Gilbert v. Fosston Manufacturing Co.

216 N.W. 778, 174 Minn. 68, 1927 Minn. LEXIS 1346

• Court: Supreme Court of Minnesota
• Decided: December 9, 1927
• Docket: No. 26,153.
• Status: Published

Opinions

¹ Reported in 216 N.W. 778, 218 N.W. 451. Action for the foreclosure of a trust deed securing $150,000 in bonds of Fosston Manufacturing Company, a Minnesota corporation, in which, under order of court, the holders of the bonds appeared as claimants. L. K. Baker, the holder of $75,000 of the bonds, appeals from a judgment denying his claim in toto on the ground of usury.

The trust deed became effective in February, 1923, and $75,000 of the bonds was soon negotiated. Of that amount, $65,000 is still outstanding. The other $75,000 of the issue was held for a short time by the corporation and finally used in a manner now to be explained. In March, 1923, the company was hard pressed for funds and negotiated a $30,000 loan from S. M. Bloss (doing business as S. M. Bloss Company) of Chicago. After the principal of that loan had been reduced by payments to $21,000, the company, again in urgent need of cash, negotiated another loan of $14,000 from Bloss, consummated in January, 1924. As security for each loan the company pledged the remaining $75,000 of its bonds. Although Bloss Company, on the face of the transactions, was nominally a mere broker, taking the notes for negotiation to others, it was in fact the lender. Bloss intentionally exacted and the borrower agreed to pay, in addition to annual interest at seven per cent, a bonus, in the form of commission, which made the return to the lender in excess of 20 per cent in each case.

There was a formal application for each loan. They were merged in the notes and so may be ignored except as part of the negotiations, which were conducted in part through correspondence between St. Paul and Chicago but very largely by personal conference at Chicago. The notes were payable there. After the making of the second loan a default occurred and Bloss Company foreclosed on the bonds. They were sold, nominally at public auction, in a manner which as to procedure conformed with Illinois law. At the sale Bloss and Baker were the only bidders, and the bonds were sold to the latter for $26,000. Baker is found to have been acting wholly for Bloss.

It was held below that the notes were Minnesota contracts, void under the usury laws of this state (G. S. 1923, § 7038), and that Baker, not being a holder in due course, had acquired no title to the bonds. By reference thereto, the bonds subjected themselves to all the terms of the trust deed securing them. They were thereby rendered non-negotiable under the rule of King Cattle Co. v. Joseph, 165 Minn. 28,205 N.W. 639. Our attention has been invited to no law of Illinois which would make them negotiable, and such a law, if any, could not affect the result as Baker is not a holder in due course.

The argument for appellant Baker is that the notes to Bloss Company were Illinois contracts and not usurious under the laws of that state. If that be so, the pledge of the bonds is also unobjectionable and Bloss, having the right under the pledge contracts to purchase the bonds himself, the title of his representative, Baker, is good.

1. Notwithstanding a finding that the notes were Minnesota contracts, we are constrained to hold that plain facts make the question one of law which must be resolved for appellant. The $30,000 note was signed by makers and guarantors in St. Paul and mailed to Bloss Company at Chicago. The $14,000 note was likewise executed in St. Paul but sent to Bloss Company at Chicago by an agent of theirs. It was the plain intention that the notes should not be effective until received by Bloss Company at Chicago. Checks for the proceeds were not forthcoming and not expected to be until actual receipt of the notes by the lender at Chicago. Both notes were payable at the office of Bloss Company at Chicago. Illinois was thereby fixed as the place of both contract and performance and its law must control. Green v. N.W. Trust Co. 128 Minn. 30,150 N.W. 229, L.R.A. 1916D, 739; Mueller v. Ober, 172 Minn. 349,215 N.W. 781.

The general rule is that contracts, not relating to real estate or specific personal property, are governed as to effect and performance by the law of the place where they were made. They are not considered made until the last act necessary to give them effect has taken place. McKibbin v. Ellingson,58 Minn. 205, 59 N.W. 1003, 49 A.S.R. 499. The place where that act takes place therefore becomes, no more appearing, the place where the contract is made. The only alternative is to treat the notes as having been made in St. Paul but to be performed in Illinois. That view would bring us to the same end, for it would invoke the "general principle * * * well settled" that such contracts "are to be governed by the law of the place of performance." Seeman v. Philadelphia Warehouse Co.274 U.S. 403, 407, 47 S.Ct. 626, 71 L. ed. 672. Ames v. Benjamin,74 Minn. 335, 77 N.W. 230. In the Seeman case it is observed accurately (quoting Wharton) that where the bona fide intent of the parties was to fix the situs of the transaction at a "place which has a natural and vital connection" with it, an intention to obtain the highest possible legal interest "does not prevent the application of the law allowing the higher rate." In other words, "greed for interest" to that extent is immaterial.

2. Here we note a finding that there "was neither thought, nor actual intent" in the minds of any of the parties "as to the law of what state should govern the transaction." That is normally the case, but notwithstanding the contract must be given a situs when there arises concerning it a problem of conflict of laws. The method of the law with respect to all writings the authors of which have intended a legal effect is to achieve if possible the intended result. It offends both sense and justice to prevent obligation where obligation is clearly intended. So if a contract may be placed either in state A or state B, the parties themselves not having indicated or even considered by what law it should be governed, and it is a nullity under the laws of state A but valid and enforceable according to its expressed purpose in state B, the law refers it to that state. In no other way can the plain intent to assume contractual obligation be given effect. So if the method is a species of "legal jugglery" (Green v. N.W. Trust Co.128 Minn. 30, 150 N.W. 229, L.R.A. 1916D, 739), it is after all an open and honest kind of legerdemain done in full view of the audience. If it be a mere trick of the law, it is at least in the interest of honesty, especially so where it prevents a forfeiture as it does here. It is "in support of a policy of upholding contractual obligations assumed in good faith." Seeman v. Philadelphia Warehouse Co. 274 U.S. 403, 407,47 S.Ct. 626, 71 L. ed. 672. Only by considering the notes Illinois contracts can we escape putting the borrowers in the moral category of swindlers. We are simply declining to hold them guilty of procuring money by the false pretense of a contract to repay and a sham pledge of security. (Our statute not only voids usurious notes but also forfeits the debt.)

Both notes were payable at the lender's office in Chicago, with the right in the holder "from time to time" to appoint another place of payment. The mere right of the holder from time to time to change the place of payment probably could not render the contract ambulatory so as to be tested now by the laws of one state and then by those of another. The situs of the contract, as distinguished from the changing place of part performance, would not change. But here the right to change the place of performance was not exercised. We need go no further.

3. We next consider the applicable laws of Illinois, pleaded and proved as facts. The statute concerning interest and usury is Smith-Hurd, Ill. Rev. St. 1923, c. 74. Sections 4 and 5 prohibit any "person or corporation" from taking, directly or indirectly, interest at a greater rate than seven per centum per annum. Section 6 penalizes "any person or corporation in this state" who "shall contract to receive a greater rate of interest or discount" by a forfeiture of "the whole of said interest so contracted to be received." Section 11, providing that "no corporation shall hereafter interpose the defense of usury in any action," has been construed by the supreme court of Illinois in Union Nat. Bank v. Louisville, N. A. C. Ry. Co. 145 Ill. 208, 34 N.E. 135, and Dorothy v. Commonwealth Co.278 Ill. 629, 116 N.E. 143, L.R.A. 1917E, 1110. The holding in both cases, as stated in the latter, is "that while a corporation cannot, on account of said section 11, insist upon the forfeiture of all interest, as provided by section 6 of the interest act, where the debtor has contracted to pay usurious interest, yet said section 11 does not prevent the debtor corporation from insisting that only interest at the legal rate shall be allowed in determining the amount due the creditor."

If we could stop here it would be clear that the amount due on the notes to Bloss Company at any time could be correctly ascertained only by charging interest at the Illinois maximum of seven per centum. But there is in evidence another statute which demands consideration. It is "the general corporation act" of Illinois, approved June 28, 1919 (Laws of Ill. 1919, p. 312 et seq.). Each domestic corporation subject thereto is given the power among other things (§ 6, subd. 7) "to borrow money * * * without regard to or restrictions under any usury law of this State." Sections 80 to 95, inclusive, have to do with foreign corporations and their domestication in Illinois.

Section 95 of the statute reads:

"Foreign corporations entitled to transact business in thisState at the time this Act takes effect * * * shall be entitled to all the rights and privileges and shall be subject to all the limitations, restrictions, liabilities and duties as are prescribed herein for foreign corporations admitted to transactbusiness in this State under this Act." (Italics ours.)

Unless that language applies to the Fosston company, which was never admitted to do business in Illinois, the loans now in question having been isolated and single interstate transactions, its receiver in this proceeding is entitled to the benefit of the interest statutes already discussed, which limit interest to seven per centum. We are thus at the final and crucial question.

We must interpret the statute of another state, and we proceed with embarrassment because, counsel assure us, there is no construction by the supreme or any other court of Illinois. It appears to us that § 95 lends itself to clear and inescapable interpretation without resort to extraneous aid, but in view of the argument contra we have considered the section even from the external viewpoints. As already indicated, § 95 is a subdivision of a general corporation statute dealing with the domestication of foreign corporations. It is an untenable suggestion that the legislature of that state would attempt to impose its conditions upon a foreign corporation transacting only interstate business in Illinois, for such an attempt would be beyond its power under the commerce clause of the federal constitution. Crutcher v. Kentucky, 141 U.S. 47, 11 S.Ct. 851, 35 L. ed. 649; International Textbook Co. v. Pigg, 217 U.S. 91, 30 S.Ct. 481,54 L. ed. 678, 27 L.R.A.(N.S.) 493, 18 Ann. Cas. 1103. That is nowhere more clearly recognized than in Illinois. Lehigh Portland Cement Co. v. McLean, 245 Ill. 326, 92 N.E. 248,137 A.S.R. 322. So that portion of the statute dealing with foreign corporations must be construed with that limitation in mind. "What is intended by the statute * * * was to guard against foreign corporations doing business in this state in competition with domestic corporations without being subject to the same restrictions and control as the domestic corporation, and to prevent what in effect would be, but for the statute, unfair competition in domestic trade in giving advantages to the foreign corporation not possessed by the domestic." A. H. Woods Production Co. v. Chicago, C. L. R. Co. 147 Ill. App. 568, 569. The purpose of § 95 is a common one in legislation, recurring in almost every revision of statutes on a subject such as that of corporations or occupations which can be carried on by individuals only under state authority. Always in such a case there are those who are lawfully admitted to do business or licensed at the time the new law takes effect, and always the purpose is to put them on a parity with those coming in under the new law. The latter portion of § 95 refers only to foreign corporations domesticated after the new law took effect, and the first part just as plainly to foreign corporations domesticated (under preceding statutes) before.

None of the companion provisions of § 95 suggests any thought that nondomesticated foreign corporations are at all affected by the act except as they may violate it by attempting domestic business without the admission requisite for that purpose. Throughout the sections relating to foreign corporations we find used as synonyms the phrases, "admitted to do business in this State" (§ 83); "foreign corporation admitted to do business" (§§ 84 and 85); "foreign corporation licensed to do business in this State" (§§ 87 and 88). Each of such phrases wherever used applies only to domesticated foreign corporations. It would be passing strange if we found a different meaning attending the phrase "entitled to transact business in this State" in § 95, particularly when again it is conjoined as an equivalent with "admitted to transact business in this State." There as elsewhere in the act the words "admitted" and "entitled," when used with respect to foreign corporations, are synonymous. Both words refer to the formal act of domestication or to a corporation which has by such act domesticated itself.

There is a "consensus of opinion that a corporation" in order to come within the purview of such a statute must transact in the state "some substantial part of its ordinary business, which must be continuous in the sense that it is distinguished from merely casual or occasional transactions, * * *. Hence it may be laid down as a general rule that the action of a foreign corporation in entering into one contract or transacting an isolated business act in the state does not ordinarily constitute 'the carrying on or doing of business' therein." 12 R.C.L. 69, cited in Plew v. Board, 274 Ill. 232, 236, 113 N.E. 603, to the proposition that "entering into one contract or transacting an isolated business act is not engaging in business in this state."

The conclusion therefore is irresistible that § 95, in its reference to "foreign corporations entitled to transact business in this State at the time this Act takes effect," does not refer to or include a foreign corporation there engaged in interstate business or isolated single transactions. The transactions of the Fosston company here involved were of that nature. Hence they are not affected at all by the general corporation act of Illinois.

By an act approved June 19, 1925 (Laws of Ill. 1925, p. 452), § 4 of the old interest statute was amended by the addition of a proviso to the effect that "with respect to money loaned to or in any manner due and owing from a corporation, the parties may stipulate or agree upon any rate of interest whatsoever, and take and pay the same." That amendment was subsequent to the transactions now involved and therefore has no effect upon them. It is relevant only as an aid in construing the law as it was before the amendment.

It follows that the loans in question were subject to Smith-Hurd, Ill. Rev. St. 1923, c. 74, and that they were usurious to the extent that more than interest at seven per centum per annum was taken. There is no objection, as we understand the case, to certain charges made by the lender to cover expenses incurred by him in making the loan. The commissions he exacted were usurious.

Deciding as we do that as Illinois contracts the notes to Bloss Company were enforceable only to the extent of principal and seven per cent interest, the maximum legal rate in Illinois, it remains to determine the effect in that state of the sale made by Bloss Company under the claim that the notes were enforceable for the full amount notwithstanding their violation of the Illinois statute. The commission or bonus on the $30,000 loan was $4,650; that on the $14,000 loan, $2,030. Both were additional to interest at the maximum rate of seven per centum. The sale of the bonds was on the theory that the notes which they secured were enforceable for par value. That theory was erroneous and the amount claimed to be due excessive accordingly. It may be that if, as of the date of the sale, the borrower had been given the credit to which he was entitled because of his payment of the usurious commissions, or if the original principal of the loans had been computed at the correct amount (face of the notes less the usurious bonuses) and proper credit given for subsequent payments, there would have been, at the date of the sale, no default and therefore no right to sell the collateral. But that issue we do not decide. It was not decided below and has not been argued here. It should be the only subject of a new trial. Another trial of the whole case is not needed.

The conclusions of law should be amended so as to conform with this decision. The new trial, if counsel cannot dispense with it, will be limited to the issue just suggested. In so far as it determines the rights of appellant Baker and not otherwise, the judgment is reversed and the case remanded for further proceedings not inconsistent with this opinion.

AFTER REARGUMENT. On March 9, 1928, the following opinion was filed: