Tuxedo Enters., Inc. v. Detroit Trust Co., 77.

• Decision Date: 03 June 1935
• Docket Number: No. 77.,77.
• Citation: 272 Mich. 160,261 N.W. 283
• Parties: TUXEDO ENTERPRISES, Inc., et al. v. DETROIT TRUST CO. et al.
• Court: Michigan Supreme Court

272 Mich. 160

261 N.W. 283

TUXEDO ENTERPRISES, Inc., et al.

v.DETROIT TRUST CO. et al.

No. 77.

Supreme Court of Michigan.

June 3, 1935.

Bill by the Tuxedo Enterprises, Incorporated, a Michigan corporation, and others against the Detroit Trust Company, successor to Security Trust Company, and others. From a decree dismissing the bill, plaintiffs appeal.

Affirmed.

Appeal from Circuit Court, Wayne County, in Chancery; Clyde I. Webster, Judge.

Argued before the Entire Bench.

Ralph E. Routier, of Detroit, for appellants.

William Henry Gallagher, of Detroit (William H. Kaplan, of Detroit, of counsel), for appellees Detroit Trust Co. and Spoke Holding Co.

Levin, Levin & Dill, of Detroit (Theodore Levin and Bayre Levin, both of Detroit, of counsel), for appellees Simons' Estate and Laura Simons.

NORTH, Justice.

By their amended bill of complaint plaintiffs sought relief from an alleged usurious mortgage loan on real estate and relief under the Mortgage Moratorium Act (Act No. 98, Pub. Acts 1933), also other incidental relief. After a lengthy hearing in the circuit court of Wayne county in chancery, a decree was entered dismissing the bill of complaint, and plaintiffs have appealed.

The facts essential to decision are herein stated in accord with plaintiffs' contention. In 1920, Mr. Harry Silverman became the owner in fee of certain land in Detroit. He caused to be erected thereon the Tuxedo Theater building, which, in addition to the theater proper, included five stores and twenty-one apartments. The building was completed about October, 1921. So that he might pay construction costs, Silverman obtained a real estate loan on this property from David W. Simons for $250,000. This loan was usurious to the extent of at least $50,000. The mortgage loan from Simons antedated the provision in the Michigan statute which in effect bars a corporation from making the defense of usury. See 2 Comp. Laws 1929, § 9983. But there was then in force in the state of New York a statutory provision of that character. In order that advantage might be taken of the New York statute, Silverman conveyed the Tuxedo Theater property to a New York corporation, the Tuxedo Building Corporation, organized in July, 1921. Immediately this corporation executed a mortgage to the Security Trust Company, now Detroit Trust Company, securing an issue of $250,000, 7 per cent. serial bonds. The defendant Detroit Trust Company became the trustee and mortgagee under this mortgage. All the money advanced on this mortgage loan came from Simons. He died in May, 1932. His estate asserts ownership to $85,000 of the mortgage bonds; and his widow also holds some of these bonds. His executors and widow are made parties defendant in this suit.

The desired loan having been consummated, the mortgaged property was reconveyed to Silverman. Thereafter, in February, 1922, Silverman leased the theater portion of the mortgaged property to plaintiff, Charles W. Munz. He operated the theater until December, 1929. In the meantime (November, 1923) Silverman and wife deeded the mortgaged property to John W. Whitley; and Whitley and wife in August, 1924, conveyed to plaintiff, Charles W. Munz. In the deed through which Charles W. Munz took title to the mortgaged property, he assumed and agreed to pay the mortgage given to Security Trust Company (now Detroit Trust Company) as trustee and also to pay accrued taxes. There was default in mortgage payments, and chancery foreclosure proceedings were instituted and decree entered. At the time this foreclosure proceedings was started, Charles W. Munz was interested in the mortgaged property as lessee under Silverman of that portion of the property used for a theater. When Charles W. Munz learned of the foreclosure proceedings he took the matter up with the mortgage trustee, and ultimately he secured vacation of the foreclosure decree in consideration of his agreeing in writing on October 13, 1924, to guarantee payment of the mortgage debt and also agreeing to pay certain amounts past due on bonds, interest, and taxes. In the meantime, Mr. Charles W. Munz had secured conveyance of the fee from Whitley. By the agreement executed, Charles W. Munz also acknowledged validity of the mortgage theretofore given to the Security Trust Company. We quote the agreement with the Security Trust Company, trustee, in part:

‘Now, therefore, it is agreed:

‘1. The trustee, after the full and complete performance by the party of the first part of every condition precedent and of every covenant and agreement herein promised and undertaken by him, but without prejudice to its full rights to enforce the terms, conditions and stipulations of the mortgage thereafter for the protection and security of the bondholders, in the event of default of any kind in the deed of trust, will dismiss the pending proceedings (No. 106940) in the Wayne County Circuit Court upon these conditions precedent, concurrent and continued, as the circumstances show them to be:

‘(h) Recognition by first party of the validity, free from any infirmity of whatsoever kind or nature, of each, and all of the said bonds remaining outstanding, and to that end the guaranty, as hereinafter provided by him of the principal and interest of each and every of such bonds and the assumption by him of liability for payment thereof. The party of the first part hereby guarantees the prompt payment when due of both principal and interest of each and every bond secured by said trust mortgage dated July 15th, 1921, and recorded in Liber 1085 of Mortgages, on page 198.'

In December, 1929, Charles W. Munz and wife gave a twelve-year lease of the theater portion of the mortgaged premises to the Kunsky Theatres Corporation. The lessee at the time of procuring the lease made a lease deposit of $88,500, and the lease was recorded not only as a lease, but also as in the nature of a mortgage to secure the repayment of the sum deposited. By assignment June 30, 1933, plaintiff Tuxedo Enterprises, Inc., a Michigan corporation, became possessed of the lessee's rights in the above-mentioned lease. All the stock of the Tuxedo Enterprises, Inc., is held by Harold Munz, son of plaintiff Charles W. Munz. At the time the lease was entered into with the Kunsky Theatres Corporation, a second chancery foreclosure proceedings was pending. Out of the $88,500 deposited by the Kunsky Theatres Corporation, Mr. Charles W. Munz paid on December 13, 1929, all sums due for principal or interest, also all taxes required to be paid by the terms of the mortgage to the Security Trust Company, trustee, to and including December 31, 1929. At this time the bondholders acting through the mortgage trustee agreed to a new schedule of bond payments by which maturity dates were deferred. In other respects the mortgage remained unchanged. This second chancery foreclosure was not further prosecuted.

By July, 1933, subsequent defaults under the terms of the mortgage had accrued, and the Detroit Trust Company began foreclosure of the mortgage by advertisement under the statute. The sheriff sold the property to the Detroit Trust Company, October 18, 1933, for $152,504.95, this being the amount claimed to be due on the mortgaged indebtedness, plus costs of foreclosure. Just prior to the year of redemption, and on October 13, 1934, plaintiffs filed the bill of complaint herein. As noted above, after hearing in open court decree was entered dismissing the bill of complaint, and plaintiffs have appealed.

Primarily plaintiffs' right, if any, to equitable relief must be found to exist because they can take advantage of the usurious nature of the mortgage loan. On this phase of the case plaintiffs claim that by the transactions above noted Charles W. Munz has become ‘substituted’ as and in the place of the original mortgagor, and hence may urge the defense of usury. In this connection plaintiffs point out that Mr. Charles W. Munz became a guarantor of the payment of the mortgage debt, and that either he or the Tuxedo Enterprises, Inc., has made all the payments on the mortgage loan, with the possible exception of the first two interest payments. Plaintiffs also assert that Mr. Charles W. Munz did not know that the mortgage loan was tainted with usury until July, 1932, and, further, that when Charles W. Munz purchased the property from Whitely the mortgage encumbrance (although he assumed and agreed to pay the same ‘as part of the consideration’) was not deducted from the purchase price. At the time decree was settled, plaintiffs by affidavit offered to establish this latter claim, but the offer was rejected by the trial court. In consequence of the factual aspect of the case as asserted by plaintiffs, they contend that the sheriff's sale incident to the statutory foreclosure should be set aside; that there should be an accounting which plaintiffs claim will disclose that the amount of money paid on the mortgage exceeds the mortgage debt (exclusive of the usurious portion) together with accrued interest thereon. But plaintiffs...