O'Brien v. Shearson Hayden Stone, Inc., 44663

• Decision Date: 24 January 1980
• Docket Number: No. 44663,44663
• Parties: Joseph E. O'BRIEN and Joyce B. O'Brien, on behalf of themselves and all other persons having similar claims, Appellants, v. SHEARSON HAYDEN STONE, INC., a Delaware Corporation, Respondent.
• Court: Washington Supreme Court

Page 51

93 Wn.2d 51

605 P.2d 779

Joseph E. O'BRIEN and Joyce B. O'Brien, on behalf of

themselves and all other persons having similar

claims, Appellants, v. SHEARSON HAYDEN STONE, INC., a Delaware Corporation, Respondent.

No. 44663.

Supreme Court of Washington, En Banc.

Jan. 24, 1980.

Karr, Tuttle, Koch, Campbell, Mawer & Morrow, Terence P. Lukens, Seattle, for appellants.

Schweppe, Doolittle, Krug, Tausend & Breezer, Fredric Tausend, Rex B. Stratton, Seattle, for respondent.

DOLLIVER, Justice.

The first opinion in this case was filed on October 19, 1978, and can be found in 90 Wash.2d 680, 586 P.2d 830 (1978). We adhere to that opinion, but add the following comments:

The heart of the analysis of the defendant is that the Restatement (Second) Conflict of Laws § 203, comments A and B (1971) must be read harmoniously. This has been done.

Comment A to section 203 requires the rate of interest to be stipulated in the contract:

The rule of this Section applies only when (1) the interest rate Stipulated in the contract is permitted in a state which has a substantial relationship to the transaction and the parties and (2) is not greatly in excess of the rate permitted by the general usury statute of the state of the otherwise applicable law. Application of the rule is not prevented by the fact that the state with the saving law authorizes a rate of interest greatly in excess of that permitted by the state of the otherwise applicable law. The rule is applicable in such a situation provided that the rate of interest Stipulated in the contract is not greatly in excess of the rate permitted by the general usury law of the state of the otherwise applicable law.

(Italics ours.)

Under the circumstances envisioned in comment A, the fact that New York authorizes up to 25 percent interest is immaterial if the rate of interest stipulated or provided for in the contract is not greatly in excess of that permitted by the laws of Washington, I. e., 12 percent. Thus, even though the contract was governed by New York law, if it had a provision/stipulation that 13 or 14 percent would be the highest rate permitted, the contract would be valid. See comment B. This was not done. No actual rate was stipulated or provided for in the margin account contracts. Rather, the rate of interest was open-ended, and it was permissible that it be as high as 25 percent, the maximum rate of interest in New York. The contract cannot be sustained against a charge of usury under Washington law.

Again, we hold (1) the summary judgment of the trial court as to the applicable law is reversed; (2) the judgment of the trial court as to the method of computing interest is affirmed; (3) the case is remanded to the Superior Court to divide the certified class into subclasses which will allow proper treatment under the conflict of laws analysis contained in the opinion filed in this case on October 19, 1978, and herein.

ROSELLINI, WRIGHT, HICKS and WILLIAMS, JJ., concur.

HOROWITZ, Justice (concurring in part and dissenting in part).

The majority agrees the state of New York has a substantial relationship to the securities margin contract between the defendant stockbroker and this plaintiff, as well as similar contracts between the defendant and Washington residents. Accordingly, under Restatement (Second) Conflict of Laws § 203 (1971), relied upon by the majority as a correct expression of the rule determining whether a usurious rate has been charged, the relationship between New York's usury law and Washington's usury law must be considered.

Prior to the American Law Institute's adoption of § 203, this court long ago adopted the rule that "the parties to a contract may make the same with reference to the laws of any state or country and have their contractual rights governed thereby, provided only that such laws have a real and not a mere fictitious connection with the subject matter of the transaction." Crawford v. Seattle, Renton & S. Ry. Co., 86 Wash. 628, 635, 150 P. 1155, 1157 (1915). Since the majority holds that the state of New York has a substantial relationship to the securities margin contract, the New York law would govern under the rule just quoted if the rate of interest charged were lawful under New York law.

Restatement (Second) Conflict of Laws § 203 (1971), however, adds a further requirement, namely, that the rate of interest permissible in the state to which the contract has a substantial relationship must be one "not greatly in excess of the rate permitted by the general usury law of the state of the otherwise applicable law under the rule of § 188" (in this case, Washington).

In explaining the rationale of § 203, § 203(b) states:

A prime objective of both choice of law . . . and of contract law is to protect the justified expectations of the parties. Subject only to rare exceptions, the parties will expect on entering a contract that the provisions of the contract will be binding upon them . . . . Usury is a field where this policy of validation is particularly apparent.

. . . Upholding a contract against the charge of usury by the application of the local law of one state, which has a substantial relationship to the transaction and the parties, can hardly affect adversely the interests of another state when the stipulated interest is only a few percentage points higher than would be permitted by the local law of the other state. Under these circumstances, the courts deem it more important to sustain the validity of a contract, and thus to protect the expectations of the parties, than to apply the usury law of any particular state. ¹

When we look to New York law on the question of permissible rates of interest we find that the legal rate is prescribed by the banking board at not less than 5 percent nor more than 8.5 percent per annum. If no rate is prescribed it is 6 percent per annum. General Obligations Law § 5-501(1); Banking Code § 14-a; 7 Martindale-Hubbel Law Directory at 1765 (1978). In the case of a securities margin contract for the purchase of stock, however, when the unpaid balance of the loan is payable on demand, a different section of the General Obligations Law applies, namely § 5-525. It provides that the applicable rate of interest may not exceed 25 percent per annum. A sharp distinction is thus made between ordinary contracts involving loans of money and securities margin contracts. For the latter, any rate Up to a maximum of 25 percent per annum is lawful.

The question that presents itself is therefore whether the words "permissible in the state to which the contract has a substantial relationship" as contained in § 203 refer only to the maximum permissible rate even if that rate has not been charged rather than to the actual (also permissible) rate charged to and paid by the purchaser under the securities margin contract.

Comment a to section 203 makes it clear that the drafters of the Restatement intended that the actual rate charged should be considered in assessing the validity of the parties' interest choice of law provision. Comment a states that "(a)pplication of the rule is not prevented by the fact that the state with the saving law authorizes a rate of interest greatly in excess of that permitted by the state of the otherwise applicable law . . . provided that the rate of interest stipulated in the contract is not greatly in excess of the rate permitted by the general usury law of the state of the otherwise applicable law."

Additionally, comment b to section 203 states that upholding a contract is justified "when the stipulated interest is only a few percentage points higher than would be permitted by the local law . . ." This comment assumes that the actual rate charged is considered in determining the validity of the parties' choice of law.

In an attempt to limit the interpretation that must be drawn from the language of comment a and comment b, the majority argues that the rate of interest charged in this case, derived from a formula set out in the contract, is not adequately "stipulated" in the parties' agreement. The commentary to the Restatement is intended to explain, not modify, its provisions. The verbs therefore must be considered synonyms; "stipulate" cannot be interpreted more restrictively than "provide," the language of § 203. To limit the application of the word "stipulate" to contracts in which the interest rate...