Bedford v. Eastern Building and Loan Assn.

181 U.S. 227 (1901)

BEDFORD
v.
EASTERN BUILDING AND LOAN ASSOCIATION.

No. 153.

Supreme Court of United States.

Argued January 30, 31, 1901. Decided April 22, 1901. CERTIORARI TO THE CIRCUIT COURT OF APPEALS FOR THE SIXTH CIRCUIT.

Mr. Robert M. Heath for Bedford and wife. Mr. Heber J. May and Mr. W.C. McLean were on his brief.

Mr. William Hepburn Russell for appellee. Mr. William Beverly Winslow, Mr. Joseph W. Buchanan and Mr. H. Dart Minor were on his brief.

MR. JUSTICE McKENNA, after stating the case as above, delivered the opinion of the court.

The assignments of error, except one, present the question of the enforceability of the notes and mortgage under the Tennessee law, or, as the question may be put, whether there was a contract between the parties — a right in one and an obligation in the other arising from a consideration given and received; mutual covenants by which each party acquired the right to that which the other promised or engaged to do, and whether the laws of Tennessee, as interpreted by its courts, impaired that right?

(1) A recapitulation of the facts in this connection will be useful. The Eastern Building and Loan Association was organized under the laws of New York, and one of its purposes was to make "advances" to members. It had a capital stock of $50,000, divided into shares of $100 each. The funds of the association were divided into two classes — a loan fund and an expense fund. The articles of incorporation provided that "the loan fund shall consist of all receipts which do not go into the expense fund, as hereinbefore provided, together with all interests and accumulations from whatever source. No money can be drawn from the loan fund for any other purpose than the making of loans on security, as provided by the by-laws, and to pay amounts due withdrawing shareholders. The funds of the association not required for advances on shares may be invested by the board of directors in such securities as the savings banks of the State of New York are permitted to take, or deposited at interest in the savings banks, trust companies or duly incorporated banks of said State, and which are in good standing"

The articles of incorporation and the by-laws also provided the manner of becoming a member of the association, the rights of a member and the obligations of the association. The entrance fee of new members and new shares were to be one dollar per share, monthly dues seventy-five cents, fines for non-payment of dues on unpledged stock twenty cents. And it was provided by sections 1 and 2, article XIX, under the heading "Contract of members," as follows:

"SEC. 1. The terms and conditions expressed in the certificate of stock, in connection with the application for membership and the by-laws of the association, form the contract between the association and each shareholder therein.

"SEC. 2. All persons desiring to become shareholders of this association must fill out, sign and deliver to the secretary an application according to the form adopted by the association, which said application shall be a part of said application with this association. Such applicant shall also pay a membership fee of one dollar per share for each and every share held by him.

* * * * * * * *

"SEC. 16. All remittances for advance, instalments, premiums, monthly instalments, fines and penalties, interest and premiums, and all other payments shall be made to the secretary of the association at the home office, and in registered letter, express or money order or drafts. Individual checks shall not be received."

The other sections of the article provide for the manner in which the loan shall be made, upon what security, interest and premium and covenants, the manner of payment and prepayment, and the enforcement of payment and when shares may be cancelled and forfeited. "Punctuality and strict performance on the part of all members, borrowers and shareholders, in payment of fines, dues, interest, loans and premiums, are made the essence of the contract."

The articles also provide with what the stock shall be charged and to what it shall be subject, the amount of monthly instalments to be paid and when paid, and when and to what extent and upon what terms shares may be withdrawn and for the issue of paid up stock.

Article XV of the by-laws is as follows:

"Loans.

"SEC. 1. Each shareholder, for each share named in their certificate, shall be entitled to a loan of one hundred dollars from the association, provided they shall first make application for such a loan upon a blank furnished by the association for that purpose, if the condition of the loan fund in the treasury shall warrant it. All applications for loans shall be filed and numbered consecutively as received, and be examined and approved, or rejected, by the board in their regular order.

"SEC. 2. All shares must be in force three months before said shareholder shall be entitled to a loan. All applications for loans are part of the contract of the shareholders with this association. Nothing herein contained shall prevent the board of directors from loaning funds of the association to any member in greater sums than the above provided upon approved securities."

On the 2d of January, 1891, Bedford applied to become a shareholder of the association, and subscribed for forty-six shares of instalment stock. The application was accepted and a certificate of stock was issued to him on the 2d of February, 1891, and on the 20th of March, 1891, he presented a written application for a loan as follows: "____ ____ do hereby make application for a loan of forty-six hundred ($4600.00) dollars, for six and a half years, to bear interest at the rate of five per cent per annum, and a premium of five per cent per annum, payable on or before the last Saturday of each month;" and to secure the sum agreed to give a mortgage on the real estate set forth in certain questions and answers which accompanied the application, which described with particularity the real estate and the improvements thereon, and stated that the loan was "for investment to relieve adjoining property." The property was stated to be of the value of $6000, and all of his property easily to be worth $40,000. The application was sworn to and accompanied by the affidavit of three other persons that they regarded Bedford "as a prompt, upright, reliable person, pecuniarily responsible for his contracts."

The application and report of the local board of appraisers was received by the association on the 12th of May, 1891, by mail from H.B. Martin, the soliciting agent of the association. It was accepted and a loan granted on the 18th of May, and to secure the same the notes and mortgage in suit were subsequently executed.

The statutes of Tennessee relied on as a defence were passed March 26, 1891, and to repeat, the question is, did the subscription to the stock of the association, its issuance and the application for a loan in pursuance of it, constitute a contract which was inviolable by the state legislature? We think the answer should be in the affirmative. By his subscription to stock of the association Bedford became a member of the association — bound to the performance of what its by-laws and charter required of him, and entitled to exact the performance of what the by-laws and charter required of the association. Each acquired a right to what the other promised, and there were all the elements of a contract. We are compelled, therefore, to disagree with the views expressed by the Supreme Court of Tennessee, in New York &c. Building & Loan Association v. Cannon, 99 Tennessee, 344, notwithstanding our high respect for that learned tribunal. It was there contended that "Cannon, having become a stockholder in the association before the acts were passed, with a view to becoming a borrower, and for that purpose, and having made his application for a loan likewise before the acts passed, acquired a vested right to the consummation of the loan, and the association became legally obligated to complete it, and it was also unfinished business, which the association had a right, and which was its duty, to finish, notwithstanding the acts of the legislature." To this contention the court replied: "If we were to grant that the borrower had a vested right to the loan, and the association had a legal obligation to consummate it, still, it must follow that the contract could be entered into, and the loan and mortgage made, only in compliance with the law. There was nothing to prevent the association from complying with the statutes and thus placing itself in the attitude where it could legally make the loan and take the mortgage if it were under obligation to do so, as it claims."

And the court observed that it could not be considered that the association and Cannon were winding up an old transaction and unfinished business, but were doing business in the sense of the statute and in defiance of its prohibition, and refused to enforce the mortgage of the association. We cannot assent to the view that there is nothing to prevent the association from complying with the statutes. The mere filing of its charter in a particular office — the secretary of state's or some other office — might be easily complied with, but the deposit with some responsible trust company or state officer of the State or some other State, of mortgages or securities of from $25,000 to $50,000 in amount, at the discretion of the state treasurer, might be impossible to comply with. At any rate, the requirement is so very onerous that the association could justly decline to do business in the State on that condition. It might indeed have the right to decline any condition and retire from the State, and from all it had the option to retire from. But it could not retire from the execution of its contracts. It contracted with Bedford to make him a loan if it had the means in its treasury and his security was good. The State could not affect that obligation nor impair it. "The obligation of a contract ``is the law which binds the parties to perform their agreement.'" 4 Wall. 452. The building association was incorporated under the laws of New York to make loans to its members, and rights to a loan accrued to membership. The condition of a loan existing — means in the treasury, a tender of good security — the contingent right became a vested one, a contract was formed, and, can there be a doubt, that it was enforceable against the association? If it could have been enforced by suit, it was properly yielded to without suit and possessed all legal sanctions.

We recognize the power of the State to impose conditions upon foreign corporations doing business in the State. We have affirmed the existence of that power many times, but manifestly it cannot be exercised to discharge the citizens of the State from their contract obligations.

It is claimed, however, that if the transactions between Bedford and the association were otherwise legal they were affected with usury, and to the extent that they were usurious they were unenforceable. The contention is that in making the loan of $4600 Bedford was required to pay a fixed premium of $460, and received only $4140, and that this constituted usury in Tennessee. This is made out because, it is said, Bedford was required to withdraw his stock and receipt in full, and could therefore get no benefit from future profits of the association; and, it is asserted, that thereby the loan became "fixed and certain and no element of contingency" remained, and the transactions are withdrawn from the principle expressed in Spain v. Hamilton, 1 Wall. 604, that "where the promise to pay a sum above legal interest depends upon a contingency, and not upon the happening of a certain event, the loan is not usurious." But the fact was not as asserted.

The stock was pledged as security for the advance, and the pledge was no more a withdrawal of the stock, terminating Bedford's ownership of it, than his mortgage was an absolute conveyance of his land. It is provided in section 3, article 19, that in addition to real estate security for a loan a shareholder shall "transfer in pledge to the association one share of the stock held by said shareholder, as collateral security, on all loans made by the association" to him. Besides, the transactions were not usurious under the laws of New York, where the notes were payable. Concordia Savings &c. Association v. Reed, 93 N.Y. 474. Therefore, the principle expressed in Miller v. Tiffany, 1 Wall. 298, applies. It was said in that case: "The general principle in relation to contracts made in one place to be performed in another is well settled. They are to be governed by the law of the place of performance, and if the interest allowed by the law of the place of performance is higher than that permitted at the place of contract, the parties may stipulate for the higher interest without incurring the penalties of usury. The converse of this proposition is also well settled. If the rate of interest be higher at the place of the contract than at the place of performance, the parties may lawfully contract in that case also for the higher rate." See also Anderson v. Pond, 13 Pet. 78; Railroad Company v. Bank of Ashland, 12 Wall. 226; Scotland County v. Hill, 132 U.S. 107; Cromwell v. Sac County, 96 U.S. 57; Cockle v. Flack et al., 93 U.S. 344.

In Pioneer etc. Loan Co. v. Cannon, 96 Tennessee, 599, a note secured by mortgage was given to a building association and made payable at Minneapolis. It provided for the payment of five per cent interest per annum, a five per cent premium per annum, monthly, on or before the last Saturday of each month, and stipulated, further, that "any failure to pay interest or premium, when due, shall, at the election of the payee, make the principal, interest and premium at once due." Of the note and mortgage the court said: "The second assignment of error is that the note and mortgage were both usurious on their faces and nonenforceable. As already stated, the note stipulates on its face to pay five per cent interest per annum, at the office of the company at Minneapolis, Minn. This contract is a Minnesota contract, and is expressly authorized by the charter of the company and the laws of that State, which have been distinctly proved, and appear on the record." The assignment of error was held not well taken.

The Circuit Court adjudged Mrs. Bedford personally liable for the indebtedness to the association. This is conceded to be error, and it has been stipulated "that an order or decree may be entered in this cause releasing her from said liability upon such terms and conditions as to this court may seem just."

The judgment of the Circuit Court will be modified in accordance with the stipulation, and, as modified, affirmed. Costs are awarded to Mrs. Bedford on her appeal to and in the Circuit Court of Appeals and in this court.