Pardee v. Fetter

• Decision Date: 14 May 1956
• Docket Number: No. 60,60
• Citation: 77 N.W.2d 124,345 Mich. 548
• Parties: M. L. PARDEE, d/b/a M. L. Pardee & Co., Plaintiff and Appellee, v. Harold E. FETTER, Defendant and Appellant.
• Court: Michigan Supreme Court

Page 124

77 N.W.2d 124

345 Mich. 548

M. L. PARDEE, d/b/a M. L. Pardee & Co., Plaintiff and Appellee, v. Harold E. FETTER, Defendant and Appellant.

No. 60.

Supreme Court of Michigan.

May 14, 1956.

David M. Miro, Detroit, for appellant.

Goddard, McClintock, Fulton & Donovan, and Theodore Souris, Detroit, for appellee.

Before the Entire Bench.

CARR, Justice.

Under date of May 27, 1949, a corporation of which defendant Fetter was president executed and delivered to plaintiff a promissory note in the sum of $5,000, due August 27th following, with interest at the rate of 2 1/2% per month. Defendant was an accommodation indorser on the instrument, waiving presentment for payment, notice of nonpayment, protest and notice of protest. Prior to the maturity of the obligation the corporation was adjudicated a bankrupt. Subsequently, on July 28, 1954, plaintiff received the sum of $2,866.39 from the assets of the estate. The case at bar was instituted in the trial court shortly thereafter for the purpose of enforcing liability of the defendant for the payment of the balance of the obligation. It is claimed that the amount received in the bankruptcy proceedings was applied against accrued interest.

The declaration filed by plaintiff averred the execution of the note, indorsement by defendant Fetter at the time of such execution, the bankruptcy of the maker, and the default in payment except as to the sum received from the bankrupt's estate. Judgment was claimed in the principal amount of the obligation plus interest computed at the rate designated. Defendant by answer admitted the material facts pleaded by plaintiff with reference to the giving of the note and its indorsement by him. By way of affirmative defenses the answer further alleged that the rate of interest reserved was usurious, that the note was executed by defendant without consideration, and that plaintiff had failed to exhaust his remedies against accounts assigned as collateral security.

After the cause was at issue plaintiff moved for summary judgment, supporting such motion by affidavit, on the basis of the facts as claimed by him. Defendant, by affidavit of merits, set forth the issues suggested by the affirmative defenses pleaded in the answer. Following a hearing on the motion the trial court determined the questions raised in favor of the plaintiff, and judgment was entered for the amount determined to be due by way of principal and interest on the note, together with costs. From such judgment defendant has appealed, asserting that the trial judge was in error in holding that the defense of usury was not available to him. The other questions suggested by defendant's answer and affidavit of merits are not raised on appeal.

As a general proposition the reservation of a usurious rate of interest on a note or similar obligation will, if properly raised, defeat recovery of any interest. C.L.1948, §§ 438.52, 438.53, Stat.Ann. §§ 19.12, 19.13. We are not concerned here with the statutory provision permitting a rate of interest in excess of 7% per annum on evidences of indebtedness issued by authority of the Michigan Public Service Commission, or the Michigan Corporation and Securities Commission, on which a higher rate is expressly permitted. However, C.L.1948, § 450.78, Stat.Ann. § 21.78, is applicable. Said section provides in substance that no corporation may raise the defense of usury in any action brought against it. It is conceded in the case at bar that under this provision, the validity of which was sustained in Wm. S. & John H. Thomas, Inc., v. Union Trust Co., 251 Mich. 279, 231 N.W. 619, the corporate maker of the note in question, had it been sued on the note, could not have interposed a defense of usury. It is the claim of the plaintiff in substance that the defendant indorser is in no different position in this respect. As before noted, the trial court agreed with plaintiff's contention.

In support of his position on appeal defendant cites and relies on Bock v. Lauman, 24 Pa. 435. That case involved the liability of the indorser of a bill of exchange drawn in New York by the agent of a corporation in favor of the president thereof. Subsequent to indorsement it was delivered to a note broker to be sold on behalf of the corporation. This was done at a substantial discount. The court concluded that the rights and obligations of the indorsers should be determined in accordance with the statutes of New York. Attention was directed to a provision of such statutes making an attempted reservation of a usurious rate of interest a misdemeanor, and also to another provision denying corporations the right to interpose the defense of usury in any action. Reference was made to the fact that at the time the interpretation of the statutory provisions involved had not been clearly expressed, the court finally reaching the conclusion that, even though the corporation could not raise the issue of usury, the indorsers, who in effect occupied the position of sureties, could do so. Judgment was entered accordingly.

It appears from a line of New York cases subsequent to decision in Bock v. Lauman, supra, that the courts of that State have recognized a construction of the pertinent statutes at variance with that accepted by the Pennsylvania court. In commenting on this situation it is said in an annotation found in 6 A.L.R. 586 that:

'Notwithstanding some early decisions to the contrary (Bock v. Lauman (1855) 24 Pa. 435; Market Bank [of Troy] v. Smith (1858) Fed.Cas.No. 9,090; Hungerford's Bank v. Dodge (1860) 30 Barb. (N.Y.) 626, 10 Abb.Pr. [ac.] 24, 19 How.Pr. [ac.] 39, reversing (1858) 9 Abb.Pr. [ac.] 124), it is settled that the effect of the New York statute which provides that 'no corporation shall hereafter interpose the defense of usury in any action' [General Business Law N.Y., McKinney's Consol.Laws, c. 20, § 374] is to prevent not only the corporation itself, but also, its surety, guarantor, or indorser, from setting up usury.'

In support of the statement the annotator cites a number of cases, including Rosa v. Butterfield, 33 N.Y. 665, and Stewart v. Bramhall, 74 N.Y. 85. In the Rosa case the action was on notes given by a corporation as evidence of indebtedness, a rate of interest of 12% being reserved. The defendants were guarantors on the obligations. It was held that the agreement by the corporation to pay more than 7% interest per annum was binding on it and that the defendants were 'guarantors of lawful contracts, and therefore liable upon their guaranties.' This decision was followed in Stewart v. Bramhall, supra, in which it was held that the defendant, who was an accommodation indorser on the note of a corporation, could not defeat liability on the ground of usury. In reaching such conclusion, it was said:

'The corporation was the borrower, and primarily liable on the note, and the defendant was surety merely. As such he must abide by the condition of his principal and has no separate standing in respect to the defense of usury. (Union National Bank v. Wheeler, 60 N.Y. 612.)'

Of similar import are: Salvin v. Myles Realty Company, 227 N.Y. 51, 124 N.E. 94, 6 A.L.R. 581; General Phoenix Corporation v. Cabot, 300 N.Y. 87, 89 N.E.2d 238; Ollendorf v. Lissberger, 176 Misc. 661, 28 N.Y.S.2d 455.

In accord with the New York cases above cited is Tennant v. Joerns, 329 Ill. 34, 160 N.E. 160, 163. There the defendants were guarantors of notes executed by a corporation and sought to defend an action to enforce their liability on the ground that a usurious rate of interest had been reserved. A State statute in force at the time, a provision of the general corporation act of the State, granted to corporations the right to borrow money at such rate of interest as might be determined without reference to restrictions under any usury law of the State. The court sustained the validity of the provision as against certain objections raised, holding that the purpose of the legislature was to withdraw from the operation of the statute relating to usury loans made to corporations. It was further pointed out that the defense defense of usury rests upon statute and not on the basis of a common law right. In rejucting the claim that, while such defense was not available to the corporation, it might be invoked by sureties, the court said:

'The general rule is that the liability of the surety is no greater and no less than that of the principal, and where the defense of usury could not be invoked by the corporation it cannot be invoked by the surety.'

In support of the conclusion certain New York cases were cited, including Rosa v. Butterfield, supra, and Salvin v. Myles Realty Company, supra.

In Fine v. H. Klein, Inc., 10 N.J.Super. 295, 77 A.2d 295, 298, the action was brought on promissory notes executed by the defendant corporation and indorsed by individual defendants. Pleas based on claims that the rate of interest reserved was usurious were interposed. The statute of New Jersey is very similar to that of Michigan and in terms precludes a corporation from setting up the defense of usury in an action to enforce a remedy on a corporation obligation. It was held that under such statute the defense of usury was not available to the maker of the notes and that it was 'likewise unavailable to the individual endorsers on the notes.' Plaintiff's motion to strike the defense of usury was granted. A conclusion in accord with the decisions above cited was likewise reached by the Circuit Court of Appeals of the 8th Circuit in Winkle v. Scott, 99 F.2d 299.

Under the facts in the instant case the liability assumed by the accommodation indorser was in practical effect that of a surety. Warner v. Fallon Coal Mines Co., 246 Mich. 493, 224 N.W. 601. The obligation of the corporate maker of the note was to pay it in accordance with its tenor. The liability of defendant Fetter was commensurate with that of the principal. It must be assumed that he...