In re International Raw Material Corporation

• Decision Date: 05 December 1927
• Docket Number: No. 53.,53.
• Parties: In re INTERNATIONAL RAW MATERIAL CORPORATION. Appeal of WORMSER & CO.
• Court: U.S. Court of Appeals — Second Circuit

22 F.2d 920 (1927)

In re INTERNATIONAL RAW MATERIAL CORPORATION Appeal of WORMSER & CO.

No. 53.

Circuit Court of Appeals, Second Circuit.

December 5, 1927.

COPYRIGHT MATERIAL OMITTED

Davidson, Moses & Sicher, of New York City (James Garfield Moses and George Schreiber, both of New York City, of counsel), for appellant.

David W. Kahn, of New York City, for appellee.

Before L. HAND, SWAN, and AUGUSTUS N. HAND, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge (after stating the facts as above).

Four questions of law are presented upon this record:

(1) Can an agreement by a corporation to pay a rate of interest or a commission in excess of the legal rate be held invalid by a court of bankruptcy, having the custody of a fund which is collateral security for the performance of the agreement, upon the ground that a lien upon that fund for an excessive rate is unconscionable and should not be sanctioned by a court of equity?

(2) Is an agreement to pay legal expenses incurred by a lienor in enforcing his lien, or in obtaining advice as to its enforcement, illegal, irrespective of the Bankruptcy Act?

(3) Was parol evidence admissible to prove what was the rate of the commissions provided for in the contract of August 31, 1925?

(4) Is an agreement providing that collateral shall be security for the amount advanced with interest, as well as for payment of commissions and for necessary services of attorneys, forbidden by section 67d of the Bankruptcy Act?

The contention that an agreement by the bankrupt corporation to pay more than 6 per cent., be it called commissions or interest, was illegal, and should not be enforced against the collateral, is largely based upon the recent decision of the Circuit Court of Appeals of the Eighth Circuit in the case of In re Chicago Reed & Furniture Co., supra. The court there held that, irrespective of the usury law of Illinois, a court of bankruptcy would not enforce an agreement which in that case involved payment from the proceeds of mortgaged property of an amount due for commissions and interest calculated at a rate of over 40 per cent. per annum. Here there seems to be no doubt that the parties agreed among themselves to pay 6 per cent. as interest on the loan and the additional sum of 1½ per cent. per month as a so-called commission. We know of nothing to prevent such an agreement. The New York statute provides that no corporation shall interpose the defense of usury, and this has been held in effect to repeal the usury laws so far as the contracts of corporations are concerned. Neither the corporations, nor those who may succeed to their rights, nor their sureties, are heard to object to their bargain, either at law or in equity, because of usury. Curtis v. Leavitt, 15 N. Y. 9; Stewart v. Bramhall, 74 N. Y. 85; Gamble v. Queens County Water Co., 123 N. Y. 108, 25 N. E. 201, 9 L. R. A. 527; Hubbard v. Tod, 171 U. S. 474, 19 S. Ct. 14, 43 L. Ed. 246; The Vigilancia (C. C. A.) 73 F. 452.

In Boise v. Talcott, 264 F. 61, this court allowed interest charges of 6 per cent., plus commissions of 10 per cent. for acting as selling agents, together with a discount of 10 per cent. on each loan to the bankrupt. There seems no justification in nullifying the agreement of the parties here, because the interest and commissions which they deliberately arranged were too large to satisfy the ideas of a court. Here, as in other similar cases, the competition of the market fixes rates. The statute has not attempted to control usury contracts made by corporations. Any decision by a court as to what would be a reasonable rate would either have to vary with the kind of security furnished or else be a mere doctrinaire pronouncement. Corporate contracts to pay more than the statutory rate of interest have been, and we believe should be, left to the agreement of the parties, and not disturbed, in the absence of fraud or duress.

The agreement to pay legal expenses is set forth in the contract of August 31, 1925, which provides that "the bankers may employ counsel to advise them, and charge the account of the client with attorney's fees actually incurred, or reasonable prospective attorney's fees, and the amount thereof shall be added to the lien of the bankers and be secured by the collateral." This clause is broader than the usual provision, and in terms covers the services rendered in this case. The fee charged was concededly reasonable in amount.

In Boise v. Talcott, supra, this court allowed compensation to attorneys of the lienor under an agreement for the payment of "all legal expenses and reasonable counsel fees," and we can see no objection to such an allowance, if the services plainly come within the terms of the agreement of the parties, as they seem to have done here.

The decision in Mercantile, etc., Corp. v. Warner Bros. Pictures, Inc., 215 App. Div. 530, 214 N. Y. S. 273 (affirmed without opinion in 244 N. Y. 504, 155 N. E. 873), is not in point as to the effect and general validity of a clause like the present, for there the agreement contained no reference to attorney's fees.

The contract of August 31, 1925, recites that "the parties desire to evidence the terms and conditions which are to govern the advance, other than as the same are to be embodied in the notes," and it provides at paragraph 5 that, in the event of failure to pay the notes, "the bankers shall be entitled to full additional commission and interest charges at the original rates agreed upon, until the loan is fully paid." No rate for these "additional commissions" is specified in the contract, and "commissions" are not even referred to in the notes. It is evident that parol testimony was necessary to explain what was the rate of the "additional commissions" agreed upon. The District Judge treated commissions and interest indistinguishably, but the oral testimony in the case did not (though some of the letters between the parties did, Creditor's Exhibit 4), and the written contract specifically differentiated them. We can find no justification in not adopting the same course, particularly when it is argued that our failure to do so would prevent proof of the rate of commissions agreed upon. Where the contract professes to cover terms "other than as the same are to be embodied in the notes," and then provides for the payment of commissions nowhere even mentioned in the notes, the contention that the notes embody the whole contract of the parties would seem to be unfounded.

The contract of August 31, supra, was manifestly incomplete, and the statement to the contrary in article 7 thereof, being plainly erroneous, must therefore be disregarded. In such circumstances there can be no doubt of the necessity of ascertaining by extrinsic evidence what the commissions were to be. While we do not suggest that the omission to fill in the blanks in the notes could not have been supplied by parol evidence, we have no reason to decide this point. Assuming, as the District Judge did, that the statutory rate of...