BROWN v. AMERICAN FINANCE CO.

BROWN v. AMERICAN FINANCE CO. U. S. Circuit Court, Southern District of N. Y. ; May, 1887. 1. Usury; what law controls.] The parties to a loan who contract in. . one State and provide for payment in another may lawfully stipu-late for interest according to the law of either State,—that where-the contract is made or that where the money loaned is to be paid,. —as they may in good faith agree. The same; case stated. ] A contract having been made in Rhode Island between defendants, residents of that State, and plaintiff, a, resident of Ohio, a prpmissory note 'was made and delivered there pursuant to the contract, dated and’payable in New York; and New York was also the place of the substantial performance of the controlling provisions of the contract. There was no intent on the part of the parties to evade the usury laws of this State, but the | making of the contract and the delivery of the notes occurred in | Rhode Island as a matter of business convenience. Held, that although the note would have been void for usury under the statute of New York because of a bonus paid the lender, it was valid and enforceable because its legality was to be determined by the laws of Rhode Island. Motion for an injunction pendente lite. This action was originally instituted in the supreme court of Mow York by Theophilus P. Brown, against the American Finance Co., the Toledo, Columbas & Southern Railway Co., the American Loan & Trust Co., Israel B. Mason and Frau cello G. Jillson, for the concellation of a .certain agreement and of certain notes given thereunder ..as usurious and void, and for the return of railway bonds pledged for the payment of the notes. One Dowling was the contractor for building the railway of the Toledo <fc Indianapolis Railway Company, and having completed his contract with the company, became ¡thereunder, entitled to all the bonds ($800,000 in amount), •and capital stock of the railway company, upon payment of claims of 'Various corporations and individuals who had supplied him with materials, and to whom the bonds had been pledged to secure their claims. The .complainant in this action having acquired Dowling’s rights applied to the Finance Company, defendant herein, to assist him in raising money to pay up the claims .of.those to whom the bonds were pledged and the other claims against the railway company, his intention being to ¿acquire all the capital stock and mortgage bonds of the railway company and to organize a new corporation. The .result of the negotiations was the agreement between the «complainant and the Finance Company, dated April 14, 1884, by which the latter, for certain commissions, under■took to raise the necessary means for the complainant to .effect this object. On September 24,1884, the tripartite agreement referred to in the opinion was entered into between the complainant and the defendants Mason and Jillson, and the Finance Company, by which Mason and Jillson promised to loan $325,000 to complainant upon his notes, to be made in form approved by them, with mortgage bonds of the Toledo & Indianapolis Railway Company in double the amount as collateral. «For making the loan they were to receive a large bonus in excess of interest at the rate of six per cent, per annum. The negotiations leading to the contract were closed at Providence, Rhode Island, that being the domicile of Mason and Jillson, and the contract was formally executed there. After the contract was signed the notes- were delivered there by plaintiff to Mason and Jillson. The bonds to be put up as collateral were not delivered. It was understood between the parties that the complainant did not then have the bonds, but that they were to be acquired subsequently, and that the money to be loaned by Mason and Jillson was to bo remitted by them to the Finance Company in New York City, to be used by that company for the purpose of acquiring the bonds from the creditors of the railway company then holding them in pledge as above stated. On September 24, 1884, the complainant signed and delivered to the president of the Finance Company at Providence, Rhode Island, á number of notes of the same te'nor, for the aggregate amount of §325,000. They were made to secure the payment of a loan to that amount which Mason and Jillson had consented to make to the complainant upon the condition expressed in the tripartite agreement. The note for $10,000 which is in question in this action, was one of the series so made for which twenty of the bonds of the railway company were acquired by Mason and Jillson as a pledge to secure its payment, and two others “ appropriated ” by them as a bonus for the loan evidenced by the note. The note purported to be made at New York, was dated September 21, 1884, was signed" by the complainant, and read as follows : £> On or before September 24th, 1886, and upon the return of securities pledged, I promise to pay to my own order at the office of the American Loan & Trust Company, New York, ten thousand dollars for value received with interest at the rate of six per cent, per annum from date payable semi annually, having deposited with the holder thereof as collateral security twenty first mortgage bonds of the Toledo & Indianapolis Railway Company for $1,000 each, with coupons for April 1, 1885, with authority to sell the same or other securities subsequently substituted at the board of brokers or at public or private sale at holder’s option, on the non-performance of this promise and without further notice ; applying the net proceeds to the payment of this note including interest and accounting to me for the surplus if any. In case of deficiency the maker promises to pay to the holders thereof the amount thereof forthwith after such sale with legal interest.” The relief sought by the bill was among other things (1) the cancellation of the said contract dated April 14, 1884, or that the agreement bo reformed ; (2) that the tripartite agreement dated September 24, 1884, be adjudged to be usurious and void and surrendered up for cancellation ; (3) that the notes executed by the complainant pursuant to the agreement last mentioned be adjudged usurious and void and surrendered for cancellation ; (4) that the defendants bo restrained from selling or negotiating the mortgage bonds received as a pledge to secure the payment of the notes and be decreed to deliver the same to the complainant. After the motion for an injunction pendente lite was heard an adjustment was made between the parties, except as between the complainant and the Finance Company, with the result of narrowing the original matters of the bill to a controversy between the complainant and the Finance Company in respect to the note for $10,000 with its accompanying twenty-two bonds, and eighty other bonds for $1,000 each. The title of the Finance Company to the twenty-two bonds depends upon the question whether the $10,000 note made by complainant pursuant to the scheme of the tripartite agreement is void for usury. , The question of the Finance Company’s title to the eighty bonds was one of fact, and those parts of the opin-. ion of AYallace, J., referring to that issue, and summarizing the facts substantially as above stated, are omitted. Burton N. Harrison, for the complainant and the motion. Robert Ludlow Fowler, for the defendant, the Finance Co., opposed. [MAJORITY — Wallace, J.] Wallace, J. [After stating the facts and deciding in favor of the Finance Company’s title to the eighty bonds upon the evidence :] It is conceded by counsel for both parties that the loan was made upon an usurious consideration if the agreement was a New York contract, that is, if its legality is to be tested by the law of New York. The agreement was not usurious if it was a Rhode Island contract. The argument for the plaintiff is that it is a New York contract because the notes are payable in New York, and because New York is the place of the substantial performance of the controlling provisions of the tripartite agreement. The argument for the defendant is that it is a Rhode Island contract because the notes and contract were made in Rhode Island and the notes were negotiated there. There was no purpose on the part of any of the parties in making the contract .in Rhode Island to evade the usury laws of New York. The complainant was a citizen of Ohio, and came to Providence because the defendants lived there, and the negotiations were closed and the instrument formally executed there, and the notes were delivered there as a matter of business convenience. It does not seem necessary to enter upon a discussion of the subject of the lex looi contractus as determined by the place of the making or the place of the contemplated performance of the contract. The general rules which control, and their exceptions, are familiar, but the books are full of conflicting illustrations of their application to the particular case. The primary rule is that the validity of a contract is to be determined by the law of the State in which it is made ; if it is valid there, it is deemed valid everywhere and will sustain an action in the courts of a State whose laws do not permit such a contract (Scudder v. Union National Bank, 91 U. S. 406). If the contract is not itself immoral, although it is expressly prohibited by the statutes of the State in which the suit is brought,- the courts administering the comity of the State will not refuse to enforce such a contract made by its own citizens in a State the laws of which permit the contract (Greenwood v. Curtis, 6 Mass. 358 ; McIntyre v. Parks, 3 Met. 207; Akers v. Demond, 103 Mass. 318). The principal exceptions to the rule that a contract is to be governed as to its interpretation, its nature, its obligation, and its performance or dissolution by the law of the place where it is made, is that the law of the place where it is to be performed will govern the mode of performance because it is presumed that the parties had this law in contemplation when they entered into the contract. Inasmuch as this exception rests upon the presumed intention of the parties to conform to the rule of the local law in carrying the contract into efiect, it seems strange that it should ever have been treated as the criterion by which to ascertain whether the obligation is void for illegality. Phillimore says, that as it rests upon the presumption that the obligor has voluntarily submitted himself to a particular local law, the presumption may be rebutted, either by an express declaration to the contrary, or by the -fact that the obligation is illegal by that particular law though legal by another. The parties cannot be presumed to have contemplated a law which would defeat their engagement (4 Int. Law Sec. 654, pp. 471). Generally the place of performance of a contract, when the contract is a promise to pay money is the place where the payment is to be made. Yet this is not always controlling, and in some, cases the courts which have looked to the place of performance as the place of the contract treat the place of payment as an incidental circumstance and look behind the written instrument to ascertain what place the parties had in mind as the place of contract (Wayne Co. Savings Bank v. Low, 81 N. Y. 566 ; Western Transportation & Coal Co. v. Kilderhouse, 87 N. Y. 430). In both of these cases the State where the parties agreed upon the terms of a loan was held the place of the contract when the legality of an agreement to pay interest would have been usurious by7 the law of the State in which -the note evidencing the loan was made payable. Without pursuing the general subject further,it suffices; that when the question is whether a contract is void for usury7 or not, the weight of authority is now decidedly to the effect that the parties to a loan who contract in one State and provide for payment in another may lawfully stipulate for interest according to the law of either State,—that where the contract is ¡nade, or that where the money loaned is to be paid,—as they may in good faith agree (Depau v. Humphries, 20 Martin, 1; Chapman v. Robertson, 6 Paige, 627 ; Peck v. Mayo, 14 Vt. 33 ; Townsend v. Riley, 46 N. H. 300 ; Kilgore v. Dempsey, 25 Ohio St. 413; Arnold v. Potter, 22 Iowa, 194). In Miller v. Tiffany (1 Wall. 298, 310), Mr. Justice Swayne delivering the opinion uses this language: “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 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 of interest be higher at the place of contract than at the place of performance, the parties may lawfully contract in that case also for the higher rate. These rules are subject to the qualification than the parties act in good faith,' and that the form of the transaction is not adopted to disguise its real character.” Adopting these decisions as controlling in the present case it must be held that the contract here, being valid by the law of Rhode Island where it was made, is not affected by the fact that the notes evidencing the loan were made payable in Hew York City. The motion is therefore denied.