[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.]
I believe the trial judge should have confirmed the report of the circuit court commissioner who alone had the advantage of seeing and hearing the witnesses. The intention to exact usury by making a necessitous borrower purchase property at twice its value is convincingly clear. The defendant had taken on foreclosure and owned for many years an old two-story four-family apartment house with an additional apartment in a high basement, the latter being occupied by a custodian who paid $17.50 per month and furnished his services in looking after the building. It had only one furnace for all the apartments, the heat being supplied by the lessor. The two apartments on the first floor were rented for $35 per month and the two on the second floor for $32.50 per month. This with the $17.50 per month for the basement made a net rental of $152.50 per month, provided there were no vacancies. The comparatively small rentals reflected the fact that the apartment building was 21 years old and in an undesirable condition and neighborhood, the latter being described by a witness as "a very
concentrated habitation there, which isn't entirely satisfactory from the residential point, approaching the tenement standpoint." Plaintiffs were obliged to purchase the apartment building for $18,800 in order to secure the loan on the Grand River property. Immediately upon taking possession of the apartment building, they were put to the expense of erecting a new roof, installing a new boiler and redecorating all the apartments.
The sole expert who testified for defendant placed a value of $14,820 on the property. This was approximately $4,000 less than the price plaintiffs were forced to agree to pay. The expert based his high estimate largely upon the cubic content of the building which he multiplied by 32 cents a cubic foot, and then deducted the depreciation. This method, while of value under certain circumstances, becomes undependable when applied to an old building in a not too attractive neighborhood. The head building appraiser of the city of Detroit assessor's office stated that 10 cents per cubic foot was the proper figure to use. He also estimated the cubic content at 5,000 cubic feet less than was found by defendant's witness. Defendant's appraiser found that the cost of heating the apartment amounted to $225 per year. One of plaintiffs' testified that he bought 50 tons of coal a year at $8 a ton. Defendant's witness further placed a higher value on the land because it abutted an alley to the west. The photographic exhibits showed that the east side of the lot adjoined the rear of business lots facing on Linwood avenue and was in close proximity to the rear of stores with wooden porches and steps. This might detract from the value of the property for residential purposes. The witness further tried to carve an additional rent-producing apartment out of the basement by taking from the present tenant part of the basement for
which he furnished his services in looking after the building in addition to paying the $17.50 monthly rent.
The wife of the custodian testified that the basement was in very bad condition, the joists under the living and dining rooms were in need of repair, while those under the kitchen and hallway were entirely worn out. The expert from the tax assessor's office placed a value of $6,450 on the building and $1,260 on the land. The estimates of plaintiffs' experts were slightly higher. The commissioner took the highest of these estimates and placed a value of $9,200 on the property. The evidence showed that this was very fair. Defendant had loaned $15,000 on the property in 1925 and in succeeding years it added taxes and other expenses paid by it so as to bring its cost to $19,669.89. It demanded $18,800 from plaintiffs or $9,600 more than the property was worth. Plaintiffs had to have a loan. The testimony on behalf of plaintiffs showed that the expression "bonus" was used by defendant's agent in the negotiation. Defendant denies this. Whether the excess price was called a bonus or not, the effect of the transaction was to force plaintiff to pay $9,600 more for the property than it was worth. This was a method of exacting usury. When it is made a condition precedent to the lending of money that land or goods be sold, either by the lender to the borrower at a price exceeding true value, or by the borrower to the lender at a price falling short of true value, the courts have never hesitated to characterize the transaction as a cover for usury. In such cases, intent is inferable from the disparity between the sale price and the true value, provided such disparity was known to the parties, whether they said anything about it or not. Such has been the consistent tenor of the American decisions from
1810 to the present day. Rose v. Dickson, 7 Johns. (N.Y.) 196; Douglass v. McChesney, 2 Rand. (23 Va.) 109; Morgan v.Schermerhorn, 1 Paige Ch. (N.Y.) 544 (19 Am. Dec. 449); Bankof the Valley v. Stribling's Ex., 7 Leigh (34 Va.), 26; Bankof Washington v. Arthur, 3 Grat. (44 Va.) 173; Root v.Pinney, 11 Wis. 84; Low v. Mussey's Estate, 36 Vt. 183;Earnest v. Hoskins, 100 Pa. 551; Meyer Brothers v. Cook,85 Ala. 417 (5 So. 147); Carter v. Hook, 116 Va. 812
(83 S.E. 386); Norton v. Nathanson, 85 N.J. Eq. 409
(97 A. 166), affirmed 86 N.J. Eq. 433, 434, 435 (99 A. 1070, 1071);Sanford v. Hawthorne, 103 Neb. 867 (174 N.W. 863); E.C.Warner Co. v. W.B. Foshay Co. (C.C.A.), 57 F.2d 656, certiorari denied, 286 U.S. 558 (52 Sup. Ct. 641, 70 L.Ed. 1292) (Minnesota law); Bishop v. Rider, 143 Misc. 291, affirmed235 App. Div. 736 (255 N.Y. Supp. 787), affirmed 261 N.Y. 512
(185 N.E. 717); In re Prince (C.C.A.), 89 F.2d 681 (New York law). See 2 Restatement of the Law of Contracts, § 528, comment a; § 530, comment b.
While it is true that had the loan been made directly to the corporation in which plaintiffs owned practically all of the stock, the corporation could not under the law avail itself of the defense of usury, it is doubtful whether this question was considered when defendant demanded that the corporation first deed the Grand River property to the plaintiffs as individuals before making the loan.
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[EDITORS' NOTE: THIS PAGE CONTAINS HEADNOTES. HEADNOTES ARE NOT AN OFFICIAL PRODUCT OF THE COURT, THEREFORE THEY ARE NOT DISPLAYED.]
I believe the trial judge should have confirmed the report of the circuit court commissioner who alone had the advantage of seeing and hearing the witnesses. The intention to exact usury by making a necessitous borrower purchase property at twice its value is convincingly clear. The defendant had taken on foreclosure and owned for many years an old two-story four-family apartment house with an additional apartment in a high basement, the latter being occupied by a custodian who paid $17.50 per month and furnished his services in looking after the building. It had only one furnace for all the apartments, the heat being supplied by the lessor. The two apartments on the first floor were rented for $35 per month and the two on the second floor for $32.50 per month. This with the $17.50 per month for the basement made a net rental of $152.50 per month, provided there were no vacancies. The comparatively small rentals reflected the fact that the apartment building was 21 years old and in an undesirable condition and neighborhood, the latter being described by a witness as "a very
concentrated habitation there, which isn't entirely satisfactory from the residential point, approaching the tenement standpoint." Plaintiffs were obliged to purchase the apartment building for $18,800 in order to secure the loan on the Grand River property. Immediately upon taking possession of the apartment building, they were put to the expense of erecting a new roof, installing a new boiler and redecorating all the apartments.
The sole expert who testified for defendant placed a value of $14,820 on the property. This was approximately $4,000 less than the price plaintiffs were forced to agree to pay. The expert based his high estimate largely upon the cubic content of the building which he multiplied by 32 cents a cubic foot, and then deducted the depreciation. This method, while of value under certain circumstances, becomes undependable when applied to an old building in a not too attractive neighborhood. The head building appraiser of the city of Detroit assessor's office stated that 10 cents per cubic foot was the proper figure to use. He also estimated the cubic content at 5,000 cubic feet less than was found by defendant's witness. Defendant's appraiser found that the cost of heating the apartment amounted to $225 per year. One of plaintiffs' testified that he bought 50 tons of coal a year at $8 a ton. Defendant's witness further placed a higher value on the land because it abutted an alley to the west. The photographic exhibits showed that the east side of the lot adjoined the rear of business lots facing on Linwood avenue and was in close proximity to the rear of stores with wooden porches and steps. This might detract from the value of the property for residential purposes. The witness further tried to carve an additional rent-producing apartment out of the basement by taking from the present tenant part of the basement for
which he furnished his services in looking after the building in addition to paying the $17.50 monthly rent.
The wife of the custodian testified that the basement was in very bad condition, the joists under the living and dining rooms were in need of repair, while those under the kitchen and hallway were entirely worn out. The expert from the tax assessor's office placed a value of $6,450 on the building and $1,260 on the land. The estimates of plaintiffs' experts were slightly higher. The commissioner took the highest of these estimates and placed a value of $9,200 on the property. The evidence showed that this was very fair. Defendant had loaned $15,000 on the property in 1925 and in succeeding years it added taxes and other expenses paid by it so as to bring its cost to $19,669.89. It demanded $18,800 from plaintiffs or $9,600 more than the property was worth. Plaintiffs had to have a loan. The testimony on behalf of plaintiffs showed that the expression "bonus" was used by defendant's agent in the negotiation. Defendant denies this. Whether the excess price was called a bonus or not, the effect of the transaction was to force plaintiff to pay $9,600 more for the property than it was worth. This was a method of exacting usury. When it is made a condition precedent to the lending of money that land or goods be sold, either by the lender to the borrower at a price exceeding true value, or by the borrower to the lender at a price falling short of true value, the courts have never hesitated to characterize the transaction as a cover for usury. In such cases, intent is inferable from the disparity between the sale price and the true value, provided such disparity was known to the parties, whether they said anything about it or not. Such has been the consistent tenor of the American decisions from
1810 to the present day. Rose v. Dickson, 7 Johns. (N.Y.) 196; Douglass v. McChesney, 2 Rand. (23 Va.) 109; Morgan v.Schermerhorn, 1 Paige Ch. (N.Y.) 544 (19 Am. Dec. 449); Bankof the Valley v. Stribling's Ex., 7 Leigh (34 Va.), 26; Bankof Washington v. Arthur, 3 Grat. (44 Va.) 173; Root v.Pinney, 11 Wis. 84; Low v. Mussey's Estate, 36 Vt. 183;Earnest v. Hoskins, 100 Pa. 551; Meyer Brothers v. Cook,85 Ala. 417 (5 So. 147); Carter v. Hook, 116 Va. 812
(83 S.E. 386); Norton v. Nathanson, 85 N.J. Eq. 409
(97 A. 166), affirmed 86 N.J. Eq. 433, 434, 435 (99 A. 1070, 1071);Sanford v. Hawthorne, 103 Neb. 867 (174 N.W. 863); E.C.Warner Co. v. W.B. Foshay Co. (C.C.A.), 57 F.2d 656, certiorari denied, 286 U.S. 558 (52 Sup. Ct. 641, 70 L.Ed. 1292) (Minnesota law); Bishop v. Rider, 143 Misc. 291, affirmed235 App. Div. 736 (255 N.Y. Supp. 787), affirmed 261 N.Y. 512
(185 N.E. 717); In re Prince (C.C.A.), 89 F.2d 681 (New York law). See 2 Restatement of the Law of Contracts, § 528, comment a; § 530, comment b.
While it is true that had the loan been made directly to the corporation in which plaintiffs owned practically all of the stock, the corporation could not under the law avail itself of the defense of usury, it is doubtful whether this question was considered when defendant demanded that the corporation first deed the Grand River property to the plaintiffs as individuals before making the loan. The record is silent as to why this was done but good business considerations might have made it desirable for defendant to have the personal obligation of plaintiffs behind the loan instead of that of the corporation. The motive possibly might have been due to a knowledge by defendant that buying apartment buildings is ultra vires of an incorporated Chevrolet dealer.
In this connection it becomes important that at the time the loan was made, plaintiffs were called upon to sign a document stating that the mortgage note of $42,500 was free from all defenses both in law and equity, and that the note and interest thereon would be fully paid when due. The suspicion is strong that defendant's demand that such a document be signed by plaintiff might have been for the very purpose of attempting to legalize something that the law proscribes.
Plaintiff was obliged also to take out a life insurance policy in defendant's company and the sum of $650 was deducted from the loan to apply on the insurance premium. We pass the question whether this was an additional usury, as the commissioner did not deduct this amount and plaintiff did not take any exception to his report. Not all the facts regarding the life insurance are clear.
The further question arises whether, in the case of a usurious loan, plaintiff, who filed a bill to restrain the foreclosure of the mortgage by advertisement, is bound to pay interest at 5 per cent. on the correct amount after proper deductions for the usurious charges. Inasmuch as defendant filed a cross bill asking for foreclosure in the instant chancery suit, plaintiffs are not required to pay any interest.
From 1843 to 1891 the obligee of a usurious loan could bring action thereon and obtain judgment for the principal and legal interest. Act No. 47, § 2, Pub. Acts 1843 (Rev. Stat. 1846, chap. 34, § 4); Thurston v. Prentiss, Walk. Ch. (Mich.) 529;Craig v. Butler, 9 Mich. 21. In the latter year the law was changed so as to provide that "in any action brought by any person" on a usurious contract, "defendant shall not be compelled to pay any interest thereon." Act No. 156, § 2, Pub. Acts 1891 (2 Comp. Laws
1929, § 9240 [Stat. Ann. § 19.12]). Regarding the sources, history, and interpretation of Michigan legislation on usury, see discussion in Fretz v. Murray, 118 Mich. 302, 303, 304, andVandervelde v. Wilson, 176 Mich. 185, 188-192.
Accordingly, it has since 1891 been held that, where a mortgagor sues to restrain a foreclosure by advertisement, then, if the mortgagee files a cross bill praying foreclosure in chancery, such cross bill constitutes an action on a usurious contract, within the meaning of the statute, and forfeits all interest. Estey v. Capitol Investment, Building LoanAssociation, 131 Mich. 502; Leach v. Dolese, 186 Mich. 695
(Ann. Cas. 1917A, 1182). But if the mortgagee only files an answer, admitting the jurisdiction of the court and joining in the prayer of plaintiff mortgagor that the amount legally due be determined by the court, such answer does not constitute "an action by the mortgagee on this usurious contract, or in the nature of a cross bill seeking affirmative relief;" therefore, in such a case, the allowance of legal interest is proper. People,ex rel. Attorney General, v. Detroit Mortgage Corp., 239 Mich. 495. The cross bill in the case at bar seeking foreclosure in chancery excuses payment of all interest. Once such a cross bill is filed, it is improper for the court to permit the mortgagee to amend his pleadings so as to withdraw it, since such an amendment would prejudice the mortgagor, by reviving his liability for legal interest. Leach v. Dolese, supra.
Defendant admits that $212.50 deducted from the loan to pay the mortgage tax was an improper charge against plaintiffs. We also find that the circuit court commissioner was correct in finding that the $100 attorneys' fees paid to defendant's attorneys and deducted from the loan to plaintiff was
also an improper charge. Plaintiff should be credited with $9,600, the excess amount they were obliged to pay for the Virginia avenue property. The total amount of the loan was $42,500. After deduction of $9,600, overpayment on the apartment building, $212.50 for the mortgage tax, $100 for defendant's attorneys' charge, $2,465.55 paid by plaintiff and credited as interest on the mortgage note, and $924.03 paid as principal, the balance of $29,197.92 is due defendant. There is also due defendant the additional amount of $3,606.46 paid out by it for taxes which plaintiffs should have paid.
We fully agree with the foregoing opinion as to plaintiffs' right to file a supplemental bill and the remanding of the case so that proper disposition can be made of moneys received on account of fire insurance.
Decree may be entered in accordance with this opinion and the case remanded for further proceedings. Plaintiff to recover costs of both courts.
BOYLES, NORTH, STARR, and BUSHNELL, JJ., concurred with BUTZEL, J. WIEST, J., took no part in this decision.