Northway Lanes v. Hackley Union Nat. Bank & Trust Co., 71-1987.
| Decision Date | 18 July 1972 |
| Docket Number | No. 71-1987.,71-1987. |
| Citation | 464 F.2d 855 |
| Parties | NORTHWAY LANES, a co-partnership consisting of Ralph Kuris and Bessie Shull, and Marshull, Inc., a Michigan corporation, Plaintiffs-Appellants, v. HACKLEY UNION NATIONAL BANK AND TRUST COMPANY, a National Banking Association, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Sixth Circuit |
Arthur M. Rude, Muskegon, Mich., for appellants; Parmenter, Forsythe, Rude & Dethmers, Muskegon, Mich., on brief.
H. Winston Hathaway, Muskegon, Mich., for appellee; Landman, Hathaway, Latimer, Clink & Robb, Muskegon, Mich., on brief.
John P. Milanowski, Grand Rapids, Mich., L. Patrick Gray, III, Walter H. Fleischer and Robert Feinson, Attys. Dept. of Justice, Washington, D. C., on brief amicus curiae for United States; John E. Shockey, Comptroller of the Currency, Washington, D. C., of counsel.
Before CELEBREZZE and PECK, Circuit Judges; and RUBIN, District Judge*.
Sections 85 and 86 of the National Bank Act, 12 U.S.C.A., §§ 85 and 86,1 prescribe the rates of interest that may be charged by national banking associations and declare that the receiving of a rate of interest greater than that allowed, when knowingly done, shall give rise to a statutory proceeding for double that amount of interest.
Appellants herein, Northway Lanes, a co-partnership consisting of Ralph Kuris and Bessie Shull, and Marshull, Inc., the successor corporation, brought this action under section 86 in the United States District Court for the Western District of Michigan, to recover from appellee the penalty imposed by that section. From an adverse judgment, 334 F.Supp. 723, they appeal.
This controversy began on November 10, 1967, when the appellee bank, a national banking association, loaned to appellants Kuris and Shull, both individually and doing business as a co-partnership under the name of "Northway Lanes," $600,000.00 for the construction and operation of an eight lane bowling alley. Because banking associations in Michigan are subject to limitations as to the amount they may loan on real estate, two separate loans were arranged in the following manner: first, a mortgage note in the face amount of $350,000.00, secured primarily by the underlying real estate with the bowling alley equipment as additional collateral; and second, an installment note in the face amount of $337,500.00 of which latter amount $87,500.00 was interest reserved by the bank in advance. The primary security for this installment loan was the bowling alley equipment and a second lien was granted upon the improved real estate.
By the terms of the mortgage note, the appellants obligated themselves to pay the principal sum of $350,000.00, with interest at the rate of 7% per year for a term of seven years. The mortgage note was payable in monthly installments of $5,283.00, with the payments to be applied first to interest and then to principal. The mortgage note also reserved to the borrower the privilege of prepayment, subject to a 5% prepayment charge if prepaid during the year 1968, and reserved to the lender the right to charge a 4% late charge on any delinquent installment.
Interest on the installment note amounted to $7.00 per $100.00 per year. The note was payable in forty monthly installments of $8,437.50 each, commencing November 20, 1967, and continuing on the same day of each month except May, June, July and August of each year. It contained no specific provision allocating a specific principal or interest factor to each installment payment, but did contain provisions similar to the mortgage note with respect to prepayment and late charges. With regard to both the mortgage note and the installment note, the reservation by the lender of 7% interest was the maximum permitted under Michigan law.2
In addition to the above terms, the appellants obligated themselves to pay all out-of-pocket expenses incurred by the appellee bank in connection with both the real estate mortgage and the installment loans, and to furnish the bank with a land survey and a commitment of title insurance satisfactory to it. Pursuant to this agreement, the appellee bank charged the borrowers $1,595.00 to cover the expenses of the loan. These expenses consisted of $876.00 for title insurance, $125.00 for land survey, $575.00 for attorney's fees for the bank's attorney, $14.00 for recording the new mortgage, $3.00 for title search, and $2.00 for security instrument filing fee.
The partnership, in the latter part of 1967 and the early part of 1968, made one payment on the mortgage note in the amount of $5,448.50 and four payments on the installment note of $8,437.50 each. On February 27, 1968, appellant corporation, Marshull, Inc., a Michigan corporation, was organized with the former partners as officers and sole stockholders thereof. On March 1, 1968, the partnership conveyed the business real estate to the corporation by deed, subject to the real estate mortgage to the appellee bank, which mortgage the appellant corporation assumed and agreed to pay. The personal property covered by the security agreement was also conveyed by the partnership to the corporation, by bill of sale executed the same day. However, no arrangement was made between the appellee bank and the corporation to relieve the co-partners Kuris and Shull individually from liability on the existing indebtedness.
Subsequent to March 1, 1968, the record shows that at least one payment, in the amount of $8,437.50, was made by the newly formed corporation on a Marshull, Inc. check. On April 16, 1968, both notes were paid off in full. Included in the final payment amount of $592,073.04 was a prepayment charge of $30,000.00, of which $17,500.00 was attributable to the mortgage note and $12,500.00 to the installment note.
Having discharged their indebtedness to the bank in full, appellants Kuris and Shull, in their capacity as partners of Northway Lanes, and Marshull, Inc., filed a complaint in the United States District Court for the Western District of Michigan under the provisions of Sections 85 and 86 of the National Bank Act, supra, n. 1, alleging that the deduction by the appellee bank of interest in advance, the assessment against the appellants of $1,595.00 in so-called "closing charges," and the imposition of a $30,000.00 prepayment charge separately and collectively constituted usurious interest, for which they sought double damages under 12 U.S.C.A. § 86, or twice the following amount:
Interest at 7% for 158 days $25,071.62
Prepayment charges 30,000.00
Title insurance on mortgage's interest only 876.00
Land survey 125.00
Bank's attorney fees 575.00
Recording new mortgage (2 counties) 14.00
Financing search 3.00
Security instrument filing fee 2.00
__________
TOTAL $56,666.62
The District Court, by order of July 12, 1971, concluded that none of appellants' contentions were meritorious and dismissed the action after a trial upon the merits. From this order, appellants have prosecuted a timely appeal.
The threshold question raised in this appeal involves the standing of the appellants to assert a cause of action founded upon usury. Under Michigan statute, as construed by the Michigan courts, a corporation may, by written agreement, contract to pay a rate of interest in excess of the general legal rate. If it does, such corporation is barred from asserting the defense of usury, see M.C.L.A. § 450.78, or from in any way seeking "to avoid its own contract by showing that it is usurious." Thomas, Inc. v. Union Trust Co., 251 Mich. 279, 231 N.W. 619 (1930). Appellee argued below and reasserts on appeal that Marshull, Inc. as the successor corporation to the co-partnership consisting of appellants individually, agreed in writing to assume and pay the indebtedness owed to the bank, that the bulk of all payments were in fact paid by Marshull, Inc., and, therefore, that as to these payments at least, a cause of action in usury cannot lie on its behalf.
The District Court below found, as a matter of fact, first, that during the period of corporate formation and conveyance of real and personal property by the partnership to the corporation, the appellee bank was not notified and had no knowledge that incorporation and assumption of the partnership debts had occurred; and second, that no arrangement was ever made between the bank and Marshull, Inc. to relieve the appellants individually from liability on the existing indebtedness. The Court further concluded that the obligation on the notes and the mortgage, so far as the bank was concerned, remained at all times with the partnership and the individuals, and that payment was made on their account and to their benefit even though channeled through the corporation to enable the loan to be paid off. We agree. The relationship of debtor and credit was created when individuals Kuris and Shull, doing business as a partnership, borrowed money from the Hackley Union National Bank & Trust Company. No substitution for such debtors was ever made and that relationship never ended. Partners who continue to hold themselves out as such after the formation of a successor corporation cannot escape responsibility for their pre-existing contracts in the absence of actual notice to creditors that the partnership has been dissolved. Peninsular Store Company v. Crane, 226 Mich. 130, 197 N.W. 693 (1924); Sibley v. Parsons, 93 Mich. 538, 53 N.W. 786 (1893); 40 Am.Jur. Partnerships § 81, p. 186; Annot. 89 A.L.R. 986. Neither should such partners be fettered with a corporate inability to assert usury where such corporation has not replaced either the individual or the partnership...
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