Spence v. Erwin

1. Where a transaction, in the form of a written contract for the sale of shares of stock with an option to repurchase within a given time for a named consideration, and apparently lawful in all respects, is alleged to have been not a sale but a loan, secured by the stock, at a usurious rate of interest, it is incumbent upon the person attacking to show affirmatively that the transaction was in fact a loan tainted with usury.

2. If, construing the petition as amended most strongly against the petitioners, it is fairly inferable that the transaction was in fact a sale and not a usurious loan as contended, such construction must prevail, although there is a definite allegation that the transaction was a loan and not a sale.

3. Thus, in such a transaction and attack, the sustaining of a general demurrer and dismissal of the petition will not be disturbed, where the allegations of the petition are equivocal and conflicting, and do not clearly establish the transaction as a loan and definitely negative it as a sale.

No. 14786. APRIL 5, 1944. REHEARING DENIED MAY 5, 1944. Spence Spence, a partnership composed of George C. Spence Sr. and George Cleland Spence Jr., filed an equitable petition against Mrs. Thomas C. Erwin Sr., Thomas C. Erwin Jr., and Albert Boylston. The petition was several times amended, and in its final form alleged substantially as follows: That on June 9, 1941, Thomas C. Erwin entered into a written contract with Spence Spence, which recited that Spence Spence had an option from Hewlett Dennis to purchase 3000 shares of preferred stock and 628 shares of common stock of the Atlanta Biltmore Hotel Corporation, and that Erwin, for one dollar and other valuable consideration, purchased this stock from Spence Spence with the provision "that the said Spence Spence shall have an option to repurchase all of said stock within six months from this date for the sum of $10,500 cash; and the further option to repurchase said stock from Thomas C. Erwin after expiration of six months option but within twelve months from this date, for the sum of $12,000 cash; and said Thomas C. Erwin covenants that he will keep and hold said stock from any limitation or contract otherwise than is herein mentioned, so that the said stock may be delivered at any time during the next year at and for the option prices as mentioned herein. But the said Thomas C. Erwin may have the privilege of pledging said stock to secure a loan for $8,000 upon the security of said stock." It was averred that the $8,000 received by the petitioners from T. C. Erwin Jr., as described in the contract, was in fact a loan from Erwin and his mother, Mrs. Thomas C. Erwin Sr., with the stock pledged as collateral, and did not represent the consideration for the sale of the stock as outlined in the purported contract; that the transaction was clothed in the form of an option-contract for the purpose of giving the loan the appearance of a legal transaction in the form of a sale with an option to repurchase; that for the use of the $8,000 loan, the petitioners were to pay $2,500 if repaid within six months, or $4,000 if repaid within twelve months; whereas, at the legal rate of 8 per cent., the interest would have been $320 for the use of the loan for six months, or $640 for twelve months; that Erwin Jr., who was a real estate agent, had been conducting extensive negotiations for the sale of the Atlanta Biltmore Hotel property, for which, if consummated, he would have received a large commission, and the principal inducement which led Erwin to make the loan to the petitioners was "because of the fact that petitioners had been counsel for the owners of the hotel property in a very extensive litigation, and were in a position to facilitate the negotiations looking to the sale of said property;" that a part of the money so borrowed was to be used for paying Hewlett Dennis for the stock, and for the purpose of consummating the closing of the transaction, T. C. Erwin Jr., who was acting in the matter for himself and his mother, on June 9, 1941, delivered the money to the trust officer of the Citizens Southern National Bank, who at the same time received the stock from the Atlanta Biltmore Hotel Corporation; that in accordance with the agreement of the petitioners and the defendants Erwin, the trust officer distributed the $8,000 as follows: $6,400 to Hewlett Dennis, which was owing to them by the petitioners on the purchase-price of the stock; $850 to the Atlanta Biltmore Hotel corporation, which Hewlett Dennis owed to that company on the stock; and the remaining $750 to the petitioners; that the stock was then delivered to T. C. Erwin Jr. to be held by him, or his mother, as collateral security for the loan: that during Erwin's efforts to effect a sale of the hotel property there was an understanding between the plaintiffs and Erwin that the loan should be carried until the sale of the hotel, or until negotiations for such sale were terminated; and that the defendants have not until recently disputed the fact that the transaction was a loan, but on July 27 they refused to accept $14,604, which was then offered, whereas the loan plus lawful interest at 8 per cent thereon at that time was $9,363.04.

About this time, the petitioners, for the sum of $7,000, purchased and received from the Bank of Atlanta, and had transferred to them in blank and without recourse, two notes of T. C. Erwin aggregating $7,000, together with all of said shares of Atlanta Biltmore Hotel Corporation stock described in the contract of sale, which had been pledged by Erwin as security for the notes. The petitioners borrowed from the defendant, Albert Boylston, the $7,000 with which to purchase said notes, and then delivered to Boylston the two notes with the stock to secure payment of the $7,000 borrowed, as well as to secure the repayment of certain other indebtedness owing by George C. Spence to Boylston. The petitioners alleged that they are the owners of the stock subject to the $8,000 loan, and tendered to the defendants Erwin the two notes signed by T. C. Erwin for $7,000 and $1,000, making a total of $8,000 principal, and $1,363.04 interest at 8 per cent. on $8,000 from June 9, 1941, to July 27, 1943, although claiming no necessity of tender since the defendants were claiming the stock adversely and had refused to accept an offer to pay them for its release. On August 4, 1943, T. C. Erwin Jr., and Madison Richardson, as attorney for the defendants Erwin, presented a letter to the defendant Boylston. setting forth their claim to the stock in question and tendering to him a cashier's check for $7,000 in payment for the notes signed by Erwin Jr., and demanding delivery to them of the notes and the Atlanta Biltmore Hotel Corporation stock, pledged as security for the payment of the notes. Boylston stated that he was holding the notes as collateral for a loan made to Spence, and that Spence claimed to be the owner of the stock, and requested Erwin and his attorney to present their claim in detail in writing in order that he might confer with his attorney and receive legal advice in the premises. Another letter, a copy of which was attached to the petition, setting out in detail the claim of the defendants Erwin to the stock, was delivered to Boylston. Among other things, it was stated in the letter that Spence had no interest in the stock, and that Thomas C. Erwin Jr. had transferred his interest therein to his mother, Mrs. Thomas C. Erwin Sr. A tender of $7,000 was made as payment of the two notes signed by Erwin aggregating $7,000; and a demand was made for delivery of the notes and the shares of stock. It was further stated that at one time Spence had an option to purchase the stock, but that this option had long since expired.

The petition further averred that T. C. Erwin was insolvent, and that the purpose of the action was to avoid a multiplicity of suits to quiet title to the stock, and to remove all clouds therefrom. The prayers were for a restraining order and injunction against the defendants, from changing the status of the transactions, from transferring the notes or the stock, or delivering the same to any one; that the court determine and decree the amount owing by the petitioners to the defendant Erwin on account of the $8,000 loan; that the amount so found constitute a lien on the 3000 shares of preferred stock and 628 shares of common stock, with the right to petitioners to pay off said debt, extinguish to the lien upon the stock, and to receive the same, all subject to the right of the defendant Boylston to retain possession thereof as security in the same manner as he now possesses the same; and for general relief.

On August 17, 1943, the lower court, without granting a restraining order, issued a rule nisi for a hearing on August 18, 1943, for the purpose of determining whether the prayers of the petition should be granted. Before a hearing, Mrs. Thomas C. Erwin Sr. sued out a bail trover for the recovery of the stock, against the defendant Boylston, in Fulton superior court, where the present suit was pending. The petitioners then sought by amendment to restrain the prosecution of the bail-trover proceeding and to have it consolidated with the instant case. Pursuant thereto, the court passed an order requiring Boylston to deposit the notes and stock with the trust officer of the court, allowing the bail-trover action to be served upon Boylston, but requiring no bail, and ordering the status of the property to remain the same until further order. By further subsequent amendments, it was alleged that the loan was for a term of twelve months, and was to be repaid on or before June 9, 1942. There was also an alleged tender of $1,000 in cash and consent to a delivery of the two notes signed by Thomas C. Erwin Jr., together with the written consent of Boylston, made to Madison Richardson, attorney for the defendants Erwin, and an alleged decline of this tender. To the petition as amended, general and special demurrers were filed by the defendants Erwin. The trial court sustained the general demurrer and dismissed the petition as to those defendants. The plaintiffs except to that judgment. The controlling question in this case is whether the transaction referred to in the foregoing statement was a sale of the stock by the plaintiffs to the defendants with an option to repurchase it from them within a given time for a specified sum of money, or a transaction in which the plaintiffs borrowed money from the defendants and pledged the stock as collateral security. We must look to the petition, as amended, for the answer to this question. "Whether a given transaction is a sale of land with right to repurchase, or a loan of money with the title to the land taken as security, depends, not upon the form of the words used in contracting, but upon the real intent and understanding of the parties. ``No disguise of language can avail for covering up usury. or glossing over an usurious agreement." Manget Realty Co. v. Carolina Realty Co.,169 Ga. 495, 508 (150 S.E. 828), and cases there cited. It follows that a petition alleging a written contract of sale with an option to repurchase between the plaintiffs and the defendants, but alleging further that the writing was simply a cloak to cover up a scheme to collect usurious interest, is not subject to dismissal on general demurrer. But a dismissal would result if, by other allegations construed most strongly against the petitioners, the petition disclosed that the transaction was not in fact a loan but a sale with an option to repurchase.

The petition as amended alleges unqualifiedly that the transaction was a loan of $8,000 to be repaid within twelve months with interest at 8 per cent. This allegation, however, must be considered along with the other allegations of the petition. The writing attached thereto as an exhibit shows a sale of the stock by the plaintiffs to the defendants for $8,000, with an option to repurchase the stock for $10,500 within six months, and for $12,000 if repurchased after six months and before twelve months. It is not alleged that this option was ever exercised, but it is averred that the writing was a cloak to cover up a usurious loan of $8,000, and asserted the right of petitioners to repay the loan with interest at 8 per cent. per annum and thereupon to have the stock delivered to them. The petitioners, in a letter addressed to the defendant Boylston, make use of the following language: "I had an arrangement with Thomas C. Erwin Jr., who advanced me $8,000 with which to handle the transaction, and at the time, I agreed with Mr. Erwin that I would pay a profit of $4,000 on the transaction. The transaction was in the form of an option and the date mentioned in the option expired, but subsequent thereto, it was agreed that the same would be renewed and continued." Again referring to the stock in question, the petitioners say, "The collateral [stock] which is mine subject to the payment of certain sums of money, to wit; a sum approximating $14,200." The plaintiffs allege at one place in the petition a tender of $14,604 to the defendants. All of these allegations are in direct conflict with the position that the transaction was a loan of $8,000 at 8 per cent. interest. These are averments by the plaintiffs, the meaning and import of which are to the effect that the writing was a sale of the stock with a right to repurchase, and not a loan. The allegations by which it is sought to show a loan instead of a sale are most indefinite. In fact, they are so indefinite as to make it impossible to ascertain the nature and terms of the loan. In the original petition it is alleged that the loan was to be carried until the sale of the hotel, or until negotiations for such sale were terminated. By one of the amendments, without striking from the petition the allegation last referred to, it was alleged that the loan was to be repaid on or before June 9, 1942. "When a transaction apparently lawful in all respects is attacked as usurious, it is incumbent upon the person making such attack to affirmatively show that the same is thus tainted." Wilkins v. Gibson,113 Ga. 31 (5) (38 S.E. 374). See also Equitable Mortgage Co. v.Watson, 116 Ga. 679 (43 S.E. 49); Harvard v. Davis,145 Ga. 580 (4 a) (89 S.E. 740). "It is an elementary rule of construction, as applied to a pleading, that it is to be construed most strongly against the pleader; and that if an inference unfavorable to the right of a party claiming a right under such a pleading may be fairly drawn from the facts stated therein, such inference will prevail in determining the rights of the parties." Krueger v. MacDougald, 148 Ga. 429 (96 S.E. 867); James v. Maddox, 153 Ga. 208 (4) (111 S.E. 731);Moore v. Moore, 188 Ga. 303 (4 S.E.2d 18). Applying the above well-recognized rules of law to the allegations of the petition in this case, it clearly appears that the contract of sale with an option to repurchase was in fact what it purported to be. Construed most strongly against the plaintiffs, the petition does not show that the transaction was in fact a loan infected with usury and not a contract of sale; and therefore the petition fails to set out a cause of action. The lower court properly sustained the general demurrer and dismissed the action.

Judgment affirmed. All the Justices concur.