22 A.D.2d 39 | N.Y. App. Div. | 1964
Lead Opinion
In an action for a declaratory judgment to determine that a certain purported stock sale transaction was in fact a disguise for a usurious loan agreement defendant appeals from an order denying her motion to compel arbitration (CPLB 7503, subd. [a]). Special Term denied the motion but directed a preliminary trial of the issues upon which arbitrability depends. The issue is whether the agreement to arbitrate has independent viability apart from the alleged usurious transactions so that all the issues, including the claim of usury, are for the arbitrators to determine rather than the court.
The order should be affirmed. The subsidiary agreement to arbitrate is subject to the alleged illegality of the principal agreement.
The transaction, as described by plaintiff, was a loan to plaintiff of $30,000> disguised in the form of a sale by him to defendant of TO,000 shares of Class A common stock in a close corporation. Plaintiff was required to repurchase the stock some 15 months later at a price of $5.40 per share. In addition, defendant was to receive the dividends payable on the stock, amounting to 60 cents per share, or a total of $6,000 in dividends. Consequently, under the transaction, if it was what plaintiff alleges it to be, defendant would receive interest at the rate of 80% per annum.
Simultaneously with the execution of the principal agreement in suit the parties also executed, under the same date, a paper which read as follows: “ It is hereby agreed among the undersigned that any dispute, claim, or controversy arising under or pursuant to letter agreements between them dated this day, shall be settled by arbitration in New York City pursuant to the rules of the American Arbitration Association then obtaining.”
The statute provides that “ [w]here there is no substantial question whether a valid agreement was made or complied with * * * the court shall direct the parties to arbitrate ” (CPLB 7503, subd. [a]). Whether the statute, which was adopted in its present form in 1962 and became effective September 1, 1963 (CPLB 10005), changed the law as it existed under the Civil Practice Act (§ 1450) need not be dispositive of the issue in this case. The law under the Civil Practice Act had been that a contract for the doing of an act the performance of which was prohibited by statute or was otherwise ‘ ‘ void and unenforceable ” was not enforceable in arbitration (Matter of Exercycle Corp. [Maratta], 9 N Y 2d 329, 334-335; Matter of Kramer & Uchitelle [Eddington Fabrics Corp.], 288 N. Y. 467, 471). In this case, concededly, there are various statutes affecting the legality or validity of usurious transactions.
The language in CPLR, on the other hand, makes explicit that the preliminary question for the court is whether there is a substantial question of the existence of a “ valid agreement ” to arbitrate. If the statute intended the meaning normally attributed to those words there is no question that a preliminary question for the court to determine is whether or not there is a valid arbitration agreement in the first instance. Certainly, if the new statute was intended to change the law, that is the only direction in which the change points. In that case, a fortiori, an agreement to arbitrate subject to a claim of infirmity for illegality in the principal agreement involves a preliminary question to be determined by the court and not by the arbitrators.
There is some authority that the new statute, which was enacted after the Exercycle case, was not intended to change the pre-existing law (8 Weinstein-Korn-Miller, N. Y. Civ. Prac., par. 7503.02). The commentators, in supporting that view, however, cite the Second Advisory Committee Report (2d Preliminary Rep. of Advisory Comm, on Practice and Procedure, p. 135,1958 Report of Temporary Comm, on Courts, N". Y. Legis. Doc., 1958, No. 13, p. 135). In fact, the Second Report draft of the statute did not expressly refer to the “ validity ” of the agreement but only to “ the existence of the agreement ”. This language continued unchanged through the 1962 drafts even after the section had received its present designation “ § 7503 ” (6th Report Sen. Finance Comm., N. Y. Legis. Doc., 1962, No. 8, p. 648). It was much later in the 1962 legislative session that the language was changed to its present form referring to validity of the agreement. This, therefore, may suggest an argument that the new statute was intended to change the law, or, at least, restate the rule as generalized in the Kramer case {supra).
The rule in the Kramer case (referring generally to the necessity of there being a valid and enforcible contract before there
As for the form of the agreement, it is undisputed law that a usurious agreement is invalid regardless of the form it takes and regardless of the rules governing integrated agreements. It is always possible to show that any transaction and the documents which are a part of it are illegal and unenforeible as a usurious transaction. (Restatement, Contracts, § 229, Comment b; § 529; cf. Hartley v. Eagle Ins. Co., 222 N. Y. 178, 184-185; Thurston v. Cornell, 38 N. Y. 281, 285.) In such an inquiry the issue is not the interpretation of the language used but what are the facts behind the facade of language.
There is no need to consider the subtleties in the line of cases discussing whether a usurious agreement is void or voidable. That question may be important when the interest of a third party is involved. Indeed, the distinction is not important when duress or fraud is involved, although these result only in voidable agreements; the preliminary issue is still for the court (Matter of Exercycle Corp., supra).
Nor does any sound distinction rest on the obvious fact that different kinds of illegality may involve a lesser or greater degree of public harm. The fact is that there are many kinds of public policy illegality, other than usury, which require- a positive election or an affirmative defense to render agreements subject to the infirmity unenforeible (17A C. J. S., Contracts, § 559).
In this case no third party is involved and a party to the alleged usury is asserting the illegality and unenforcibility of the agreements, both as to the principal agreement and the subsidiary agreement to arbitrate. No precedent suggests that illegality may be waived in advance. If so, such waiver would be accomplished indirectly by inserting an arbitration clause
The separate execution of the one-sentence agreement to arbitrate any disputes which might arise under the principal agreements does not, of course, present a separable question. The papers being executed simultaneously and as part of the same transaction are to be construed together (Nau v. Vulcan Rail & Constr. Co., 286 N. Y. 188, 197; 10 N. Y. Jur., Contracts, § 213; Restatement, Contracts, § 235, subd. [c]). If the main purpose of the transaction was illegal then the subsidiary agreements, if they are truly subsidiary, are rendered invalid by the invalidity of the principal agreement (Manson v. Curtis, 223 N. Y. 313, 324).
What the situation would be with respect to a prior general agreement between parties to arbitrate all disputes which might arise between them in a variety of transactions need not now be decided.
In Matter of Metro Plan v. Miscione (257 App. Div. 652) the precise question involved in this case was decided as an alternative holding. It was held that a principal agreement, if usurious, would render unenforcible stipulations for arbitration contained within it. It was said flatly that such a question was for the court to decide and not the arbitrators.
The most significant aspect of the matter, however, is that in Matter of Exercycle (supra), the court referred to the Metro Plan case. It was cited under the first category of cases described by the court as one in which arbitration would be preliminarily enjoined with respect to certain allegedly voidable agreements. While the category was denominated as involving fraud or duress, the Metro Plan case was included with a comparative reference, p. 334. Consequently, not only is the Metro Plan case a binding precedent upon this court but its rule is one which appears to have been expressly excepted from the principle laid down in the Exercycle case.
Matter of Gale (Hilts) (262 App. Div. 834) did not hold contrary to the Metro Plan case, and therefore does not impair the precedental standing of the Metro Plan case. There the question of illegality was raised only after award by the arbitrators. This is quite a different matter; the grounds for vacatur of an award are not identical with those which will warrant a stay of arbitration (Civ. Prac. Act, § 1462; cf. CPLR 7503, subd. [b]; 7510, 7511, subd. [b]). The award, on the facts in that case, was then supportable on the ground that the arbitrators could have found on the facts that there was no usurious transaction.
The problems of usury extend well beyond larger commercial transactions to small business situations and to personal loans for those without capital. If the arbitration clause device could be thus used, all the complicated legislative distinctions in the statutes, civil and criminal,
Accordingly, the order denying defendant’s motion to compel arbitration pending a trial of the issues of whether the written agreements are usurious and invalid should be affirmed, with costs to plaintiff-respondent.
(See, e.g., General Business Law, § 370 et seq.; Banking Law, §§ 108, 173, 235-b, 293-a, 352, 510-a; Penal Law, § 2400; Personal Property Law, § 46-f.)
Dissenting Opinion
We disagree to the extent that we believe all the issues are determinable by the arbitrators and that consequently Special Term should have granted the motion to compel arbitration.
We agree with the majority that two questions are presented, namely, whether CPLR changed the existing law as to the respective functions of the court and the arbitrators and whether, assuming there was no change applicable to the present situation, the question is for the court or the arbitrator. We further agree that if either of these questions is to be answered as the respondent contends, Special Term’s disposition is correct. As to the first question, as we read the majority opinion the court
Prior to the enactment of Civil Practice Law and Buies it was quite clear that before arbitration could be directed it was the duty of the court to determine whether the parties had agreed to arbitrate (Matter of Rosenbaum [Amer. Sur. Co.], 11 N Y 2d 310). This would involve a court-made determination of such questions as whether there was a meeting of the minds, and whether an apparent agreement was vitiated by fraud in the factum, duress or any other element which interdicted an offer and its acceptance (see Matter of Lipman [Haeuser Shellac Co.], 289 N. Y. 76, 79). As most agreements to arbitrate are terms in the contract which gives rise to the controversy, it was also the province of the court to determine whether that term was so understood by the parties that it could be said that they had agreed to it (Matter of Riverdale Fabrics Corp. [TillinghastStiles Co.], 306 N. Y. 288). Other questions are for the arbitrators. ‘ ‘ Once it be ascertained that the parties broadly agreed to arbitrate a dispute ‘ arising out of or in connection with ’ the agreement, it is for the arbitrators to decide what the agreement means and to enforce it according to the rules of law which they deem appropriate in the circumstances.” (Matter of Exercycle Corp. [Maratta], 9 N-Y 2d 329, 334.)
The Exercycle case was decided pursuant to the statutory directions contained in section 1450 of the Civil Practice Act, which limited court inquiry to any “ substantial issue as to the making of the contract”. The current statutory provision (CPLB 7503) is whether there is any “ substantial question whether a valid agreement was made ’ ’. The distinction between the succeeding provision and its predecessor is in the use of the word “ valid ”. This may refer to the making of the contract, that is, that all steps necessary to formalize an agreement were taken and nothing was done to negate the effect of those steps, or it may refer to the agreement itself—whether it is such that no legal obstacle to its enforcement can prevail. This would embrace such questions as lack of consideration, mutuality of obligation and all other situations which can serve to render what purports to be a contract obligation into a nudum pactum. Either interpretation is possible under the language used. If the first represents the legislative intent, no substantial change
We turn now to the more difficult question of whether illegality under the rule of the Exercycle case is arbitrable or whether, when such a claim is asserted, the court must first find the claim unjustified before arbitration can be ordered. The general rule is, and always was, that illegality negates the existence of the contract and hence there is nothing to arbitrate (Matter of Kramer & Uchitelle, 288 N. Y. 467). However, illegality is a very broad term and when applied to contracts is used to cover a multitude of situations. These vary from agreements which are intended to carry out a criminal result (i.e., an agreement to divide the spoils of a robbery) to one that runs counter to a statute regulating trade. The nature of the illegality involved can and does have some effect on the rights created by the contract and the ability to enforce it. Every contract to which a claim of illegality in the broad meaning of that word might be asserted is not, ipso facto, a nullity, nor is arbitration of questions arising out of it interdicted. That result only attends such contracts whose performance would call for acts which run counter to our public policy. (See Matter of Exercycle, supra, p. 335.) And this limitation of the effect of the generic term “illegality” fits in perfectly with our legal concepts. As noted, arbitrators, where they are empowered to act, may enforce an agreement under any rule of law that they deem appropriate. It would be an unthinkable travesty to allow them to apply a rule which directed enforcement of acts, or to give
So it becomes necessary to determine whether the collection of a usurious rate of interest is such an act. We submit it is not. Usury means a stipulation for interest in excess of a statutory rate. A contract tainted with usury occupies, in the law of this State at least, a rather peculiar situation. By statute, certain, but not all, such contracts, are declared to be void (General Business Law, § 373
Our courts have increasingly adopted the principle that where the parties have agreed upon arbitration as the forum for their disputes, the courts will not place obstacles in the way of that agreement. The nature of the contract here is in dispute. It is not controverted that this very question, the nature of the contract, is left to arbitration. If we can, we should give recognition to this agreement. If it should eventuate that the arbitrators find an agreement that contravenes our policy but, nevertheless, decree enforcement, any resulting question can be determined on the motion to confirm the award (Matter of Gale, 262 App. Div. 834). But the factual questions upon which the legality or illegality of the contract depends are for the arbitrators (Matter of Goodman v. Lazrus, 15 A D 2d 530). This is exactly what the parties contracted for. Moreover, it is the only way consonant with our existing procedure in which their indisputable agreement to arbitrate the underlying questions of fact—which will determine whether this is in fact a usurious contract—can be given effect.
In the view we take it is unnecessary to decide whether the agreement to arbitrate should be considered separate and apart from the agreement in dispute. Naturally, if it is considered separate, the first question is obviated (17A C. J. S., Contracts, § 515 [5]). No doubt exists that the agreement to arbitrate is a valid agreement.
Order denying motion for arbitration pending a trial of certain issues should be reversed and the motion granted.
Yaleete and McNally, JJ., concur with Beeitel, J. P.; Stetjer, J., dissents in opinion in which Eager, J., concurs.
Order, entered June 15, 1964, denying defendant’s motion to compel arbitration pending a trial of the issues of whether the written agreements are usurious and invalid, affirmed, with $30 costs and disbursements to respondent.
While there is very little proof of the legislative intent dehors the statute, Professor Weinstein states that no change in the substantive law was intended (8 Weinstein-Korn-Miller, N. Y. Civ. Prac., p. 75-62). (But see Thornton, Practice Commentary, § 7503, McKinney’s Cons. Laws of N. Y., Book 7B, CPLR, p. 488; Falls Jr., Arbitration Under the Civil Practice Law and Rules in New York, IX New York Law Forum 335, 346 et seq.)
This section will very shortly become part of the General Obligations Law, § 5-511.