Mutual Benefit Loan & Building Co. v. Lynch ( 1900 )

Marean, J.

The plaintiff is a building and mutual loan association having its offices in the Mechanics’ Bank Building in Brooklyn. It was incorporated in 1893 pursuant to article V, of chapter 689 of the Laws of 1892. Article V was amended by chapter 705 of the Laws-of 1894. By the latter act associations already organized were permitted to reincorpórate under it (§§ 192, 193*), but the plaintiff has not availed itself of that permission. Nevertheless, the recital in the amended act of the subject and purpose of such associations must be regarded as applying to those already formed. Section 171 of the amended law is as follows: “The object and purpose of such associations shall be to encourage industry, frugality, home building and savings among its members, the accumulation of savings, the loaning of such accumulation to its members,” etc.

By section 170 it was provided that every such association thereafter incorporated should have as part of its name the words “ Co-operative Barings and Loan Association.”

The central idea of the association contemplated by the Legislature was co-operation.among people of small means. The statute of 1892, as well as that of 1894, contemplated an association of persons to whom the obligation of a small weekly or monthly contribution would be a stimulus to continuous saving. Vol. 2, Laws of 1892, p. 1914, subd. 11. It contemplated the accumulation by such contributions of a fund, to be increased by legitimate interest, and which might be borrowed by members of the association to aid them in procuring modest homes. It contemplated the possible payment of some amount in excess of legal interest called a premium, not for the purpose of larger profit by the association and those interested in its funds, but as an unavoidable means of determining which of the members should have the loan; and it was provided that the payment of such premiums should not be deemed a violation of any statute against usury. The encouragement of frugality and saving, the accumulation of a fund by periodic small contributions and the increase by lawful interest of the fund thus accumulated, which should constitute a borrowing fund within the reach of members, at substantially legitimate rates, were the objects of the legislation in question. The permission to pay and receive a premium above legal interest was an unfortunate but unavoidable incident of the scheme, never intended to be perverted into a license to carry on a business consisting mainly of the loaning of large capital at usurious rates; It was never intended to create corporations which, representing already accumulated capital, should have a monopoly of the business of usury. The evils and oppressions of usury are none the less shocking because the payer has a remote fractional interest in the fund to which the usury when paid is added.

The statute of 1892 does not permit the issuing of what, in the plaintiff’s certificate of incorporation, and in its by-laws, are termed income shares and prepaid shares. The issuing of such shares is a departure from the whole spirit and purpose of the law; it provides a means of immediately realizing, out of the stores of wealth, a capital without limit, with which to enter the loan market, and at the same time attracts to the subscription for installment shares, not those thrifty and industrious persons whose purpose is primarily to save, but a class of needy borrowers ready to pay usury. Thus what was intended to be a co-operative savings and loan association is perverted into an association for the loaning of already accumulated capital at usurious rates to all comers who are willing to cover up the usury by an acceptance of installment shares. That is the character in which the plaintiff presents itself. It is doubtful, therefore, if the plaintiff is in any case entitled to the protection against the usury laws given by the law of 1892. It is only the painful savings of frugality accumulated by periodic contributions which may be loaned at a premium without falling under the condemnation of the usury laws.

The defendant in this case was in search of a loan on mortgage, her property being already encumbered by a mortgage of $2,500. She went to a loan broker, where she signed a written application for a loan, addressed to the plaintiff, and the plaintiff, a few days later, loaned her $500 at 24 per cent, interest per annum, payable monthly in advance. She did not wish to become a member of the association. She did not know that she had become a member of it, bnt on the closing of the loan, at the plaintiff’s office, she signed, unconsciously, with the bond and mortgage, an application for membership, and was given a certificate for fifteen shares of installment stock in the association.

If the main purpose in such a case is the obtaining of the loan on the part of the borrower, and the making of the loan on the part of the company, and the issue and taking of the shares is only resorted to in order to avoid the usury laws, the loan is usurious if more than six per cent, is exacted, and all obligations for its payment are void. That such is the character of the transaction is a conclusion that cannot be escaped in any case where a person, not a member, applies to the association for a loan which is made to him at a usurious rate in connection with the issuing to him of a certificate of shares. The issuing of the shares constituting the borrower a member of the association is a mere cover for the usury, as plain matter of fact, and it is time it should be so declared.

The plaintiff, at the time of the delivery of the certificate of shares, and the closing of the loan, further exacted from her, and deducted and kept out of. the amount loaned, forty-five dollars, six months dues at fifty cents a month, on each of the fifteen shares then issued to her. She was not, even if she had become a hona fide member on that day, under any obligation to pay these dues, and the exaction and payment thereof in itself tainted the loan with usury. Their payment was exacted in consideration of the loan, in addition to legal interest and to the other usury.

It is true this forty-five dollars dues was credited to the defendant as invested capital in the account opened with her, and was in part payable back to her in case she should pay off the mortgage and withdraw from membership. But it was payable back without interest for a period, and at four per cent, during another period, and at five per cent, during a further period, and only with certain deductions for expenses. By-laws, art. IY, § 3. So that in any event the payment of these dues was a matter of value to the plaintiff, and of prejudice to the defendant.

But it is not necessary to hunt for usury in this transaction with a candle. Every tissue of it is rotten with usury.

The character of the business done by the plaintiff is as follows: It issues its shares from time to time without any limit to persons desiring them. Such shares do not mean when issued, an interest in existing assets, if any, of the company. The holder of installment shares pays into the treasury of the association certain sums monthly called dues, and an account is opened with him in which • he is credited with the amounts so paid. If his shares are “ Prepaid Shares ” or “ Income Shares ” he pays in at once a fixed sum in lieu of all dues, which is put to his credit, fifty-three dollars on income shares, and sixty-five dollars on prepaid shares. Thus a capital is created to be manipulated for a profit, by loaning it to members. Once a year the profits are ascertained. They consist, after deducting expenses, of the legal interest and premiums in excess of legal interest received from members upon the loans to them, together with the fees for transfer of shares (insignificant in amount) and the fines paid by the members for delinquency. These profits are, once a year, divided among shares in proportion to the average amount to their credit respectively, during the then ended year. Dividends, except on income shares, are not paid over to members, but put to their further credit on their respective accounts. When the amount to the credit of any share reaches the sum named in the certificate as its par value ($200 for installment shares and $100 for prepaid shares) it is said to be matured and the amount is to be paid over to the shareholder, and the certificate surrendered and cancelled. The dividend on income shares ($100 par value) is limited to six per cent, on the par value, and this is paid over to the shareholder semi-annually instead of being accumulated like dividends on other shares. Income shares are issued on payment of fifty-three dollars. The holder may surrender them on sixty days notice and receive fifty dollars. This makes a brief but complete outline of the scheme of the company’s business.

The company advertises that installment shares, Class B, to which defendant’s shares belonged, i. e., shares calling for fifty ■cents a month dues, will mature in eleven years. The holder of such shares has, they advertise, only to pay fifty cents a month in advance on each share for eleven years, and the association declares itself able to then return him therefor two hundred dollars. Fifty cents a month is six dollars a year, and amounts at the end of eleven years to sixty-six dollars. The average capital of the shareholder which may be kept at interest by the company during the eleven years is thirty-three dollars. The profit which the company gets out of it, and returns to him at the end of eleven years is one hundred and thirty-four dollars.

The plaintiff claims to make its funds earn interest, compounded every month, because it exacts interest on its loans monthly in advance, when such interest can itself be gathered up and loaned. Theoretically this is possible; practically, the total of interest must of course fall short of the theoretically possible amount.

Compound interest at six per cent, compounded every month for eleven years on thirty-three dollars average capital is less than thirty-one dollars. Yet the company undertakes to realize for him by the use of his money, one hundred and thirty-four dollars, being more than four times thirty-one dollars, more than four times compound interest at six per cent, compounded monthly. Of course all shareholders receive the same rate of return on the capital contributed by them (except holders of income shares).

In a pamphlet published by the association in the present year will be found the following statement (page 17). “ It is estimated that Class B. shares will mature in eleven years. Credits have been made pro rata at this rate for the past five years, after doing which the company has a comfortable surplus.”

In the same connection will be found a statement that the company has assets of about $1,000,000.

On page 16 will be found the following: “ Fully paid six per cent, income stock is issued upon a cash prepayment of fifty dollars per share, and three dollars premium, upon which dividends at the rate of six per cent, per annum, payable semi-annually, will be paid on the par value.” The par value is one hundred dollars. See by-laws, art. IV, § 3. That is to say the association will borrow money for use in its loan business and pay more than eleven per cent, per annum for it, payable semi-annually. This throws-confirmatory light upon the extraordinary profits which the association is able to realize.

It must then be accepted as a fact in the case that the usurious-interest upon loans, in excess of legal interest, collected under the name of premiums, by the company from its borrowing members, together with fines for delayed payments, which are at the rate of sixty per cent, per annum upon the payment delayed, amount to a grand total sufficient to pay all the expenses, which are annually two and one-half per cent, of its assets, i. e., of all its-x loans (see pamphlet, page 20), and leave a residue of eighteen per cent, per annum upon every dollar contributed by shareholders to its capital: In other words, that the usury alone amounts to more than twenty per cent, on all loans.

How this can be done is illustrated by the very loan in question in this case. The loan was $500. The first mortgage was $2,500. The association did not pay the first mortgage, but only conditionally assumed its payment, and plaintiff’s mortgage was made for $3,000 instead of $500. The defendant paid interest at six per cent, per annum, monthly in advance, on the $500, and also on the $2,500. The interest received on the $2,500, plaintiff of course paid over to the holder of the $2,500 mortgage, but only at the end of each six months, thus realizing interest on the interest for the period between its receipt and its payment. It then exacted, payable like the interest, monthly in advance, a premium of three per cent, not only on the loan, but on the amount of the first mortgage, to wit: Eighteen per cent.' on the amount of the actual loan. Had the first mortgage been only $1,500, the premium would have amounted to only twelve per cent.; had it been $5,000 then to thirty-three per cent, on the loan.

Thus the plaintiff realized in this case on its loan of five hundred dollars, twenty-four per cent, interest, which it received monthly in advance. Each month the defendant, as shareholder, was also paying dues of fifty cents a month on each share, amounting to seven and one-half dollars a month on fifteen shares, which was put to her credit. But the twenty-four per cent, interest and premium which the defendant paid, not as a shareholder contributing capital but as a borrower for the use of the money, went into the fund which at the end of the year was, after paying expenses, to be divided, among all shareholders who should stay in till the end, as profits.

But the truth is that no borrowing member, or only here and there one, stays in to the end. The burdens which are put upon him are too grievous to be carried for eleven years. The case must be very rare where any person in such straits as to accept a second mortgage loan at twenty-four per cent, is of sufficient substance to stand the strain for eleven years. He has besides, to pay his dues, a further eighteen per cent, per annum, making in all forty-two per cent, per annum. He has to keep up the interest on the first mortgage and pay his taxes. On any possible theory of chances ninety out of one hundred borrowing members will fall by the way. The moment the borrowing member fails to meet any of his paymente, he is charged sixty per cent, per annum on the payment delayed. Finding himself in such straits suppose he wishes to withdraw and end his disastrous connection with the association. He is allowed as the surrender value of his shares onlythe dues he has paid with interest at four per cent, (luring the second six months, at five per cent, during the second year, and from that on at six per cent, (less certain deductions for expenses) in reduction of his mortgage, but only provided he can then raise and pay the balance in cash. In some cases no doubt he does that, but he is not likely to be able to do it since he is not even able to meet his monthly payments. The result is that his payments one after another fall in arrears and, swollen by sixty per cent, per annum, of fines, are charged against the pitiful surrender value of his shares until it is extinguished, when the association is relieved of its assumption of the first mortgage, and thereupon proceeds to foreclose its own mortgage. That is what happened in this case, and that is what, in the nature of things, must happen in most cases. All that the "borrowing member has paid, in dues, fines and premiums, is swallowed up by the association and divided as profits among the investing inembers. Even if he pays up his mortgage without foreclosure, he leaves behind him all he has paid in premiums and fines. The association counts on this result, and in that reliance holds itself out as able to afford to shareholders profits amounting to twenty-four per cent, on their investment.

It is perfectly patent that from first to last not a penny goes into the treasury of the association except out of the pocket of some shareholder, and if each were to get back again at any time the money paid in, except the lawful interest paid on loans, and get it back just with six per cent, compound interest, there would be nothing left even to pay expenses with. The expenses being two and one-half per cent, of the assets annually, each member could only get his money back after the payment of such expenses with-something like three and one-half or four per cent, interest. Yet this plaintiff advertises to pay it back with twenty-four per cent, interest. It is manifest that all these exorbitant profits, if the representations of their existence be true, and not a piece of fraudulent deceit, are simply the bones and blood of those wretched usury ridden borrowing members who have fainted and fallen by the way.

Is this plaintiff that benevolent and helpful thing which the statute contemplated, or is it a monster of greed and oppression masquerading in its garments. If the statute is susceptible of such perversion as this case discloses, it is a disgrace to a civilized State, and until it- is wiped from the statute hook it is the duty of courts to he vigilant to repress, so far as may be, the crying evils which shelter themselves under it.

Complaint dismissed.