All Purpose Finance Corp. v. D‘Andrea, Appellant.
Supreme Court of Pennsylvania
November 14, 1967
Arguеd January 10, 1967. Before BELL, C. J., JONES, COHEN, EAGEN, O‘BRIEN and ROBERTS, JJ.
Finally, even on the majority‘s own theory—that appelleе failed to prove negligence below—its disposition in my view is improper. Rather than remand for a new trial as the majority does, on its theory of the absence of negligence the court below should have been directed to enter a verdict for appellant. Accordingly, I dissent.
Mr. Justice MUSMANNO joins in this dissenting opinion.
All Purpose Finance Corp. v. D‘Andrea, Appellant.
Argued January 10, 1967. Before BELL, C. J., JONES, COHEN, EAGEN, O‘BRIEN and ROBERTS, JJ.
Marvin Allanoff, for appellee.
OPINION BY MR. JUSTICE O‘BRIEN, November 14, 1967:
On April 25, 1965, appellee caused judgments to be entered against appellants by confession, on a note executed by them. Appellants thereafter filed a petition to open the judgment, alleging that the loan was usurious, and that $3,500 was paid to appellee on account of the obligation, for which credit was not received. A hearing on the petition and rule was held on March 15, 1966, and on May 16, 1966, the court signed an order discharging the rule. This appeal followеd.
Appellants executed this judgment note pursuant to a loan agreement between appellee and Jay-Bee Plumbing and Heating Company, a New Jersey Corporation, under the terms of which Jay-Bee was the borrower and appellants, as well as other parties, became liable as surety for the loan. The court below found as follows: “The record discloses, accоrding to Mr. D‘Andrea, one of the defendants, that the Jay-Bee Plumbing and Heating Company, Inc., (hereinafter referred to as Jay-Bee), was in financial need and that it was unable to negotiate, based on its own assets, a loan in the amount required. Negotiations were then conducted initially through one Mr. Howard Lipkin who in turn introduced the defendants and others interested in Jay-Bee to plaintiff. Certain properties belonging to the defendants, inter alia, were to be pledged as security for the loan, some in Pennsylvania and some in New Jersey. Mr. D‘Andrea owned one share of stock
“On or about May 1, 1964, a check was issued to Jay-Bee by plaintiff in the amount of $24,400 same being negotiated by Jay-Bee. On the same date, a written agreement was entered into between plaintiff, Jay-Bee, the defendants and Mr. and Mrs. LaSassa. In this agreement, the defendants and the other individual signatories were designated as sureties for a $25,000 loan to be made to Jay-Bee, payable within one year, with interest at the rate of 2% per month; the loan was to be repaid in eleven $500 installments and a final installment of $25,500, a total of $31,000. The agreement further provided for an optional method оf repayment which is not material to the issues presented in the instant case. In addition, the corporate resolution of Jay-Bee was introduced into evidence approving and authorizing, inter alia, the execution of judgment notes relative to this loan in accordance with the aforesaid agreement.”
In reviewing the record, we reach the same conclusion as the cоurt below that the loan was usurious. However, we further agree with the court below in its conclusion that this loan was made to Jay-Bee, a New Jersey corporation, for its business purposes, and therefore reach the same issue as was before the trial court, that is: “May individual sureties to a usurious loan made to a corporation raise the defense of usury where the corporatiоn itself is precluded from raising the defense of usury?” We agree with the court below that
The
“No business corporation shall plead or set up usury, or the taking of more than six per cent interest, as a defense to any action brought against it to recover damages on, or to enforce payment of, or to enforce any other remedy on, any mortgagе, bond, note, or other obligation executed or effected by the corporation.”
With this Act in mind, it is clear that Jay-Bee could not itself raise the defense of usury. An issue involving usury was before the Superior Court in the case of Walnut Discount Co. v. Weiss, 205 Pa. Superior Ct. 161, 208 A. 2d 26 (1965), where the late Judge FLOOD, speaking for a unanimous court, reviewed in great detail pertinent matter that is before us. He stated:
“The court below found as facts that the apрellees were actually the principal obligors and Department Store Sales, Inc., the new corporation, was merely an accommodation maker or surety, that the corporate device was used by the loan company in an attempt to take advantage of
§313 of the Business Corporation Law of May 5, 1933, P. L. 364, art. III, 15 PS §2852-313 , to avoid the defence of usury, but that the appellеes, as individuals, were not prevented by§313 from asserting the defence of usury. The court consequently held, under theUsury Act of May 28, 1858, P. L. 622, §2, 41 PS §4 , that all amounts paid in excess of 6% simple interest should be credited on the principal sum of $2900 and opened the judgment in order that the amount, if any, remaining due might be determined.“We have been referred to no case in our appellate courts determining the effect of
§313 of the Business Corporation Law upon the obligation of individual endorsers of a corporate obligation bearing usurious interest. An early Pennsylvania case, considering a simi-lar New York statute, held that a corporate obligation carrying usurious interest was valid as to the corporation but that the individual accommodation endorsers could successfully raise the defence of usury. Bock v. Lauman, 24 Pa. 435 (1855). On the other hand, the New York Court of Appeаls, construing its own statute, [footnote omitted] has held that the individual guarantors of a corporate obligation are precluded from interposing the defence of usury. General Phoenix Corp. v. Cabot, 300 N.Y. 87, 89 N.E. 2d 238 (1949). The weight of authority is in accord with the New York view. General Motors Acceptance Corp. v. Larson, 110 N.J. Eq. 305, 159 A. 819 (1932); Pardee v. Fetter, 345 Mich. 548, 77 N.W. 2d 124 (1956); Dahmes v. Industrial Credit Co., 261 Minn. 26, 110 N.W. 2d 484 (1961); 63 A.L.R. 2d 924, 950, §12. “Where, however, the obligation is really that of an individual, and the form of a corporate obligation is used only in an attempt to evade the usury laws, there is a split of authority. It is held in some jurisdictions that the individual may successfully raise the defence of usury in such a case, even though he appears on the face of the documents to be an endorser or guarantor of a corporate obligation. [citing cases].
“On the other hand, some courts havе held that the parties were free to frame their transactions so as to take advantage of the corporate exemption from the usury laws, even though the loan was in reality made to individuals, and if a corporation actually executed the contract with the individuals as guarantors, the usury defence was precluded, in the absence of fraud. [citing cases].”
In Raby v. Commercial Banking Corp., 208 Pa. Superior Ct. 52, 220 A. 2d 659 (1966), the Superior Court had before it a case where the question was whether an individual who co-signs a note with a corporation for a loan can recover alleged usurious interest paid by the
Again that court agreed with the reasoning of Walnut Discount Co., supra, that the
Order affirmed.
Mr. Justice MUSMANNO took no part in the consideration or decision of this case.
DISSENTING OPINION BY MR. JUSTICE ROBERTS:
“May individual sureties to a usurious loan made to a corporation raise the defense of usury where the
To decide whether an individual may raise the defense of usury, it is under the majority approach now necessary to determine the status of that individual vis-a-vis the lender. If he is found to be the primary obligor, he may avail himself of the usury defense; but if he is merely a surety or an accommodation party to a legitimate corporate loan, he is bound just as is the corporation. The genesis of this test in Pennsylvania can be fоund in Walnut Discount Co. v. Weiss, 205 Pa. Superior Ct. 161, 208 A. 2d 26 (1965). Weiss involved a usurious loan made to a closed corporation whose sole stockholder was the son of the appellee-defendants. The parents of this sole stockholder were named on the loan agreement as “guarantors“. Thus, when the corporation defaulted and these guarantors resisted payment of any interest over six per cent, the lender
Whatever may have been the wisdom of the rule set down in Raby, it first appeared easy to apply. Perhaps this was so because the facts in Weiss and Raby represented the very opposite poles of the problem. Unfortunately, filling in the grey areas has clearly demonstrated the unworkability of this rule. In the present case, for example, the majority has decided that these facts fall on the Raby side of the line. It is true that the corporate borrower here, Jay-Bee Corp., was not created just to borrow money. But, the majority seems to ignore completely the significant fact that while Raby concerned a surety who had no connection whatsoever with the corporation, the accommodation parties here arе the sole stockholders of Jay-Bee. When in fact the corporation and the sureties are really but one entity, a distinction based solely on the label “accommodation party” is meaningless.
Nevertheless, if a more careful factual analysis of each case could repair this area of law, I would not sо strongly dissent. However, a test designed to make judges and fact finders “tilt at windmills” is often indicative of a more fundamental defect. The fundamental defect present in the Weiss-Raby test goes to the very heart of this Commonwealth‘s public policy against usury, for it assumes that certain individuals may still be compelled to pay interest in excess of six per cent. Since 1858 a borrower could recover any intеrest paid in excess of the lawful rate. The
As eаrly as 1855 this Court, when called upon to interpret New York‘s usury law and its corporate exception, made the following observation: “Regarding such laws as the means adopted by the state to protect people against their own weakness, and against the power of money lenders, we must suppose that corporations are excluded from this protection, because thеy have not the same need of it that individuals have: perhaps because of their being usually powerful associations, and the associates not usually being personally liable for their contracts.” Bock v. Lauman, 24 Pa. 435, 448 (1855). These reasons for the corporate exception remain just as valid today.4 The corporation does not need the protection of the usury statute because it has its own, built in protections. But an individual, no matter how he is classified or labelled, does not have limited liability. He cannot pass his risks to a collection of stockholders.
Time and again this Court has said that “the statute against usury forms a part of the public policy of the state and cannot be evaded by any circumvention
In my opinion, the usury statute and its corporate exception permit but a single rule: If a man loans money to a corporation, the interest rate on that loan can be whatever the market will bear; but, this lender is on notice that whenever an individual is asked to repay the loan, no interest above six per cent may be recovered. The lender‘s plea that such a rule would foreclose loans to small corporations is simply without merit. If a lender balks at loaning money to a company because of its allegedly weak financial structure, such a lender can certainly require sufficient collateral, advanced by individuals if that is desired, to
More than one hundred years ago, in striking down an attempt to evade the usury laws by the false inflation of рrincipal, we said: “Courts of justice would be very stupid if they could not see through so transparent a device to evade the statute, and very feeble if, seeing the usury, they could not reach it ....”6 In my opinion, the Weiss-Raby test comes dangerously close to fulfilling this disturbing prediction.
I dissent.