Lilienthal v. Kaufman

395 P.2d 543, 239 Or. 1, 1964 Ore. LEXIS 464

Opinions

DENECKE, J.

TMs is an action to collect two promissory notes. The defense is that the defendant maker has previously been declared a spendthrift by an Oregon court and placed under a guardianship and that the guardian has declared the obligations void. The plaintiff’s counter is that the notes were executed and delivered •in California, that the law of California does not recognize the disability of a spendthrift, and that the Oregon court is bound to apply the law of the place of the making of the contract. The trial court rejected plaintiff’s argument and held for the defendant.

This same defendant spendthrift was the prevailing party in our recent decision in Olshen v. Kaufman, 285 Or 423, 385 P2d 161 (1963). In that case the spendthrift and the plaintiff, an Oregon resident, had gone into a joint venture to purchase binoculars for resale. For this purpose plaintiff had advanced moneys to the spendthrift. The spendthrift had repaid plaintiff by his personal cheek for the amount advanced and for plaintiff’s share of the profits of such venture. The check had not been paid because the spendthrift had had insufficient funds in his account. The action was for the unpaid balance of the check.

The evidence in that case showed that the plaintiff had been unaware that Kaufman was under a spendthrift guardianship. The guardian testified that he knew Kaufman was engaging in some business and had bank accounts and that he had admonished him to cease these practices; but he could not control the spendthrift.

The statute applicable in that case and in this one is OKS 126.335:

“After the appointment of a guardian for the spendthrift, all contracts, except for necessaries, and all gifts, sales and transfers of real or personal estate made by such spendthrift thereafter and before the termination of the guardianship are voidable.” (Repealed 1961, eh 344, § 109, now ORS 126.280)

We held in that case that the voiding of the contract by the guardian precluded recovery by the plaintiff and that the spendthrift and the guardian were not estopped to deny the validity of plaintiff’s claim. Plaintiff does not seek to overturn the principle of that decision but contends it has no application because the law of California governs, and under California law the plaintiff’s claim is valid.

The facts here are identical to those in Olshen v. Kaufman, supra, except for the California locale for portions of the transaction. The notes were for the repayment of advances to finance another joint venture to sell binoculars. The plaintiff was unaware that defendant had been declared a spendthrift and placed under guardianship. The guardian, upon demand for payment by the plaintiff, declared the notes void. The issue is solely one involving the principles of conflict of laws.

We could quickly dispose of some of the conflict problems involved by applying principles previously stated some years ago by this court and other courts and writers. We are restrained from following this easy course for two reasons: First, “Contracts is by common consent the most complex and also the most confused part of Conflict of Laws.” Restatement (Second), Conflict of Laws, Tentative Draft No. 6, p 1. “Conflict of laws was in a far more unexplored state than it is now when Professor Beale began work on the original Restatement of the nineteen-twenties.” Reese, Contracts and the Restatement of Conflict of Laws, Second, 9 Int & Comp L Q 531, 532 (1960). Second, the field of conflict of laws is today filled with judicial and pedagogical groping; the blazes of the future trail still remain faint and far apart. “In certain fields, as currently in Conflict of Laws, the wilderness grows wilder, faster than the axes of discriminating men can keep it under control.” Traynor, Law and Social Change in a Democratic Society, 1956 Ill L For 230, 234.

Under these circumstances our duty is threefold,— to decide this case correctly, to indicate generally our views on the course to be taken in this particular part of the conflict of laws, but at the same time to refrain from making any pronouncements which might in the future restrain this court from taking a course which by that time has proved to be the most desirable.

Before entering the choice-of-law area of the general field of conflict of laws, we must determine whether the laws of the states having a connection with the controversy are in conflict. Defendant did not expressly concede that under the law of California the defendant’s obligation would be enforceable, but his counsel did state that if this proceeding were in the courts of California, the plaintiff probably would recover. We agree.

At common law a spendthrift was not considered incapable of contracting. Taylor v. Koenigstein, 128 Neb 809, 260 NW 544, 546 (1935). Incapacity of a spendthrift to contract is a disability created by the legislature. California has no such legislation. In addition, the Civil Code of California provides that all persons are capable of contracting except minors, persons judicially determined to be of unsound mind, and persons deprived of civil rights. § 1556. Furthermore, § 1913 of the California Code of Civil Pro eedure provides: “* * * that the authority of a guardian * * * does not extend heyond the jurisdiction of the Government under which he was invested with his authority.”

Defendant contends that the law of California should not be applied in this case by the Oregon court because the invalidity of the contract is a matter of remedy, rather than one of substance. Matters of remedy, procedure, are governed by the law of the forum. What is a matter of substance and what is a matter of procedure are sometimes difficult questions to decide. Stumberg states the distinction as follows: “* * * procedural rules should be classified as those which concern methods of presenting to a court the operative facts upon which legal relations depend; substantive rules, those which concern the legal effect of those facts after they have been established.” Stumberg, Principles of Conflict of Laws (3d ed), 133. Based upon this conventional statement of the distinction, it is obvious that we are not concerned with a procedural issue, but with a matter of substantive law.

Plaintiff contends that the substantive issue of whether or not an obligation is valid and binding is governed by the law of the place of making, California. This court has repeatedly stated that the law of the place of contract “must govern as to the validity, interpretation, and construction of the contract.” Jamieson v. Potts, 55 Or 292, 300, 105 P 93, 25 LRA (NS) 24 (1910). Eestatement 408, Conflict of Laws, § 332, so announced and specifically stated that “capacity to make the contract” was to be determined by the law of the place of contract.

This principle, that lex loci contractus must govern, however, has been under heavy attack for years; For example, see Lorenzen, Validity and Effects of Contracts in the Conflict of Laws, 30 Yale L J 565, 655 (1921), 31 Yale L J 53 (1921). The strongest criticism has been that the place of making frequently is completely fortuitous and that on occasion the state of making has no interest in the parties to the contract or in the performance of the contract. Stumberg, supra, at 231. The principle is undermined when it is observed that in many of the decisions, the state of the place of making had other associations with the contract, e.g., it was also the place of performance and the domicile of one of the parties. In our decisions stating this principle, the state whose law was applied had connections with the contract in addition to being the place of making. Jamieson v. Potts, supra (55 Or 292); McGirl v. Brewer, 132 Or 422, 443, 280 P 508, 285 P 208 (1930). As a result of this long and powerful assault, the principle is no longer a cornerstone of the law of conflicts. Tentative Draft No. 6, p 3, Restatement (Second), Conflict of Laws, comments on the new contracts chapter: “First, it no longer says dogmatically that the validity of a contract is governed by the law of the place of contracting.”

There is no need to decide that our previous statements that the law of the place of contract governs were in error. Our purpose is to state that this portion of our decision is not founded upon that principle because of our doubt that it is correct if the only connection of the state whose law would govern is that it was the place of making.

In this case California had more connection with the transaction than being merely the place where the contract was executed. The defendant went to San Francisco to ask the plaintiff, a California resident, for money for the defendant’s venture. The money was loaned to defendant in San Francisco, and by the terms of the note, it was to be repaid to plaintiff in San Francisco.

On these facts, apart from lex loci contractus, other accepted principles of conflict of laws lead to the conclusion that the law of California should be applied. Sterrett v. Stoddard Lbr. Co., 150 Or 491, 504, 46 P2d 1023 (1935), rests, at least in part, on the proposition that the validity of a note is determined by the law of the place of payment. Tentative Draft No. 6, p 30, Restatement (Second), Conflict of Laws, § 332b(a) states: “if the place of contracting and the place of performance are in the same state, the local law of this state determines the validity of the contract, * * Judge Goodrich in Frankel v. Johns-Manville Corporation, 257 F2d 508, 511 (3d Cir 1958), stated: “This throws both making and performance into the same state. And under those circumstances the conflict of laws rule in Pennsylvania is that the law of making-performance controls.” The place >of payment, unlike the place of making, is usually not determined fortuitously. The place is usually selected by the payee and the payee normally selects his place of business or the location of his bank. The parties at the time of contract normally do not have in mind the problem of what law should govern. If they did, it is our belief that the payee would intend the law of the place of payment to be governing.

There is another conflict principle calling for the application of California law. Stumberg terms it the application of the law which upholds the contract. Stumberg, supra, at 237. Ehrenzweig calls it the “Rule of Validation.” Ehrenzweig, Conflict of Laws, 353 (1962). Mr. Justice Harlan, speaking for the majority in Kossick v. United Fruit Co., 365 US 731, 741, 81 S Ct 886, 6 L ed2d 56 (1961), stated such a rule and cited Ehrenzweig. Accord, Leñar, The Validity of Contracts and the Conflict of Laws, 2 Ark L Bull 3 (1930). The “rule” is that, if the contract is valid under the law of any jurisdiction having significant connection with the contract, i.e., place of making, place of performance, etc., the law of that jurisdiction validating the contract will be applied. This would also agree with the intention of the parties, if they had had any intentions in this regard. They must have intended their agreement to be valid.

Stumberg, supra, at 237, observes that this principle has been most frequently applied in cases in which the claim of invalidity has been based upon the contention that the contract is usurious. The same principle, however, has been applied to other types of oases. The “rule of validation” is appealing because it is founded upon the same reasoning that is followed in other aspects of the law of contracts. This court and all other courts reiterate that contracts are “sacred and shall be enforced by the courts of justice unless some other over-powering rule of public policy intervenes which renders such agreement illegal or unenforceable. * * * Without such a rule the commerce of the world would soon lapse into a chaotic state.” Bliss v. Southern Pacific Co., 212 Or 634, 646, 321 P2d 324 (1958). This court has repeatedly stated that a contract is presumed valid. Edwards Farms v. Smith Canning Co., 197 Or 57, 62, 251 P2d 133 (1952). We also consistently hold: “It is our duty to construe the writing, if possible, so that it has meaning and validity.” Champion v. Hammer, 178 Or 595, 601, 169 P2d 119 (1946). In the general law of contracts we constantly strive to hold the contract valid and enforceable. The “rule of validation” has the same purpose in conflict of laws.

Thus far all signs have pointed to applying the law of California and holding the contract enforceable. There is, however, an obstacle to cross before this end can be logically reached. In Olshen v. Kaufman, supra, we decided that the law of Oregon, at least as applied to persons domiciled in Oregon contracting in Oregon for performance in Oregon, is that spendthrifts’ contracts are voidable. Are the choice-of-law principles of conflict of laws so superior that they overcome this principle of Oregon law?

To answer this question we must determine, upon some basis, whether the interests of Oregon are so basic and important that we should not apply California law despite its several intimate connections with the transaction. The traditional method used by this court and most others is framed in the terminology of “public policy.” The court decides whether or not the public policy of the forum is so strong that the law of the forum must prevail although another jurisdiction, with different laws, has more and closer contacts with the transaction. Included in “public policy” we must consider the economic and social interests of Oregon. When these factors are included in a consideration of whether the law of the forum should be applied this traditional approach is very similar to that advocated by many legal scholars. This latter theory is “that choice-of-law rules should rationally advance the policies or interests of the several states (or of the nations in the world community).” Hill, Governmental Interest and the Conflict of Laws- — -A Reply to Professor Currie, 27 Chi L Rev 463, 474 (1960); Currie, Selected Essays on the Conflict of Laws, 64-72 (1963), reprint from 58 Col L Rev 964 (1958).

The traditional test this court and many others have used in determining whether the public policy of the forum prevents the application of otherwise applicable conflict of laws principles is stated in the oft-quoted opinion of Mr. Justice Cardozo in Loucks v. Standard Oil Co. of N. Y., 224 NY 99, 120 NE 198 (1918). Foreign law will not be applied if it * * would violate some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal.” Quoted in Schultz v. First Nat. Bk. of Portland, 220 Or 350, 360, 348 P2d 22, 81 ALR2d 1121 (1960). In the latter case we held the law of Oregon — that contracts to adopt were invalid — was not so fundamental to our jurisprudence that we could not apply the Nebraska law— that such contracts were valid when made and to be performed in Nebraska. In that case the plaintiff, whose domicile is not stated, was claiming to be the heir, by reason of the Nebraska contract to adopt, of an Oregon decedent.

In McGirl v. Brewer, supra (132 Or 422), Oregonians purchased Montana land, delivering a promissory note secured by a purchase money mortgage. The note was executed, delivered, and payable in Montana. The purchaser defaulted and the mortgage was foreclosed in Montana. The foreclosure sale yielded less than the amount owing on the note and mortgage. The action in Oregon was on the note for the unpaid balance, i.e., for the deficiency. An Oregon statute prohibits a deficiency judgment in a foreclosure of a purchase money mortgage; a Montana statute permits such a deficiency judgment. The court pointed out that the Oregon statute was adopted to prevent a repetition of the plight in which debtors found themselves in the panic uf 1897. Nevertheless, this court found that the Montana 'statute is not a law “which offends by shocking moral standards, or is injurious or pernicious to the public welfare,” applied the law of Montana, and permitted the action for the deficiency.

Footnotes

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① (132 Or at 447)

In Bowles v. Barde Steel Co., 177 Or 421, 433-437, 164 P2d 692 (1945), 162 ALR 328. Mr. Justice Brand reviewed the subject and some of the leading eases and concluded: “The cases cited above do not involve penalties but they do manifest an evolution toward wider recognition by one state of the rights created by the statutes of another state.”

How “deep rooted [the] tradition of the common weal,” particularly regarding spendthrifts, is illustrated by our decisions on foreign marriages. This court has decided that Oregon’s policy voiding spendthrifts’ contracts is not so strong as to void an Oregon spendthrift’s marriage contract made in Washington. Sturgis v. Sturgis, 51 Or 10, 93 P 696, 131 AS 724, 15 LRA (NS) 1034 (1908), was a suit for divorce and alimony. Defendant had been declared a spendthrift by an Oregon court. The guardian refused to consent to the spendthrift’s marriage. The spendthrift got married in Washington. The marriage was held valid. Although the case involved a 'spendthrift’s contract and, therefore, is persuasive in this case, it should not be considered determinative since marriage contracts are unique and the law applicable to marriage contracts does not necessarily apply to other types of contracts.

On the other hand, we have held a foreign marriage, made before the expiration of six months from the rendition of an Oregon divorce decree, is absolutely void in the courts of Oregon. McLennan v. McLennan, 31 Or 480, 50 P 802, 38 LRA 863 (1897). Our statute provided then, and provides now, that a divorced person is incapable of contracting marriage until six months from the expiration of the Oregon decree. OES 107.110. McLennan v. McLennan, supra, did not use the reasoning that Oregon’s public policy against too-early remarriage was so basic that a Washington marriage in violation thereof would not be recognized. However, in In re Estate of Ott, 193 Or 262, 269, 238 P2d 269 (1951), affirming McLennan v. McLennan, we did use the public policy rationale.

The only decision on this issue involving spendthrifts and economic contracts is Gates v. Bingham, 49 Conn 275 (1881). The defendant was adjudged a spendthrift in Connecticut. He moved to Massachusetts and there incurred a debt which was a valid debt in Massachusetts. An action was brought on the debt in Connecticut, and the defense of being a spendthrift was made. The defendant contended it was against the public policy of Connecticut to permit contracts with spendthrifts to be enforced. The court in its decision did not discuss this contention; it held that a contract valid where made is equally valid in Connecticut. Although the debt was for a necessity, rent, the court did not rest its decision on that fact.

The difficulty in deciding what is the fundamental law forming a cornerstone of the forum’s jurisprudence and what is not such fundamental law, thus allowing it to give way to foreign law, is caused by the lack of any even remotely objective standards. Former limitations on the capacity of married women to con tract illustrate the difficulty. Milliken v. Pratt, 125 Mass 374, 28 AR 241 (1878), is used in many case books as an example. There, the Massachusetts court held that the Massachusetts law that a Massachusetts married woman was incapable of contracting as a surety was not such a cornerstone of Massachusetts jurisprudence and economy that Maine law to the contrary could not be applicable. However, in Union Trust Co. v. Grosman, 245 US 412, 38 S Ct 147, 62 L ed 368 (1918), Mr. Justice Holmes, writing for the court, held that a similar Texas limitation on a Texas married woman was such an integral part of Texas policy that the Illinois law to the contrary would not be enforced in a Texas court.

However, as previously stated, if we include in our search for the public policy of the forum a consideration of the various interests that the forum has in this litigation, we are guided by more definite criteria. In addition to the interests of the forum, we should consider the interests of the other jurisdictions which have some connection with the transaction.

Some of the interests of Oregon in this litigation are set forth in Olshen v. Kaufman, supra. The spendthrift’s family which is to be protected by the establishment of the guardianship is presumably an Oregon family. The public authority which may be charged with the expense of supporting the spendthrift or 'his family, if he is permitted to go unrestrained upon his wasteful way, will probably be an Oregon public authority. These, obviously, are interests of some substance.

Oregon has other interests and policies regarding this matter which were not necessary to discuss in Olshen. As previously stated, Oregon, as well as all other states, has a strong policy favoring the validity and enforceability of contracts. This policy applies whether the contract is made and to be performed in Oregon or elsewhere.

The defendant’s conduct, — borrowing money with the belief that the repayment of such loan could be avoided — is a species of fraud. Oregon and all other states have a strong policy of protecting innocent persons from fraud. “The law * * * is intended as a protection to even the foolishly credulous, as against the machinations of the designedly wicked.” Johnson v. Cofer, 204 Or 142, 150, 281 P2d 981 (1955).

It is in Oregon’s commercial interest to encourage citizens of other states to conduct business with Oregonians. If Oregonians acquire a reputation for not honoring their agreements, commercial intercourse with Oregonians will be discouraged. If there are Oregon laws, somewhat unique to Oregon, which permit an Oregonian to escape his otherwise binding obligations, persons may well avoid commercial dealings with Oregonians.

The substance of these commercial considerations, however, is deflated by the recollection that the Oregon Legislature has determined, despite the weight of these considerations, that a spendthrift’s contracts are voidable.

California’s most direct interest in this transaction is having its citizen creditor paid. As previously noted, California’s policy is that any creditor, in California or otherwise, should be paid even though the debtor is a spendthrift. California probably has another, although more intangible, interest involved. It is presumably to every state’s benefit to have the reputation of being a jurisdiction in which contracts can be made and performance be promised with the certain knowledge that such contracts will be enforced. Both of these interests, particularly the former, are also of substance.

We have, then,, two jurisdictions, each with several close connections with the transaction, and each with a substantial interest, which will be served or thwarted, depending upon which law is applied. The interests of neither jurisdiction are clearly more important than those of the other. We are of the opinion that in such a case the public policy of Oregon should prevail and the law of Oregon should be applied; we should apply that choice-of-law rule which will “advance the policies or interests of” Oregon. Hill, supra, 27 Chi L Rev at 474.

Courts are instruments of state policy. The Oregon Legislature has adopted a policy to avoid possible hardship to an Oregon family of a spendthrift and to avoid possible expenditure of Oregon public funds' which might occur if the spendthrift is' required to pay his obligations. In litigation Oregon courts are the appropriate instrument to enforce this policy. The mechanical application of choice-of-law rules would be the only apparent reason for an Oregon court advancing the interests of California over the equally valid interests of Oregon. The present principles of conflict of laws are not favorable to such mechanical application.

We hold that the spendthrift law of Oregon is applicable and the plaintiff cannot recover.

Judgment affirmed.

Currie criticizes this case. Currie, Selected Essays on the Conflict of Laws, 421 (1963), reprint from 1960 Duke L J 1.