Where a secured creditor voluntarily comes into the Bankruptcy
Court and asserts a claim to property in the trustees' possession,
the proceeding is one in equity and the decree is reviewable by the
circuit court of appeals both as to law and fact; § 566, Rev.Stat.,
is inapplicable, and the whole case is open under § 128, Judicial
Code, and an appeal lies to this Court under § 241, Judicial
Code.
A contract for loaning money secured by accounts payable to the
borrower, who is to act as agent for the lender in their
collection, providing that the lender shall, in pursuance of a
provision in a bond of indemnity given by third parties, examine
the accounts and books of the borrower monthly and receive a
compensation therefor equivalent to a specified percent of the
accounts remaining due,
held in this case to have been
made in good faith and not for the purpose of avoiding the usury
laws, and not to be a usurious and void contract under the laws of
the New York.
On an inquiry whether the contract is one forbidden by law,
evidence
dehors the agreement is admissible to show that,
though legal on its face, the agreement is in fact illegal.
Usury may be interposed as a defense even though it contradicts
the agreement.
Where the law of the state makes usury a crime, the burden is
strongly on him who would avoid a debt on that ground, and where,
as in this case, the borrower is supported by one witness who is in
his employ and the lender is supported by one disinterested
witness, the burden is not sustained.
The facts, which involve the jurisdiction of the circuit court
of appeals to review facts in certain cases coming from the
Bankruptcy Court and the construction of usury laws of New York,
are stated in the opinion.
Page 228 U. S. 164
MR. JUSTICE LURTON delivered the opinion of the Court.
This is an appeal from a decree determining a controversy
arising in a bankruptcy proceeding. The origin of the matter was
this: Canfield, the bankrupt, was a merchant in New York. He
borrowed from Burden the sum of $10,000, and as security assigned
to him certain book accounts, aggregating the sum of $14,000, and
agreed to act as agent for Burden in their collection. Shortly
afterwards, he was adjudicated a bankrupt. The receiver obtained
possession of the bankrupt's books and held onto the assigned
accounts, and proceeded to collect them upon the claim that the
contract was usurious and void under the law of New. York.
In this situation, Burden intervened in the bankruptcy case and
filed a petition in which he asserted his title to the assigned
accounts and to any proceeds collected by the receiver. The
district court, upon a final hearing, upheld the contention of the
bankrupt's receiver, now the trustee, and dismissed the intervening
petition. This decree was reversed by the circuit court of appeals,
that court holding that the defense of usury had not been
satisfactorily made out.
The appellant contends that, the controversy having been heard
by the district judge without a jury, the circuit court of appeals
had no authority to review the facts. For this, § 566, Revised
Statutes, is cited, and also the case of
Campbell v. United
States, 224 U. S. 99, which
construes that section. But that provision only requires that the
trial of issues of fact in the district court, except in cases in
equity and admiralty, and except as otherwise provided in
proceedings in bankruptcy, shall be by jury. But the district court
is, by § 2 of the Bankruptcy Act of 1898, July 1, 1898, 30 Stat.
545, c. 541, when sitting
Page 228 U. S. 165
as a bankruptcy court, given jurisdiction in law and equity for
the purpose of collecting and distributing the estate of a
bankrupt, and for the purpose of determining controversies relating
thereto, except as otherwise provided. The exception has no
application here, as Burden voluntarily came into the bankrupt
proceeding and submitted his claim to the adjudication of the
bankruptcy court. Such an intervention for the purpose of asserting
a title or claim to property in the possession of the bankrupt's
trustee is an intervention in equity, and a decree is reviewable by
appeal to the circuit court of appeals in the exercise of its
general appellate powers in equity cases under § 24a of the
Bankruptcy Act. Loveland on Bankruptcy, 4th ed., §§ 826 to 829;
Hewit v. Berlin Machine Works, 194 U.
S. 296,
194 U. S. 300;
Knapp v. Milwaukee Trust Co., 216 U.
S. 545. Upon such an appeal, the law and the facts are
open for reconsideration, and from the decree of the circuit court
of appeals, it not being final (§ 128, new Judicial Code), an
appeal may be taken under § 241 of the same Code.
Being an appeal from a decree in a controversy arising in a
bankruptcy proceeding, and therefore an appeal under § 24a, and not
under § 25b, General Order XXXVI, made under the latter section and
requiring a finding of facts, has no application, and the appeal
opens up the whole case as in other equity cases.
Hewit v.
Berlin Machine Works, supra; Coder v. Arts, 213 U.
S. 223, and
Knapp v. Milwaukee Trust Co.
supra.
Coming now to the merits. The single question is one of usury in
the contract. The lawful rate of interest in New York is 6 percent.
By § 373 of the General Business Law of New York, it is
provided:
"All . . . contracts . . . whatsoever . . . whereupon or whereby
there shall be reserved or taken or secured, or agreed to be
reserved or taken, any greater sum or greater value for the loan or
forbearance of any money,
Page 228 U. S. 166
goods, or other things in action than is above prescribed shall
be void."
Canfield was a reputable merchant engaged in business in New
York. Burden was a retired merchant and an experienced accountant
who wished to secure light employment. To secure such employment,
he advertised that he would lend from $10,000, to $20,000 at 6
percent to a merchant whose rating was good if the loan would
secure such employment. Through a broker, compensated by Canfield,
negotiations were opened with Burden, who proposed the loan
provided he could get light employment in Canfield's office as a
financial man. But the financial statement of Canfield exhibited to
Burden was nearly a year old, and this did not satisfy Burden, and
the negotiations fell through partly for that reason, and partly
because the parties could not agree upon the position Burden
desired. Some weeks later, the negotiations were resumed, the
broker saying that he might get additional security through an
indemnity bond, by which the validity of the book accounts which
were agreed to be assigned might be guaranteed as well as the
payment of collections made by Canfield as agent. Canfield agreed
to furnish such a bond. The proposed bond required the obligee to
watch the shipping receipts and to make monthly minute examinations
of Canfield's books, showing the several assigned accounts. Finding
this requirement to be a condition of such a bond, Burden demanded
that he should be compensated for the service he would be required
to render to keep the bond in force, and a compensation of one
percent per month upon the amount of the uncollected accounts at
the end of each month was agreed upon. Thereupon the contract in
question was executed, a bond of indemnity was given to Burden, and
something like 100 accounts, aggregating about $14,000, were duly
assigned, upon which an advance of $10,000 was made.
The contract is elaborate, and too lengthy to be set out
Page 228 U. S. 167
in full. In substance, it provided for a loan of $10,000 at 6
percent upon assigned accounts against reputable merchants, the
loan not to exceed 75 percent of the face value of the accounts.
Canfield agreed to act as burden's agent in collecting, and to
guarantee the payment of each account so assigned. The contract
also provided that, after the payment of the money borrowed and
interest, and costs and expense of collection, and the compensation
to Burden for his services as required by the bond, the remaining
accounts should be reassigned to Canfield. The clause in regard to
this compensation gives rise to the claim of usury. It was in these
words:
"The party of the second part shall be entitled to compensation
for the labor and services to be performed and time to be expended
by him in making the examinations required by the terms of the bond
executed by the Fidelity & Casualty Company of New York and
delivered simultaneously herewith, which compensation is to be
measured by computing one percent per month upon whatever part of
the advance shall remain uncollected on the said accounts, and for
the period that the same shall remain uncollected."
The indemnity bond, styled an "assigned accounts bond," is in
the usual form, and is undoubtedly a device resorted to, to enable
merchants to use book accounts as collateral for money advanced or
loaned. The principal condition was in these words:
"The obligee shall require the principal to state in writing at
the time of assigning each account the date when the payment of
such account is due, and if the payment of any account is not made
within twenty days of the date that such payment is due, the
obligee shall immediately thereupon make demand by registered mail
upon the debtor for the amount due. The obligee shall require the
principal to file with the obligee in connection with each account
a certificate signed by a responsible
Page 228 U. S. 168
official or employee of the principal, stating that the account
referred to in the certificate represents a
bona fide
sale, and that the merchandise concerned with the account has,
prior to signing of the certificate, been shipped to the customer
named in the account. The obligee at least monthly, shall make an
examination of the accounts of the principal, which shall embrace
-- (1) a complete examination of the books, accounts, and vouchers
of the principal as respects the accounts covered under the said
agreement; (2) a strict comparison between all unpaid accounts, as
such accounts appear on the records of the obligee, and as such
accounts appear in the books of original entry of the
principal."
That this contract upon its face is absolutely legal there can
be no serious doubt. A material part of the security which Canfield
proposed to give was the bond by which the collection of 75 percent
of the face value of the assigned accounts was guaranteed, to the
extent of $7,500, as well as that Canfield would promptly pay over
any money and checks collected by him as agent for Burden. But a
condition of this security was that the obligee should keep a
watchful guard over the accounts assigned, and make monthly
inspection of the books of Canfield. That this would necessitate
several days' work each month, if actually done with fidelity, is
clearly shown. That little service was rendered under this
provision, aside from the examination of the accounts and shipping
receipts as they were assigned at different times, was due to the
bankruptcy's ensuing within a very short time and the seizure of
the bankrupt's books by his receiver.
The contention is that this provision for compensating Burden
for the service required by the indemnity bond was a mere cover for
unlawful interest, and that it was never intended or expected that
any such service would be given. This is sought to be shown by
alleged oral declarations of Canfield. Thus, Canfield says that,
when
Page 228 U. S. 169
he was about to sign the contract, he asked Burden what the
clause about services to be rendered meant, and that he replied,
"that that was simply to get around the usury law; there were no
services to be rendered at all." Canfield's bookkeeper, a Miss
Herzog, after saying that, in the negotiations prior to the day the
agreement was signed, that she had heard Burden say that he must
have a bonus of one or two percent a month as usury, testified as
to what she overheard through an open window between her office and
that occupied by Canfield at the time the bond was signed, as
follows:
"Q. Isn't it a fact that Mr. Canfield asked Mr. Burden what was
meant in this agreement concerning services and charges for
services to be rendered by Mr. Burden?"
"Mr. Crawford. Objected to as leading."
"The Referee. Sustained."
"Q. What did you hear Mr. Canfield say concerning this agreement
shown you."
"A. I don't remember."
"Q. Well, did Mr. Canfield say anything about services, or did
Mr. Burden say anything about services to be rendered?"
"A. Well, Mr. Burden said he would like to have about an hour's
work to do in our establishment every day, and then Mr. Canfield
told him we would not have any use for him there."
Burden, when recalled, testified to his good faith, and that the
compensation agreed upon was to be for the service required by the
contract and bond, and would be worth what he was to receive. He
denied in most emphatic terms that he ever demanded a bonus or used
the word "usury" in any of the negotiations, or that he had ever
made any such statement or declaration as testified to by Canfield.
He was supported in his denial by Koehler, the broker who
negotiated the loan for Canfield. All of this evidence was excepted
to as contradicting the written agreement, and was admitted over
objection. Where the inquiry is whether the contract is one
forbidden by law,
Page 228 U. S. 170
it is open to evidence
dehors the agreement to show
that, though legal upon its face, it was in fact an illegal
agreement. Otherwise the very purpose of the law in forbidding the
taking of usury under any cover or pretext would be defeated. The
defense is one which the debtor may make even though it contradicts
the agreement.
Scott v.
Lloyd, 9 Pet. 418.
It has been suggested that there is a distinction between the
admissibility of evidence
dehors the contract which is
intended to show the whole and true nature of the transaction and
mere declarations made by the lender in the nature of a confession
that the agreement for services required to maintain the obligation
of the indemnity bond was a mere scheme to cover usury, and that no
service was to be rendered. We notice the distinction and pass it
by for the reason that, assuming the evidence to be competent, it
is not so convincing as to justify a disagreement with the view of
the circuit court of appeals that the defense of usury has not been
satisfactorily made out.
The instrument, upon its face, is not usurious. Of course, if
the service to be rendered should be made to appear trivial and of
no real importance, the inference might be drawn that the agreement
in that particular was a sham and device to cover a mere usurious
contract, such as we are asked to believe Burden declared it to be.
Burden's plan was that the loan should carry with it light work,
such as a retired business man might do -- one or two hours of
office work each day, as he explained. But he also requested
security for his money. Open book accounts might answer if the
borrower had a satisfactory business rating. The latter means
everything to businessmen. Canfield's rating was not late enough to
satisfy Burden, and the negotiations fell through, and were not
resumed for a month or more. Then Koehler, who had before
negotiated loans for Canfield, suggested that he should also
Page 228 U. S. 171
give Burden the indemnity bond. Burden examined the form of such
bond, and finding that one of its conditions was his own
watchfulness over collections and minute inspections of Canfield's
books, he proposed to make the loan upon the assigned accounts and
the indemnity bond, provided he was compensated for the service the
bond required from him. The amount agreed upon, Burden claims, was
no more than a fair return for what Judge Hand, who, in the
district court, sustained the defense, describes as "work which was
undeniably substantial and vexatious."
To hold the agreement void would seem to require that we shall
accept as true that there was no such service expected or required,
and that the clause was inserted to cover a usurious bonus. But, as
the indemnity bond was conditioned upon Burden's doing the very
things which he is said to have declared were not to be done, of
what value would that security become? The natural presumption is
that Burden was endeavoring to put his contract in such shape that
Canfield could not defeat his obligation by the defense of usury.
Yet we are asked to believe that he deliberately declared to the
debtor that the agreement as to services was a device to defeat the
law, and that he was not to render any such service. The
incredibility of such a declaration by Burden to Canfield, the
debtor, seems obvious. Upon this point Judge Coxe, for the circuit
court of appeals, said:
"Of course, bankruptcy was not contemplated at that time, at
least by Burden. If Canfield did not enforce the usury law, Burden
had nothing to fear. If the agreement did not bind Canfield, it did
not bind anyone, and yet Burden, if this testimony be true, made it
absolutely useless to accomplish the object for which he says it
was signed."
"Why should Burden make an agreement to enable him to receive
usurious interest, and at the same time make it
Page 228 U. S. 172
impossible for him to take such interest without placing him
absolutely at the mercy of Canfield?"
"There is no pretense that Burden was
non compos mentis
at the time, and yet it is difficult to believe that any rational
being would have gone to the trouble and expense of having this
elaborate agreement prepared for the purpose of avoiding the usury
law, and at the same time admit to the only man who could interpose
the defense of usury that it was a void agreement. So far as the
validity of the agreement is concerned, Burden might as well have
stamped in red ink on its face the words, 'void for usury.'"
"We must assume that Burden is a man of ordinary common sense,
but, in order to find that he made the statement quoted, we must
convict him of stupidity which is unique in its originality. It is
difficult to imagine that a rational being would procure a safe to
protect him from burglary, and immediately send the 'combination'
to the burglar whom he had most reason to dread."
Canfield is supported by his bookkeeper, though her account of
the matter is materially different from his. Burden is supported by
Koehler, the broker, who was in the negotiations throughout, and so
far as appears, absolutely disinterested. There are two witnesses
against two, and the burden to make out the usury is strongly upon
the appellant.
Stillman v. Northrup, 109 N.Y. 473, 478;
White v. Benjamin, 138 N.Y. 623, 624. In the case last
cited, it was said:
"Usury is a crime, and he who alleges it as a defense to an
obligation must establish it by clear and satisfactory
evidence."
This the appellant has not done.
Decree affirmed.
MR. JUSTICE PITNEY dissents.