Trauernicht v. Kingston , 156 Minn. 442 ( 1923 )

Dibell, J.

Action to cancel a note as usurious and to compel tbe surrender of security pledged as collateral. There were findings for tbe plaintiffs. Tbe defendant appeals from tbe order denying bis motion for a new trial.

When a transaction takes tbe form of a sale of property, in this case corporate stock, having a market price at which it may be sold on any business day, and tbe sale price is in excess of market value, for which sale price a note is given, tbe purpose being to cover usury, tbe apparent vendor being a lender in disguise and tbe buyer a borrower, tbe intent being that tbe vendor shall receive in addition to tbe legal rate of interest on tbe selling price tbe difference between tbe market and selling price, tbe transaction is usurious. Barry v. Paranto, 97 Minn. 265, 106 N. W. 911, 7 Ann. Cas. 984; Elwell v. Lund, 102 Minn. 166, 112 N. W. 1009, 1067.

Tbe plaintiffs Florence Trauernicht and Lucile Coates Hammerel are sisters. Tbe plaintiff W. C. Hammerel is tbe husband of tbe latter. He lives in Minneapolis. Tbe defendant, M. S. Kingston, is tbe only defendant appearing on tbe appeal. He lives in Eveletb. Hammerel is tbe only plaintiff who personally participated in tbe transaction under investigation. He represented bis coplaintiffs.

On June 18,1921, the plaintiffs made to Kingston a pote for $9,000 payable on or before July 20, 1924, bearing interest at tbe rate of 10 per cent per annum, which was then tbe highest legal rate. Tbe plaintiffs received for it 100 shares of IT. S. Steel common, then worth on tbe market about 74. They pledged as collateral certain interests in tbe Arcturus mine in Itasca county and two life insurance policies. A formal contract was made at the time reciting a sale of tbe stock at 90, and pledging tbe securities for tbe payment of tbe note.

The negotiations resulting in the $9,000 note and the accompanying contract commenced in March, 1921. On March 7 Hammerel wrote to Kingston, asking for a loan of $12,000, but indicating that $10,000 would be accepted. On March 10 Kingston answered, stating that he had taken up the matter with an associate in California; that it would take two weeks to determine whether he was 'interested in making such a loan; that he would want 10 per cent interest semiannually, and that he “might turn over U. S. steel common stock instead of cash which you would have to convert.” Kingston was in Minneapolis on March 22 and took up the matter with Ham-merel. The stock was then worth 82J.

A sale by Kingston of 100 shares of steel common at 90, though worth but 82J, on three years time on the plaintiffs’ secured note, at 10 per cent semiannually, was valid. The plaintiffs might make such an investment if they chose. Kingston could agree to it if he chose. It was legitimate. But Kingston could not lend Ham-merel $9,000 at 10 per cent, insisting as a condition that he take at 90 one hundred shares worth 82-|-, and avoid usury by clothing the transaction in the form of a sale. Whether the transaction was a loan or a sale is the question, and the trial court found it a loan.

Hammerel’s testimony is that Kingston told him at Minneapolis, before consultation with his counsel, that he would have to take the stock at 90; that he complained that that made a “stiff rate of interest;” and that Kingston replied that it was “only about 12 per cent per annum over a period of three years.” The stock was listed and could be sold on any business day. At no time between the beginning of the negotiations and their consummation did it come within a number of points of 90. Hammerel says that Kingston later told him, after consultation with his attorney, that the transaction could not be carried out as they had contemplated; that his counsel advised him “it would be usury; we have got to make this in the form of a sales contract.” Kingston had been warned by his counsel of usury. He had not been advised that the infection of usury could be avoided by a change of outward form. He apparently had been advised, and correctly so, that he could make a straight sale of his stock at 90. He was not advised that he could cover usury in such a way; nor would it affect the result had he been so advised.

In the correspondence which followed the Minneapolis meeting between Hammerel and Kingston, the latter referred to the transaction as a loan. In a letter to his counsel he referred to it as a loan. On the stand he referred to it as a loan. Unquestionably the first negotiations were for a loan. Hammerel was at no time buying stock upon speculation or for an investment. He wanted money. He wanted to borrow. He was in a hurry. He was asking that the matter be speeded, so that he could get money, or that an advance of money be made him.

The court found that a sale was not made, and that the form of the agreement, though of that effect, was a cloak for usury. The finding is well sustained by the evidence and has our approval. The statute imposes a drastic penalty for usury. The plaintiffs get some $7,000 or $8,000 for nothing without merit in themselves. There can be no judicial quarrel with legislative policy. The court does its duty when it carefully inquires whether there is a violation of the statute, and if there is gives to it the effect prescribed by the legislature.

The plaintiffs are in a court of equity asking the cancelation of their notes and the surrender of their securities for usury. They do not offer a return of what they have received. The general rule over the country is that a borrower on usury when he comes to a court of equity asking affirmative relief by way of the cancelation of an obligation or surrender of securities must restore the money actually received. This was the rule applied in Patterson v. Wyman, 142 Minn. 70, 170 N. W. 928. The case involved a North Dakota contract and the North Dakota law, not that of Minnesota, was applied as the case distinctly states. Our own rule, often announced, is that restoration need not be made. Scott v. Austin, 36 Minn. 460, 32 N. W. 89, 864; Exley v. Berryhill, 37 Minn. 182, 33 N. W. 567; Mathews v. Missouri, K. & T. Trust Co. 69 Minn. 318, 72 N. W. 121. It results from our statute that a usurious loan is void and that it may be so declared and evidence of it and securities pledged for its payment canceled. G. S. 1913, §§ 5807-5809. In Missouri K. & T. Trust Co. v. Krumseig, 172 U. S. 351, 19 Sup. Ct. 179, 43 L. ed. 474, where the claim was that there must be restoration of the money received before relief would be given, the court, referring to the Minnesota statute, and the state adjudications upon it, said [at page 358]:

“We think it a satisfactory reply to such a proposition that the complainants in the present case were not seeking equity, but to avail themselves of a substantive right under the statutory law of the State.”

Order affirmed.