Kupfert v. Guttenberg Building Ass'n ( 1858 )

The opinion of the court was delivered by

Lowrie, C. J.

— Our juridical experience often reveals to us instances of great individual cruelty; but it has not yet revealed to us any institutions more cruel in theory than these building associations, as they call themselves, — and often the theory runs into practice.

■Their practice is to make up a company of individuals, who subscribe for stock payable in monthly instalments; and, as the money is paid in, they lend it out by auction to such of their own number as hold an equal amount of stock, and as bid the highest premium; and, to secure its repayment, they take a pledge of the borrower’s stock, and also a bond and mortgage, payable in one year with interest, enforceable after six months, if the interest be not paid. This is the written theory of these loans, as appears by the constitution and by-laws of this association, and of all others that have fallen under our notice.

Now, when we notice further, that these associations go on an opposite principle from all others, in this, that they are to be dissolved so soon as all the stock is paid up, which is usually in eight or nine years; then we are prepared to understand what is designed to be the actual practice. All stock paid in is intended to be loaned out to the stockholders at premiums and interest, and when the stock is all fully paid, it -and its profits are to be distributed among them. If a member has subscribed for $1000 of stock, and is not in arrears, he may become a borrower of $1000, on bidding the highest premium, and paying it in advance. The bond and mortgage which he gives as security, though made payable in a year, are really intended to stand until the period of dissolving the association, and are then to be regarded as paid by the mere payment of the interest and of the instalments of stock, and then the borrower will be entitled to his share of the profits of the association. In short, the loan is a mere advance of the stock to which the borrower expects to be entitled at the close of the concern; and when the arrears of stock and the interest on the advances are paid, the loan or advance is paid, and the borrower can claim only profits on the dissolution.

In practice, these loans are sold at premiums of from thirty per cent, downwards, varying according to the number of years the association has yet to run. If the premium be only twenty-five per cent, on a loan of eight years, then, in that time, a real loan of $750 would produce $1480, which is over twelve per cent, a year. But a borrower on such terms must be expected to make default, and this may be in one year; and then, if the bond can be enforced, he will have to pay $1060 for $750, which is over forty-one per cent. If he should fail in six months, it would be worse still.

Now, when we consider, that the persons who make these ruinous engagements are apt to be men in very moderate circumstances, in earnest to secure a competence for themselves and their families, and not accustomed to the dangers and expedients of mere speculators, and therefore not sufficiently watchful against the excitements of social action and of auction competition, and are urged on by the hope of sharing in their own usury, and by associates too wise to be bidders themselves, we incline to wonder how the legislature could ever have authorized such incorporations. This has led us to examine the subject, and we do not find any law authorizing them.

The legislature have authorized the incorporation of building associations (Act 22d April 1850), and allowed them to adopt such constitutions and articles of association as to them may seem most beneficial. But such institutions are not defined by the act, and not being then known among us, they had received no customary-definition. Their definition must, therefore, be drawn from the name given by the legislature, and their constitution must accord with the defined objects. “Building Association:” this is descriptive of their objects, and it does not authorize the incorporation of citizens as a means of dealing in money, in disregard of the usury laws. If it does, banks and saving funds for loaning money at legal interest are ridiculous institutions, in a mere financial aspect. The usurers of the land may form a thousand building associations to-morrow, and admit needy borrowers as members, and then, by means of premiums, lend them money at any given rate of interest.

We are quite sure, that the legislature have not intended to say, that six per cent, is the law of interest for citizens generally, and with severe penalties for its breach, but where individuals unite together, and falsely call themselves a building association, they may take as much interest as they can get. Such absurdity dares not uncover its face anywhere.

The courts have always been assiduous in ferreting out the devices of usurers in violation of law, but if such associations are authorized by law, then one of the worst of all such devices is beyond control, because placed under the special protection of the legislature. Such cannot be the institutions intended to be exempted from the taint of usury by the Act of 1855. In what kind of cases it is, that the legislature expects the courts to indulge one class of citizens in unlimited usury, and to enforce their grinding bargains, while all other citizens are to be punished by us for the same acts, and kept within the bounds of humane principles, we do not know, and the Act of 1855 does not inform us. Presuming that all are equal before the law, we must administer it equally to all who do not clearly show their special exemption, shadowed by no doubts in its interpretation.

This company is not a building association at all. True, in the second article of its constitution, it declares its objects to be to erect buildings; but this is mere sham, for all the rest of its constitution and by-laws shows most distinctly that its only purpose is to loan out its money. This is a new device, and may require of the courts new or modified remedies to reach all the cases that will arise under it. We have begun of late to suspect that, by want of care, abuses were creeping in under the laws authorizing incorporations, and have begun to be extremely cautious in certifying charters. We advise other courts to do likewise, and we advise those interested in them to be sure that their objects and all their conditions are lawful.

We must treat the present case as a mere loan of money, in advance of the time when the concern is to be wound up. The means of paying it is the regular payment of the stock instalments, and interest equal to the advantage gained over others by the advance. All stock payments are, therefore, so far as they go, a compliance with the terms involved in the transaction. The written terms are usurious, and must be set aside, except so far as necessary to enforce the lawful duty. When future cases arise, we must deal with them as wisely as we can, having regard to the many interests involved in the general question.

The company is not entitled to say that the stock may be of less value than the payments, for it has engaged in no legitimate business by which either loss or gain can properly arise. If the stock is more valuable, we do not say what questions may arise from this.

Judgment reversed and judgment in favour of the ■plaintiff below for the sum of $85.78, according to the second point in the case stated; and record remitted.