Searl v. Earll.

• Decision Date: 18 November 1948
• Docket Number: No. 646.,646.
• Citation: 62 A.2d 374
• Parties: SEARL et al. v. EARLL.
• Court: D.C. Court of Appeals

62 A.2d 374

SEARL et al.

v.EARLL.

No. 646.

Municipal Court of Appeals for the District of Columbia.

Nov. 18, 1948.

Appeal from the Municipal Court for the District of Columbia, Civil Division.

Action by Donald M. Earll against Everett A. R. Searl and Pearl A. Searl to recover on a note, wherein defendants filed a counterclaim to recover damages for alleged breach of faith by plaintiff while he acted as defendants' agent. From a judgment for the plaintiff, the defendants appeal.

Reversed with instructions to award a new trial.

Arthur J. Hilland, of Washington, D. C., for appellants.

H. Max Ammerman, of Washington, D. C. (Louis Ottenberg, of Washington, D. C., on the brief), for appellee.

Before HOOD and CLAGETT, Associate Judges, and NEILSON, Associate Judge, The Municipal Court for the District of Columbia, sitting by designation. ¹

CLAGETT, Associate Judge.

The plaintiff below sued for the unpaid balance of $1,564.58 and interest on an unsecured promissory note of $2,000, signed by defendants August 14, 1943. He was met with the defense of usury and a counterclaim of $3,000 for alleged breach of faith while he acted as defendants' agent. The trial judge in a memorandum opinion found that the evidence did not support the defendants' claim of usury and gave judgment for plaintiff in the full amount requested; and also found for plaintiff on defendants' counterclaim. Defendants on this appeal assign as error the alleged failure of the trial court to make any ruling on the defense that the plaintiff was guilty of fraud; and also the ruling that the evidence did not support the defense of usury.

It appears from the record that sometime prior to July 22, 1943, defendant Everett A. R. Searl approached plaintiff Earll, a licensed real estate broker, to secure a loan of $18,000 on unimproved real estate. The parties had transacted similar business over a number of years and had negotiated some ten or more loans. Plaintiff stated he might be able to get the money, and there was a general discussion of the transaction. At a later date, plaintiff drafted a letter for the signature of defendant Searl and his wife, which authorized plaintiff to obtain an $18,000 blanket first trust loan on the unimproved property, and sell two notes owned by defendant at a net price of $2,266.48. In consideration of these services defendants agreed to pay the plaintiff a commission of $2,000 in the form of an unsecured note will interest at 6%, principal and interest payable at the rate of $50 a month.

The letter of authority was signed by defendants on July 22, 1943, and there was no further contact between the parties until the time for settlement. The $18,000 loan incorporated and paid off an outstanding loan of some $8,750 previously negotiated between the parties. The promissory note given by the Searls for the $18,000 loan was made to the order of S. F. Wolstencroft, a ‘straw party’, known by all parties to be Earll's secretary. She endorsed it in blank without recourse and gave it to Earll, who testified that he delivered it to his wife. The note was subsequently extinguished by payments of principal and interest made to Earll. Payments on the $2,000 note in controversy were discontinued after thirteen payments, totaling $650, had been made. The present suit for the balance was then instituted.

The Searls' defense of usury was based, first, upon the allegation contained in their answer that the $18,000 loan actually belonged to plaintiff Earll an that since the $2,000 commission was paid to him a usurious charge was made. It is not disputed that if the $2,000 charged as commission were added to the 6% interest charged and paid on the $18,000 loan the result would constitute usury under the District of Columbia statute. ² However, both plaintiff Earll and his wife claimed and apparently established to the complete satisfaction of the trial court that the money loaned was the sole and separate property of Mrs. Earll, and that he had acted as her agent in this transaction as he had been doing in similar instances for some 25 years. The evidence on this point was so conclusive that the decision of the trial court in this respect is not open to question on appeal.

During the progress of the trial defendants accepted, tacitly at least, the contention that the money loaned belonged to Mrs. Earll, but they thereupon urged, based upon the evidence adduced, the legal principle that where a lender's agent, with the lender's knowledge and approval, takes the borrower's separate promissory note payable to himself for his compensation for obtaining the loan for the borrower, the agent cannot recover on the note from the borrower when the interest on the principal loan plus the agent's commission totals more than the legal rate.

This principle is well established in the law. The leading case on the subject is Fowler v. Equitable Trust Co., 141 U.S. 384, 12 S.Ct. 1, 35 L.Ed. 786, in which the trust company made a loan to Fowler at the legal rate of interest and in addition Fowler, the borrower, paid Johnston, through whom the loan was negotiated, a commission of $100. Johnston received no compensation from the trust company. He testified, however, that shortly before this loan was made he had an understanding with the trust company that he was acting as its agent and that the company was to pay him nothing and that he was to procure whatever pay he had from the borrower. The Supreme Court held the arrangement usurious largely on the ground that the $100 paid to the trust company's agent was a part of the amount which the borrower was required to pay for the use of the money borrowed.

In Richards v. Bippus, 18 App.D.C. 293, 299, a wife intrusted $300 to her husband to be loaned to a third party at the highest rate of interest permissible in the District of Columbia and the borrower agreed to pay the husband $50 as a bonus. Instead of paying the $50 separately the note was made for $350, and the wife testified that she was to pay over the $50 to the husband. The arrangement was held usurious, the court saying: ‘Now, had he (the husband) received this bonus in cash, or taken a separate obligation therefor payable to himself, and had received for the plaintiff (the wife) a note for $300 only and delivered the same to her without her knowledge or approval of the exaction of his own exclusive benefit, her right to recover both the principal and interest of her note would not be impaired,’ citing Call v. Palmer, 116 U.S. 98, 6 S.Ct. 301, 29 S.Ct. 559. (Emphasis supplied.) The court 18 App.D.C. at page 300 went on to state the rule governing such cases as follows: ‘The doctrine established by the weight of authority is this: The note or obligation is affected with usury if the principal makes the loan, knowing that his agent has exacted a bonus or commission, though for his own sole benefit, which, with the interest payable to the principal, would amount to more than the rate permitted by law,’ citing 27 A. & E. Encyc.Law 1006, 1007, and Fowler v. Equitable Trust Co., supra. To the same effect is Whaley v. American Freehold Land Mort. Co. of London, Ltd., 4 Cir., 74 F. 73, 77, 78, wherein the rule is stated as follows:

‘But when a lender authorizes his agent to make loans for him under a general arrangement that he must look to the borrower for his compensation, and such agent for the lender effects a loan, and charges the borrower a commission, this will make the contract usurious, whether the lender knew of the charge or not * * *, for this exaction is by the authority of the lender, the principal.' ³ (This rule, of course, applies only when the interest plus the commission exceeds the legal rate.) The burden of proof is upon the borrower to show that the lender knew, or was chargeable with knowledge that his agent exacted a commission from the borrower in excess of the legal rate of interest. ⁴ However, the mere fact that there is a family or trust relationship between the lender and the agent has not been construed as sufficient to impute knowledge to the lender in the absence of other evidence, even though the lender knew he was not paying the agent. ⁵ As to what constitutes knowledge by the lender of the charge of a commission by the agent, it is held that such knowledge may be implied as well as actual. ⁶ It has also been held that the understanding that the agent is to look to the borrower for his remuneration is often deducible from the fact that the lender avails himself of the agent's services without paying anything therefor. ⁷

Defendants here urge that circumstantial evidence was conclusive that Mrs. Earll knew of the charging of the commission by her husband while acting as her agent and that since neither Mrs. Earll nor Mr. Earll denied such knowledge on her part the evidence was undisputed and hence that the trial court was bound as a matter of law to hold the transaction usurious.

The evidence relied upon in support of this contention is as follows: Both Mr. and Mrs. Earll testified that he acted as her agent in this as well as in numerous other similar transactions over a period of more than 25 years, including other loans to Mr. and Mrs. Searl. The husband secured these loans for his wife, prepared all necessary papers, attended to the collection of interest and principal without her name ever appearing, and no evidence was adduced showing that she paid him for his services. Plaintiff admittedly handled this and other similar transactions so that the borrower would not know the identity of the lender. For a long period while the husband and wife were conducting such loan transactions together but prior to this particular loan, Mr. and Mrs. Earll maintained joint bank accounts.

[3] [4] The strongest evidence on the subject of knowledge and approval had to do with the following: Mrs. Earll's $18,000 loan of August 14, 1943, to Mr. and Mrs. Searl was used in part to pay off a previous loan of $8,750 made on ...