Continental Mortg. Investors v. Sailboat Key, Inc.

• Decision Date: 13 September 1977
• Docket Number: No. 75-1686,75-1686
• Citation: 354 So.2d 67
• Parties: CONTINENTAL MORTGAGE INVESTORS, a Massachusetts Business Trust, Appellant, v. SAILBOAT KEY, INC., a Florida Corporation, Appellee.
• Court: Florida District Court of Appeals

Page 67

354 So.2d 67

CONTINENTAL MORTGAGE INVESTORS, a Massachusetts Business Trust, Appellant, v. SAILBOAT KEY, INC., a Florida Corporation, Appellee.

No. 75-1686.

District Court of Appeal of Florida, Third District.

Sept. 13, 1977.

Rehearing Denied Feb. 10, 1978.

Sibley, Giblin, Levenson & Glaser, Miami, Richard H. M. Swann, Coral Gables, for appellant.

Lapidus & Hollander, Miami, for appellee.

Before HENDRY, C. J., and PEARSON and HAVERFIELD, JJ.

PER CURIAM.

The mortgagee, Continental Mortgage Investors, appeals an adverse judgment of $1,321,924.06 plus costs in favor of the mortgagor, Sailboat Key, Inc., in this foreclosure action based upon a determination that a loan agreement was usurious.

Burton Goldberg, president of Sailboat Key, Inc., entered into negotiations on behalf of Sailboat Key with Continental Advisors for financing the acquisition and development of an island in Biscayne Bay known as Fair Isle. Continental Advisors, which is based in Coral Gables, is the advisor of appellant, Continental Mortgage Investors (hereinafter referred to as CMI), a Massachusetts business trust with offices in Boston. On December 30, 1969 CMI sent a loan commitment letter to Sailboat Key setting out the following terms: (1) a 24-month loan in the principal amount of $3,350,000 bearing interest at 14% Per annum; (2) a 2% Discount on the face amount of the loan to be taken by CMI (i. e., $67,000); (3) as additional consideration, receipt by CMI of 50% Of the stock of the borrower, Sailboat Key, Inc.; (4) the right of first refusal on construction loans; (5) designation of the laws of Massachusetts as governing; (6) a 1% Commitment fee to be paid by borrower upon acceptance of the commitment; however, upon closing the loan within 30 days of the date thereof, the 1% Fee would be credited against the discount of the loan. Burton Goldberg paid CMI the commitment fee of $33,500 on behalf of Sailboat Key. All the necessary documents were prepared by CMI's advisor in Florida, and on January 22, 1970, in the Boston offices of CMI, the parties executed these documents which included a loan agreement, a note secured by a first mortgage, personal guarantees of Burton Goldberg and his wife and stock pledge agreements. The 1% Commitment fee was credited against the discount of the loan, and CMI began disbursing the funds to Sailboat Key. In August 1971 the loan was in default for Sailboat Key's failure to make the interest payments on the due dates and the parties reached the following settlement agreement: (1) CMI to advance an additional $400,000 for which Sailboat Key would execute a note; (2) CMI to sell all of its Sailboat Key stock to Burton Goldberg for $10,000; and (3) CMI to release its right of first refusal on all construction financing for the sum of $740,000 ($190,000 payable on or before November 30, 1971 and the remainder due on November 1, 1976). In accordance with the above terms, on October 22, 1971 the parties executed a modification of loan agreement. Sailboat Key then executed a $400,000 note and $740,000 note (which bore no interest) secured by mortgages in favor of CMI which further agreed to subordinate $550,000 of the $740,000 indebtedness in favor of an institutional lender providing $6,000,000 in financing. Thereafter, Sailboat Key borrowed $6,000,000 from Fidelity Mortgage Investors to refinance its land development loan, and on November 5, 1971 paid CMI all the funds advanced by it totaling $2,691.412.17 and the $190,000 due under the terms of the $740,000 note.

Subsequently, Fidelity Mortgage Investors and others filed a mortgage foreclosure action naming as defendants, among others, CMI and Sailboat Key. CMI as holder of a subordinated mortgage in the amount of $740,000 filed a cross-claim against Sailboat Key which answered and raised the defense of usury. Sailboat Key also cross-claimed against CMI for return of the principal amount paid and double the amount of interest exacted on the ground that CMI had received interest at a rate in excess of 25%. CMI answered the cross-claim and pled as defenses: (1) that Massachusetts law is applicable and under the laws of Massachusetts, the loan is not usurious; (2) that the 50% Stock of Sailboat Key it received cannot be considered interest because the value thereof depended upon the success of the venture within the meaning of Section 687.03, Florida Statutes (1975); (3) that the modification of the loan agreement of October 22, 1971 released CMI from any claims or defenses with respect to the loan; (4) that Sailboat Key is barred by the statute of limitations; and (5) that Sailboat Key cannot raise the defense of usury pursuant to Section 687.11(4), Florida Statutes (1974). Upon motion therefor, the cross-claims of CMI and Sailboat Key were severed from the main action. Sydney Lefcourt, certified public accountant, was appointed special master to make findings of fact with regard to the interest computations. CMI then voluntarily dismissed its cross-claim to foreclose the mortgage securing the $740,000 note. The special master in his report determined that the interest on the actual principal amount loaned exceeded 15% Without considering the issue of whether the receipt of the 50% Equity interest in Sailboat Key by CMI represented additional interest. CMI filed exceptions to the report and a hearing was held thereon and on Sailboat Key's cross-claim. After hearing the testimony presented, the trial judge concluded that (1) Florida law and not Massachusetts law was applicable because the only purpose in selecting Massachusetts law was to evade Florida's usury laws; (2) a 2% Or $67,000 discount was taken and CMI's bookeeping records so indicated; (3) Sailboat Key is not barred by the statute of limitations as the statute had not yet begun to run; (4) the stock in Sailboat Key which CMI received as additional consideration was valued at $987,500 when CMI took it and is considered as interest; (5) CMI did not provide funds for actual construction of the project and had the right, not the obligation, to make such a loan which it declined to make; (6) in fact, CMI forced Sailboat Key to repurchase the stock from CMI (the 50% Equity interest in the project) for $750,000; and (7) the $10,000 received for the stock, and the $190,000 payment on the $740,000 note ¹ were additional interest on the loan. The trial judge concluded that the 2% Discount, the $10,000 cash payment and the $740,000 note are additional interest which resulted in an interest rate in excess of 25%. He then determined that the proper penalty is twice the amount of interest actually exacted and entered judgment for $1,321,924.06 ² plus costs in favor of Sailboat Key and further held that CMI could not recover the $550,000 balance on the $740,000 note.

A threshold question raised in this appeal is whether the laws of Massachusetts ³ as appellant contends, or the laws of Florida as appellee argues is applicable to the instant transaction.

An exception to the general rule that a contract valid under its governing law is valid everywhere is the rule that where the enforcement of the agreement would violate the fixed, settled or strong public policy of the state in which the action is brought, it will not be enforced by that state. See 15A C.J.S. Conflict of Laws § 4(10) (1967); 17 C.J.S. Contracts § 16 (1963); and Davis v. Ebsco Industries, Inc., 150 So.2d 460 (Fla. 3d DCA 1963); Bond v. Koscot Interplanetary, Inc., 246 So.2d 631 (Fla. 4th DCA 1971). The public policy of a state is the law of the state whether found in its constitution, statutes, judicial records or otherwise. See 17 C.J.S. Contracts § 16(e) (1963) and Davis, supra; C & D Farms, Inc. v. Cerniglia, 189 So.2d 384, 386 (Fla. 3d DCA 1966); Bond, supra. The public policy in this state with respect to usurious contracts and corporations is found in Florida Statute 687.02 (1975) which dates back to 1955 and provides that "any contract whereby a corporation undertakes to pay an interest rate higher than fifteen per annum is hereby declared usurious." The prime purpose of the usury law is to protect needy borrowers by penalizing unconscionable moneylenders. Stubblefield v. Dunlap, 148 Fla. 401, 4 So.2d 519 (1941). The contract in this case is far in excess of the maximum 15% Rate (which will be discussed in detail infra), and to apply Massachusetts law and enforce this agreement would violate Florida's well settled and strong public policy.

There is a second compelling reason to hold Massachusetts law inapplicable. Where parties have expressly designated the governing law, the only question for the court to determine is whether they acted in good faith or in bad faith for the purpose of evading the law of the place to which their contract is really referable. See 45 Am.Jur.2d Interest And Usury § 21 (1969). Thus, if a contract of loan secured by a lien on real estate is made with the intent and purpose to evade the usury laws of the jurisdiction where the real estate is situated, its laws will govern. 91 C.J.S. Usury § 4(8) (1955); 45 Am.Jr.2d Interest and Usury § 31 (1969) and Thomson v. Kyle, 39 Fla. 582, 23 So. 12 (1897); Beacham v. Carr, 122 Fla. 736, 742, 166 So. 456, 459 (1936). With respect to the issue of whether the parties acted in good or bad faith in their designation of the governing law, effect will be given to their intention only insofar as that intention is directed to the law of the place that has a real and vital connection with the transaction. 45 Am.Jur.2d Interest and Usury § 21 (1969); May v. United States Leasing Corporation, 239 So.2d 73 (Fla. 4th DCA 1970). Which state has a real and vital connection with the transaction is a question of fact to be determined by the trier of the facts. See May, supra. The judge determined that Massachusetts had no real connection with this transaction and the choice of Massachusetts law was a scheme to evade Florida's usury law and to exact greater interest...