National Trust & Credit Co. v. F.H. Orcutt & Son Co.

• Decision Date: 02 April 1919
• Docket Number: 2662.
• Citation: 259 F. 830
• Parties: NATIONAL TRUST & CREDIT CO. v. F. H. ORCUTT & SON CO. et al.
• Court: U.S. Court of Appeals — Seventh Circuit

259 F. 830

NATIONAL TRUST & CREDIT CO. v. F. H. ORCUTT & SON CO. et al.

No. 2662.

United States Court of Appeals, Seventh Circuit.

April 2, 1919

Rehearing Denied May 15, 1919.

John W Creekmur and Donald J. De Wolfe, both of Chicago, Ill., for appellant.

William S. Oppenheim, of Chicago, Ill., for appellees.

Before BAKER, ALSCHULER, and EVANS, Circuit Judges.

ALSCHULER Circuit Judge.

Appellant a business corporation organized under the general incorporation laws of Illinois, for the purpose inter alia of purchasing accounts receivable, made a written agreement at Chicago, May 26, 1910, with appellee F. H. Orcutt & Son Company (referred to herein as the Company), a Nebraska wholesale merchandising corporation, the general purport of which is that thereafter the Company might sell and duly assign to appellant such of the Company's customers' current accounts as it desired so to dispose of, and that appellant should upon such of the accounts as it approved at once pay the Company about 80 per cent. of the face thereof that the Company as agent for appellant should receive from the customers the remittances for the accounts, and as received send them to appellant, which was given power of attorney to indorse them; whereupon appellant should deduct therefrom its first advance, its own charges, and whatever if any expense it had incurred, and remit the rest to the Company as payment of the balance of purchase price of such accounts. The Company guaranteed the payment of all the accounts, and agreed to pay appellant within five days after notice of default the face value of defaulted accounts.

Upon the execution of the contract dealings between the parties, substantially on the plan outlined in the contract, commenced, and actively continued for over two years, covering hundreds of separate accounts aggregating in face value nearly half a million dollars. In 1912 the Company became deeply involved, and the number of accounts grew less, and in September appellant terminated the Company's agency to collect assigned accounts and itself proceeded to collect them. In December the Company, with the consent of all the creditors (except appellant), made a general assignment for the benefit of its creditors, and there then remained unpaid of previously assigned accounts somewhat over $75,000, which appellant was undertaking itself to collect. Where remittances came to the trustees they sent them to appellant.

The amounts which appellant retained ostensibly as the profits in the transactions exceeded the maximum which under the interest laws of Illinois may be taken as interest on loans. The bill herein, filed May 13, 1914, by the Company and its trustees, is predicated on the claim that these transactions between the parties, while purporting to be sales of accounts, were in fact loans from appellant to the Company; that the interest on such loans which appellant really contracted to receive, and did receive, was usurious; and that appellant should be required to account for all such usurious payments of interest beyond the Illinois noncontract rate of 5 per cent. per annum. An amendment to the bill set up the additional claim that appellant had no charter power to make loans, and that as a loaning agreement the contract was unlawful and void, but did not affect the relief demanded in the bill.

Upon this basis accounting was ordered, resulting in a decree against appellant for $17,353.38, after allowing it various items for service and expense in the collection of certain of the later assigned accounts.

Appellant contends that the contract was one of sale and not of loan, wherefore the transactions were within appellant's charter powers, and were not subject to the complaint of usury; and that in any event many, or most, of the transactions were, as between the parties thereto, settled and closed, and were not properly subject to be reopened for inclusion in the accounting.

The contract here is in all essentials like those which the federal and the Illinois courts have held to be in fact loaning contracts, and not contracts for sale of accounts as on the face they purport to be, and the transactions under them to be loans and not sales. Mercantile Trust Co. v. Kastor, 273 Ill. 332, 112 N.E. 988; Dorothy v. Commonwealth Co., 278 Ill. 629, 116 N.E. 143; Home Bond Co. v. McChesney, Trustee, 239 U.S. 568, 36 Sup.Ct. 170, 60 L.Ed. 444; In re Grand Union Co., 219 F. 353, 135 C.C.A. 237. The contract in question must therefore be regarded as if loans, and not sales, were its subject-matter. But, appellant being organized under the general incorporation act of the state of Illinois, it concededly follows that it had no power under its charter to engage in the loaning business, and that its loaning transactions are, as such, ultra vires and void. Mercantile Trust Co. v. Kastor, supra; Calumet, etc., Dock Co. v. Conklin, 273 Ill. 318, 112 N.E. 982, L.R.A. 1917B, 814; North Avenue Building & Loan Association v. Huber, 270 Ill. 75, 110 N.E. 312, Ann. Cas. 1917B, 587; Central Transp. Co. v. Pullman's Car Co., 139 U.S. 24, 11 Sup.Ct. 478, 35 L.Ed. 55.

Holding, as we do, that the real transaction between these parties was intended to be, and was in fact, for loans of money and not sales of accounts, and that appellant had not the legal capacity to enter into such transactions, the contract had no validity whatever, and neither party could enforce it, nor predicate upon it any right of recovery.

Accounting upon the long series of transactions between these parties is permissible, not because of the void contractual relation, but because of what the parties actually did in the course of their dealings. But, in so far as the accounting was had upon the theory that the profits which appellant took for the making of loans were larger than the maximum interest rate allowed by the Illinois statutes, it must be said that under the law of Illinois transactions tainted with usury, but which have nevertheless been definitely settled and closed as between the parties thereto, cannot thereafter be made the subject of a recovery or accounting for the usurious interest payments. Dorothy v. Commonwealth Co., supra; Richter v. Burdock, 257 Ill. 410, 100 N.E. 1063; Lake v. Brown, 116 Ill. 83, 4 N.E. 773; Riddle v. Rosenfeld, 103 Ill. 600. This is likewise the law generally respecting recovery and accounting for transactions had pursuant to contracts void only for lack of power to enter into them. In Central Transp. Co. v. Pullman's Car Co., 139 U.S. 24, 11 Sup.Ct. 478, 35 L.Ed. 55, recovery was sought of rent specified to be paid by the Pullman Company under a lease to it of the cars of another sleeping car company. The court held that the lease was one which the parties to it had not the power to make, and that it was 'wholly void and of no effect,' and recovery under the lease was denied. But in a subsequent action, involving accounting between the same parties, respecting the same property, and under the same purported leasing contract, the same court, adhering to its previous conclusion of the invalidity and unlawfulness of the lease, said, respecting demand for accounting for the rents paid:

'During the fifteen years elapsing from 1870 to 1885 no violation of the terms of the lease by either party is complained of, and we think the whole transaction between the parties during those fifteen years must be treated as closed, so that no examination should be made in regard to anything that happened within that time. ' Pullman's Car Co. v. Central Transp. Co., 171 U.S. 138, 18 Sup.Ct. 808, 43 L.Ed. 108.

See, also, St. Louis R.R. v. Terre Haute R.R., 145 U.S. 393, 12 Sup.Ct. 953, 36 L.Ed. 748; Spring Co. v. Knowlton, 103 U.S. 49, 26 L.Ed. 347; Thomas v. Railroad Co., 101 U.S. 71, 25 L.Ed. 950; Thomas v. City of Richmond, 12 Wall. 349, 20 L.Ed. 453; Leigh v. American Brake-Beam Co., 205 Ill. 147, 68 N.E. 713.

The executed agreement here merely set out the basis for future dealings of the parties. If, after its execution, the Company had sent no accounts to appellant, that would have been the end of the business, for the contract distinctly states that the Company was not obligated to sell any accounts. While the contract, treated as a loaning agreement, is void, yet, in order to arrive at an understanding of what the parties actually did, it is proper and well to know what they mutually purported or intended to do, and resort may be had to anything that will throw light thereon-- even for such purpose to the contract itself, however void as an obligation. What they actually did, viewed in the light of what they intended to do, must determine what, if any, of their many transactions were closed and settled. For such closure and settlement no particular form or ceremony was necessary. Receipts need not be passed nor formal declaration made. If the fair and reasonable deduction from the acts and conduct of the parties is that certain of their transactions were as between them closed and settled, they are closed and settled accordingly. The evidence bearing upon this subject is practically undisputed, the question being as to the legal effect to be given it.

After the execution of the contract the Company at once began sending accounts to appellant, each time making formal written assignment of the accounts sent. They were sent as first as often as once a week, and thereafter more frequently-- as often as daily; but for some months prior to the end of the business the volume was much less. In each instance appellant paid (on the purported purchase price therefor) approximately 80 per cent. of the face of the accounts sent, and remitted the balance, less its charges after the customer had fully paid the account, rendering an account of the...