Pinnix v. Maryland Casualty Co.

214 N.C. 760

• Court: Supreme Court of North Carolina
• Decided: February 1, 1939
• Status: Published

Opinion

Seawell, J.

1. Tbe plaintiffs, representing a junior mortgage or deed of trust, brought tbis suit to restrain tbe foreclosure of a senior mortgage or deed of trust upon tbe same land until tbe amount due on tbe senior mortgage might be ascertained and plaintiffs given an opportunity to pay said amount and be subrogated to tbe rights of tbe senior mortgagee. They claim tbat tbe note secured by tbe senior mortgage represents a considerable amount of usury, and demand tbat tbe senior claim shall be purged of usury, all interest thereon forfeited, and tbe amount claimed by defendants reduced to tbat extent.

Tbe defendants, pointing out tbat tbe plaintiffs do not contend for any reduction of defendants’ claim except for tbe aforementioned usury and consequent forfeiture of all interest, say that the item in controversy is thus segregated and relates to usury only, and since they have pleaded the statute of limitations, which upon the record they conceive to be applicable, the matter has become one of law to be settled without a jury, and the court below should have dissolved the injunction.

The statute pleaded became effective 1 April, 1931, and reads as follows:

“442 (3). The forfeiture of all interest for usury: Provided, however, this section shall not apply to the counties of Cherokee and Clay.”

The defendants’ note became due 1 July, 1936. This action was brought 30 May, 1938.

There is considerable controversy between counsel as to the beginning point or time when the statute begins to run, if applicable at all. It is conceded that a difference in the application of the statute might follow accordingly as we might adopt the theory that the junior mortgagee stood in the shoes of the debtor with reference to his right to plead usury or, on the other hand, might plead it as a right independent from that of the debtor.

We might say here that if we adopt the first view, it would be easy to arrive at the conclusion that the action is barred, since a comparison of the dates above set out shows that the debtor’s cause of action, if he had any, accrued more than two years before this action was brought; if we adopt the latter view, it would reasonably follow that the plaintiffs’ cause of action, if they had any, is not barred. They had no cause of action until they came into relation with the subject by taking the second mortgage; but defendants’ mortgage was not then due and did not become due until 1 July, 1936. Since usury does not accelerate the payment of the principal, plaintiffs could not have compelled the defendants to accept payment before their note became due; and we do not understand how the plaintiffs could have prosecuted an action, the mere purpose of which would be to declare a status and, so to speak, put it on ice, so that plaintiffs might use it when occasion arose. We might, therefore, arrive at the conclusion that plaintiffs’ cause of action is not barred.

But we do not think it advisable to pursue an academic discussion of this question, since we think the junior mortgagee has heretofore been permitted to exercise a privilege to which he is not in equity entitled. It seems clear, too, that much of the difficulty in applying the statute of limitations invoked in this ease arises from the confusion thus produced.

2. The right of a junior mortgagee to resort to injunction to stay a foreclosure proceeding under a senior mortgage having a lien upon the same land, until a bona fide controversy as to the amount due on the senior mortgage has been ascertained, is not questioned. When that controversy is narrowed down to a question of usury in the senior mortgage debt, the courts which have passed upon usury statutes similar to ours are not'agreed as to whether the junior mortgagee should be let in at all to raise the question of usury.

We think, on examination of the authorities, our own decisions, as well as those of other jurisdictions having similar laws, will lead to the conclusion that our present discrimination between the mortgagor and the junior mortgagee with respect to the conditions under which they may he let in to raise the question of usury is not sufficiently supported.

Basing their reasoning on the ground that the usury laws are enacted for the benefit of the borrower and are personal to him, and those in privity with him, a great number of jurisdictions refuse to allow the junior mortgagee to raise the question at all; others, while permitting this question to be raised by the junior mortgagee upon other grounds, notably that of public policy, do not give him the benefit of the statute creating penalties and forfeitures, but permit him to come in only upon the tender of the legal amount due, with the lawful rate of interest. Our own courts, while demanding of the mortgagor, and those in privity with him, a tender of the principal amount due, with six per cent interest thereon as a condition precedent of raising the question of usury, permit the junior mortgagee to attack the senior mortgage without any tender, and secure a forfeiture of all interest. Broadhurst v. Brooks, 184 N. C., 123, 113 S. E., 576.

It is not contended anywhere that there is any privity between the junior mortgagee and the borrower or mortgagor in the senior mortgage; but an examination of the North Carolina authorities will show that this rule is seated upon the theory that C. S., 2306, which in most other jurisdictions is considered to raise a right personal to the borrower, makes the promise to pay interest in a note tainted with usury absolutely void for all purposes and incapable of any effect anywhere it is encountered. Ward v. Sugg, 113 N. C., 489, 18 S. E., 717; Ripple v. Mortgage Corp., 193 N. C., 424, 137 S. E., 156; Bank v. Jones, 205 N. C., 648, 650, 172 S. E., 185. It must be said that the two last cited cases merely follow Ward v. Sugg, supra, as a precedent; and none of them deal with the rights of the junior mortgagee, but the theory on which Ward v. Sugg, supra,, was decided is the sole support for the .privilege accorded the junior mortgagee in Broadhurst v. Brooks, supra, of demanding forfeiture of all interest.

The premise to this conclusion that C. S., 2306, makes any promise to pay money utterly and unconditionally void and .of no effect under any circumstances where the transaction is tainted with usury is not tenable; and the position that any part of C. S., 2306, can be borrowed to aid tbe junior mortgagee in the matter of usury in a contract to which he is a stranger is so thoroughly against the weight of authority as to challenge the further usefulness and justice of the rule.

At the threshold of this discussion we must remember that our statute, 0. S., 2306, is copied from the National Banking Act (with additions immaterial to this consideration), and has gone into the laws of very many states of the Union in exactly the same form. Its application to the junior mortgagee in Broadhurst v. Brooks, supra, and our own cases following this line of reasoning, is somewhat peculiar to our State.

The question presented in Ward v. Sugg, supra; Ripple v. Mortgage Corp., supra, and Pugh v. Scarboro, 200 N. C., 59, at p. 62, 156 S. E., 149, was whether the question of usury in a note might be raised against an innocent holder without notice, and these cases hold that this can be done. As stated, the conclusion rests upon an elaborate discussion in Ward v. Sugg, supra, in which the decision by a divided Court was based upon the theory that the usury made the promise to pay interest abso-' lutely and unconditionally void and of no effect for any purpose wherever encountered. Since the protection afforded an innocent purchaser of a note, who has no notice of a defect therein, is an equitable provision of law, and the holder has a better security against the payee and endorser — Ward v. Sugg, supra — it is obvious that the decision of such a matter might have rested upon the ground of superior equity; hut we are not here interested in that question. The point is that the holding in Ward v. Sugg, supra, must have entered into and became the dominant consideration in Broadhurst v. Brooks, supra, and similar cases, since therein the right of the junior mortgagee to demand a forfeiture of all interest was based upon the provisions of C. S., 2306. Broadhurst v. Brooks, supra.

The doctrine was repudiated in Ector v. Osborne, 179 N. C., 667, 670, 103 S. E., 388, and a vigorous dissent defending the principle was filed by Ciarle, C. J., who later wrote the short opinion in Broadhurst v. Brooks, supra.

To get at the root of the matter, we turn now to an analysis of Ward v. Sugg, supra, where the theory seems to have originated.

In this case, speaking of a note given for usurious interest, Justice Clark, speaking for the Court, says:

“The question whether it is valid in his hands is not an open one in this State. Such note- is held to be void into whatever hands it may pass, Ruffin v. Armstrong, 9 N. C., 411; Collier v. Nevill, 14 N. C., 30.” (Such was, of course, the law by statute at that time, but not in 1893, when this opinion was rendered.)

“When the statute makes a note void it is void into whosesoever hands it may come, but when the statute merely declares it illegal the note is good in tbe bands of an innocent bolder. Glenn v. Bank, 70 N. C., 191, 206. Hence, it was argued strenuously tbat tbe authorities above cited were good under our former statute, wbicb made tbe contract void, but tbat tbe present statute merely makes tbe contract illegal. It does not seem so to us. Tbe former statute (Rev. Code, cb. 114; Rev. Stat., cb. 117) denounced tbe contract as void as to tbe whole debt, principal and interest. Tbe present statute (Tbe Code, sec. 3836) makes it void, not as to principal, but as to tbe interest only. It provides tbat Tbe taking, receiving, reserving or charging a rate of interest greater than be is allowed . . . shall he deemed a forfeiture of tbe entire interest . . . wbicb has been agreed to be paid/ with a further provision tbat, if such interest has been paid, double tbe amount can be recovered back by tbe debtor. Tbe only difference between tbe two acts is tbat formerly tbe whole note was forfeited and of no avail, and now only tbe stipulation as to tbe interest is ipso facto deemed forfeited and void.

“In two cases this Court — and by most eminent judges — has expressly held tbat tbe words, 'deemed a forfeiture/ in tbe Act of 1876-7 (now Tbe Code, sec. 3836) makes void tbe agreement as to interest. If any attention is to be paid to tbe doctrine of stare decisis, tbe precedents in our own Court do not leave this open to debate.”

In Ector v. Osborne, supra, a different opinion was reached as to tbe effect of C. S., 2306, and a vigorous dissent along tbe same line was made by tbe writer of tbe foregoing opinion.

Close observation of tbe above quotation from Ward v. Sugg, supra, will show tbat tbe opinion twice interchanges tbe term “void” with tbe expression “deemed a forfeiture,” as if they were synonymous.

¥e can reach no intelligent result by a mere troweling together of terms to wbicb we have arbitrarily assigned tbe meaning most suitable to our purpose. Cole v. Fibre Co., 200 N. C., 484, 489. Tbe conclusion is forced when, in an endeavor to support it, we must resort to tbe spirit of tbe law when tbe letter fails, to tbe letter when tbe spirit is weak, and to precedent when both fail.

Ector v. Osborne, supra, as in tbe case at bar, involved an action for tbe recovery of a note representing usurious interest. It represents a later pronouncement by tbe Court and is directly contrary to tbe bolding in Ward v. Sugg, supra, although tbe latter case is followed in Ripple v. Mortgage Corp., supra, and Pugh v. Scarboro, supra. These merely follow precedent, and it is worthy of note tbat in each of them tbe party pleading usury was tbe maker of tbe note, and tbe party demanding tbe enforcement of tbe note was, of course, a privy of tbe payee. Tbe decisions need not have been placed upon tbe ground tbat tbe forfeiture of tbe statute rendered tbe promise utterly void anywhere it was encountered — a position directly contrary to Ector v. Osborne, supra, and entirely repudiated in Ghormley v. Hyatt, 208 N. C., 478, 181 S. E., 242.

Tbe discussion in Ward v. Sugg, supra, binged on tbe difference between “void” and “voidable” as applied to tbe provision in C. S., 2306, forfeiting interest. Tbe opinion arguendo seems to conceive tbat if tbe statute makes tbe interest or promise to pay it “void,” tbis provision is available to anybody, anywhere, at any time, and on any occasion- — tbat tbe promise is utterly ineffective for any purpose; and while tbe word “void” is not mentioned anywhere at all in tbe statute, it is made tbe subject of sharp controversy between tbe main and dissenting opinions. Tbe word “void” is notoriously one of tbe trickiest in legal terminology, and it would be rash to assign to it any intrinsic meaning apart from a consideration, not merely from its context, but tbe whole subject which has called it into use. It seldom implies a present nullity, but most often prospectively refers to a final condition which exists after tbe invalidity is disclosed and judicially declared- — in tbe sense of “voidable.” But we need not discuss tbe term further, since it does not appear in tbe statute at all and tbe term used there has an entirely different significance. We merely discuss it because it was, as we think, one of tbe factors leading to tbe peculiar result in Broadhurst v. Brooks, supra.

A note promising to pay money, regular upon its face and meeting tbe requirements of tbe Negotiable Instruments Law, and not containing a patent defect, is not void because of tbe taint of usury, but is only subject to tbe penalties and forfeitures of tbe statute, one of which is tbe forfeiture of all interest, which takes place when usury is pleaded and tbe plea supported by proof. It has been repeatedly stated tbat in order to be available tbe statute must be pleaded. Ector v. Osborne, supra; Dixon v. Osborne, 204 N. C., 480, 168 S. E., 683.

We shall not discuss tbe propriety of permitting tbe junior mortgagee to raise tbe question of usury in a senior mortgage. Perhaps section 2305, fixing tbe legal rate of interest and providing tbat no more shall be taken, is sufficient, since it is really tbe statute which declares tbe policy of tbe State with regard to usury. Polikoff v. Service Co., 205 N. C., 631, 172 S. E., 536; Hackney v. Hood, Comr., 203 N. C., 486, 166 S. E., 323.

“Since usury laws are enacted for tbe protection of needy borrowers, and not to punish extortion in money lenders, tbe defense of usury is purely personal to tbe borrower, or those in privity with him, and is not available to a stranger to tbe transaction. Tbis is true whether tbe statutes declare tbe contract void in whole or only to tbe extent of tbe usury, or whether a penalty is given for tbe taking.” 66 O. J., page 251; see authorities under note 90.

“Tbe policy of tie Legislature in adopting statutes of usury is tie protection of borrowers against tie oppressive exactions of lenders. It does not tend to tie promotion of tiat policy tiat persons otier tian tie victims of tie usury siould iave tie benefit of suci statutes, and accordingly, as a general rule, usury is considered to be a ground of relief available only to tie debtor or to tie one in legal privity witi iim.

“To allow a stranger to interpose tie defense of usury to a contract witi wiici tie maker is in all respects satisfied, and by tie terms of wiici ie desires to abide, and upon wiici ie is liable for a deficiency judgment, would be exceedingly unfair to a debtor wio desires to perform iis contract, because ie made it, or because ie may "deem-it to be advantageous so to do. So long as tie inclination to profit from man’s adversity or necessity exists, a law limiting tie rate of interest tiat tie lender may ciarge tie borrower for tie use of money will continue to be wiolesome and beneficial to society; but common experience suggests many instances in wiici tie borrower may not desire to invoke tie protection of tie law enacted for iis especial benefit.” 27 R. C. L., page 281; Stuart Court Realty Corp. v. Gillespie, 59 A. L. R., page 342.

Referring to tie minority rule admitting junior mortgagees to plead usury and explain its rationale, wiere tie usurious excess is void, we find in 27 R. C. L., page 284, tie following :

“Tie just rights of tie senior creditor are protected, as he can still recover his debt and as high a rate of interest as in the judgment of the law he ought to demand, and tierefore tiere can be little, if any, wrong to iim in allowing a junior creditor to protect tie fund in wiici ie is interested for tie payment of iis debts, by making tie defense of usury.” See note to Stuart Court Realty Corp. v. Gillespie, supra; Carter v. Dennison (1848), 7 Grill. (Md.), 157.

“A borrower is not, however, compelled to plead usury, and as the defense is personal to him, it may be waived.” “Tie statutes of usury being enacted for the benefit of the borrower, ie is at liberty to waive iis right to claim suci benefit and pay iis usurious debt, if ie sees fit to do so.” Ector v. Osborne, supra. Approved in Ghormley v. Hyatt, supra; Dixon v. Osborne, 204 N. C., 480, 485, 168 S. E., 683. In all these opinions tie reference is to C. S., 2306.

“It results from a just interpretation of tie legislation tiat tie right to complain is a personal one belonging to tie borrower and iis representatives ; no otier party is entitled to relief, defensive or affirmative.” Pomeroy Equity Jurisprudence, 4th Ed., section 937. See authorities cited.

Further confusion and contradictory statements as to tie principles upon wiici a court of equity will administer relief in usury cases both as to the borrower and those in privity with him, and as to the junior mortgagee who pleads usury, should not continue.

3. Apart from these considerations, there is a want of equality at the threshold of equity as between the borrower, who as actor seeks to raise the question of usury in a mortgage debt, and the junior mortgagee who comes into equity for the same purpose. This inequality between the two at the threshold of equity is sharply illustrated in Broadhurst v. Brooks, supra, in which the mortgagor or borrower is required to tender the principal amount due, with six per cent interest, under the maxim: “He who seeks equity must do equity,” and the junior mortgagee, a total stranger to the usurious contract and seeking the same remedy through equity, need make no tender and may require a forfeiture of all interest. Wilson v. Trust Co., 200 N. C., 788, 158 S. E., 479. The more favorable position accorded the junior mortgagee is stated in Wilson v. Trust Co., supra, to arise from the fact that he is under no legal or moral obligation to pay the debt; but surely this is no good reason when the junior mortgagee not only elects to pay the debt for his own security, but demands subrogation against the borrower. Both are seeking equity by the same route, and however the junior mortgagee may be related to the usury laws, the same equitable principle should be applied to him. Conceding that there is some discretion in the equity court as to the conditions upon which persons may seek equity, it is not equity at all unless the rule applies uniformly to all comers.

The discrimination cannot be explained by reference to any rule of equity. It cannot rest upon the principle that the borrower does not come into court with clean hands because of his participation in the usurious contract, since he is not in pari delicto. Pomeroy Equity Jurisprudence, 4th Ed., section 937; Bank v. Lutterloh, 81 N. C., 144. If actor, “the doors of the court will be shut against him in limine Pomeroy Equity Jurisprudence, 4th Ed., section 398. And the Court cannot take the middle ground that the mortgagor is to be penalized pro tanto and then admitted, without inventing a new legal gadget. The maxim, “He who seeks equity must do equity,” expresses a very different principle, broader in its scope, and considered “the source of every doctrine and rule of equity jurisdiction.” Pomeroy. No man comes into court so clean-handed as to escape the maxim, “He who seeks equity must do equity.”

This is no equitable basis for a discrimination against the mortgagor and in favor of the junior mortgagee in this proceeding. Coming into the situation by the narrowest sort of a margin and against well reasoned authority, the junior mortgagee, when pleading usury in a senior mortgage, should be held to the same rule, at least, which applies to the borrower, who raises the same question in the same way.

We, therefore, conclude that former rulings of the court holding to the contrary should be revised, and that the junior mortgagee seéking equitable relief against foreclosure of a senior mortgage because of usury should be required to tender, or at least, offer to pay, the principal sum due, with legal interest thereon at six per cent.

Since these plaintiffs began their action in good faith, under the rule laid down in Broadhurst v. Brooks, supra, and other cases following this precedent, they will not be required to make tender; but they will be permitted only to purge the debt of its usury and have it stripped down to the principal sum advanced, with legal interest thereon at the rate of six per cent.

This, however, does not conclude the controversy between the parties, but only modifies the extent of the possible relief; and the judgment of the court below .continuing the injunction to the hearing is

Affirmed.