McIlwaine v. Ellington
111 F. 578
4th Cir.
1901
Check Treatment
MORRIS, District Judge

(after stating the facts). The learned circuit judge had questions identical with those in this case before him in the case of Mcllwaine v. Iseley, and, having very carefully considered them, he announced his conclusions in an opinion which is reported in 96 Fed. 62, and in the supplemental opinion in the same volume at page 775. Having considered all the facts of Iseley’s Case, which in essentials did not differ from the present case, he found that by express terms, and by the explicit understanding and intention of the parties as expressed in the note, the subscription to stock and the loan were Tennessee contracts; that they were consummated at Knoxville, in that state, and all dues and payments were required to be paid there; and that it was not so made a Tennessee contract to evade the usury laws of North Carolina, but for the reason that, the association having borrowing and nonborrowing shareholders in many other states, it was necessary *582that it should have one uniform rule of construction of its contract, in order to insure equality, uniformity, and mutuality among all its members. We fully agree with the learned circuit judge that the contract in this case'was a Tennessee contract. The circuit judge further found that under the rule of law of Tennessee the contract in this case was legal and valid, and free from the imputation of usury. Had the association still been a solvent and going concern, the mortgagors would have been required to settle with it according to the terms of their contract. The Tennessee law was proved in the case by the testimony of Tennessee lawyers familiar with the rulings of the courts of that state, and the circuit judge also referred to the decisions of the following Tennessee cases, which fully establish these rules: McCauley v. Association, 97 Tenn. 421, 37 S. W. 212, 35 L. R. A. 244, 56 Am. St. Rep. 813; Post v. Association, 97 Tenn. 408, 37 S. W. 216, 34 L. R. A. 201; Rogers v. Hargo, 92 Tenn. 35, 20 S. W. 430; Hughes v. Association (Tenn. Ch. App.) 46 S. W. 362.

The circuit judge further found that by the laws of North Carolina —the state in which the mortgaged land was situated, and in which this proceeding to foreclosure was prosecuted—the rule was different, and that by the decisions of the supreme court of North Carolina such a contract would be held unconscionable and usurious, and not to be enforced, and, if the association were solvent, the rule of settlement under the North Carolina decisions would be to charge the borrower with the sum loaned and interest from the date of the loan, and to credit him with all sums paid as interest, premium, and stock dues as partial payments. Meroney v. Association, 116 N. C. 882, 21 S. E. 924, 47 Am. St. Rep. 841; Rowland v. Association, 116 N. C. 878, 22 S. E. 8. The rule of settlement between the association and its borrowing members would be very different under the North Carolina law from that which would be the rule if the Tennessee law governed. While this association, if solvent, would have been entitled to have collected a considerable sum from the defendants had the account between them been stated in accordance with the Tennessee law, the defendants would have overpaid b)f $9.42 the amount which the association could have claimed from them if the relations between them were governed by the North Carolina laws. This association is, however, not solvent, but is insolvent! The rule of settlement between the borrowing members and the association is in'both Tennessee and North Carolina different, when, the association has become insolvent, from that which prevails in each state when it is solvent. In Tennessee, when the association has become insolvent, its receivers are by the law of Tennessee, in settling with the borrowing members, permitted to charge them with the amount loaned and interest thereon at 6 per cent., and to give them credit for all payments of interest and premium as partial payments, but not to credit them with the monthly payments for stock dues or membership fees, as to which they are treated as other stockholders, and are entitled to only their pro rata share in the distribution of the corporate assets. See Tennessee cases heretofore cited. In North Carolina, as the circuit judge has held, borrowing stockholders of an insolvent *583association, in addition to the amount which they' would owe the association were it solvent, are liable to contribute their proper proportion of the losses chargeable to their share of advanced stock for the benefit of the other members of the association. Meares v. Davis, 121 N. C. 126, 28 S. E. 188; Thompson v. Association, 120 N. C. 420, 27 S. E. 118; Williams v. Maxwell, 123 N. C. 586, 31 S. E. 821. It thus appears that, while the rule of settlement between an insolvent association and its borrowing shareholders is stated in different language by the courts of Tennessee from that which is used by the courts of North Carolina, yet, those rules are in their practical results hardly distinguishable. The question as to which rule should govern, however, was strenuously contested before the circuit judge, and subsequently on appeal before this court. The circuit judge, having found the stock subscription and loan to be a Tennessee contract, then considered the question whether, as the performance of the contract was secured by a mortgage of land in North Carolina, and the object of this suit was a foreclosure and sale of the land because of default, the circuit court was controlled by the North Carolina decisions for the purpose of such a proceeding in North Carolina, and was bound to treat the contract as a North Carolina court would treat it. As to this question the circuit judge held that the gist of the action was the mortgage of land in North Carolina, and as the North Carolina courts had decided that such a mortgage to secure a loan of money under such a contract, when the money was to be used in North Carolina on the mortgaged land, could not be enforced except to the extent of requiring the repayment of the principal and simple interest at 6 per cent., crediting all payments as partial payments on the loan, the circuit court of the United States sitting in that state was controlled by those decisions as in the nature of a rule of property. The circuit judge accordingly held that the North Carolina rule of settlement should be applied, and so decreed. The appellants assigned this as error.

In accordance with an accounting under the North Carolina rule, the circuit judge decreed that the defendants were found to have overpaid the amount with wdiich they were chargeable by the sum of $9.42, but that they were still liable for their proper proportion of the losses chargeable to the shares of advanced stock for the benefit of the other members of the association, and that the defendants were not entitled to have the mortgage released, but that it should stand as security for the ultimate payment by the defendants of their pro rata contribution to such losses and deficiencies. We do not agree with the learned circuit judge in his conclusion that, because this was a suit to foreclose a mortgage of land in North Carolina, given to secure the performance of the Tennessee contract, the North Carolina rule for the construction of the contract must prevail. When, by the rule applicable to the construction of the contract, the amount due thereunder is ascertained, then the mortgage stands as security for the payment of that amount. As to the proceedings to foreclose the mortgage and the manner and terms of sale, the terms of redemption of the land from the sale, and similar matters, the laws of the state where the land lies do control. Brine *584v. Insurance Co., 96 U. S. 627, 24 L. Ed. 858; Insurance Co. v. Cushman, 108 U. S. 51, 2 Sup. Ct. 236, 27 L. Ed. 648. But the present question is not with regard to the proceedings to obtain payment by a sale of the land, but the question is whether the amount due under this contract, which is valid by the Tennessee law, is to be determined by that law, or whether the contract is to be treated-as usurious, as it is held to be under the decision of the North Carolina courts. The weight of authority would seem to be that, if the contract is valid by the laws of the state where made, the amount due under it is tó be ascertained'by those laws, and the security is liable for that amount, although situated in another state. It is to be noticed that there is no legislation of North Carolina declaring such a contract as this against the public policy of North Carolina, and nonenforceable against mortgaged land there situated.

In Bendey v. Townsend, 109 U. S. 665-668, 3 Sup. Ct. 482-484, 27 L. Ed. 1065, 1066, speaking of a decree for foreclosure of a mortgage of land in Michigan, the supreme court said:

“The land is in Michigan, the notes and mortgage were made and payable in Michigan, and by the law of Michigan, as settled by repeated and uniform decisions of the supreme court of that state, the stipulation to pay an attorney’s or solicitor’s fee of a fixed sum is unlawful and void, and cannot be enforced, in foreclosure, either under the statutes of the state or by a bill in equity. * * * Upon such a question affecting the validity and effect of a contract made and to be performed in Michigan concerning land in Michigan, the laws of the state would govern in proceedings to enforce the contract in a federal court held within the state.”

In Bedford v. Association, 181 U. S. 227-242, 21 Sup. Ct. 597-602, 45 L. Ed. 834-845, which was a foreclosure suit brought in the circuit court of the United States for the Western district of Tennessee to enforce a mortgage of land in Tennessee, executed to a New York corporation, among the other defenses it was urged that the contract was usurious, and as to that defense the supreme court of the United States said:

“Besides, the transactions were not usurious under the laws of New York, where the notes were payable. * * * Therefore the principle expressed in Miller v. Tiffany, 1 Wall. 298, 17 L. Ed. 540, applies. It was said in that case: ‘The general principle in relation to contracts made in one place to be performed in another is well settled. They are to be governed by the law of the place of performance, and, if the interest allowed by the law of the place of performance is higher than that permitted at the place of contract, the parties may stipulate for the higher interest without incurring the penalties of usury. The converse of this proposition is also well settled. If the rate be higher at the place of the contract than at the place of performance, the parties may lawfully contract in that case also for the higher rate.’ See, also, Andrews v. Pond, 13 Pet. 78, 10 L. Ed. 61; Junction R. Co. v. Bank of Ashland, 12 Wall. 226, 20 L. Ed. 385; Scotland Co. v. Hill, 132 U. S. 107, 10 Sup. Ct. 26, 33 L. Ed. 261; Cromwell v. Sac Co., 96 U. S. 57, 24 L. Ed. 681; Cockle v. Flack, 93 U. S. 344, 23 L. Ed. 949.”

In Loan Co. v. Cannon, 96 Tenn. 599, 36 S. W. 386, 33 L. R. A. 112, 54 Am. St. Rep. 858, a note secured by mortgage of land in Tennessee was given to a Minnesota building association, and made payable in Minneapolis. The court said:

“The second assignment of error is that the note and mortgage were both usurious on their face and nonenforceable. As already stated, the note *585stipulates on its face to pay five per cent, interest per annum and five per cent, premium per annum at the office of the company at Minneapolis, Minnesota. This contract is a Minnesota contract, and is expressly authorized by the charter of the company and the laws of that state, which have been distinctly proved and appear on the record.”

Another case in point is Association v. Rector, 38 C. C. A. 686, 98 Fed. 171. This was an appeal from the circuit court for'the Eastern district of Arkansas in a suit to foreclose a mortgage '.of land in Arkansas. The appellant was an Alabama corporation. The circuit court of appeals for the Eighth circuit said:

“Is this contract valid under the laws of Alabama? This is the only question in the case. Tlu; contract was made and was to be performed in the state of Alabama, and its validity and effect must be determined by the laws of that state. * * * The validity and legal effect of this contract must be tested by the laws of Alabama and the decisions of the supreme court of that state construing those laws, and not by the laws and decisions of other states. Applying that test, we find that under the laws of Alabama, as construed by the supreme court of that state, the contract in suit is not usurious.”

The decree of the circuit court for Arkansas was reversed, and the case remanded, with instructions to render a decree for the sum found due, treating the contract as valid, and not usurious.

Another case is Andruss v. Association, 36 C. C. A. 336, 94 Fed. 575. This was a bill to foreclose a mortgage of land in Texas, executed to a building and loan association incorporated in New York. The circuit court of appeals for the Fifth circuit held that, under the laws of the state of New York, the contract was valid, and not usurious, and that the mortgage of land in Texas was enforceable according to the terms of the contract.

The case of MacMurray v. Gosney, 106 Fed. 11, in the circuit court of the United States for the Western district of Pennsylvania, was a suit by the receivers to foreclose a building association mortgage given to an Illinois corporation on land in Pennsylvania. Circuit Judge, Acheson applied the rule of settlement adopted by the United States circuit court for the Southern district of Illinois, and refused to apply the rule, more favorable to the borrower, established by the supreme court of Pennsylvania in like cases.

These decisions in building and loan association cases, several of them decided since the ruling in the present case now appealed from, appear,to us, in the absence of legislation by the state of North Carolina controlling the enforcement of a mortgage of land in that state given to a foreign building and loan association, to establish the rule that such a mortgage is enforceable for the amount of the contract secured, provided it is a contract to be performed in the foreign state, and to the extent that it is lawful under its laws. The circuit judge, while not applying the rule of settlement in this case established by the Tennessee decisions, did, by his final decree, adopt the method of settlement sanctioned by the decisions of the supreme court of North Carolina by the cases hereinbefore cited, by which the borrowing stockholder is required to contribute to the losses in respect to his advanced shares. In accordance with this method of settlement, it was decreed that Ellington and wife were *586liable as stockholders for their pro rata share of the losses of the Covenant Building & Doan Association, and that the mortgage should not be released, but that their pro rata share of the losses and deficiencies should be secured by sáid mortgage, and the mortgaged land remain charged with that liability. This although not strictly the rule of settlement adopted by the court of primary jurisdiction in this receivership, which we hold to be the proper rule, yet it is for practical results hardly distinguishable and quite equitable, and was not appealed from by the defendants, and therefore we do not think the appellees should be charged with the costs of this appeal.

The further contention of the appellants that in a proceeding like the present one to wind up and distribute the assets of an insolvent building and loan association the pledgéd stock should be decreed to be sold in the event that the land should not bring sufficient to pay the borrowers’ debt, is without merit. The object of the proceeding is to pay off the stock by an equitable distribution of the assets.

Decree modified in accordance with this opinion.