Rivkind, Leonard M.

English

University of Miami School of Law

University of Miami Law SchoolInstitutional RepositoryUniversity of Miami Law Review4-1-1953Usury, Inc. -- Incorporation to Avoid Usury LawsLeonard M. RivkindFollow this and additional works at: http://repository.law.miami.edu/umlrThis Comment is brought to you for free and open access by Institutional Repository. It has been accepted for inclusion in University of Miami LawReview by an authorized administrator of Institutional Repository. For more information, please contact library@law.miami.edu.Recommended CitationLeonard M. Rivkind, Usury, Inc. -- Incorporation to Avoid Usury Laws, 7 U. Miami L. Rev. 375 (1953)Available at: http://repository.law.miami.edu/umlr/vol7/iss3/6COMMENTSUSURY, INC. - INCORPORATION TO AVOID USURY LAWSWhere the real truth is a loan of money, the wit of man cannotfind a shift to take it out of the statute. - Lord Mansfield,Floyer v. Edwards, 1 Cowp. 112 (1774).THE STATUTE"No corporation shall interpose the defense of usury in any action inany court in this state." FLA. STAT. § 612.62 (1951). The statute is notviolative of the 14th amendment of the United States Constitution or theequal protection clause' of the Florida Constitution.2 Similar enactmentsexpressly denying the defense of usury to corporations exist in many statesand have successfully withstood attacks upon their constitutionality.3INTERPRETATIONSince the statute refers merely to a defense, and is silent as to anypositive action, there have been attempts to avoid its effect by bringing abill in equity to cancel the agreement,4 or by instituting suit to recover backpremiums.5 These have proven unsuccessful, since the statute has beeninterpreted to mean any position or attitude by which the corporation seeksto avoid its contract by showing it is usurious.6 The courts recognize thata strict construction would defeat the beneficial aims of the Act7 and thecorporation should not be permitted to accomplish by indirection what itcannot do directly.8 A clearly defined provision similar to that containedwithin the modern Business Corporation Act of Oklahoma9 would elimi-nate this unnecessary litigation. The provision in the aforementioned Actis embodied in the Proposed Florida Business Corporation Act' 0 which wasintroduced into the 1951 Legislature and is now in an interim committee.1. FLA. CONST., Dec. of Rights § 1 (1951).2. 759 Riverside Ave., Inc. v. Marvin, 109 Fla. 473, 147 So. 848 (1933).3. Brierley v. Commercial Credit Co., 43 F.2d 724 (D. C. Pa. 1929), aff'd, 43F.2d 730 (3rd Cir. 1930); State v. Huriburt, 82 Conn. 232, 72 Ati. 1079 (1909); Freesev. Brownell, 35 N.I.L. 285, 10 Am. Rep. 239 (1871); Carozza v. Federal Finance &Credit Co., 149 Md. 223, 131 Ati. 332 (1925); Win. S. & John H. Thomas v. UnionTrust Co., 251 Mich. 279, 231 N.W. 619 (1930); Smoot v. People's Perpetual LoanAnd Building Ass'n, 95 Va. 686, 29 S.E. 746 (1898). But see Gordon v. WinchesterBldg. Ass'n, 12 Bush, 110, 23 Am. Rep. 713, 715 (Ky. 1876).4. Isle of \,Vight Co. v. Smith, 51 lun, 562, 4 N.Y. Supp. 73 (1889).5. Rosa v. Butterfield, 33 N.Y. 665 (1865).6. Matlack Properties v, Citizens & Southern Nat. Bank, 120 Fla. 85, 162 So. 148(1935%: Supra, note 5.8. Supra, note 4.9. OKLA. STAT. tit. 18, § 1.26 (Supp. 1949).10. Prepared by the Fla. Corporation Code Revision Committee, Floyd A. Vright,Chairman and Draftsman.MIAMI LAW QUARTERLYPURPOSEIn order to appreciate fully the hypothetical problem to be presented,it is necessary to discuss briefly the purpose of a usury law in comparisonwith the purpose of the statute which denies the defense of usury to cor-porations. "The prime purpose of the usury law is to protect needy bor-rowers by penalizing unconscionable money lenders."" It is ". . . to bindthe power of creditors over necessitous debtors and prevent them fromextorting harsh and undue terms in the making of loans."' 2 The usury laws,then, proceed upon the theory that the loan can be attributed to such aninequality in the relation of the lender and borrower that the borrower'snecessities "deprived him of freedom in contracting and placed him at themercy of the lender." 13  On the other hand, the statute depriving a cor-poration of the defense of usury proceeds upon the theory that corporationsdo not borrow by necessity, but voluntarily, to enable them to carry forwardsome enterprise which affords a reasonable expectation of profits sufficientto repay the interest without loss or sacrifice."Of prime consideration is the fact that the usury laws increase thevalue of money and credit, and are restraints on the natural flow and supplyof capital to the prejudice of industry and commerce. 15SCOPEThe statute with which we are here concerned is based upon plain andpractical considerations of public policy and this writer has no quarrel overits enactment - it is the application of the statute that has provoked thiscomment. The following hypothetical question presents a popular methodemployed by money lenders to avoid the usury laws:Mr. Borrower applies for a loan. Mr. Lender informs him that theinterest rate allowed in an individual loan is not satisfactory but, if Mr.Borrower will incorporate, a loan can be arranged at an agreed rate ofinterest. Mr. Borrower, subsequent to incorporation, conveys property tothe corporation in order to secure the loan. The note and mortgage areexecuted by the corporation with Mr. Borrower as endorser, and the loanis made at a rate of interest in excess of the amount legally allowed bythe usury laws. In a mortgage foreclosure proceeding the borrower defendson the ground of usury. Upon a motion to strike the defense, who prevails?APPLICATIONUnfortunately an answer to the preceeding hypothetical situation isnot readily ascertained inasmuch as the law in this regard is unsettled,There have been few cases in which the precise point has been litigated.None have been reported in Florida. The leading case is Jenkins v. Moyse,"'11. Stubblefield v. Dunlap, 148 Fla. 401, 4 So.2d 519, 521 (1941).12. Chandler v. Kendrick, 108 Fla. 450, 146 So, 551, 552 (1933).13. Carozza v. Federal Finance & Credit Co., 149 Md. 223, 131 Ati. 332, 342 (1925).14. Southern Life Ins. And Trust Co. v. Packer, 17 N.Y. 51 (1858).15. Carozza v. Federal Finance & Credit Co, 149 Md. 223, 131 At]. 332 (1925).16. 254 N.Y. 319, 172 N.E. 521 (1930).COMMENTSa New York Court of Appeals decision. In refusing to grant relief to theborrower, the court "hung its hat" on the fact that the loan was refusedthe individual - that the lender never agreed to make the loan to him.The court said that there must be evidence that a loan to the individualwas agrccd upon and that the corporation was used to conceal an individualtransaction. The opinion in Jenkins v. Moyse did not close the door on ausury defense in our hypothetical situation, but one must concede it left itonly slightly ajar. In effect, it depends on the way the lender approachesthe deal. 17 If, then, the lender agrees to make the loan to the individual,and the corporation is used to conceal the usurious agreement, the motionto strike the defense will be denied.'8 The lender, if he knows how, canbring himself safely within the Jenkins v. Moyse rule. In First NationalBank of Brooklyn v. American Near East and Black Sea Line, 9 the courtstated, "The law is that, if there is notice of an intent to take usury, thelender cannot evade the statute by disguising the borrower."20  Thisdecision was followed in Arona Holding Corp. v. West 25th St. RealtyCorp.2' These cases, decided in the lower courts of New York priorto Jenkins v. Moyse, have not been expressly overruled. A recent decisionof that state granted the lender a summary judgment in a case where theloan was also refused the individual, the court stating, "The law has notbeen evaded but has been followed meticulously in order to accomplish aresult which all parties desired and which the law does not forbid."22In a Maryland case,23 the court relied upon the decision in Jenkins v.Moyse and estopped the borrower from denying the validity of the corpora-tion. In that case too, the loan was refused the individual. Relief wasdenied although the court recognized "that the primary and decisive con-sideration was the avoidance of a conflict with the usury laws of thestate." 2The problem has also been presented to the courts of New Jersey ina foreclosure proceeding. The defense was raised that the loan was made infact to an individual, while in form to the corporation, and that the cor-poration was not to engage in business or exercise any function whatsoever.The court said that, having succeeded by false and fraudulent representationin obtaining a certificate of incorporation, the corporation cannot nowbenefit by this fraud and avoid its obligation.2 In a recent action at law17. Sherling v. Gallatin Improvement Co., Inc., 145 Misc. 734, 260 N.Y. Supp. 229(1932), rev'd on other grounds, 237 App. Div. 535, 261 N.Y. Supp. 747 (1933), appealdismissed, 262 N.Y. 641, 188 N.E. 101 (1933).18. Ibid.19. 119 Misc. Rep. 650, 197 N.Y. Supp. 856 (1922).20. Id at page 856.21. 198 N.Y. Supp. 660 (1923).22. Werger v. Hlaines Corp. 94 N.Y.S.2d 691, 692 (1950), aff'd, 277 App. Div.1108, 101 N.YS.2d 361 (1950), aff'd, 302 N.Y. 930, 100 N.E.2d 189 (1951).23. Rabinowich v. Eliasberg, 159 Md. 655, 152 Atl. 437 (1930).24. Id at page 438.25. Silberman v. Cades, 107 N.J. Eq. 547, 153 At]. 473 (1931).MIAMI LAW QUARTERLYthe court held that whether the loan was refused the individual or agreedupon was an issuable question of fact for the jury to determine? 6 Thislatter decision of the New Jersey court adopts the rule established inJenkins v. Moyse.CONCLUSION AND RECOMMENDATIONIt is apparent from the foregoing analysis that the lender can protecthimself by first refusing to make the loan to the individual and then suggestthat, if the borrower will incorporate, a loan will be made to the corpora-tion. Should the lender agree to make the loan to the individual and thenimpose the condition that the borrower incorporate, he may well find him-self subject to the penalties provided by the usury laws. This hairlinedistinction should not be recognized. The courts have repeatedly struckdown various devices employed to avoid the usury laws 7  The SupremeCourt of Florida has said, concerning the usury laws, ". . . we deem it to beof paramount importance that a statute so salutary in its operation as is thestatute against usury, should be sedulously guarded against the ingeniousshifts and devices so often resorted to to evade its operation."28  To frus-trate evasions, the courts look beyond the form of transactions to theirsubstance.2 They will not, however, by "piercing the corporate veil," defeatthe purpose of the statute depriving the corporation of the defense of usury.However, they cannot escape the fact that blindly closing their eyes totainted transactions defeats the very letter and spirit of the usury laws. Itis inconceivable that the law itself has provided unscrupulous money lenderswith a device to successfully avoid the usury statutes. The needy borroweris no less deprived of his freedom of contracting and is as much at the mercyof the lender in this instance as in any other. XVhen the problem presentsitself to the courts the transaction should be closely scrutinized. If thecourt finds that the loan was to the corporation in form only while in factit was to an individual, then it should make no difference in the way thelender approached the deal. The transaction should be considered as justanother shift or device to avoid the usury statutes and be dealt with accord-ingly. Reality, not appearance, should determine legal rights.LEONARD M. RIViICNDCOVENANTS FOR TITLE - PROTECTION AFFORDEDBUYER OF REALTY IN FLORIDAThe "Covenants for Title", sometimes referred to as the "CommonLaw Covenants for Title", are six in number. They are: 1) The covenant26. Celber v. Kugel's Tavern, Inc., 10 N.J. 191, 89 A.2d 654 (1952)27. See Evasion and Avoidance of Florida Usury Laws, Comment, 5 M,^Ami LQ.493 (1951).28. Belden v. Cray, 5 Fla. 504, 508 (1854).29. Beachan v. Carr, 166 So. 456 (Fla. 1936). But see Kings Meichantile Co. v.Cooper, 199 Misc. 381; 100 N.Y.S.2d 754, 756 (1950).

Usury, Inc. -- Incorporation to Avoid Usury Laws

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Usury, Inc. -- Incorporation to Avoid Usury Laws

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