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cent interest upon payment of a bonus of $75,000, all to be secured by a mortgage on real estate, is usurious, although the transaction is given the form of a sale at a discount of bonds secured by the mortgage.
Payment, § 1 with funds furnished by creditor and returned.
6. Where, with knowledge on the part of all concerned, a debt is paid with money obtained from the creditor for that purpose, and then immediately refunded to the creditor by the debtor, the transaction is not a payment in fact, but the act is to be dealt with according to its substance, and not form.
novation which will defeat the de-
Usury, § 23 duty to pay
Usury, § 40-novation - execution
of mortgage to refund usurious one. 9. The execution of a mortgage to refund an existing mortgage loan to an agent of the original mortgagee, to whom the new mortgage is immediately transferred, does not constitute a
11. Where by statute a corporation
12. The only restriction upon the
[See 6 R. C. L. 171.]
13. Guarantors or sureties on the obligations of corporations which by statute are deprived of the defense of usury are bound to the extent of the principal obligors, and without right to set up usury as a defense to such obligations.
APPEAL by plaintiffs from a decree of the Circuit Court for Baltimore County (Offutt, J.) dismissing a bill filed to enjoin the foreclosure of a mortgage. Affirmed.
The facts are stated in the opinion of the court.
Messrs. Shirley Carter and J. Le Roy Hopkins, for appellants:
Equity has jurisdiction to restrain foreclosure of a usurious mortgage, where suit is filed by the mortgagor or
someone having an interest in the
Gantt v. Grindall, 49 Md. 313; Walk
Border State Perpetual Bldg. Asso. v. Hilleary, 68 Md. 54, 11 Atl. 505; Border State Perpetual Bldg. Asso. v. Hayes, 61 Md. 599.
Evidence dehors the papers executed is admissible to determine the real purport of the transaction.
Bowdoin v. Hammond, 79 Md. 181, 28 Atl. 769; Andrews v. Poe, 30 Md. 488; Tyson v. Rickard, 3 Harr. & J. 109, 5 Am. Dec. 424; Brown v. Waters, 2 Md. Ch. 208; Gaither v. Clarke, 67 Md. 18, 8 Atl. 740; Rouskulp v. Kershner, 49 Md. 516; Montague v. Sewell, 57 Md. 407; Bailey v. Poe, 142 Md. 57, 120 Atl. 242.
Even if the loan of $220,000 were made to the Hopkins Building Corporation, it was in reality and in equity a loan to Mr. Carozza, as he was the corporation.
Swift v. Smith, 65 Md. 428, 57 Am. Rep. 336, 5 Atl. 534; Bellona Co's Case, 3 Bland, Ch. 442; Bear Creek Lumber Co. v. Second Nat. Bank, 120 Md. 566, 87 Atl. 1084; Bauernschmidt v. Bauernschmidt, 101 Md. 148, 60 Atl. 437; Folsom v. Detrick Fertilizer & Chemical Co. 85 Md. 65, 36 Atl. 446; Pott v. Schmucker, 84 Md. 552, 35 L.R.A. 392, 57 Am. St. Rep. 415, 36 Atl. 592.
Statutes prohibiting incorporated borrowers from pleading usury are unconstitutional.
Citizens' Secur. & Land Co. v. Uhler 48 Md. 455; Birmingham v. Maryland Land & Permanent Homestead Asso. 45 Md. 541; Commercial Bldg. & L. Asso. v. Mackenzie, 85 Md. 142, 36 Atl. 754; Washington Nat. Bldg. & L. Asso. V. Andrews, 95 Md. 700, 53 Atl. 573; Faust v. Twenty-Third German American Bldg. Asso. 84 Md. 190, 35 Atl. 890; Baltimore Home Mut. Bldg. Asso. V. Thursby, 58 Md. 288; Border State Perpetual Bldg. Asso. v. McCarthy, 57 Md. 559; Baltimore Permanent Bldg. & Land Soc. v. Taylor, 41 Md. 417; Robertson v. American Homestead Asso. 10 Md. 408, 69 Am. Dec. 145; Williar v. Baltimore Butchers' Loan &
Annuity Asso. 45 Md. 562; Henderson Bldg. & L. Asso. v. Johnson, 88 Ky. 191, 3 L.R.A. 289, 10 S. W. 787; Gulf, C. & S. F. R. Co. v. Ellis, 165 U. S. 156, 41 L. ed. 668, 17 Sup. Ct. Rep. 255.
Messrs. James Thomas, William L. Marbury, H. Courtenay Jenifer, Theodore C. Waters, and Addison E. Mullikin, for appellees:
Corporate existence may be ignored by a court of equity where it is necessary to do so in order to prevent the sole stockholder from perpetrating a fraud upon his creditors.
Pott v. Schmucker, 84 Md. 535, 35 L.R.A. 392, 57 Am. St. Rep. 415, 36 Atl. 592; Bear Creek Lumber Co. v. Second Nat. Bank, 120 Md. 566, 87 Atl. 1084.
An indorser, even an accommodation indorser, as well as the corporation maker, is barred from making usury a defense.
Penrose v. Canton Nat. Bank, 147 Md. 200, 127 Atl. 852; Stewart v. Bramhall, 74 N. Y. 85; Union Estates Co. v. Adlon Constr. Co. 221 N. Y. 183, 12 A.L.R. 363, 116 N. E. 984; Salvin v. Myles Realty Co. 227 N. Y. 51, 6 A.L.R. 581, 124 N. E. 94; Rosa v. Butterfield, 33 N. Y. 665; Freese v. Brownwell, 35 N. J. L. 285, 10 Am. Rep. 239.
The transaction involving the issue of bonds secured by the deed of trust of the Hopkins Building Corporation to trustees was closed by the redemption, payment, surrender, and cancelation of said bonds, and the release by the trustees of the deed of trust securing them, and the $50,000 mortgage loan between the two finance companies and Carozza, even though considered as a renewal of some personal obligation of Carozza incident to the previous transaction, is not tainted with usury.
Lovett v. Calvert Mortg. & D. Co. 106 Md. 132, 66 Atl. 708; Second German American Bldg. Asso. v. Newman, 50 Md. 65; Border State Perpetual Bldg. Asso. v. Hilleary, 68 Md. 52, 11 Atl. 505; New York Secur. & T. Co. v. Davis, 96 Md. 81, 53 Atl. 669.
A sale of bonds secured by a deed of trust to trustees, when certified and issued by said trustees, even though sold at a discount, is not an usurious loan of money within the meaning of the usury statute.
39 Cyc. 936; Murphy v. Stubblefield, 133 Md. 27, 104 Atl. 259; Dolph v. Stubblefield, 135 Md. 147, 108 Atl. 488; Georgia Southern & F. R. Co. v.
Mercantile Trust & D. Co. 94 Ga. 306, 32 L.R.A. 208, 47 Am. St. Rep. 153, 21 S. E. 701.
Parke, J., delivered the opinion of the court:
The appellant, Antonio T. Carozza, was the owner of a property in Baltimore county known as Ingleside, and on April 29, 1922, he and his wife, Margaretta M. Carozza, executed a mortgage conveying the same to Addison E. Mullikin to secure an indebtedness of $50,000, and on July 10, 1922, the mortgagors gave a mortgage lien on the same property to Harry M. Rowe, Sr., as security for a contemporaneous loan of $60,000. Mr. Mullikin assigned the mortgage debt and deed on May 1, 1922, to the Federal Finance & Credit Company and to the Baltimore Acceptance Corporation, which were his principals in the loan, and, default occurring, foreclosure proceedings were begun on June 1, 1923. Upon the theory that the mortgage to Mullikin was without consideration, on the ground that the mortgage debt was but a renewal obligation for a portion of a former usurious charge made by the principals against Carozza, the appellants Antonio T. Carozza and Margaretta M. Carozza, his wife, and Harry M. Rowe, Sr., began proceedings in equity and secured an injunction against the foreclosure. After the bill of complaint was amended in conformity with the judgment of the chancellor on a demurrer interposed to the original complaint, answers were filed, and testimony was taken in open court, and the bill of complaint was dismissed on the proof.
The appellants insist that there should be a reversal, because they contend that the entire mortgage debt is without consideration and is merely a renewal of a part of a former wholly usurious obligation, which, while in the form of a purporting corporate debt under an issue of bonds, actually was the personal loan of Antonio T. Carozza upon his individual credit and the
security of his own property, and that, by reason of his ownership of all of the capital stock of the corporate obligor at the time of the creation of the debt, the corporate obligor was none other than Carozza himself. It is also argued by the appellants that the statute providing that corporations shall not plead usury is void on constitutional grounds. These positions present issues of fact and of law, and a statement of the controlling facts will be necessary in order to grasp their significance.
The Hopkins Building Corporation, a Maryland corporation that
owned a lot of land at the northwest corner of St. Paul and ThirtyFirst streets in Baltimore city, proposed to build and operate on this site a large apartment house to be known as the Hopkins Apartments. The contract to build this apartment house was let to the Fisher & Carozza Bros. Company, a corporation engaged in construction, for the sum of $1,300,000, which included, it was said, the price of the lot and the cost of the buildings. The conorigin was in Antonio T. Carozza, trol of both corporations from their president, and who was vitally conone of the appellants, who was their cerned in their success, because he was then the owner of almost all of their stock.
Through the efforts of its president, Antonio T. Carozza, the Hopkins Construction Corporation se、 cured the agreement of the Commonwealth Finance Company to furnish, for a bonus of $180,000, the sum of $900,000, payable in monthly installments of specified but varying amounts, which, with the last payment of $50,000 in November, 1921, should equal the total of $900,000.
The details of the agreement were set forth in a paper writing or "committal" dated at Washington on April 30, 1921, and addressed to the Hopkins Building Corporation over the signature of William A. Mills, the agent of the Commonwealth Finance Corporation. And
(— Md. —, 131 Atl. 338.)
on this "committal" appears this indorsement:
"I hereby accept the within commitment and loan and guarantee repayment of same as mentioned. This the 2d day of May, 1921. "A. T. Carozza.
In pursuance of this agreement, the Hopkins Building Corporation on May 9, 1921, gave to William A. Mills, the agent of the lender, a first mortgage lien on its lot for an ostensible subsisting indebtedness from it to Mills of $1,080,000 on its obligation in that amount and of like date with the mortgage, payable $50,000 on the 1st day of January, 1922, and $50,000 on the 1st day of every month thereafter until December 1, 1922, when the whole of the unpaid residue of the principal and the interest at the rate of 6 per centum per annum fell due. And, in further performance of the terms under which this loan was obtained, and as a substitute for a costly corporate bond to the lender guaranteeing the completion of the apartment house when and as planned, Antonio T. Carozza and his wife gave a second mortgage on May 5, 1921, to the lender on the Lake Drive Apartment House in Baltimore city, which belonged individually to Antonio T. Carozza, and which was subject to an outstanding mortgage of $250,000. The second mortgage was in the amount of $200,000, without interest during a period of two years, and was to remain a lien until the Hopkins Apartments had been completed and their corporate owner had paid $300,000 on account of the principal of the loan of $1,080,000. These paper writings were duly assigned by the agent, William T. Mills, to his principal, the Commonwealth Finance Company, which made the first payment under this plan of $50,000 on May 5, 1921, and which thereafter made monthly payments until by October 1, 1921, the sum of $564,033.85 had been advanced on the promised aggregate of $900,000.
The requisition of the Hopkins Building Corporation for October 5, 1921, was $232,249.88, but it was not forthcoming from the Commonwealth Finance Company, which promised, however, to pay in installments of $116,124.93 on or before October 25, 1921, and of $103,716.27 on November 5, 1921. The first installment was paid, but the second was not, and, as the Commonwealth Finance Company failed to pay anything more, the total advances made by it to the Hopkins Building Corporation aggregated $680,158.79.
By reason of this default, the Hopkins Building Corporation was in a most precarious situation. Under a recorded purporting mortgage indebtedness of $1,080,000 on an unfinished apartment, with a liability to the Fisher & Carozza Bros. Company in the sum of at least $620,000 on account of the building of the Hopkins Apartments, and with no liquid resources and its credit impaired, the financial situation was acute, and particularly so because of the sum due the construction company; the amount of $220,000 was owing to subcontractors, who were demanding a payment, which could not be met until the Hopkins Building Corporation would discharge its indebtedness to the Fisher & Carozza Bros. Compa
In this emergency $220,000 in money had to be procured immediately in order to complete the Hopkins Apartment House. An application was made to the Federal Finance & Credit Company and the Baltimore Acceptance Corporation, two corporations engaged in lending money. After surveying the situation, doubt arose if the mortgage of the Commercial Finance Corpora tion to secure the purporting subsisting loan of $1,080,000 was a lien on the land granted, because at the time of the execution of the mortgage, the debt between the parties. was but $50,000, and the mortgage was, in fact, to obtain a lien of $1,080,000 for future advances of money to the extent only of $850,000,
and there was no compliance by the mortgage with the statutory condition precedent that a mortgage to secure future loans or advances shall not be valid unless the amount or amounts of the same and the times when they are to be made shall be specifically stated in the mortgage. Bagby's Code 1924, art. 66, § 2. See Baltimore High Grade Brick Co. v. Amos, 95 Md. 571, 52 Atl. 582, 53 Atl. 148; Western Nat. Bank v. Jenkins, 131 Md. 239, 1 A.L.R. 1577, 101 Atl. 667; New Baltimore Loan & Sav. Asso. v. Tracey, 142 Md. 211, 120 Atl. 441.
The money lenders concluded that they would grant to the Hopkins Building Corporation the desired loan of $220,000 at 6 per centum interest a year for eight months, for a bonus of $75,000, provided the principal, interest, and bonus could be legally secured by a lien upon (a) the Hopkins Apartments of the borrowing corporation, and (b) the Lake Drive Apartments in Baltimore city and the tract of land in Baltimore county called Ingleside, which were both owned by Antonio T. Carozza. In addition, it was a part of the program to institute equity proceedings to set aside the mortgage deed of the Hopkins Building Corporation to William A. Mills to secure an alleged indebtedness of $1,080,000, that had been assigned by Mills to the Commonwealth Finance Corporation. By these proceedings it was hoped to secure for the two lending corporations a first mortgage lien on the borrower's property, either through a compromise settlement and release of the Commonwealth Finance Corporation's claim on the basis of the money actually advanced, with interest, or through a cancellation by the court of the mortgage lien.
The form and manner evolved for the securing of the loan and the bonus were elaborate:
I. The Hopkins Building Corporation would issue its negotiable bonds of $1,000 each, dated December 15, 1921, and payable June 15, 1922, and bearing interest at the
rate of 6 per centum per annum, aggregating $620,000, in two series of which series A should be a first second mortgage lien on the property conveyed by the deed of trust securing the payment of the bonded indebtedness, and of which series A should aggregate $220,000, and be numbered
to 220, inclusive, and series B should total $400,000, and be numbered 1 to 400, both inclusive; and the deed of trust would convey the Hopkins Apartments to secure the payment of these bonds; and the appellants, Antonio T. Carozza and Margaretta M. Carozza, his wife, "for the purpose," as recited in the deed of trust, "of further securing the holders of said bonds by pledging certain property against which the lien on said properties should only be enforceable to the extent of any deficit that may arise after the enforcement of the mortgage against the property of the Hopkins Building Corporation" would convey the Lake Drive Apartments and the tract named "Ingleside."
II. The deed of trust should recite the indebtedness of the Hopkins Building Corporation in the sum of $620,000, the total amount of the authorized issue of bonds, to the Fisher & Carozza Bros. Company for the residue of the contract price due on account of the erection of the Hopkins Apartments, and the indebtedness of the Fisher & Carozza Bros. Company to various subcontractors in the sum of $220,000 for work done and materials furnished in the course of the erection of the Hopkins Apartments, and the necessity of the Hopkins Building Corporation to raise this last amount so as to pay the said subcontractors, and the additional sum of $400,000 to discharge its full liability to the Fisher & Carozza Bros. Company; and, further, the deed of trust should provide that the trustees certify and deliver to the Fisher & Carozza Bros. Company, "in sideration of the settlement of the indebtedness aforesaid," all of the