Ryan v. Motor Credit Co., Inc.

• Citation: 130 N.J.Eq. 531,23 A.2d 607
• Decision Date: 26 November 1941
• Docket Number: 120/268.
• Parties: RYAN v. MOTOR CREDIT CO., Inc., et al.
• Court: New Jersey Court of Chancery

23 A.2d 607

130 N.J.Eq. 531

RYAN

v. MOTOR CREDIT CO., Inc., et al.

120/268.

Court of Chancery of New Jersey.

Nov. 26, 1941.

[Copyrighted material omitted.]

Syllabus by the Court.

1. Whatever vice is inherent in an original usurious loan transaction follows and attaches to all substituted obligations.

2. Commercial paper evidencing loans by a small loan company licensed under Chapter 62, P.L.1932, N.J.S.A. 17:10-1 et seq., issued in violation of the provisions of that act, are void and unenforceable, and the fact that the parties did not wilfully or Intentionally violate the act is immaterial.

3. A bill of discovery will not lie to enforce a penalty or a forfeiture. It is against the general principles of equity to aid in the enforcement of penalties and forfeitures.

4. One who comes Into a court of conscience to enforce a forfeiture must come with skirts free from blame in the transaction.

5. Penal laws, strictly speaking, are those imposing punishment for an offense against the state, and the test whether a law is penal is whether the wrong sought to be redressed is a wrong to the public or a wrong to the individual.

6. A statute may be both penal and remedial.

7. A statute which will support an indictment for a crime is penal in character.

8. Chapter 62, P.L.1932, is remedial as to the borrower and penal as to the lender.

9. The statute of limitations, 3 C.S. § 3170, Sec, 21, N.J.S.A. 2:24-22 is a bar to any action by a borrower against a lender for a penalty under Chapter 62, P.L.1932, arising out of any transaction completed more than two years before the beginning of the suit.

10. Excess loans by a small loan company licensed under the Small Loan Act, Chapter 62, P.L.1932, being prohibited by the statute, are void and unenforceable.

11. It is a rule of both law and equity that no one can found a cause of action on an illegal contract or interpose its illegality as a defense to such action.

12. As a general rule equity will not aid one party or another to an illegal transaction where they stand in pari delicto, but will leave them just where it finds them. Where, however, the party seeking relief is not a free moral agent, and his consent to the illegal transaction is obtained through duress, menace, or undue influence, he is not regarded as in pari delicto with the person obtaining his consent by the employment of such means, and will not be precluded from invoking affirmative relief in equity to set aside contracts or instruments so executed, or to defeat an attempted enforcement of them against him. This constitutes an exception to the general rule. In such cases relief is granted not to the party, but to the public through the party because the public interest requires that relief be given. This is done, not out of regard for the defendant in the action, but because of the courts' unwillingness to use the powers granted them for the furtherance of lawful ends in aiding schemes in their nature venal, or for the purpose of relieving parties from the liability which such schemes create.

13. The exception and not the rule is usually applied to cases arising out of usurious contracts and contracts violative of the Small Loan Act because in those cases it is presumed that the borrower is always the oppressed victim of circumstance, the slave of the lender, and is not, therefore, in pari delicto.

14. But this presumption is rebuttable by proof that the parties are actually in pari delicto. Whether or not they are so is a question of fact to be determined by the jury, or by the court when sitting without a jury.

15. Presumptions are merely substitutes for evidence. Both presumption and fiction are resorted to simply for the furtherance of justice. Neither will be permitted to work any wrong to the individual or the state.

16. The provisions of the Small Loan Act imposing penalties upon the lender, giving certain rights to the borrower, and voiding contracts violative of that act, were designed to prevent oppression of the weak and poor; they were not designed to encourage fraud or as rewards for the perfidy of the borrower. Therefore, where excessive loans are made by a licensee to a borrower with the deliberate purpose of defeating the statute, the lender and the borrower freely conspiring to that end, no restraint or oppression of the borrower by the lender being involved, and no advantage of the borrower taken by the lender, the parties to the transaction are both particeps criminis and in pari delicto, and the rule and not the exception applies.

17. In an action based upon an illegal contract it is not necessary that the rule of law expressed in the maxims "In pari delicto potior est conditio defendentis, et possidentis," or "ex turpi causa non oritur actio" be pleaded by the defendant; it may be invoked by the court on its own motion.

18. A plea that the complainant does not come into a court of equity with clean hands is inclusive of the doctrine and rule expressed in the above maxims.

19. Where the officers of a small loan company licensed under Chapter 62, P.L. 1932, entered into over four hundred illegal loan transactions with a borrower in violation of the prohibitions of the statute, with the deliberate purpose on the part of both lender and borrower to set at naught its provisions, such contract constitutes a fraud on the statute, the parties are in pari delicto and this court will neither aid the lender in its effort to recover upon its contracts of loan, nor reward the borrower for his perfidy by imposing statutory penalties upon the lender for the benefit of the borrower. In such case the court will leave the parties exactly where they have placed themselves by their own fraudulent acts.

Suit by William Ryan against the Motor Credit Company, Incorporated, and another, for forfeiture of notes and other obligations, surrender and cancellation of written instruments, and other relief, wherein defendants counterclaimed.

Bill and counterclaim dismissed.

Fast & Fast, of Newark (Israel B. Greene, of Newark, of counsel), for complainants.

Charles Blume, of Newark (James D. Carpenter, Jr., of Jersey City, of counsel), for defendants.

BERRY, Vice Chancellor.

This controversy arises under the Small Loan Act, Chapter 62, P.L. 1932, page 94, and not under R.S. 17:10-1 et seq, N.J.S.A. 17:10-1 et seq, referred to in the brief filed on behalf of complainant, as all of the transactions here involved occurred prior to the effective date of the Revision.

By this bill the complainant seeks a forfeiture of certain notes and other obligations in writing executed by the complainant in favor of the defendants (one or both), the surrender and cancellation of certain written instruments evidencing such obligations, and the recovery of a penalty from the defendants because of their alleged violation of certain provisions of the Small Loan Act.

The controversy arises out of the following circumstances:

The complainant is a dealer in secondhand automobiles and had, for about ten years previous to the filing of the bill of complaint, been engaged in the purchase and sale of automobiles in Essex County, New Jersey, carrying on his business on several different parking lots in Newark and Irvington. The defendant Motor Credit Company, Inc., is a New Jersey corporation licensed to operate under the Small Loan Act and is a subsidiary of the co-defendant General Acceptance Corporation which owns all of its stock. The two corporations have common or interlocking officers and directors.

In the course of its business the defendant Motor Credit Company, Inc., loaned money on the security of automobiles, and from time to time took into its possession cars pledged for such loans. It found a ready outlet for many of these cars through the complainant who, in order to finance his purchases from this defendant, obtained loans from it from time to time, pledging the cars so purchased as security for such loans.

In 1935 these business transactions materially increased, and in order to circumvent the prohibition of the statute which limited the amount which any one individual could owe to a small loan company at any one time to $300, the complainant and the defendant Motor Credit Company, Inc., entered into an arrangement whereby the complainant obtained the necessary loans in the names of nominees, relatives, friends, employees or fictitious persons. In some instances the papers evidencing such loans were signed by the various nominees, but in many instances the complainant himself signed the papers using fictitious names or forging the names of others. Names for this purpose were sometimes selected at random from telephone directories, from tombstones or taken from the thin air. The result was that in the spring of 1937, when an accounting was had between the parties, the complainant owed the defendant Motor Credit Company, Inc., on account of such loans, a sum in excess of $28,000. The evidence indicates that in the two years preceding the filing of this bill the loans from Motor Credit Company to complainant were in excess of $75,000, and he claims to have paid to the defendants on account of these various loans more than $50,000. A schedule of the loans during this period, made up from the defendants' records, was offered in evidence and marked Exhibit C-18. From this and other evidence it appears that there were 472 dummy loans made by the defendant Motor Credit Company, Inc., to complainant during 1935, 1936 and 1937. Many of these loans were obtained by either the complainant or his nominees signing the papers in blank and leaving them with the Motor Credit Company, Inc., to be filled in at a later date as occasion should require. Bills of sale which were supposed to accompany these transactions and to be filed in the Motor Vehicle Department were not, in many instances, furnished, and generally speaking, there was no attempt at actual compliance with the requirements of the statute. In May,...