Kramer v. McCormick

Decision Date14 May 1984
Docket NumberNo. 1263,1263
Citation59 Md.App. 193,474 A.2d 1346
PartiesRichard E. KRAMER, et al. v. James H. McCORMICK. Sept. Term 1983.
CourtCourt of Special Appeals of Maryland

Jeffrey N. Pritzker, Baltimore, with whom were Margolis, Pritzker & Epstein, P.A., Baltimore, on brief, for appellants.

Peter B. Turney, Baltimore, for appellee.

Argued before MOYLAN, LOWE and BELL, JJ.

LOWE, Judge.


Literally, if not historically, money lending has not been an industry held in the highest esteem. Historians have demeaned such lenders, 1 playwrights have derided them. 2 It is at best a chancy business; at worst it can be dangerous. Public concern is reflected by its unique posture as the only industry constitutionally controlled absent legislative limitations. The Md. Const. Art. III, § 57 states that

"[t]he Legal Rate of Interest shall be Six per cent. per annum; unless otherwise provided by the General Assembly."

The General Assembly has tried to keep up with the ingenuity of the industry's exacting of profits from lending by means other than interest--such as points, forfeitures, prepaid interest, prepayment penalties and the like--but fully understood that contemporary society was more and more dependent upon credit. Rather than driving the industry to obscure its profits or dry up lending altogether, it began to relax its limits on interest. It varied the rates according to the degree of risk involved.

Procedurally the Legislature generally decided that the legal rate of interest should remain at 6 per cent. per annum. Comm.Law, § 12-102. It then permitted proportionately increased rates of interest for 1) loans under written agreements, 2) loans secured by residential real estate, 3) unsecured installment loans, 4) secondary mortgage loans, 5) retail installment sales, 6) small loans, etc. Significantly, it appears that the Legislature felt that commercial and corporate borrowers did not need any of the limitation protections which it had graduated for the rest of us; it declared that loans to corporations or those borrowing' over $5,000 for commercial purposes could be charged interest without limit. Comm.Law, § 12-103.

As the interest rates were relaxed the penalties for usury were increased. In addition to criminal penalties imposed for violating the loan laws, Com.Law, § 12-414, the Legislature imposed substantial civil penalties:

"Except for a bona fide error of computation, if a lender violates any provision of this subtitle he may collect only the principal amount of the loan and may not collect any interest, costs, or other charges with respect to the loan. In addition, a lender who knowingly violates any provision of this subtitle also shall forfeit to the borrower three times the amount of interest and charges collected in excess of that authorized by law." Com.Law, § 12-413.

Obviously, this treble excess interest penalty was intended to deter the temptation to exceed the liberalized rates; however, there were lenders still not satisfied by the liberalized interest nor deterred by the treble damages. Users could avoid interest limitations simply by having a distraught borrower sign an affidavit that his loan was a commercial one; that is, solely to acquire or carry on a business or commercial enterprise. Com.Law, § 12-101(c)(1).

Effective July 1, 1980, the Legislature devised a deterrent to that practice as well. It exposed those lenders who knowingly tried to circumvent the legal limits imposed by the Legislature through such a subterfuge to another penalty of treble interest and charges contracted for beyond legal limits.

"(a) Prohibited.--A person may not require a borrower, as a condition to receiving a loan to make any false or misleading statement or characterization that a loan is a commercial loan under §§ 12-101(c), 12-103(e), or 12-105 of this subtitle if the loan is not a commercial loan.

(b) Penalty.--Any person who willfully requires a borrower to make a false or misleading statement in violation of subsection (a), or who willfully procures such statement, knowing that it is false or misleading, shall forfeit to the borrower three times the amount of interest and charges contracted for or collected in excess of that permitted by law, in addition to any other penalty otherwise provided in this title." Com.Law, § 12-106.1.


Because the loan at issue in this case was made on July 31, 1980, perhaps appellant lenders were not aware of their exposure when they required an affidavit from appellee that their loan of $15,000 to him for the purpose of paying off a foreclosed second mortgage, defaults in a first mortgage and a fuel bill reduced to judgment, was solely to carry on a commercial enterprise.

Appellee, James H. McCormick's problems had begun before he ever met any of the appellants. Although he owned a home worth $72,000, it was encumbered by a first mortgage (Leeds Federal Savings and Loan) of approximately $40,000 and a second mortgage of nearly $10,000 (North American Credit Corporation). In 1978, appellee's small medical-supply business failed and it took nearly a year for him to find a job. That employment lasted another year and by 1980, appellee was again unemployed. His debts mounted; he was in default on both mortgages; North American foreclosed; the sale was scheduled for July 31, 1980.

Appellee contacted North American about three days before the sale to ascertain how he might avert that catastrophe and was referred to North American's lawyer, Jay Fred Cohen. Despite Mr. Cohen's seeming acquiescence to the request to "postpone" the foreclosure for the $1300 that appellee had raised, Cohen proposed a different solution to Mr. McCormick.

"He indicated to me that the $1,300, he could accept it, but I would be back, by not working I'd be back in the same position, you know, that I was in if he accepted the money. He says, he became my advisor, and he says, 'Maybe what you should do is get it refinanced, and that will give you time to get some additional monies,' which sounded okay because I was sort of pressed for money at the time. So he indicated to me that he knew someone that was in the money loaning business, that was up the street from him, two or three doors up the street.

Q Did he name him?

A Yeah, he called his name then, but it wouldn't ring a bell to me. I don't know if he did call his name, because he says, 'I have a friend,' or, 'Someone comes in here all the time that loans money.' So he says, 'Maybe he can help you,' like that. So I says, 'Well, let me talk to him.' He says, 'He was just in here a couple of minutes ago.' I think he had his secretary look around. 'I think he should have been upstairs,' or something. But he wasn't upstairs. So he says, 'He's in and out of here every ten or fifteen minutes, so he'll probably be back.' So we started talking a little bit more. And then Mr. Mirsky came in, and he introduced me to him.

Q You are referring to the same Mr. Howard Mirsky--

A Right, uh-huh. And he told him, Fred Jay Cohen said to Mirsky, 'Mr. McCormick needs some money. Do you think you can help him?' And Mirsky says, 'Maybe so, I don't know.' He says, "Why don't you come up to my office and we'll sit down and talk about it,' which I did."

Mr. Mirsky perceived the essence of appellee's pecuniary concerns, had him pay off an overdue real estate tax and agreed to refinance the second mortgage loan. Appellee was told to be at Mr. Mirsky's office on the morning of July 31, 1980--the same day the foreclosure was scheduled for the afternoon. Apparently among the many papers placed before Mr. McCormick for his signature was an affidavit indicating that the money borrowed was for the purpose of entering the insurance business, although appellee did not specifically recall it. In fact, he testified that he clearly told the mortgage broker, Mr. Mirsky, the broker's lawyer, Mr. Kramer, and even Jay Fred Cohen, that he had no business and was not anticipating starting another one. He hoped to work as an insurance salesman, but as an employee of another, not in a business of his own.

"Mr. Mirsky and Mr. Kramer, I told both of them, I even mentioned it to Fred Jay Cohen that I didn't have a job. He indicated to me that, 'Well, I'm not supposed to make a loan of this size, I'm not licensed,' or, 'I'm not for something of this size unless you have a business.' I said, 'Well, I don't have a business.' He said, 'Well, we can work out something.' He said, 'Who do you think you will be going to work for?' I says, 'Hopefully I'm supposed to go to work for Paul Revere tomorrow or the next day, or something like that.' He said, 'Well, okay, then we'll work out something,' like that. So I left it at that."

To avert the foreclosure by a noon deadline, appellee "signed the papers" that were ready for him when he entered the office. These included a second trust on McCormick's home with Mirsky and Kramer as trustees for Associated Mortgage Group and/or Howard W. Mirsky. In addition to Mirsky, the Associated Mortgage Group consisted of Ellis Shapiro and Dennis Weiner. The terms of the second trust loan were not overly complicated. The loan was for $15,000, from which the foreclosed second mortgage was paid off in the amount of $9,259; the first mortgage back payments were paid up in the amount of $1,355; a fuel oil bill reduced to judgment was paid in the amount of $270; and a mortgage broker fee was paid to Mirsky in the sum of $4,000 (from which he paid $82.50 recording costs). Twenty-seven percent interest was payable monthly for the eighteen month term of the loan at the end of which (February 1, 1982) the entire principal was due and payable.

By March 27, 1981 the loan was in default. Suit was docketed foreclosing the deed of trust. On July 7, 1981, appellee's 70 to 75 thousand dollar home was sold to Dennis H. Weiner on behalf of General Realty Co. for $1,000, subject to a mortgage of $35,420.16. General Realty Co., coincidentally, was...

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