All Purpose Finance Corp. v. D'Andrea

• Decision Date: 14 November 1967
• Parties: ALL PURPOSE FINANCE CORP. v. Nicholas D'ANDREA and Hannah E. D'Andrea, Appellants.
• Court: Pennsylvania Supreme Court

Page 808

235 A.2d 808

427 Pa. 341

ALL PURPOSE FINANCE CORP. v. Nicholas D'ANDREA and Hannah E. D'Andrea, Appellants.

Supreme Court of Pennsylvania.

Nov. 14, 1967.

[427 Pa. 342] Malvin L. Skaroff, Philadelphia, for appellants.

Marvin Allanoff, Philadelphia, for appellee.

Before BELL, C.J., and MUSMANNO, JONES, COHEN, EAGEN, O'BRIEN and ROBERTS, JJ.

OPINION OF THE COURT

O'BRIEN, Justice.

On April 25, 1965, appellee caused judgments to be entered against appellants by confession, on a note executed by them. Appellants thereafter filed a petition to open the judgment, alleging that the loan was usurious, and that $3,500 was paid to appellee on account of the obligation, for which credit was not received. A hearing on the petition and rule was held on March 15, 1966, and on May 16, 1966, the court signed an order discharging the rule. This appeal followed.

Appellants executed this judgment note pursuant to a loan agreement between appelle and Jay-Bee Plumbing and Heating Company, a New Jersey Corporation, under the terms of which Jay-Bee was the borrower and appellants, as well as other parties, became liable as surety for the loan. The court below found as follows: 'The record discloses, according to Mr. D'Andrea, one of the defendants, that the Jay-Bee Plumbing and Heating Company, Inc., (hereinafter referred to as Jay-Bee), was in financial need and that it was unable to substantiate, based on its own assets, a loan in the amount required. Negotiations were then conducted initially through one Mr. Howard Lipkin who in turn introduced the defendants and others interested in Jay-Bee to plaintiff. Certain properties belonging to the defendants, inter alia, were to be pledged as security for the loan, some in Pennsylvania and some in New Jersey. Mr. D'Andrea owned one share of stock in Jay-Bee and the balance of stock in Jay-Bee (20 shares total) was owned by a Mr. LaSassa and his wife. At the time of the transaction, Jay-Bee had approximately fifteen jobs, of varying size, running in Pennsylvania and New Jersey; the loan was required, according to Mr. D'Andrea, because the 'company needed the money.' In addition, the record discloses, according to Mr. D'Andrea, that the money borrowed was actually used by Jay-Bee.

'On or about May 1, 1964, a check was issued to Jay-Bee by plaintiff in the amount of $24,400., same being negotiated by Jay-Bee. On the same date, a written agreement was entered into between plaintiff, Jay-Bee, the defendants and Mr. and Mrs. LaSassa. In this agreement, the defendants and the other individual signatories were designated as sureties for a $25,000.00 loan to be made to Jay-Bee, payable within one year, with interest at the rate of 2% Per month; the loan was to be repaid in eleven $500.00 installments and a final installment of $25,500.00, a total of $31,000.00. The agreement further provided for an optional method of repayment which is not material to the issues presented in the instant case. In addition, the corporate resolution of Jay-Bee was introduced into evidence approving and authorizing, inter alia, the execution of judgment notes relative to this loan in accordance with the aforesaid agreement.'

In reviewing the record, we reach the same conclusion as the court below that the loan was usurious. However, we further agree with the court below in its conclusion that this loan was made to Jay-Bee, a New Jersey corporation, for its business purposes, and therefore reach the same issue as was before the trial court; that is: 'May individual sureties to a usurious loan made to a corporation raise the defense of usury where the corporation itself is precluded from raising the defense of usury?' We agree with the court below that this question must be resolved adversely to the appellants.

The Business Corporation Law, Act of May 5, 1933, P.L. 364, Art. III, § 313, 15 P.S. § 2852--313, provides as follows: 'No business corporation shall plead or set up usury, or the taking of more than six per cent interest, as a defense to any action brought against it to recover damages on, or to enforce payment of, or to enforce any other remedy on, any mortgage, bond, note, or other obligation executed or effected by the corporation.' With this Act in mind, it is clear that Jay-Bee could not itself raise the defense of usury. An issue involving usury was before the Superior Court in the case of Walnut Discount Co. v. Weiss, 205 Pa.Super. 161, 208 A.2d 26 (1965), where the late Judge Flood, speaking for a unanimous court, reviewed in great detail pertinent matter that is before us. He stated: 'The court below found as facts that the appellees were actually the principal obligors and Department Store Sales, Inc., the new corporation, was merely an accommodation maker or surety, that the corporate device was used by the loan company in an attempt to take advantage of § 313 of the Business Corporation Law of May 5, 1933, P.L. 364, Art. III, 15 P.S. § 2852--313, to avoid the defence of usury, but that the appellees, as individuals, were not prevented by § 313 from asserting the defence of usury. The court consequently held, under the Usury Act of May 28, 1858, P.L. 622, § 2, 41 P.S. § 4, that all amounts paid in excess of 6% Simple interest should be credited on the principal sum of $2900 and opened the judgment in order that the amount, if any, remaining due might be determined.

'We have been referred to no case in our appellate courts determining the effect of § 313 of the Business Corporation Law upon the obligation of individual endorsers of a corporate obligation bearing usurious interest. An early Pennsylvania case, considering a similar New York statute, held that a corporate obligation carrying usurious interest was valid as to the corporation but that the individual accommodation endorsers could successfully raise the defence of usury. Bock v. Lauman, 24 Pa. 435 (1855). On the other hand, the New York Court of Appeals, construing its own statute, (footnote omitted) has held that the individual guarantors of a corporate obligation are precluded from interposing the defence of usury. General Phoenix Corp. v. Cabot, 300 N.Y. 87, 89 N.E.2d 238 (1949). The weight of authority is in accord with the New York view. General Motors Acceptance Corp. v. Larson, 110 N.J.Eq. 305, 159 A. 819 (1932); Pardee v. Fetter, 345 Mich. 548, 77 N.W.2d 124 (1956); Dahmes v. Industrial Credit Co., 261 Minn. 26, 110 N.W.2d 484 (1961); 63 A.L.R.2d 924, 950, § 12.

'Where, however, the obligation is really that of an individual, and the form of a corporate obligation is used only in an attempt to evade the usury laws, there is a split of authority. It is held in some jurisdictions that the individual may successfully raise the defence of usury in such a case, even though he appears on the face of the documents to be an endorser or guarantor of a corporate obligation. (citing cases).

'On the other hand, some courts have held that the parties were free to frame their transactions so as to take advantage of the corporate exemption from the usury laws, even though the loan was in reality made to individuals, and if a corporation actually executed the contract with the individuals as guarantors, the usury defence was precluded, in the absence of fraud. (citing cases).'

In Raby v. Commercial Banking Corp., 208 Pa.Super. 52, 220 A.2d 659 (1966), the Superior Court had before it a case where the question was whether an individual who co-signs a note with a corporation for a loan can recover alleged usurious interest paid by the individual to a lending institution. In that case, the Superior Court properly found that the aforementioned § 313 of the Business Corporation Law 'bars a corporation from claiming usury, either as a 'shield' to defend an action to recover allegedly usurious interest or as a 'sword' to recover money already paid and alleged to be usurious. Pink Lady, Inc. v. William Penn Loan Co., 189 Pa.Super. 187, 150 A.2d 154 (1959).'

Again that court agreed with the reasoning of Walnut Discount Co., supra, that the Business Corporation Law 'precludes the defense of usury only in the case of a bona fide corporate loan and not in the case of a loan to an individual who is the real debtor, even though he appears on the face of the document to be a guarantor of a corporate obligation.' The situation in Raby, as in the instant case, however, involves a true corporate obligation. The Superior Court properly decided in that case that: '* * * individual accommodation parties and guarantors of a true corporate obligation are precluded from interposing the defense of usury.' As was said by the Superior Court in Raby, and which is applicable in the instant case: 'An individual who signs a note as an accommodation party to a corporation so that corporation can obtain a loan is entitled to no more protection than the corporate borrower whom he accommodates. He binds himself to perform in accordance with the obligation of his principal, the corporation, which in such cases is the borrower. Since the borrower cannot assert the defense of usury, the accommodation party cannot.'

Order affirmed.

MUSMANNO, J., took no part in the consideration or decision of this case.

ROBERTS, J., filed a dissenting opinion.

DISSENTING OPINION

ROBERTS, Justice.

'May individual sureties to a usurious loan made to a corporation raise the defense of usury where the corporation itself is precluded from raising the defense of usury?' As the majority views this case, that is the issue confronting the Court today. I, too, would so style the issue were it not for the fact that I strongly believe the time has come to eliminate the distinction between primary obligors and accommodation parties for purposes of determining which individuals may raise the defense of usury. As I view the statutes prohibiting the charging of interest in excess of six per cent, except to corporations, No individual, whatever may be the hat he wears, can be...