Schneider v. Phelps

Decision Date13 January 1977
Citation41 N.Y.2d 238,391 N.Y.S.2d 568,359 N.E.2d 1361
Parties, 359 N.E.2d 1361 Esther S. SCHNEIDER et al., Respondents, v. Alma G. PHELPS, Appellant.
CourtNew York Court of Appeals Court of Appeals

William Griff, White Plains, for appellant.

Benjamin Rothstein, New York City, for respondents.

JASEN, Judge.

The plaintiffs in this action seek to foreclose a second mortgage on defendant's home given by the defendant Alma G. Phelps as security for her guarantee of a loan made by plaintiffs to her corporation, Mrs. Bradley G. Phelps, Inc. Defendant asserts that the transaction was usurious and the mortgage, therefore, unenforceable under section 5--501 of the General Obligations Law. Plaintiffs counter that the loan was made not to an individual but to a corporation, which by section 5--521 of the same statute is barred from interposing the defense of usury, and point out that the individual guarantor of a corporate obligation is also precluded from asserting that defense. (General Phoenix Corp. v. Cabot, 300 N.Y. 87, 95, 89 N.E.2d 238, 243.)

The facts, as gleaned from the affidavits of the various parties, reveal that in 1971 defendant, a 75-year-old widow and licensed real estate broker whose business activities were very limited and whose sole income consisted of Social Security payments, approached Harold Schneider, the husband of one of the plaintiffs, for a loan. Schneider was agreeable, provided that a corporation were organized to serve as borrower. Consequently, Mrs. Bradley G. Phelps, Inc., was formed by an attorney representing Schneider and Admiral Development Corporation. The latter, an organization in which Schneider was a principal stockholder, then made a loan of $7,000 with interest at the annual rate of 18% Nominally to the Phelps corporation. The defendant personally guaranteed the corporate loan and secured her guarantee by a second mortgage on her home. Additional loans of $3,000 and $2,000 were made by Admiral in January and May, 1972, also to the Phelps corporation. All of these loans, defendant claims, were necessitated by her own personal debts and the proceeds were applied exclusively to the discharge of such debts, as Schneider knew they would be. Schneider avers, however, that the loans were made on the strength of Mrs. Phelps' assertion that she had a 'number of deals pending'.

In September, 1972, defendant, again in need of funds, obtained a personal loan in the amount of $35,000 from the Fourth Federal Savings and Loan Association of New York--$17,000 of which was used to pay off a prior first mortgage on her home held by another financing institution, and $13,000 of which was used to pay off the obligations of the Phelps corporation to Admiral Development Corporation. The Fourth Federal loan was secured by a new first mortgage on defendant's residence, title to which remained at all times in her individual name.

Two new loans totaling $4,000 were made in 1973 by one Bernard Wain, ostensibly to the Phelps corporation but guaranteed personally by defendant and used in part, according to her affidavit, to make payments on her debt to Fourth Federal.

The Wain loans did not alleviate defendant's financial plight and in November, 1973 a loan of $8,000--the predicate for the present action--was made by plaintiffs, again in form to the Phelps corporation, at an annual interest rate of 18%. This corporate loan was personally guaranteed by defendant and was secured by a second mortgage on her home. The proceeds of the loan, according to defendant's affidavit, were used for the payment of her personal needs and obligations, including the Wain loans. Although the papers indicate that Esther Schneider and Rose Wolf were the lenders, the defendant contends that the loan was in fact advanced by Harold Schneider.

When defendant defaulted on the first mortgage on her home, held by Fourth Federal, plaintiffs, to prevent foreclosure of that mortgage and to protect their second mortgage, made the overdue payments to the bank and, exercising their acceleration privilege under the mortgage held by them, demanded payment of the full amount of $8,068.74 by defendant. When defendant failed to pay, the present foreclosure action was instituted. In her answer, defendant pleaded three affirmative defenses, and, in an affidavit in opposition to plaintiffs' motion for summary judgment, raised the defense of usury and requested leave to serve an amended answer alleging that defense.

The court granted plaintiffs' motion for summary judgment and appointed a referee to compute the amount due and report on whether the property could be sold in parcels. The referee reported that the defendant owed $10,719.53, that the property was not divisible, and that sale of the whole premises 'is necessary and will be most beneficial to the parties.' A subsequent motion by plaintiffs to vacate the judgment was denied. The judgment of foreclosure and the order denying the motion to vacate have been affirmed by the Appellate Division.

Whether summary judgment should have been granted depends on whether defendant had raised a triable issue of fact, the resolution of which in her favor would permit the defense of usury to be asserted. Defendant avers that Mrs. Bradley G. Phelps, Inc., was a paper corporation which never possessed any assets, bank accounts, or other indicia of corporate activity. The defendant also asserts that the proceeds of the loans were used to pay off her personal debts and obligations and were not used in furtherance of any enterprise, corporate or personal. In short, the claim is that plaintiffs' loan was in fact made to her, though in form to the corporation. These assertions here, we believe, were sufficient to preclude the grant of summary judgment.

Our decisions have made it clear that in cases like the present one the availability of the defense of usury turns on the resolution of the ultimate question of fact--was the corporate form used to conceal a usurious loan to an individual guarantor? If it was, the defense is available, provided the loan was made to discharge personal debts and obligations of the individual. (Hoffman v. Nashem Motors, 20 N.Y.2d 513, 516, 285 N.Y.S.2d 68, 70, 231 N.E.2d 765, 418 Trading Corp. v. Oconefsky, 14 N.Y.2d 676, 249 N.Y.S.2d 876, 198 N.E.2d 907; Jenkins v. Moyse, 254 N.Y. 319, 172 N.E. 521; cf. Leader v. Dinkler Mgt. Corp., 20 N.Y.2d 393, 283 N.Y.S.2d 281, 230 N.E.2d 120.) As Judge Lehman wrote in Jenkins v. Moyse, supra, 254 N.Y. at p. 324, 172 N.E. at p. 522), '(t) he test of whether (a) loan is usurious is whether it was in fact made to the (individual). Doubtless at times loans are made in fact to an individual though in form they are made to a corporation to hide the fact that the lender has exacted an...

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