Ruckdeschall v. Seibel , 126 Va. 359 ( 1919 )

Sims, J.,

after making the foregoing statement, delivered the following opinion of the court:

The questions raised by the assignments of error will be disposed of in their, order as stated below.

[1, 4] 1. Was the original obligation, set forth in the statement preceding this opinion, usurious?

The legal principles and the rule of evidence governing this enquiry have been long well settled and therefore need no restatement here. The enquiry under consideration is purely one of fact. If the transaction under investigation was in truth an investment in a particular enterprise or business entitling the investor to a share of the profits and the agreement as to the profits was in fact a guaranty of a minimum but left the investor entitled to a greater profit if made, so that in effect a partnership was created, and the agreement for profit was not in the nature of an agreement for interest—as is alleged in substance in the answer of Ruckdeschall was the true nature of the transaction—it would not have been usurious. 3 Minor’s Inst. (2d ed.) 306-310; Clemens v. Crane, 234 Ill. 215, 84 N. E. 884; Collyer on Partnership (6th ed.) sec. 68; Orvis v. Curtiss, 157 N. Y. 657, 52 N. E. 690, 68 Am. St. Rep. 810; Duffy v. Gilmore, 202 Pa. 444, 51 Atl. 1026. It is also true that it was held in Ward’s Achn’r v. Cornett, 91 Va. 676, 22 S. E. 494, 49 L. R. A. 550, that usury must be established beyond a reasonable doubt. But this holding was taken from Brokenborough v. Spindell, 17 Gratt. (58 Va.) 21, where ,it was said that usury “should be proved beyond a rational doubt to the contrary.” Judge Keith, however, in the opinion of this court delivered by him in Evans v. Rice, 96 Va. 50, at p. 55, 30 S. E. 463, 465, quotes the language next above quoted and says: “We should with reluctance accept the sentence quoted as accurately expressing the degree of proof required in such cases. It seems to us somewhat severe in its terms, but we are warranted, and indeed compelled, to hold that usury must be proved by a clear and satisfactory preponderance of the evidence.” The latter is we think the true rule on the subject. Further: As the answer aforesaid is under oath and is responsive to the cross-bill exhibited by Seigel as a bill of discovery, it is evidence in favor of Ruckdeschall; and, as it makes statements which if true disclose a transaction free of usury, the evidence of such answer must be overcome by the testimony of two witnesses or of one witness and corroborative circumstances, and a different state of facts established in order to entitle Seibel to the relief he seeks. But in this cause we have the testimony of two witnesses which overcomes the evidence furnished by the answer and establishes a different state of facts, namely, the testimony of Taylor and of the respondent Ruckdeschall himself, which testimony, as set forth in the statement preceding this opinion, establishes by a clear and satisfactory preponderance of the evidence the fact that the true nature of the transaction aforesaid was not an actual investment in any particular enterprise or business, but an agreement for a profit in the nature of interest on the $9,000.09 loaned, which exceeded the rate allowed by law, and hence the original obligation aforesaid was unquestionably usurious.

[5] 2. Can the bill in equity for discovery filed by Seibel be maintained?

The cross-bill in question admits liability for the principal sum justly due after the elimination of the usury in accordance with the laws of Pennsylvania, which are alleged as governing the subject, and in effect admits liability also for' legal interest on such principal sum, and thus conforms to the law of the forum—to the rule on the subject which obtained in ancient chancery practice; and therefore, if Seibel occupies such a relationship to the debt in question that he can make the defense of usuiy against the enforcement of it in this suit, the bill in question can be maintained for discovery of the usury and for relief therefrom based on such discovery independent of any statute affording that remedy. Young v. Scott, 4 Rand. (25 Va.) 415; and Munford v. McVeigh, 92 Va. 446, 449, 23 S. E. 857.

[6] Indeed no objection is urged against the right of Seibel to maintain such a bill, except that he was not the “borrower” of the money; and the position is taken for Ruckdeschall that the statute in Virginia (sec. 2822 of the Code) affords the remedy by bill of discovery and relief from usury to the “borrower” of the money only. It is true that such statute in terms affords such remedy only to a “borrower.” But the object of that statute was not to confer jurisdiction upon equity of suits for discovery and relief in cases of usury, for that jurisdiction existed independent of statute. The mischief which the statute under consideration was meant to cure was this, and this only: By the rule of the forum no plaintiff could maintain a bill in equity for discoveiy and relief from usury without waiving all forfeiture inflicted by the usury statute of the right of the lender to recover the principal sum justly due and legal interest thereon. The statute (sec. 2822) was enacted to enable a plaintiff to maintain such a bill and not waive the penalty inflicted by the usury statutes on the lender of forfeiture of all interest on a loan tainted with usury, including interest on the principal sum justly due as well as usurious interest. See Young v. Scott, supra,, 4 Rand. (25 Va.) 415, and the authorities therein cited for the state of the law which the statute last cited was meant to change.

[7] But even if the cross-bill had not in effect contained the waiver of forfeiture aforesaid, if Seibel was entitled to make the defense of usury, he could have exhibited the bill in the name of the “borrower” for his use and benefit and thus could have maintained the bill under this statute section 2822;.and this being true, equity, which looks at the substance and not the form of things, would not dismiss the bill merely because filed by Seibel in his own name.

So that we are of opinion that in the case before us the’ bill in question can be maintained both under the ancient chancery practice existing as above stated and under the statute last mentioned, if, as aforesaid, Seibel. the plaintiff in such bill, occupies such a relationship to the debt as entitles him to defend against it on the ground that it is usurious.

This brings us, therefore, to the following questions:

[8] 3. Is the plaintiff, in the cross-bill, Seibel, entitled to make the defense of usury against the debt aforesaid?

It is true that the plea of usury is a personal plea which can be made in general only by the borrower himself. But this is not a rule which is universal in its application. It is established by the great weight of authority that a surety on a debt may plead usury, just as the principal may, where the sole consideration of the promise of the .surety is the same as that of the principal debtor, that is, a loan or credit given to the principal debtor. 39 Cyc. 1075. Such is the position of Seibel in the cause before us, the fact being that he was merely an accommodation endorser and as such was a surety on the obligation in question, as is established by the preponderance of evidence in the cause, as set forth in the statement preceding this opinion.

We are of opinion, therefore, that the question last stated must be answered in the affirmative.

[9] 4. Should the plea of Ruckdeschall of the statute of limitations have been sustained?

Ruckdeschall, in his plea of the statute of limitations, relies on section 2823 of the Code of Virginia. This statute, so far as material, is as follows:

“If an excess beyond the lawful interest be paid in any case the person paying the same may in a suit brought within one year thereafter recover it from the person with whom the contract was made or to whom the assurance was given * * *.”

Sec. 2821 of the Code of Virginia, so far as material, also provides, as construed in Munford v. McVeigh, supra, 92 Va. at p. 454, 23 S. E. 859, as follows: “* * * that where usury is established in an action brought by the lender on an usurious contract, the judgment shall be rendered for the principal sum only.” And the case last cited also holds that under the statute law of this State then in force (which is the same as that applicable to the case before us in so far as such law is applicable at all) the same is true of the measure of relief granted in equity in a suit therein by the borrower for relief and discovery (and, as we have seen, the same rule is applicable in a suit in equity by a plaintiff such as Seibel, who exhibits his bill under section 2822 of the Code), namely that the lender can recover the principal sum only. Such a suit, in general, is in its nature not a suit to recover back usury paid, but sets up the usury in equity as a defense pro tanto against the enforcement of the debt.

[10, 11] And when we consider that the effect of usury at common law was to render the whole contract void because of its illegalitythat the option of at any time refusing to pay and of retaining the whole sum, both of principal and interest, involved in an usurious transaction, continued to remain with the debtor at common law so long as the debt was unpaid or was not novated; and that the statutes in Virginia on the subject have gone no further than merely to limit what the debtor may in such case refuse to pay and retain, and has not at all altered the common law right aforesaid with respect to what the statute still permits the debtor to refuse to pay and retain, it is clear that the Virginia statute of limitations (sec, 2823 of the Code), relied on by the lender, Ruckdeschall, in the cause before us, has no application to suits in equity by the borrower or a surety, such as Seibel, for relief from unpaid usury, unless the plaintiff in such a suit seeks to have credited on the debt payments which have been in fact made and applied to the usurious principal or usurious interest. The statute does apply to such payments but to no other. That is to say, it is plainly applicable only to usury which has been in fact paid to the person with whom the usurious contract was made or to whom the usurious assurance was given, and where the usury which has been so paid is sought to be recovered back or applied as a credit on that portion of the debt which is justly due, which is, in effect, the same thing.

Seibel, however, proved in the cause and relies on the statute of Pennsylvania on the subject (2 Stew. Purd. Dig. 1988, § 2), which, so far as .material, is as follows:

“When a rate of interest for the loan or use of money exceeding that established by law shall have been reserved or contracted for, the borrower or debtor shall not be required to pay the creditor the excess over the legal rate, and it shall be lawful for such borrower or debtor, at his option, to retain and deduct such excess from the amount of any debt; and in all cases where any borrower or debtor shall heretofore or hereafter have' voluntarily paid the whole debt or sum loaned, together with interest exceeding the lawful rate, no action to recover back any such excess shall be sustained in any court of this Commonwealth unless the same shall have been commenced within six months from and after the time of such payment * *

[12] It is plain from the language of this statute that it too, like the Virginia statute, has no application to suits in equity such as that instituted by the cross-bill of Seibel in this cause; and that that statute also, like the Virginia statute aforesaid (sec. 2823 of the Code), in so far as the limitation of actions is concerned, is applicable only to usury which has in fact been paid and is sought to be recovered back as aforesaid.

The question under consideration therefore leads to another, and that is as follows:

[13] 5. Has any of the alleged $1,000.00 usury reserved at the time of the original contract or any interest thereon (which of course was also usurious) been paid to the lender, Ruckdeschall?

This question must be answered in “the negative on the record before us. As shown by the evidence in the cause, as set forth in the statement preceding this opinion, neither Gummey nor Burr appear to have applied the payment of $500.00 which was made by one or the other óf them, to the usurious portion of said debt or to any of the interest on such portion; nor did Seibel, who made all the other payments which were made, make such application of any of them; nor did Ruckdeschall, so far as the evidence discloses, make such application of any of the payments made to him. In such case the court, where the usury is in issue before it, and is established, will,, under the Virginia statute, eliminate the usurious principal and all interest, and will apply the payments on the principal sum justly due, and will allow the lender to recover only the balance thus found to be owing to him of such principal, without any interest, Munford v. McVeigh, supra, 92 Va. 446, 23 S. E. 857; and, under the Pennsylvania statute aforesaid, the court will eliminate the usurious principal and all interest thereon and apply the payments on the principal sum justly due, together with legal interest thereon, and will allow the lender to recover the balance thus found to be owing to him of such principal and legal interest.

[14] The latter was the course pursued by the court below in accordance with the position aforesaid taken by Seibel in his cross-bill. Seibel is not complaining of such holding. Ruckdeschall has made no assignment of error before us complaining of such holding on the ground that interest has been allowed him on the sum justly due him in accordance with the Pennsylvania statute, rather than the infliction of the penalty imposed by the Virginia statute of the forfeiture of all interest. And the holding of the court below being in accordance with the law of Pennsylvania and more favorable to Ruckdeschall than he was entitled to under the law of Virginia, it therefore becomes immaterial and, hence, unnecessary for us to determine whether the law of Virginia or that of Pennsylvania gov-ems any of the rights of the parties, and, if so, which of such rights in the premises.

The next question for our consideration is as follows:

6. Was the usury in the original note purged by the coming in of new parties; the execution of the different forms of obligation; and the frequent change of parties and of their relations to the debt subsequent to the original transaction?

This question is, in substance, was there at any time a novation of the original obligation?

This is purely a question of fact.

[15-18] It is true that “where third persons are mixed up with the new transaction the courts regard it with a favorable eye,” (Drake’s Ex’r. v. Chandler, 18 Gratt. [59 Va.] 909, at pp. 911-12, 98 Am. Dec. 762, quoting from Comyn on Law of Usury p. 186; and in the absence of explanatory evidence on the subject the coming in of a new party or parties to a new obligation, in which the relationship of the obligors is changed, as where a new party appears as maker of a new obligation, or the like, there is a prima facie presumption of fact that there has been a novation of the original obligation, notwithstanding that it may be true that the new obligation includes a part or the whole of the usury involved in a prior transaction. Coffman & Bruffy v. Miller, 26 Gratt. (67 Va.) 698. But, after all, it is a question of fact as to whether the new obligation is executed for motives “unaffected by the usurious consideration” and is intended “to supersede or supplant” the original security. Drake’s Ex’r v. Chandler, 18 Gratt. (59 Va.) at p. 910, 98 Am. Dec. 762. As said in the case last cited, quoting from Walker v. Bank of Washington, 3 How. (U. S.) 62, 11 L. Ed. 494; “‘The mere change of securities for the same usurious loan to the same party who received the usury * * * does not purge the original illegal consideration * * *. Every subsequent security given for a loan originally usurious, however remote or often renewed, is void.’ ” If the new obligation be'in fact a new contract founded in whole or in part on a new consideration, although it be not in fact a valuable but merely a meritorious consideration, Drake’s Ex’r v. Chandler, supra, 18 Gratt. (59 Va.) 910, 98 Am. Dec. 762, then indeed there will have been a novation of the obligation, Coffman & Bruffy v. Miller & Co., supra, 26 Gratt. (67 Va.) 698; and see notes on usury in 67 Va. Rep. Anno. pp. 229, et seq. and in 59 Va. Rep. Anno. p. 909. But, in the case before us, Ruckdeschall himself testified to the effect that the various notes given and accepted by him subsequently to the original'note were all executed for the same consideration as was the original note and none other; that they were parts of one and the same transaction and none of them were intended by any of the parties thereto to constitute a new contract. And to the same effect is Seibel’s testimony.

[19] Further: It is clearly shown by the evidence in the record that there was no new consideration moving to Seibel for the confession of judgment set forth in the statement preceding this opinion, nor was it intended or considered by him or Ruckedschall, at the time, as a novation of the debt. The judgment, it is true, merged the contract evidenced by the notes on which it was entered, and it became subsequent and different security; but the judgment, nevertheless, was wholly based on obligations which were unpurged of and hence were tainted with the usury aforesaid. Therefore, the judgment was itself inescapably also tainted with such usury.

We therefore conclude that there was not a novation of the original debt so as to purge it of usury and that the question under consideration must be answered in the negative.

We have still another question to dispose of, which is as follows:

[20, 21] 7. Is the security, Seibel, barred from settling up the usury in the original obligation or in the notes on which the judgment was entered, by his confession of judgment?

It is settled in Virginia that a judgment by default does not bar the judgment debtor from thereafter setting up the defense of .usury against the judgment when it is sought to be enforced in a court of equity. Greer v. Hale, 95 Va. 533, 28 S. E. 873, 64 Am. St. Rep. 814. We see no difference in principle as affecting the question under consideration, between a judgment which is confessed and one by default; nor do we, indeed, perceive any difference, as affecting such question, between such judgments and any other judgment where the usury was not in fact pleaded or put in issue as a defense in the action which resulted in the judgment.

As said in Brown v. Toell’s Adm’r, 5 Rand. (26 Va.) 543, 16 Am. Dec. 759: “It is competent to a party to an usurious contract, to go into equity for relief * 55 * , even after judgment at law and without assigning any reason for having failed to defend himself at law.” See to same effect, Rankin v. Rankin, 1 Gratt. (42 Va.) 151, and Terry v. Dickenson, 75 Va. 475. But for a contrary holding in Virginia see Hope v. Smith, 10 Gratt. (51 Va.) 221. It has been expressly held in some' decisions in other States that a judgment by confession may be opened where it is alleged to be usurious. 1 Black on Judgments 105; McGuire v. Campbell, 58 Ill. App. 188; Marr. v. Marr, 110 P. A. 60, 20 Atl. 592; Webster v. Smith, 36 Pa. Super. Ct. R. 281. And there are other decisions holding that a judgment does‘not bar the subsequent defense of usury against its enforcement. 23 Cyc. 1200. It may be true that where the confession of judgment is not on a warrant of attorney given as a part of the same transaction as the execution of the obligation in question, a majority of the cases may hold that the judgment cannot be reopened. But the cases so holding, so far as we have had access to them, do so on the principle that a judgment is conclusive against the defendant of every legal defense which might and should have been made against the action and that the defense of usury is not an equitable but a legal defense and should be made, if at all, in defense of the action at law. See note to 12 L. R. A. (N. S.) pp. 659-660; Hope v. Smith, supra, 10 Gratt. (51 Va.) 221; Montague v. McDowell, 99 Pa. 265; Bell v. Fergus, 55 Ark. 536, 18 S. W. 931; Kendig v. Marble, 58 Iowa 529, 12 N. W. 586; 39 Cyc. 1025-6. But it seem? to us that although. the defense of usury is generally a legal defense, it is in truth in its nature purely equitable in character where, as in the case before us, it does not invoke any forfeiture of principal or interest justly due—does not avail of any statutory penalty creating such a forfeiture, but takes the equitable position that the lender is entitled to such principal and interest as is justly due; and, too, where a statute, as does section 2822 of the Code, expressly confers upon a court of equity jurisdiction in the terms, which such statute uses. As it happens the case before us falls within both of these classes of cases, as aforesaid. The well established rule that a judgment at law will not conclude defenses which are of a purely equitable character would seem to us to be controlling in the former, and the authority of the statute in the latter class of cases. That is to say, the principle of res judicata does not apply to either of such classes of cases.

[22] Of course, if a debt is being enforced in a suit in equity against a party to the suit and he fails to make the defense of usury before final decree, the principle of res judicata applies in that case in bar of the defense of usury. Snyder v. Loan Building Co., 52 W. Va. 655, 44 S. E. 250. But such is not the case before us.

There is evidence in the record tending to show that Seibel did not have knowledge of the existence of usury in the transaction at the time he confessed the judgment. But in the view we have taken of the question under consideration we deem that fact, if it be a fact, immaterial, and we do not consider it necessary to enter upon a consideration of the subject of whether the judgment should be reopened on the ground of mistake (39 Cyc. 1026), or lack of knowledge on the part of the judgment debtor of the grounds of defense at the time of the judgment (23 Cyc. 1198). For the reasons above stated we are of opinion that different principles govern the subject and that the rule laid down in the case of Brown v. Toell’s Adm’r, supra, 5 Rand. (26 Va.) 543, 16 Am. Dec. 759, above quoted, is applicable to and is decisive of the question under consideration.

But one other matter remains to be disposed of.

[23] Our attention is called in the supplementary brief for Buckdeschall to the form of the decree under review set forth in the statement preceding this opinion, in that the decree does not fix the amount of the debt but leaves that question still open dependent upon the option given Seibel, the judgment debtor, “to retain and deduct” the usurious principal and interest thereon aforesaid, “upon the payment of the balance of the judgment.” (See the form of the decree set forth in the statement preceding this opinion). The phraseology of the decree is open to this objection. Doubtless the attention of the court below was not called to this as no assignment of error is based on it. On the going back of the cause to that court it should alter the form of the decree so as to fix the amount of the judgment subject to the deduction of the usurious $1,000.00 and all interest thereon, and the decree should establish the order of priority of such debt as a lien upon the real estate involved in the cause. We shall not undertake to do this by the decree we shall enter for the reason that the record does not disclose whether the master commissioner’s report has or has not been acted on, or whether the order of priority of the debt in question as therein reported is or is not correct.

[24] In this connection we should perhaps mention the further position taken in the supplemental brief for Ruckdeschall aforesaid, to-wit, that there should have been a personal decree in favor of Ruckdeschall against Seibel for the amount of the judgment which is found by the court to be justly due when purged of the usury. But we think that there is no need of any such personal decree being entered in this cause. Such a decree would be but another judgment. The personal judgment already exists, and by order of court in this cause, entry can be made on the judgement lien docket, where the judgment is docketed, of the effect of the decree which will be entered by the court below in conformity with this opinion, as to the proper deduction from or credit on the original amount of the judgment. Thereafter such .other proceedings may be had from time to time on the judgment as the judgment creditor may be lawfully entitled to.

Therefore, subject to the modification of the form of the decree under review, which will be made by the court below in accordance with the two paragraphs of this opinion next above, such decree will be affirmed with costs to the appellee Seibel, as the party substantially prevailing.

Affirmed and remanded.