Galloway v. Travelers Ins. Co., 56026

CourtUnited States State Supreme Court of Mississippi
Citation515 So.2d 678
Docket NumberNo. 56026,56026
PartiesW. Perry GALLOWAY and Lake George Plantation, Inc. v. THE TRAVELERS INSURANCE COMPANY, Richard W. Hickman, Kenneth R. Brantley and C. Milton Boyer.
Decision Date03 June 1987

Don Barrett, Pat M. Barrett, Jr., James C. Patton, Jr., Barrett, Barrett, Barrett & Patton, Lexington, H.L. Merideth, Jr., Merideth & Daniels, Greenville, for appellants.

Lee David Thames, Butler, Snow, O'Mara, Stevens & Cannada, Jackson, James W. Burgoon, Jr., Fraiser, Burgoon & Abraham, W. Wayne Drinkwater, Jr. En Banc.

Lake, Tindall, Hunger & Thackston, Greenville, for appellees.

WALKER, Chief Justice, for the Court:

Perry Galloway and Lake George Plantation, Inc., filed suit against the Travelers Insurance Company and certain of its agents, alleging usury and tortious interference with business. After discovery and on motion of the defendants, the Circuit Court of Washington County entered summary judgment for the defendants as to both causes of action. Perry Galloway and Lake George Plantation, Inc., have appealed. Finding no reversible error, we affirm the judgment of the trial court.

Perry Galloway (Galloway) and George Whitsett (Whitsett) first began participating in business ventures together in 1965. Over the years they operated a cotton merchandising and shipping company, owned interests in a textile mill and a plastics factory, and conducted a trucking business as an adjunct to their cotton-shipping operation. During the 1970's, Galloway and Whitsett acquired, through several purchases, approximately 16,000 acres of farm land in Yazoo, Humphreys and Holmes Counties in Mississippi. The land was used in their agricultural venture which was known as G & W Farms.

The farming operation was a disaster and unprofitable, and by 1978 the land was heavily encumbered with debts which were in default; foreclosure was imminent. In the late fall of 1978, Richard Hickman (Hickman) and Danny Dew (Dew), agents of the Travelers Insurance Company (Travelers), approached Galloway to discuss a possible loan from Travelers. Hickman and Dew told Galloway that Travelers could lend $15,000,000.00 on two conditions: 1) a 5% brokerage fee would have to be paid to Hickman at closing, and 2) Galloway and Whitsett would have to form a corporation, to which all of the farm land would be deeded, and which would be the borrower of record. The necessity for forming a corporation was due to the restrictions of the applicable Mississippi usury statute discussed infra. Because the interest rate on the loan, calculated according to the actuarial method, was to be 11.7819%, the rate would be usurious if charged to an individual, but not usurious if charged to a corporation. Apparently the sole purpose of the incorporation was to make applicable the corporate, rather than the individual, ceiling on interest.

Galloway had no objection to the procedure, and Lake George Plantation, Inc., (Lake George) was formed. On March 8, 1979 the loan was made to the corporation, and neither Galloway nor Whitsett was personally liable on the note. 1 The corporation never transacted any business, 2 and the payments on the note were made by Galloway as an individual. The proceeds of the loan were distributed immediately in the following manner:

The loan from Travelers afforded Galloway/Lake George a temporary reprieve from financial woes. By September of 1980, however, the corporation was again in financial trouble, and Lake George Plantation, Inc., conveyed to Galloway the entire 16,000 acre tract, for which Galloway paid no consideration to the corporation. An attempt by Galloway to sell the land to a third party was unsuccessful, and Galloway Late in 1983, Galloway and Lake George filed suit against Travelers and certain of its agents. Of the four (4) original counts of the complaint, only two (2) are involved in the instant appeal: 1) a usury claim, alleging that the corporation was formed solely to circumvent the usury law and that the loan was therefore usurious, and 2) a claim for tortious interference with business, alleging that Travelers and its agents pretended to negotiate with Galloway for the orderly payment of the indebtedness while actually working to prevent him from obtaining financing, so he would be forced to convey the land to Travelers.

was forced to convey the land to Travelers in lieu of foreclosure.

After discovery and on motion of the defendants, the trial court entered summary judgment for the defendants on both causes of action, holding, as to the usury claim, that the loan was made to a corporation, and holding, as to the tortious interference with business claim, that once Galloway/Lake George defaulted neither Travelers nor its agents had any duty to enter into an agreement with Galloway to resolve the default.

The instant appeal is a case of first impression in our State with regard to the issue which we now consider: when an individual has formed a shell corporation solely for the purpose of obtaining a loan which would otherwise be usurious, and when the individual has used the proceeds of the loan for a business purpose, is the loan usurious? We hold that it is not.

The applicable 3 usury statute is Miss.Code Ann. Sec. 75-17-1 (Supp.1979), which reads, in pertinent part, as follows:

(2) Any borrower may contract for and agree to pay a finance charge for any loan or other extension of credit made directly or indirectly to a borrower, which will result in a yield not to exceed ten percent (10%) per annum, calculated according to the actuarial method, which shall be known as the contract rate.

(3) Notwithstanding the foregoing and any other provision of law to the contrary, any domestic or foreign corporation organized for profit may agree to pay any rate of finance charge in excess of the maximum rate provided in this section, but not to exceed fifteen percent (15%) per annum, calculated according to the actuarial method, on any contract or other obligation under which the principal balance to be repaid shall originally exceed two thousand five hundred dollars ($2,500.00), or on any series of advances of money pursuant to a contract if the aggregate of sums advanced or originally proposed to be advanced shall exceed two thousand five hundred dollars ($2,500.00), or on any extension or renewal thereof; and as to any such agreement, the claim or defense of usury by such corporation, its successors, guarantors, assigns, or anyone on its behalf is prohibited.

Under applicable law, the loan which Travelers made would have been usurious if made to an individual, but not if made to a corporation. Galloway, who formed a corporation to obtain the loan and then used the proceeds primarily to discharge debts incurred in his business ventures, argues on appeal, as he did below, that the corporation was formed solely to circumvent the usury statute, and that the loan was therefore usurious.

Various state courts have considered this issue, and two lines of authority have developed. One, known as the "New Jersey Rule," had its origin in Gelber v. Kugel's Tavern, 10 N.J. 191, 89 A.2d 654 (1952). The lender in Gelber required the potential borrower, an individual, to incorporate. When the lender sued after default, the borrower counterclaimed, alleging usury. At the close of the proof, the trial court entered judgment for the lender on the counterclaim, on the ground that the loan had been made to a corporation. The New Jersey Supreme Court reversed, holding that a lender could not require an individual borrower to form a corporation which would "serve as a cloak to cover usurious transactions to evade the usury statute." Gelber, 10 N.J. at 197, 89 A.2d at 657.

Since Gelber, the New Jersey Rule has been reaffirmed by the courts of that state, In re Greenberg, 21 N.J. 213, 220, 121 A.2d 520, 524 (1956); Lesser v. Strubbe, 56 N.J.Super. 274, 285, 152 A.2d 409, 415 (1959), and has been followed in other jurisdictions, Walnut Discount Co. v. Weiss, 205 Pa.Super. 161, 208 A.2d 26 (1965), Havens v. Woodfill, 148 Ind.App. 366, 266 N.E.2d 221 (1971).

We believe the better rule is that adopted by the New York Supreme Court in Jenkins v. Moyse, 254 N.Y. 319, 172 N.E. 521 (1930). In Jenkins the court held that the loan was not usurious, although made to a corporation which was formed solely for the purpose of charging the higher interest rate. "The law has not been evaded," the Jenkins court held, "but has been followed meticulously in order to accomplish a result which all parties desired and which the law does not forbid." Jenkins, 254 N.Y. at 325-26, 172 N.E. at 522. The New York Rule, like the New Jersey Rule, has found a following in other jurisdictions. RepublicBank of Dallas v. Shook, 653 S.W.2d 278 (Tex.1983); Rabinowich v. Eliasberg, 159 Md. 655, 659, 152 A. 437, 438 (1930). The Fifth Circuit Court of Appeals considered the issue in 1980 and concluded that the great weight of authority would not allow the borrower to claim usury when he formed the corporation to obtain the loan for a business purpose. In the Matter of LeBlanc, 622 F.2d 872, 878 (1980) (applying Louisiana law).

We agree with these authorities that the New York Rule is the better approach. The corporate form offers various options to those who choose it. Among these options is the opportunity to pursue financing which is unavailable to those who have not incorporated. When an individual acting in furtherance of a profit-oriented business venture chooses to incorporate solely for the purpose of obtaining such financing, he will not later be heard to complain that the loan was usurious.

Our adoption of the New York Rule does not mean that usury as a claim or defense is never available to one who forms a corporation at the lender's request. Although one who forms a corporation to obtain a loan for business purposes may not assert usury, the claim or defense is available when the proceeds of the...

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