Drew v. Skeena Lumber Company, Ltd.

• Decision Date: 16 May 1930
• Docket Number: 27,904
• Citation: Drew v. Skeena Lumber Company, Ltd., 230 N.W. 819, 180 Minn. 358 (Minn. 1930)
• Parties: CHARLES M. DREW v. SKEENA LUMBER COMPANY, LTD. AND ANOTHER
• Court: Minnesota Supreme Court

230 N.W. 819

180 Minn. 358

CHARLES M. DREW v. SKEENA LUMBER COMPANY, LTD. AND ANOTHER

No. 27,904

Supreme Court of Minnesota

May 16, 1930

Plaintiff appealed from an order of the district court for Hennepin county, Waite, J. denying his motion for a new trial. Affirmed.

SYLLABUS

Transaction was a usurious loan.

1. Plaintiff indorsed a note of the Skeena Lumber Company, Ltd. for $22,500, a Canada corporation then adjudged a bankrupt in the proper court of that dominion, got a contract from the corporation to pay the note as it came due, obtained a bond with respondent as surety to secure the performance of the contract, and then negotiated the note at a bank, receiving $2,500 for his compensation. The finding is supported that the transaction was in its character and purpose a loan by plaintiff to the lumber company of $20,000 at eight per cent with a bonus to plaintiff of $2,500, hence usurious.

Usury is borrower's personal defense.

2. The defense of usury is personal to the borrower.

And may extend to his sureties.

3. It is however also extended to the sureties of the borrower.

Usury tainted all the instruments used.

4. The usury herein found tainted every instrument designed as part in the consummation of the loan.

Bankruptcy proceeding admissible in evidence.

5. The bankruptcy proceeding of the lumber company is of no importance to a decision herein, but the fact thereof was incidentally admissible as affecting the testimony of certain witnesses.

Ruling on admission of evidence not prejudicial.

6. No reversible error occurred through the admission or exclusion of evidence.

Usury 39 Cyc. p. 994 n. 47; p. 1062 n. 35; p. 1075 n. 3; p. 1086 n. 95, 99.

See note in L.R.A. 1917F, 923; 27 R.C.L. 242; R.C.L. Perm. Supp. 5959.

See 27 R.C.L. 282; R.C.L. Perm. Supp. 5963.

Drew & Cain, for appellant.

Herbert T. Park, for Union Indemnity Company, respondent.

OPINION

HOLT, J.

The action is to recover on an indemnity bond wherein plaintiff was obligee, Skeena Lumber Company, Ltd. obligor, and respondent surety. Findings were in favor of respondent, and plaintiff appeals. The lumber company defaulted.

The important facts are these: A. H. Johnson, the assistant secretary of Skeena Lumber Company, Ltd. a Canada corporation, hereinafter referred to as the lumber company, approached plaintiff for a loan, representing that the lumber company had obtained a conditional approval of the state securities commission to register for sale in this state its $250,000 bond issue, the condition being that the title to its property be cleared up. To do this a loan in the sum of $20,000 was needed; and it had arranged with the Phoenix Corporation of Minneapolis to float or sell its bonds and that corporation had guaranteed that enough of the bonds to pay off the loan could be sold within 60 days. Several conversations were had; and, it appearing that Johnson was ready to pay $2,500 as commission or bonus, the proposition became attractive to plaintiff. But he told Johnson he could not make the loan since for the consideration stated it would be illegal. The proposal finally made and accepted was that plaintiff would indorse the lumber company's note of $22,500, due in instalments, the first of $7,500 in three months, and thereafter $5,000 each month, with interest at eight per cent per annum, and to protect plaintiff on the indorsement he should be furnished an indemnity bond in the sum of $25,000. One Morton representing respondent and one Hoar representing the Phoenix Corporation interviewed plaintiff and were present with plaintiff and Johnson when the plan was consummated, the note of $22,500 was made, the agreement was executed between the lumber company and plaintiff that the company would pay the note promptly and furnish plaintiff an indemnity bond, the bond in suit was given, the note negotiated at the bank, and the proceeds distributed. It appears that $1,500 of the amount went to the Phoenix Corporation, $1,000 to Hoar, its representative, $1,000 to Johnson, $3,650 to Morton, $2,500 to plaintiff, and the balance to he lumber company or to others at its direction.

It also appears that prior to these negotiations a receiver in bankruptcy had been appointed for the lumber company in the proper court of its domicile, who had been in charge of its property ever since. Of this none of the parties admits knowledge except Johnson. Johnson, Morton, and Hoar professed their confidence that with the proceeds of this loan the conditions of the security commission could be complied with and the money to repay the loan would be raised within 60 days by selling the bonds which had been executed and were ready for the market. The lumber company never was in position to sell its bonds. It defaulted the note negotiated at the bank, and plaintiff was compelled to take it up, paying $22,924.40, no part of which has been repaid to him except $6,482.

The defenses of the surety herein are, in short, that Morton had no authority to execute the bond; that there was a conspiracy to defraud respondent; and that the transaction in the giving of the note was usurious. The decision is rested wholly on the last ground, the pivotal finding of the court being:

"The transaction aforesaid was negotiated between the parties, other than the bank, with the reasonable expectation that the lumber company would default upon its note, that plaintiff would then take up the note pursuant to his indorsement and would rely for reimbursement upon the liability of the indemnity company under its bond. It was in its true character and purpose a loan by plaintiff to the lumber company of $20,000 at eight per cent interest with a bonus to plaintiff of $2,500, at first inchoate and afterward fully consummated."

Plaintiff vigorously assails the facts stated in the first sentence and contends that if they are not true the conclusion or the really material fact announced in the last sentence has no foundation. That the officers of the lumber company who put through the deal with plaintiff had no reasonable expectation that bonds in a company adjudged a bankrupt and in the hands of a receiver could be sold so as to liquidate this loan is quite clear. The Phoenix Corporation and Hoar, representing it, disclosed no basis upon which a bond issue of the lumber company could be marketed; and the court could well conclude that their expectations went no further than the share they might receive of this loan. There is no evidence of the standing, resources and ability of either the Phoenix Corporation or Hoar to guarantee a bond sale. The extreme care to which plaintiff went in so drawing the contract and indemnity bond that he should take no chance whatever on the success of the bond issue, the only available resource disclosed to him, might be convincing to the trial court that he had no reasonable expectation that the lumber company could repay the loan. He testified to having seen a financial statement of the lumber company, but neither that statement nor what it indicated is in the record.

As to Morton's expectations that the lumber company would default, there was ample room for the court to conclude that his testimony in that respect was absolutely false. His conduct shows flagrant dishonesty or such lack of experience in business that it should have dawned on those with whom he dealt that he was not acting for the best interests of his principal. He was but 22 years old. In conjunction with Johnson, of the lumber company, he had sought to negotiate a loan from a bank at Aitkin and from a Mr. Donahue of St. Cloud. In each instance he submitted to this respondent te proposition of furnishing an indemnity bond, but it was turned down. In this deal with plaintiff he did not submit to his principal the giving of a bond, but executed it without its knowledge. Although he collected from this loan $3,650, which included his services and the premium of $375 for the bond, he never reported the writing of the bond nor remitted any part of the premium until after the lumber company had defaulted. There was ample ground for finding a conspiracy to defraud between Morton and the officers of the lumber company. The court made no finding thereon, because he found that plaintiff's connection with a conspiracy was not established, hence acts of the conspirators could not prejudice his cause of action.

We think the evidence supports the finding that the transaction between plaintiff and the lumber company, of which the note of $22,500, the contract given by the company to plaintiff and the bond in suit are component parts, "was in its true character and purpose a loan by plaintiff to the lumber company of $20,000 at eight per cent interest with a bonus to plaintiff of $2,500, at first inchoate and afterward fully consummated." That being so, the law declares it usurious regardless of any evidence of an...