Judges.

PARKER, Circuit Judge.

This is an appeal from so much of a judgment on certain promissory notes as denies recovery of the 10 per cent. attorney's fee therein provided for. The facts are undisputed. The makers of the notes were residents of West Virginia, and the notes were executed and delivered to a Virginia bank, from which a loan was obtained. While the notes and accompanying deed of trust not here material were executed in West Virginia, the agreement with the bank in accordance with which the loan was obtained was made in Virginia, the notes were made payable at the bank in Virginia, and the loan was closed in Virginia by the bank's accepting the notes there and crediting the makers on its books with the amount of the loan. The notes contained a provision, recognized as valid under the laws of Virginia, for the payment of a 10 per. cent. attorney's fee for collection in case of default. The court below denied recovery on this provision, on the ground that the public policy of West Virginia, as declared by the Supreme Court of Appeals of that state, forbade the enforcement of such provision by the courts. From this judgment the plaintiffs have appealed.

The provision for the payment of an attorney's fee for collection is recognized as valid by the law of Virginia where the contract was made and where it was to be performed. Conway v. American Nat. Bank, 146 Va. 357, 131 S. E. 803; Cox v. Hagan, 125 Va. 656, 100 S. E. 666, 673; Triplett v. Second Nat. Bank, 121 Va. 189, 92 S. E. 897. It is held invalid by the Supreme Court of Appeals of West Virginia on the ground that it may be used as a cloak for usurious interest and is a mere penalty, and hence contrary to the public policy of the state. Raleigh County Bank v. Poteet, 74 W. Va. 511, 82 S. E. 332, L. R. A. 1915B, 928, Ann. Cas. 1917D, 359. And the courts of West Virginia deny enforcement to such a provision, even where the contract containing it is made and to be performed in another state, on the ground that it is at variance with the public policy of the state of the forum. Campen Bros. v. Stewart, 106 W. Va. 247, 145 S. E. 381. This holding is in accord with the decisions of a number of states (see note in Ann. Cas. 1917D, at page 365), although opposed to the reasoning of the Supreme Court of Appeals of Virginia in R. S. Oglesby Co. v. New York Bank, 114 Va. 663, 77 S. E. 468.

If the public policy of the two states with respect to treating contractual provisions of this sort as valid or invalid were embodied in statutory law, there can be little doubt that the law of the state where the contract was made and was to be performed would be applied in determining its validity. Seeman v. Philadelphia Warehouse Co., 274 U. S. 403, 407, 408, 47 S. Ct. 626, 71 L. Ed. 1123; Hartford Accident & Indemnity Co. v. Delta & Pine Land Co., 292 U. S. 143, 54 S. Ct. 634, 636, 78 L. Ed. 1178, 92 A. L. R. 928. As said in the case last cited: "A state may limit or prohibit the making of certain contracts within its own territory (Hooper v. California, 155 U. S. 648, 15 S. Ct. 207, 39 L. Ed. 297; Orient Insurance Co. v. Daggs, 172 U. S. 557, 565, 566, 19 S. Ct. 281, 43 L. Ed. 552; New York Life Ins. Co. v. Cravens, 178 U. S. 389, 398, 399 20 S. Ct. 962, 44 L. Ed. 1116); but it cannot extend the effect of its laws beyond its borders so as to destroy or impair the right of citizens of other states to make a contract not operative within its jurisdiction, and lawful where made (New York Life Ins. Co. v. Head, 234 U. S. 149, 34 S. Ct. 879, 58 L. Ed. 1259; ?tna Life Ins. Co. v. Dunken, 266 U. S. 389, 399, 45 S. Ct. 129, 69 L. Ed. 342). Nor may it in an action based upon such a contract enlarge the obligations of the parties to accord with every local statutory policy solely upon the ground that one of the parties is its own citizen. Home Insurance Co. v. Dick, 281 U. S. 397, 407, 408, 50 S. Ct. 338, 74 L. Ed. 926, 74 A. L. R. 701."

Where a foreign contract is repugnant to good morals or where its enforcement would lead to disturbance and disorganization of the local municipal law, the courts will refuse to enforce it, as contrary to the public policy of the state of the forum. Bond v. Hume, 243 U. S. 15, 21, 37 S. Ct. 366, 61 L. Ed. 565; Parker v. Moore (C. C. A. 4th) 115 F. 799. And they will on like ground refuse to enforce a foreign contract affecting local property rights of persons domiciled within the state where such contract contravenes the settled law of the forum. Union Trust Co. v. Grosman, 245 U. S. 412, 38 S. Ct. 147, 62 L. Ed. 368. But they may not on grounds of public policy deny enforcement to a contract valid under the laws of the state where made in cases where the interest of the forum has but slight connection with the substance of the contract obligations. To quote again from the opinion in Hartford Acc. & Ind. Co. v. Delta & Pine Land Co., supra: "Conceding that ordinarily a state may prohibit performance within its borders even of a contract validly made elsewhere, if the performance would violate its laws (Home Insurance Co. v. Dick, supra, 281 U. S. 397, p. 408, 50 S. Ct. 338, 74 L. Ed. 926, 74 A. L. R. 701), it may not, on grounds of policy, ignore a right which has lawfully vested elsewhere, if, as here, the interest of the forum has but slight connection with the substance of the contract obligations. Here performance at most involved only the casual payment of money in Mississippi. In such a case the question ought to be regarded as a domestic one to be settled by the law of the state where the contract was made. A legislative policy which attempts to draw to the state of the forum control over the obligations of contracts elsewhere validly consummated and to convert them for all purposes into contracts of the forum, regardless of the relative importance of the interests of the forum as contrasted with those created at the place of the contract, conflicts with the guaranties of the Fourteenth Amendment. ?tna Life Ins. Co. v. Dunken, supra; Home Insurance Co. v. Dick, supra. Cases may occur in which enforcement of a contract as made outside a state may be so repugnant to its vital interests as to justify enforcement in a different manner. Compare Bond v. Hume, 243 U. S. 15, 22, 37 S. Ct. 366, 61 L. Ed. 565. But clearly this is not such a case."

If, therefore, there were a conflict between the law of Virginia with respect to the validity of a provision of the character here in question and the statute law of the state of West Virginia, we would enforce the contract in accordance with the agreement of the parties and the Virginia law; for West Virginia clearly has no such interest in the matter as would justify the courts in refusing enforcement on grounds of public policy. Whatever view may be taken of the provision for payment of attorneys' fees, it is not repugnant to good morals, nor does it tend to "disturbance and disorganization of local municipal law."

But there is no statute in West Virginia which would invalidate a provision of this character or forbid its enforcement in the courts. Recovery was denied upon it, because of the holding of the West Virginia courts that such recovery is contrary to the public policy of that state and because the judge below was of opinion that the federal courts are bound to follow the decisions of the courts of the state in such matters. In this we think there was error. The question involved is not a matter of statutory construction but of general law, as to which the federal courts exercise their independent judgment. The declaration of public policy by a court with respect to such a provision is but a decision with respect to the principles of the general commercial law applicable to its validity; and nothing is better settled than that, with respect to such matters, the federal courts exercise an independent judgment and are not bound by the decisions of state tribunals. Swift v. Tyson, 16 Pet. 1, 10 L. Ed. 865; Township of Pine Grove v. Talcott, 19 Wall. 666, 22 L. Ed. 227; Oates v. First National Bank, 100 U. S. 239, 246, 25 L. Ed. 580; Salem Trust Co. v. Manufacturers' Finance Co., 264 U. S. 182, 44 S. Ct. 266, 68 L. Ed. 628, 31 A. L. R. 867; Appleby v. City of New York, 271 U. S. 364, 46 S. Ct. 569, 70 L. Ed. 992; 27 R. C. L. 52. And the rule is not avoided by the declaration of a state court that its decision is grounded in public policy; for it is equally well settled that in matters of general law the federal courts determine such matters of public policy for themselves in deciding whether a contract is contrary thereto. Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., 276 U. S. 518, 48 S. Ct. 404, 407, 72 L. Ed. 681, 57 A. L. R. 426; Hartford Fire Ins. Co. v. Chicago, M. & St. Paul R. Co., 175 U. S. 91, 100, 20 S. Ct. 33, 44 L. Ed. 84; Lake Shore & M. S. R. Co. v. Prentice, 147 U. S. 101, 106, 13 S. Ct. 261, 37 L. Ed. 97; Liverpool & G. W. Steam Co. v. Phenix Ins. Co., 129 U. S. 397, 442, 9 S. Ct. 469, 32 L. Ed. 788; New York Cent. R. Co. v. Lockwood, 17 Wall. 357, 368, 21 L. Ed. 627; Interstate Compress Co. v. Agnew (C. C. A. 8th) 255 F. 508; Mechanics'-American Nat. Bank v. Coleman (C. C. A. 8th) 204 F. 24, 28; Gordon v. Ware Nat. Bank (C. C. A. 8th) 132 F. 444, 67 L. R. A. 550; Sheppey v. Stevens (C. C.) 177 F. 484; Eells v. St. Louis, etc., R. Co. (C. C.) 52 F. 903.

In the recent case of Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., supra, the question involved was the validity of a provision of a contract...