George v. Oscar Smith & Sons Co.

• Decision Date: 18 March 1918
• Docket Number: 3056.
• Parties: GEORGE v. OSCAR SMITH & SONS CO. et al. In re CRAWFORD.
• Court: U.S. Court of Appeals — Fifth Circuit

250 F. 41

GEORGE v. OSCAR SMITH & SONS CO. et al.

In re CRAWFORD.

No. 3056.

United States Court of Appeals, Fifth Circuit.

March 18, 1918

Henry P. Dart and William Kernan Dart, both of New Orleans, La (Benjamin W. Kernan and Henry P. Dart, Jr., both of New Orleans, La., on the brief), for appellant.

Robert H. Thompson, of Jackson, Miss., and Albert S. Bozeman, of Meridian, Miss. (J. Harvey Thompson, of Jackson, Miss., on the brief), for appellees.

Before WALKER and BATTS, Circuit Judges, and EVANS, District Judge.

WALKER Circuit Judge.

By appeal, and also by petition to superintend and revise, A. L George, trustee of V. L. Crawford, a bankrupt, presents for review a decree an effect of which was to permit the foreclosure of a deed of trust given by the bankrupt to secure the payment to Oscar Smith & Sons Company, a corporation, of $25,000 and interest, evidenced by nine notes made by the bankrupt. The principal ground upon which the right to enforce the deed of trust was denied was that the contract was infected with usury; and it was contended that it is governed by the law of Mississippi, and that the rate of interest contracted for was such as, under the law of that state (Acts of Mississippi 1912, p. 301), results in the forfeiture of the principal and all interest. The opposing contentions were that there was no usury in the contract, and that it was a Pennsylvania contract, and, if it was usurious the result was, not to invalidate the contract, but to render uncollectable only so much of the interest reserved as was in excess of the legal rate.

The correspondence which passed between the lender and the borrower before the deed of trust and the notes it secured were executed we think clearly shows that the lender was to be paid, as compensation for the loan of the money, an amount in addition to the 6 per cent. per annum interest which the secured notes by their terms called for, and that this amount was such as to make the compensation for the use of the money for the period the loan was to run more than 8, but less than 20, per cent. per annum.

The deed of trust was signed and acknowledged in Mississippi, the property it covered was located in Mississippi, and the notes it secured were made payable at the First National Bank of Meridian, Miss. A representative of the lender, the principal place of business of which was Philadelphia, Pa., went to Mississippi, investigated the security proposed to be given for a loan of $25,000, which was to include an unsecured amount already advanced, reported favorably to his principal; and thereupon the deed of trust and the notes it secured were prepared and forwarded to Philadelphia, accompanied by Crawford's draft on Oscar Smith & Sons Company for the balance of the $25,000 to be lent, and the papers were delivered to the drawee in Philadelphia upon its payment of the draft. The deed of trust and the notes it was to secure were not effective until they were delivered in Philadelphia. Delivery was required to make the contract they evidence. Tilden v. Blair, 21 Wall. 241, 22 L.Ed. 632; Buchanan v. Drovers' National Bank, 55 F. 223, 5 C.C.A. 83. The contract was made in Pennsylvania and performance of it was to be in Mississippi. It was usurious under the laws of both states. In such case the legal consequences of the violation of the law by the making of the contract for a usurious consideration are determined by the law of the place where the contract is made. Andrews v. Pond, 13 Pet. 65, 78, 10 L.Ed. 61; Heath v. Griswold (C.C.) 5 Fed. 573; Minor on Conflict of Laws, p. 433; 39 Cyc. 904, 908. Andrews v. Pond, supra, presented the case of a contract which was usurious under the law of New York, the state in which it was made, and under the law of Alabama, the state in which it was to be performed. The following is the court's statement of the ground relied on to support the conclusion reached that the legal consequence of the usury was determined by the law of the place where the contract was made:

'The defendants allege that the contract was not made with reference to the laws of either state, and was not intended to conform to either; that a rate of interest forbidden by the laws of New York, where the contract was made, was reserved on the debt actually due; and that it was concealed under the name of exchange, in order to evade the law. Now, if this defense is true, and shall be so found by the jury, the question is not which law is to govern in executing the contract, but which is to decide the fate of a security taken upon an usurious agreement, which neither will execute? Unquestionably, it must be the law of the state where the agreement was made and the instrument taken to secure its performance. A contract of this kind cannot stand on the same principles with a bona fide agreement made in one place to be executed in another. In the last-mentioned cases the agreements are permitted by the lex loci contractus, and will even be enforced there if the party is found within its jurisdiction. But the same rule cannot be applied to contracts forbidden by its laws and designed to evade them. In such cases the legal consequences of such an agreement must be decided by the law of the place where the contract was made. If void there it is void everywhere, and the cases referred to in Story's Conflict of Laws, 203, fully establish this doctrine.' 13 Pet. 77, 78, 10 L.Ed. 61.

The result of applying the rule stated to the facts of that case was the conclusion that the contract under consideration was void because under the law of New York that was the legal consequence of the usury. But nothing in the court's statement of the rule governing a contract forbidden by the law of the place where it was made and also by the law of the place where it was to be performed indicates that the rule stated is applicable only where the contract is a void one under the law of the place where it was made. We understand the court's ruling to be that the legal consequences of such a forbidden contract must be decided by the law of the place where the contract was made, whether that law makes the contract void or attaches a less penalty to the commission of usury. A contract reserving interest at the rate of more than 20 per cent. per annum is a forbidden one in Pennsylvania as well as it is in Mississippi, though the penalty in the former state is the loss of the right to collect any interest, while in the latter state the principal and all interest are forfeited. We have not had access to the statutes of Pennsylvania relating to interest and usury, and have relied on summaries of such laws found in publications which are supposed to be accurate in reference to such a matter. As above stated, we understand the consequence of making a usurious contract in that state is to render so much of the interest to be received uncollectable as is in excess of the legal rate of 6 per cent. per annum. Under that law the deed of trust in question is not unenforceable.

The following is the Mississippi statute which it is contended should govern in determining the consequences of the usury:

'The legal rate of interest on all notes, accounts, and contracts shall be six per cent. per annum; but contracts may be made, in writing, for a payment of a rate of interest as great as eight per centum per annum. And if a greater rate of interest than eight per centum shall be stipulated for or received in any case, all interest shall be forfeited, and may be recovered back, whether the contract be executed or executory. If a rate of interest is contracted for or received, directly or indirectly, greater than twenty per cent. per annum, the principal and all interest shall be forfeited, and any amount paid on such contract may be recovered by suit. ' Acts of Mississippi 1912, p. 301.

The forfeiture provisions of this statute are penal in their nature. The penal laws of Mississippi are not effective on transactions happening beyond the borders of the state. The statute does not purport to operate extraterritorially or to make a usurious contract entered into in another state subject to the penalties it denounces. A forbidden transaction occurring in Pennsylvania and having penal consequences there does not subject a party to it to a penalty denounced by a Mississippi statute which does not purport to have such an effect. The transaction in question was such as to subject the lender to a penalty imposed by the law of Pennsylvania, the state in which the lending took place. It is that penalty which the lender incurred. If more than 20 per centum per annum interest had been reserved, and payments on the contract had been made to the lender in Pennsylvania, it hardly would be contended that the making of such payments gave rise to the right of action in the borrower which the Mississippi statute would have made a consequence of the transaction if it had happened in the latter state. We are not of opinion that the Mississippi statute operated extraterritorially in the one way more than the other. It happens in the instant case that the deed of trust in question is enforceable for the principal of the debt secured whether it is the Pennsylvania law or the Mississippi law that governs in determining the consequences of the usury.

Another suggestion is that the deed of trust is unenforceable by the nonresident corporation to which it was made because of that corporation's failure to comply with the requirements of the Mississippi statute prescribing the conditions on which such a corporation may do business in that state. Though that corporation, prior to the execution of the deed of trust in question, did or transacted business in Mississippi in violation of the law of that state, that law does not purport to...