Case ID: abbn-cas_22/html/0147-01.html
Source: Caselaw Access Project
Author: {"author": "Andrews, J.", "license": "Public Domain", "url": "https://static.case.law/"}
Date Created: 2024-08-24T03:29:51.129683

MILLER v. ZEIMER.
    
      N. Y. Court of Appeals ;
    
    
      November, 1888.
    1. Fraud; extent of recovery by innocent purchaser of usurious security.1 The innocent purchaser of a usurious security, where the purchase is induced by fraud, may enforce the security against an obligor privy to the transaction, to the extent of the money advanced, or he may, on discovery of the fraud, rescind and recover back the money paid; but his recovery cannot, in any form of action, exceed this.
    
      S. Case stated.] So held, in an action against alleged conspirators who transferred a bond and mortgage, representing the same to be valid and free from usury, ami upon which an innocent purchaser in an action thereon was allowed to recover the amount paid by him, and a recovery was here sought for the expenses incurred in that action and the loss of the difference between the amount paid by the innocent purchaser for the bond and mortgage and the amount represented to be due thereon.
    Appeal from the judgment of the General Term of the 'Court of Common Pleas of New York city entered upon an appeal from judgment of the trial court in favor of' the plaintiffs.
    The plaintiffs, Frederick W. Miller and Elizabeth Miller, .as executor and executrix of Christopher Miller, brought this action against Samuel and Henry Zeimer, Solomon ■Stransky and Edward 3L Raubitsclieck, alleging in their complaint in substance that the defendants entered into a ■criminal scheme and conspiracy for the purpose of borrowing and obtaining money on worthless securities, that by reason of the defendants’ fraud and fraudulent representations, the plaintiffs’ testator was induced to purchase an invalid bond and mortgage, by reason whereof he was ■compelled to institute an expensive action involving counsel fees and the loss of the difference between the amount paid by him for the bond and mortgage and the amount represented to be due thereon, and for which expenses and losses-judgment was demanded.
    Upon the trial of the action the court dismissed the-complaint; but on appeal therefrom the judgment entered upon the dismissal was reversed.
    
      The Court of Common Pleas on that appeal held, that a vendee induced to purchase property which is less valuable than it is fraudulently represented to be by the vendor, may retain it or sell it for what he can get and sue the vendor for the damage he has ■ sustained by the fraud (Reported in 12 Daly, 126).
    A second trial of the action was then had and the plaintiffs recovered a verdict, which was sustained on appeal, the general term re-affirming the views expressed on the former appeal. This decision is reported in 6 N. 7. State Pew. 229.)
    From this decision the defendants appealed to the court of appeals.
    
      A. R. Dyett (Townsend, Dyett & Einstein attorneys),, for the appellants.
    I. The plaintiffs’ testator received from Samuel Zeimer the full amount paid for the bond and mortgage with interest and costs; and that was all he could recover aS damages for the fraud alleged in the complaint (Webb v. Odell, 49 N. Y. 583 ; Littauer v. Goldman, 72 Id. 506, 510; Ross v. Terry, 63 Id. 613 ; Fake v. Smith, 7 Abb. Pr. N. S. 106 ; Whitney v. National Bank of Potsdam, 45 N. Y. 303 ; Payne v. Burnham, 62 Id. 69, 72).
    II. When a party is induced by fraud to enter into a contract he has two remedies : (1) to rescind it and recover the consideration, but no more ; (2) to affirm it and recover damages for the fraud (Bowen v. Mandeville, 95 N. Y. 239). The latter remedy the plaintiffs here ask for, and consequently they must affirm the contract, which is an illegal .one. This they cannot do.
    III. Fraud,by which a party is induced to enter into an> illegal contract does not constitute a cause of action for damages sustained thereby (Thalimer v. Brinkerhoff, 20 Johns. 386, 398 ; Nellis v. Clark, 4 Hill, 424, 429; Seneca County Bk. v. Lamb, 26 Barb. 595, 601 ; Rea v. Smith, 19 Wend. 291 ; Gray v. Hook, 4 Comstock, 449, 459; Peck v. Burr. 10 N. Y. 294, 298 ; Haynes v. Rudd, 102 Id. 372).
    
      Emile Beneville, for the respondents.
    The purchase ■of an usurious instrument on the false representation that it was valid, does not make such a purchase an illegal transaction as to innocent parties, so as to relieve the guilty .parties from responsibility for their fraud. In actions for fraud and deceit substantial damages are recoverable (Hart v. TenEyck, 2 Johns. Ch. 62; Hubbell v. Meigs, 50 N. Y. 480; Stiles v. White 11 Metc. 380; Sibley v. Hulbert, 15 Gray, 509).
   Andrews, J.

The transaction, although in form of a mortgage, was nevertheless in contemplation of law, a loan •of money to the extent of the consideration advanced, the mortgage not having had any inception until its transfer to the plaintiffs’ testator. The mortgage was void for usury by force of the statute, notwithstanding the purchaser was innocent and had no intent to enter into a usurious transaction, but purchased the mortgage, supposing that it was a bona fide and valid security (Bennet v. Smith, 15 Johns. 354; Brooks v. Avery, 4 N. Y. 226 ; Hall v. Earnest, 36 Barb. 585, and cases cited). But the plaintiffs’ testator having been induced to purchase the mortgage upon the false and fraudulent representations of both' the mortgagor and the mortgagee, that it was a valid security given upon a full consideration, free from usury, they were estopped from setting up this defense. This has now become the •settled rule, although the doctrine was established with ■some hesitation, and there is some ground for supposing that it trenches upon the policy of the usury laws, by inducing purchasers to forbear inquiry, relying upon certificates which have become a common assurance attending the transfer of securities. But the courts have limited the-effect of the estoppel in such cases to the purpose of indemnifying the purchaser for the money actually advanced with interest, and they refuse to permit him to enforce the security to recover the usurious profits or premium in the-transaction (Payne v. Burnham, 62 N. Y. 69). The law was so applied in the former action for the foreclosure of the mortgage brought by the plaintiffs’ testator. The judgment decreed that the land should be sold to satisfy the sum advanced on the purchase of the mortgage, excluding any allowance for the usurious excess, ■ thereby depriving the transferee of the benefit of his bargain to that extent.

The present action was subsequently brought for the deceit, and the plaintiffs seek to recover as damages, the difference between the value of the mortgage as represented, and its actual value to the plaintiffs’ testator. In short, by changing the form of action, the plaintiffs seek to-recover the sum which their testator was precluded from recovering in the action on the contract. The general rule-undoubtedly is, that the gains prevented, as well as actual loss incurred, may be recovered as well in an action for false representations, as in actions for breach of contract, so-far as they are the natural and proximate result of the-wrongs (See Grissler v. Powers, 81 N. Y. 57, 61).

The case of Payne v. Burnham (supra), proceeded upon special grounds not applicable in ordinary cases of contract,, and the recovery was limited, because the policy of the usury-statute seemed to require such a limitation.

We think the same policy requires the same limitation here. If the plaintiffs are permitted to recover, they secure-the benefit of the usury, which in an action on the contract was denied. There are no authorities in point on the-briefs of counsel, and none perhaps can be found directly applicable. The vice-chancellor, in Holmes v. Williams- ' (10 Paige, 326, 332), refers to a somewhat similar question, but expresses no definite opinion. We think the reasoning in Payne v. Burnham supra) is against a recovery here. The innocent purchaser of a usurious security, where the purchase is induced by fraud, may enforce the security against an obligor privy to the transaction, to the extent of the money advanced, or he may, on discovery of the fraud, rescind and recover back the money paid, but he cannot, we think, in any form of action, recover more.

This leads to a reversal of the judgment and a new trial.

All the judges concurred. 
      
       Rev’g 2 Hun, 143.