Durst v. Abrash

• Decision Date: 16 June 1941
• Citation: 253 N.Y.S.2d 351,22 A.D.2d 39
• Parties: Joseph DURST, Plaintiff-Respondent, v. Anne M. ABRASH, as Trustee under Trust Agreements dated
• Court: New York Supreme Court — Appellate Division

Page 351

253 N.Y.S.2d 351

22 A.D.2d 39

Joseph DURST, Plaintiff-Respondent, v. Anne M. ABRASH, as Trustee under Trust Agreements dated June

16, 1941, George Abrash, Grantor,

Defendant-Appellant, and Paskus, Gordon

and Hyman, a Partnership, Defendant.

Supreme Court, Appellate Division, First Department.

Oct. 27, 1964.

Jules J. L. Hessen, New York City, of counsel (Hahn, Hessen, Margolis & Ryan, New York City, attorneys), for defendant-appellant.

Paul R. Scott, New York City, of counsel (Milton I. Newman, New York City, with him on the brief, Baar, Bennett & Fullen, New York City, attorneys), for plaintiff-respondent.

Before BREITEL, J. P., and VALENTE, McNALLY, EAGER and STEUER, JJ.

BREITEL, Justice Presiding.

In an action for a declaratory judgment to determine that a certain purported stock sale transaction was in fact a disguise for a usurious loan agreement defendant appeals from an order denying her motion to compel arbitration (CPLR § 7503 [a]). Special Term denied the motion but directed a preliminary trial of the issues upon which arbitrability depends. The issue is whether the agreement to arbitrate has independent viability apart from the alleged usurious transactions so that all the issues, including the claim of usury, are for the arbitrators to determine rather than the court.

The order should be affirmed. The subsidiary agreement to arbitrate is subject to the alleged illegality of the principal agreement.

The transaction, as described by plaintiff, was a loan to plaintiff of $30,000, disguised in the form of a sale by him to defendant of 10,000 shares of Class A Common Stock in a close corporation. Plaintiff was required to repurchase the stock some 15 months later at a price of $5.40 per share. In addition, defendant was to receive the dividends payable on the stock, amounting to 60 cents per share, or a total of $6,000 in dividends. Consequently, under the transaction, if it was what plaintiff alleges it to be, defendant would receive interest at the rate of 80% per annum.

Simultaneously with the execution of the principal agreement in suit the parties also executed, under the same date, a paper which read as follows:

'It is hereby agreed among the undersigned that any dispute, claim, or controversy arising under or pursuant to letter agreements between them dated this day, shall be settled by arbitration in New York City pursuant to the rules of the American Arbitration Association then obtaining.'

The statute provides that '[w]here there is no substantial question whether a valid agreement was made or complied with * * * the court shall direct the parties to arbitrate' (CPLR § 7503[a]). Whether the statute, which was adopted in its present form in 1962 and became effective September 1, 1963 (CPLR § 10005), changed the law as it existed under the Civil Practice Act (§ 1450) need not be dispositive of the issue in this case. The law under the Civil Practice Act had been that a contract for the doing of an act the performance of which was prohibited by statute or was otherwise 'void and unenforceable' was not enforceable in arbitration (Matter of Exercycle Corp. [Maratta], 9 N.Y.2d 329, 334-335, 214 N.Y.S.2d 353, 355, 356, 174 N.E.2d 463, 464, 465; Matter of Kramer & Uchitelle [Eddington Fabrics Corp.], 288 N.Y. 467, 471, 43 N.E.2d 493, 495, 141 A.L.R. 1497). In this case, concededly, there are various statutes affecting the legality or validity of usurious transactions.

If, on the other hand, CPLR changed the law then defendant's situation is the worse. The Civil Practice Act provided for the preliminary determination of 'a substantial issue as to the making of the contract or submission or the failure to comply therewith' (§ 1450). The language was always troublesome and there was decisional law that the court was to decide as a preliminary matter not merely the fact of making an agreement but also whether the parties had succeeded in effecting an enforceable contract to arbitrate (see conc. and dis. opns. in Matter of Exercycle Corp., supra, and the cases cited).

The language in CPLR, on the other hand, makes explicit that the preliminary question for the court is whether there is a substantial question of the existence of a 'valid agreement' to arbitrate. If the statute intended the meaning normally attributed to those words there is no question that a preliminary question for the court to determine is whether or not there is a valid arbitration agreement in the first instance. Certainly, if the new statute was intended to change the law, that is the only direction in which the change points. In that case, a fortiori, an agreement to arbitrate subject to a claim of infirmity for illegality in the principal agreement involves a preliminary question to be determined by the court and not by the arbitrators.

There is some authority that the new statute, which was enacted after the Exercycle case, was not intended to change the pre-existing law (8 Weinstein-Korn-Miller, N.Y.Civ.Prac. Par. 7503.02). The commentators, in supporting that view, however, cite the Second Advisory Committee Report (2 N.Y.Adv.Comm.Rep. on Practice and Procedure 135, 1958 Report of the Temp. Comm. on the Courts, N.Y.Legis.Doc.1958, No. 13, p. 135). In fact, the Second Report draft of the statute did not expressly refer to the 'validity' of the agreement but only to 'the existence of the agreement'. This language continued unchanged through the 1962 drafts even after the section had received its present designation ' § 7503'. (6th Report Sen.Fin.Comm., N.Y.Legis.Doc.1962, No. 8, p. 648). It was much later in the 1962 legislative session that the language was changed to its present form referring to validity of the agreement. This, therefore, may suggest an argument that the new statute was intended to change the law, or, at least, restate the rule as generalized in the Kramer case, supra.

The rule in the Kramer case (referring generally to the necessity of there being a valid and enforceable contract before there can be arbitration under a subsidiary clause) was cast in some doubt by the opinion in the Exercycle case, supra. The holding in the Exercycle case certainly was that common law contract invalidity, as distinguished from public policy illegality, of a principal agreement containing an otherwise viable arbitration clause was not a preliminary matter to be determined by the court. Whether the language in CPLR was intended to overrule the holding in the Exercycle case, a matter which is not relevant to the issues in this case, is quite another question. It is this last question with which the commentators were primarily concerned, namely, whether technical common law contract rules (e. g., mutuality, consideration, and the like) which might leave a substantive agreement unenforceable at law did not also render a subsidiary agreement to arbitrate unenforceable.

As for the form of the agreement, it is undisputed law that a usurious agreement is invalid regardless of the form it takes and regardless of the rules governing integrated agreements. It is always possible to show that any transaction and the documents which are a part of it are illegal and unenforceable as a usurious transaction. (Restatement, Contracts, §§ 229, Comment b, 529; cf. Hartley v. Eagle Ins. Co., 222 N.Y. 178, 184-185, 118 N.E. 622, 624, 3 A.L.R.2d 1379; Thurston v. Cornell, 38 N.Y. 281, 285.) In such an inquiry the issue is not the interpretation of the language used but what are the facts behind the facade of language.

There is no need to consider the subtleties in the line of cases discussing whether a usurious agreement is void or voidable. That question may be important when the interest of a third party is involved. Indeed, the distinction is not important when duress or fraud is involved, although these result only in voidable agreements; the preliminary issue is still for the court (Matter of Exercycle Corp., supra).

Nor does any sound distinction rest on the obvious fact that different kinds of illegality may involve a lesser or greater degree of public harm. The fact is that there are many kinds of public policy illegality, other than usury, which require a positive election or an affirmative defense to render agreements subject to the infirmity unenforceable (17A C.J.S. Contracts § 559).

In this case no third party is involved and a party to the alleged usury is asserting the illegality and unenforceability of the agreements, both as to the principal agreement and the subsidiary agreement to arbitrate. No precedent suggests that illegality may be waived in advance. If so, such waiver would be accomplished indirectly by inserting an arbitration clause in the otherwise illegal agreement, thus precluding court control of the public policy issue.

The separate execution of the one-sentence agreement to arbitrate any disputes which might arise under the principal agreements does not, of course, present a separable question. The papers being executed simultaneously and as part of the same transaction are to be construed together (Nau v. Vulcan Rail & Construction Co., 286 N.Y. 188, 197, 36 N.E.2d 106, 110; 10 N.Y.Jur., Contracts, § 213; Restatement, Contracts, § 235 [c]). If the main purpose of the transaction was illegal then the subsidiary agreements, if they are truly subsidiary, are rendered invalid by the invalidity of the principal agreement (Manson v. Curtis, 223 N.Y. 313, 324, 119 N.E. 559, 562).

What the situation would be with respect to a prior general agreement between parties to arbitrate all disputes which might arise between them in a variety of transactions need not now be decided.

In Matter of Metro Plan, Inc. v. Miscione, 257 App.Div. 652, 15 N.Y.S.2d 35, the precise question involved in this case was decided as an alternative holding. It was held that a principal agreement, if usurious, would render unenforceable stipulations for arbitration contained within it. It was said flatly that such...