EC Warner Co. v. WB Foshay Co.

• Decision Date: 15 March 1932
• Docket Number: No. 9294.,9294.
• Citation: 57 F.2d 656
• Parties: E. C. WARNER CO. v. W. B. FOSHAY CO. et al.
• Court: U.S. Court of Appeals — Eighth Circuit

57 F.2d 656 (1932)

E. C. WARNER CO. v. W. B. FOSHAY CO. et al.

No. 9294.

Circuit Court of Appeals, Eighth Circuit.

March 15, 1932.

Claude G. Krause, of Minneapolis, Minn. (Glen Stiles and Cobb, Hoke, Benson, Krause & Faegre, all of Minneapolis, Minn., on the brief), for appellant.

F. H. Stinchfield, of Minneapolis, Minn. (Clark R. Fletcher, Morris B. Mitchell, Thomas P. Helmey, Donald A. Holmes, and C. P. Randall, all of Minneapolis, Minn., on the brief), for appellees.

Before KENYON, VAN VALKENBURGH, and GARDNER, Circuit Judges.

GARDNER, Circuit Judge.

This is a suit in equity brought by E. C. Warner Company, a corporation, as plaintiff, against W. B. Foshay Company, a corporation, and C. J. Rockwood, as receiver of said W. B. Foshay Company, Public Utilities Consolidated Corporation, a corporation, and Joseph Chapman, as receiver thereof, as defendants, to determine the amount due appellant on certain promissory notes described in the complaint, and to foreclose on certain collateral pledged to the appellant as security for said notes. The parties will be referred to as they appeared in the lower court.

Defendants answered, asserting that the notes were tainted with usury, because of the nature of the transactions as a part of which they were given, and they asked that the notes be canceled and the collateral pledged to the plaintiff as security therefor be delivered up to the receiver defendants.

The lower court found the issues in favor of the defendants, and entered decree canceling the promissory notes and directing plaintiff to restore to the receiver defendants the property pledged as security therefor. From this decree the plaintiff has appealed, and in support of its assignments of error urges that (1) the plea of usury was not available to the defendant, and (2) that the finding of usury is not sustained by the evidence. We shall consider these contentions in the reverse order of their statement.

At the times in controversy in this suit, plaintiff was a Minnesota corporation with its principal place of business at Minneapolis, Minn.; defendant W. B. Foshay Company was a Delaware corporation with its principal place of business in Minneapolis, Minn.; and defendant Public Utilities Consolidated Corporation was an Arizona corporation with its principal place of business at Minneapolis, Minn. On November 1, 1929, each of the two last-named companies was placed in the hands of a receiver because insolvent, and at that time the property and assets of both these companies were taken over by the receivers, and the companies are being liquidated and their assets administered on by these respective receivers.

On August 23, 1929, the Foshay Company had overdrawn its account in the banks; it had no cash; and the value of its assets was only a small fraction of the amount of its liabilities. It had a large number of checks outstanding and no funds with which to meet them; it had obligations coming due which it could not meet. The company, being in desperate financial straits, applied, through its managing officer, W. B. Foshay, to Mr. E. C. Warner, who controlled and practically owned the plaintiff company, for assistance. Warner owned a residence property on Lake Calhoun, which Mr. Foshay knew he desired to dispose of. Foshay suggested that the Foshay Company would purchase the property as an inducement for the making of a loan by the Warner Company, to the Foshay Company, at a price of $378,000, although both the contracting parties then knew that the property did not exceed in value at that time $250,000. As a further consideration for making this loan, Warner required the Foshay Company to purchase 8,000 shares of the class B stock of the Public Utilities Consolidated Corporation for $80,000. This stock, the court found, had no intrinsic value and no market value on August 23, 1929. These purchases were agreed upon as a part of the transaction as a result of which the plaintiff loaned the Foshay Company $500,000. Thereupon the defendant Foshay Company agreed to pay plaintiff $529,093.38, according to the terms of sixty-six promissory notes due at various intervals between that date and April 10, 1931. These notes represented a loan of $500,000 made by the plaintiff to the Foshay Company. Interest at 7 per cent. per annum to maturity, amounting to $29,093.89, was added to the principal, thus making the aggregate of $529,093.89.

The Foshay Company, by its written contract of purchase, also agreed to pay Warner $378,000 as the purchase price of the Lake Calhoun property, plus 7 per cent. interest to maturity of the several payments specified in the contract, amounting in the aggregate to $395,231.31. It also gave to Warner, or his company, twelve promissory notes aggregating $80,603.63, which represented the purchase price of 8,000 shares of the stock of the Public Utilities Consolidated Corporation at $10 per share, plus 7 per cent. interest to maturity of the notes.

Plaintiff, at the time of the delivery of the sixty-six notes, gave the Foshay Company a check for $500,000, and at the same time received back from that company a check for $143,470.83, in payment of the prior obligations of that company to the plaintiff.

All of the notes and the contract for deed were made and delivered contemporaneously as a part of one transaction in the city of Minneapolis, Minn., where the contracts were to be paid and performed.

As a result of these transactions, the Foshay Company received cash or credit for $500,000, a contract for a deed to the Lake Calhoun property, and 8,000 shares of the class B stock of the Public Utilities Consolidated Corporation, in consideration for which it obligated itself to pay the plaintiff within twelve months $1,400,928.83.

To secure the payment of the sixty-six notes and the contract for deed, the Foshay Company pledged as collateral 635 shares of common stock of the Winget-Kickernick Company; 470 shares of common stock of the Foshay Trust & Savings bank; 22,647 shares of the class B stock of the Foshay Building Corporation; 333,629 shares of the class B stock of the Public Utilities Consolidated Corporation; 38,231 shares of the class B stock of the Leamington Hotel Corporation; a note for $50,000, and interest, of the Citizens' Light, Power & Water Company; a note for $150,000, and interest, of the Central American Power Corporation; a note for $300,000, and interest, of the Public Utilities Georgia Corporation; a note for $500,000, and interest, of the Foshay Building Corporation; and an assignment of an equity in 100,000 shares of the Public Utilities Consolidated Corporation class B stock, which were being purchased under contract. These securities were turned over to the plaintiff, and were in its possession at the time of the trial of this suit.

Before the appointment of the receivers, the twelve notes for $80,502.54 given for the stock were paid, and $25,273.18 had been paid on this $500,000 loan represented by the sixty-six notes.

These negotiations were carried on by E. C. Warner on behalf of the plaintiff, and by W. B. Foshay on behalf of the W. B. Foshay Company. These men had known each other for many years, and the companies which they represented had had many business and financial dealings with each other. Plaintiff was controlled and practically owned by E. C. Warner, and the Foshay Company was controlled by W. B. Foshay. Mr. Warner was a successful business man and capitalist of wide experience. He had been on the board of directors of one of the large banks of Minneapolis for many years, and had served on its discount committee. Mr. Foshay was an organizer, promoter, and salesman. The principal business of the Foshay Company had been the purchase of utility property. It also purchased other income-producing properties, and sold its own stock and securities and the stock and securities of the Public Utilities Consolidated Corporation, besides other subsidiary and affiliated corporations.

The lower court found that, in order to procure this loan for $500,000, the Foshay Company was obliged to pay 7 per cent. interest; to buy the Lake Calhoun property for $378,000, although it was actually worth not to exceed $250,000; to buy 8,000 shares of Public Utilities Consolidated Corporation class B stock for $80,000, although it had no intrinsic or market value; to pay interest on all deferred payments at 7 per cent. per annum; and to deposit the collateral security herein referred to. The court concluded that the whole transaction was a device to cover usury and to evade the usury laws.

The Minnesota statutes fix 8 per cent. as the maximum interest rate chargeable, and condemn as usurious all contracts for the loan of money requiring the payment of a rate in excess of that amount. Minn. St. 1927, §§ 7037, 7038, 7040.

The facts as found by the lower court are sustained by both direct and circumstantial evidence, and we accept them as the facts in this case.

So far as the form of the transaction is concerned, no usury is disclosed. Courts, however, are not bound by what the parties represent themselves to be doing, but will look beyond the mere form of the transaction to its substance. Usury is a moral taint, and no subterfuge, however cunningly devised, will be permitted to conceal it. If it appears that the transaction as disclosed by the testimony and the surrounding facts and circumstances was in substance a receiving or contracting for the receiving of usurious interest for a loan or forbearance of money, then, regardless of the forms or devices resorted to to conceal the character of the transaction, the parties thereto are subject to the consequences provided by the usury statutes. Gage v. J. F. Smyth Mercantile Co. (C. C. A.) 160 F. 425, 429; Bank of United States v. Owens, 2 Pet. 527, 7 L. Ed. 508; Lukens v. Hazlett, 37 Minn. 441, 35 N. W. 265, 266; Drew v. Skeena Lumber Co., 180 Minn. 358, 230 N. W. 819, 821; Missouri, K. & T. Trust Co. v....