Missouri, K. & T. Trust Co. v. Krumseig

77 F. 32, 23 C.C.A. 1, 1896 U.S. App. LEXIS 2212

• Court: Court of Appeals for the Eighth Circuit
• Decided: November 5, 1896
• Docket: No. 756
• Status: Published

Opinions

CALDWELL, Circuit Judge,

after stating the case as above, delivered the opinion of the court.

The case of Trust Co. v. McLachlan, 59 Minn. 468, 61 N. W. 560, involved the construction of one of the appellant’s contracts identical in its provisions with the one here in suit. Judge Mitchell, speaking for the court in that case, said:

“We had supposed that in the course of our professional and judicial experience we had met with about all the forms of contract which have been devised by the ingenuity of modern associations of this and similar kinds, but this one is entirely novel to us. It is certainly unique, and, after a careful study of all its provisions, it seems clear to us that it must have been contrived for the purpose of evading-either the insurance laws or the usury laws, or both, of this state; hut we shall take plaintiff at its word, and assume, without deciding, that it is not a life insurant!' contract, and hence that the laws of this state prohibiting and declaring invalid Such contracts made by a foreign insurance company which has not complied with tmr statutes are inapplicable. It remains to be considered whether the facts Justify the conclusion that the scheme was devised as a cover for usury. It was on ibis ground that the trial court held the notes and mortgage void.”

And (he court: held that the scheme embodied in the application, notes, and mortgage was merely a colorable device to cover usury, and that the notes and mortgage were usurious and void. This judgment: of the supreme court of Minnesota is directly in point in the case at bar on the question as to whether the contract is usurious.

The statute's of Minnesota fix the legal rate of interest: at 7 per cent:., and the highest conventional rate at 10 per cent., and declare that “all bonds, bills, notes, assurances, conveyances, chattel mortgages, and all other contracts and securities whatsoever, and all deposits of goods, or anything- whatever, whereupon or whereby there shall be reserved, secured or taken any greater sum or value for the loan or forbearance of any money, goods, or things in action, than is above prescribed, shall be void,” with exceptions that have no relation to this case. It is also provided that any person who has paid usurious interest may recover it back by action brought within two years after its payment, and that, “where the original holder of an usurious note sells the same to an innocent purchaser, the maker of said note or his representatives shall have the right to recover back from the said original holder the amount of principal and interest paid by him on said note.” Gen. St. Minn. 1888, c. 23, §§ 1-4.

The loan was to be repaid in monthly installments. Notes were given for these installments which included both principal and interest. The payment of each monthly installment, reduced the; principal of the debt by the amount of the principal included therein, and it extinguished the interest on that sum. Without reciting the testimony or setting out the extended calculations of the experts, it is sufficient, to say that, viewing the contract as a loan of money, the interest charged on the loan in excess of 10 per cent, is nearly $500, after allowing the appellant the cost to it of the policy of insurance on Krumseig’s life taken out in its favor upon the “renewable reducing term plan” under its contract with the Prudential Insurance Company. It is immaterial what name is given to this life insurance which the appellant required Kruinseig to take out in its favor as a condition of making the loan. By whatever name called, it was taken out for the benefit of the appellant, at the cost and expense of Kruinseig. Allowing the cost of this insurance to the appellant to be a legitimate charge, the fact remains that the contract stipulates for a large sum in excess of 10 per cent.

It is urged that the obligation to repay the loan is contingent upon Krmnseig’s living, and that in the event of his death, if he has “promptly paid previous installments, and kept other conditions,” the appellant is bound to “release 1he unpaid portion of the debt.” But, in the contingency of Krumseig’s death and the release of the unpaid portion of the debt, the appellant is indemnified against loss at Krumseig’s expense, for he was made to purchase the insurance for the appellant’s benefit. On this branch of the case, the supreme court of Minnesota, in Trust Co. v. McLachlan, supra, said:

“The peculiar and unusual provisions of this contract themselves constitute intrinsic evidence sufficient to justify the finding- of the existence of every essential element of usury, viz. that there was a loan, that the money was to be returned at all events, and that more than lawful interest was stipulated to be paid for the use of it. The only one of these which could be seriously claimed to be lacking was that the money was not to be paid at all events, but only upon a contingency-, .to wit, the continuance of the life of McLachlan; but the facts warrant the inference that this contingency was not bona fide, but was itself a mere contrivance to cover usury. The mere fact that the contract has the form of a contingency will not exempt it from the scrutiny of the court, which is bound to exercise its judgment in determining whether the contingency be a real one, or a mere shift and device to cover usury. The circumstances would justify a finding that the contingency in this case was merely a colorable device to cover usury.”

We concur in the views here expressed, and they find support in other cases. Miller v. Insurance Co. (N. C.) 24 S. E. 484; Insurance Co. v. Kittle, 1 McCrary, 234, 2 Fed. 113; Insurance Co. v. Harvey, 2 McCrary, 576, 7 Fed. 805; Clague v. Creditors, 2 La. 114.

But, conceding that the notes and mortgage are void for usury, it is contended that the appellees cannot obtain the relief they seek, except upon the condition of paying or tendering the principal of the loan and lawful interest. Undoubtedly, this is the general equity rule, but the rule has been abrogated by statute in the state of Minnesota. Construing the statute on the subject of usury which we have cited, the supreme court of the state, upon full consideration, held that its provisions were intended to apply as well to actions brought by borrowers for relief against usurious notes or other securities as to those brought against them, in which the usury is set up by way of defense; and that in the former, equally with the latter, the note or other security, whenever its usurious character is made to appear, should be declared void, and ordered canceled and delivered up unconditionally, and without requiring the borrower to-repay the lender the amount loaned, with legal interest, or any part of it. Scott v. Austin, 36 Minn. 460, 464, 32 N. W. 89, 864, reaffirmed in Exley v. Berryhill, 37 Minn. 182, 33 N. W. 567. This decision was pronounced in a case where the mortgagor, without paying or tendering any part of the unpaid mortgage debt and interest, brought a bill to set aside a sale to the mortgagee of the mortgaged premises under a power of sale, and to cancel the mortgage and notes, upon the ground that the contract was usurious. The court found the contract was usurious, and thereupon rendered a decree setting aside the sale of the mortgaged premises to the mortgagee under the power of sale contained in the mortgage, and requiring the notes and mortgage to be surrendered for cancellation, and the mortgage canceled of record. The express holding of the court was that the complainant was entitled to this relief under the statute, without paying or tendering any part of the debt or interest. The decision is grounded solely on the statute. The court recognizes the general rule of equity that a maker of a usurious contract cannot maintain a bill to cancel the same for usury without first paying or offering to pay the principal sum borrowed, with lawful interest. The court holds, however, that this rule of equity is abrogated by the statute which we have cited, and that, under that statute, conveyances and mortgages made to secure a usurious contract are void, aiid that the statute makes it obligatory on the court, when the usury is established at the suit of the maker of the usurious contract, to annul and cancel the contract with all conveyances given to secure performance of the same, without requiring the plaintiff to pay any part of the usurious debt or interest. The judicial department of every government is the rightful exponent of its laws, and the construction placed upon the statute of Minnesota by the supreme court of the state is conclusive in this court. The judicial interpretation of a state statute by the supreme court of the state becomes, in legal effect, a part of the text of the statute itself. Bergman v. Bly. 27 U. S. App. 650, 13 C. C. A. 319, and 66 Fed. 40.

Other states have statutes similar to the Minnesota statute, among them New York (1 Pom. Eq. Jur. § 391, note 1; Bissell v. Kellogg, 60 Barb. 617) and Arkansas. The Arkansas statute is more comprehensive than the Minnesota or New’ York statute, in that it extends the right to have the usurious securities canceled to the vendees, assignees, or creditors of the maker of the usurious contract. It declares (hat every conveyance or lien given to secure a usurious contract “may he canceled and annulled at the suit of the maker of such usurious contract or his vendees, assigns, or creditors”; and, in terms, provides, that “neither the maker of the usurious contract nor his vendees, assigns or creditors ® * * shall be required to tender or pay any part: of the usurious debt or- interest as a condition of having such contract and any conveyance, mortgage, pledge or oilier lien given to secure its payment or executed in furtherance thereof, enjoined, canceled and annulled, and any rule of law, equity, or practice to the contrary is abrogated.” Sand. & H. Dig. St. Ark. 1894, c. 110, §§ 5086, 5088.

A further contention of the appellant is that a state statute which changes a rule of equity law is not obligatory on a federal court, and that, therefore, the statute of Minnesota providing for the unconditional cancellation of conveyances, mortgages, and other liens given to secure the payment of usurious contracts will not be given effect by a federal court of equity sitting in that state in cases where it applies. It will be conceded that, if this suit had remained in the state court where it was originally brought, the appellees would have bad tbe benefit of the state statute. Did they lose that right; by tbe removal of the cause into the federal court? The practice in the federal courts in suits in equity is regulated by themselves and by rules established by the supreme court of the United States under The authoritv of an act of congress, and are uniform throughout; the United States, and cannot be varied by state laws. But the question in this case is not one of mere practice, hut of substantive law’. The bill seeks to cancel a mortgage on real estate situated in the state of Minnesota. The mortgage is a cloud upon the title of the complainant, which, under the statute of Minnesota, he is entitled to have removed unconditionally. The mode of proceeding to accomplish this result is the same in the federal courts that it is in the state courts, namely, by bill in equity. The statute is not, therefore, a practice act. It abrogates a rule of equity law, and secures to the maker of the usurious securities a substantive right, which may be enforced according to the established and well-understood equity practice. It is immaterial whether this right be called legal or equitable; It is an absolute right, and one of which no court can deprive the party. Its enforcement is not dependent on the discretion of the chancellor, nor can a rule of decision based on the supposed authority of the maxim that “he who asks equity must do equity” prevail over a positive statute expressly abrogating that rule of decision. When a court of equity is called upon to deal with a right given by statute, then it accepts and acts upon that other maxim that “equity follows the law.” It is not competent for any court to take from the citizen a right secured to him by a valid exercise of legislative power. “Rights,” says the supreme court of the United States, “under our system of law and procedure, do not rest in the discretionary authority of any officer, judicial or otherwise.” In re Parker, 131 U. S. 221, 9 Sup. Ct. 708.

In the absence of a statute, the equity rule of decision that we are considering prevails alike in the state and federal courts, and, if a statute is ineffectual to abrogate it in one court, it is not perceived why it is not equally ineffectual to abrogate it in the other, and the result would be to make a judge-made rule of law paramount to the legislative will. A rule of equity law is no more beyond legislative control than a rule of the common law. Both may be abrogated at the pleasure of the legislature. The statute was designed to make the usury laws of the state effective. It is well known that the equity rule of decision, the application of which the appellant is insisting on in this case, rendered the usury law nugatory in many cases. By taking a mortgage with a power of sale, the usurer was sure of his mortgage securities to the extent of the principal of the loan and legal interest, notwithstanding the statute declared the contract and securities void. Moreover, the Minnesota statute deals with conveyances and titles to real estate, and to the removal of clouds therefrom, and it never was doubted that the federal courts will enforce the right given by the state law in such cases, in the mode appropriate to those courts. The laws of the state in which land is situated control exclusively its alienation and transfer, and the effect and construction of instruments intended to convey it (U. S. v. Fox, 94 U. S. 315; U. S. v. Crosby, 7 Cranch, 115; Clark v. Graham, 6 Wheat. 577; McGoon v. Scales, 9 Wall. 23); and all such laws in existence when a contract in regard to real estate is made, including the contract of mortgage, enter into and become a part of such contract (Brine v. Insurance Co., 96 U. S. 627). “The state legislatures certainly have no authority to prescribe the forms and modes of proceeding in the courts of the United States; but having created a right, and at the same time prescribed a remedy to enforce it, if the remedy prescribed is substantially consistent with the ordinary modes of proceeding on the chancery side of the federal courts, no reason exists why it should not be pursued in the same form as it is in the state courts. On the contrary, propriety and convenience suggest that the practice should not materially differ where titles to lands are the subject of investigation. And such is the constant course of the federal courts. * * * The undoubted truth is that, when investigating and decreeing on titles in this country, we must deal with them, in practice, as we And them, and accommodate our modes of proceeding, in a considerable degree, to the nature of the case, and the character of the equities involved in the controversy, so as to give effect to state legislation and state policy; not departing, however, from what legitimately belongs to the practice of a court of chancery.” Clark v. Smith, 13 Pet. 195. It would be an unheard-of doctrine to say that a state statute affecting conveyances and the removal of clouds upon the title of real estate, and giving full effect to an established state policy on a subject confessedly within the exclusive domain of state legislation, should not be obligatory on a federal court held in the state in a case coming within the purview of the statute. No decision of the supreme court of the United States has been cited, and it is believed none can be found, supporting such a doctrine. Under the operation of the rule here contended for, we should have two rules of decision on the same facts,, —one for the state court, and one for the federal court; the former based on a valid exercise of the legislative power pf the state, and the latter based on nothing but a rule of decision of chancery courts having no legislative sanction whatever. As a result of such diverse rules of decision, each party to a suit would engage in an unseemly struggle to get into that jurisdiction whose rule of decision favored his side of the case. Indeed, this is precisely what occurred here. This case was removed from the state to the federal court in the hope that the federal court would disregard the state statute. There are a few cases in which the rule of decision in the federal and state courts may vary, but they relate to questions of general commercial law which are not dependent upon any statute. When-r ever a right is given by state statute, it is obligatory on both courts to enforce it.

The insurance feature of the contract remains to be considered. To explain and define the nature of the contract, the appellant called three expert witnesses. Mr. Lunger, the actuary of the Prudential Insurance Company, in his testimony, says: “In brief, the contract is a combination of a mortgage loan payable in installments, and a life insurance policy.” Mr. Stillwell, the president of the appellant company, says: “I invented the plan on which this loan was made;” and he says Ms invention consists in “combining the loan and the insurance into one contract.” Mr. Cone, secretary of the appellant company, testifies that “the contract involved in this case is similar to a ten-year loan and a ten-year endowment policy. The borrower in this case has all of the benefits and advantages of both a ten-year loan and a ten-year endowment policy on his life, and other additional benefits and advantages. In fact, the only difference between this contract and a straight loan and endowment policy consists in the additional and superior advantages which the borrower has, under this contract, over and above those he would have in case he borrowed money for ten years, and then insured his life for ten years on the endowment plan.” Accepting the construction of this contract given by the appellant’s expert witnesses, one of whom, to use his own language, “invented the plan,” we must hold that the contract is, in the language of another of appellant’s witnesses, “a combination of a mortgage loan * * * and a life insurance policy.” Viewed as a contract for life insurance either in whole or in part, it is void for noncompliance with the insurance laws of the state of Minnesota. These laws impose numerous conditions on foreign insurance companies doing business in the state, and punish criminally the officers and agents of any insurance company doing .business in the state contrary to their provisions. Gen. St. Minn. 1878, c. 34, tit. 6, §§ 291-297 (Gen. St. 1894, §§ 3167-3174).

It is admitted that the appellant did not qualify itself to do an insurance business in the state. Upon these facts, two familiar rules of decision come into play, — one, that a penalty implies a prohibition of the thing itself, on the doing of which the penalty is to accrue though there are no prohibitory words in the statute; and the other is that a court of justice will give no assistance to the enforcement of contracts which the law of the land has interdicted. Swann v. Swann, 21 Fed. 299, 306. Applying these well-settled rules to the contract of insurance^ it must be held illegal and void, and such we understand to be the holding of the supreme court of Minnesota. Seamans v. Mill Co. (October term, 1896) 68 N. W. 1065. A court of equity will not require the appellees to await a suit against them on the illegal contract to which they have an absolute defense, but will relieve them by ordering the contract executed in violation of the statute to be surrendered and canceled. The remedy of cancellation is simply the equitable proceeding identical with the setting up of the illegality as a defense to defeat a recovery at law, and thus get rid of the contract as a binding executory obligation. 2 Pom. Eq. Jur. § 940. The parties in this case are not in pari delicto. The appellant is the party responsible for the contract. It must be conclusively presumed to know that it was doing an illegal act, and it induced the appellees to enter into the contract of insurance in ignorance of its illegality. The appellees had a right to presume that the appellant had qualified itself to do an insurance business in the state. Ehrman v. Insurance Co., 1 Fed. 471. Where one party to an illegal executory contract is comparatively the more innocent, a court of equity may grant him full affirmative relief by canceling the contract. 2 Pom. Eq. Jur. §§ 941, 942. The decrée of the circuit court is affirmed.