Case Name: P. J. Knight et al., Respondents, v. American Investment & Improvement Company et al., Appellants
Court: Washington Supreme Court
Jurisdiction: Washington
Decision Date: 1913-05-06
Citations: 73 Wash. 380
Docket Number: No. 10553
Parties: P. J. Knight et al., Respondents, v. American Investment & Improvement Company et al., Appellants.
Judges: 
Reporter: Washington Reports
Volume: 73
Pages: 380–389

Head Matter:
[No. 10553.
En Banc.
May 6, 1913.]
P. J. Knight et al., Respondents, v. American Investment & Improvement Company et al., Appellants.
Usury — Consideration — Extension of Time — Unlawful Exaction. A contract to stay proceedings in a mortgage foreclosure, and extend the time for payment to one year and give partial releases of the property, is an evasion of the usury statute and void, where it was provided that the mortgagor should pay therefor $550 per month for each and every month the mortgages should remain unpaid, not exceeding $5,000 in all, which was almost treble the lawful interest; since the principal consideration of the contract was the extension of time of payment and tainted the entire transaction.
Same — Consideration—Forbearance. The fact that the foreclosure suit was ready for trial and plaintiffs lost their place on the calendar was but an incident to the forbearance, and not a lawful consideration for the exaction.
Same — Conditional Contract — Risk or Loss. The fact that the contract provided that it “shall be void” in case the mortgaged property was ordered sold by a receiver in a case then pending, does not render the contract lawful, since the contingency did not put in peril any part of the principal or interest that could be lawfully reserved.
Same — Personal Defense — Privity. Usury exacted from a corporation may be set up by a stockholder holding nine-tenths of the capital stock, where he had signed the usurious contract and stood in the relation of a surety, and was, in the broad sense, a privy.
Crow, C. X, Morris, and Mount, JX, dissent.
Appeal from a judgment of the superior court for King county, Dykeman, J., entered December 11, 1911, in favor of the plaintiffs, after a trial on the merits before the court without a jury, in an action on contract.
Reversed.
Munn & Brackett, for appellants.
G. E. Steiner and Walter B. Beals, for respondents.
Reported in 132 Pac. 219.

Opinion:
Gose, J.
— On the 18th day of June, 1907, the plaintiffs, as first parties and the defendants, as second parties, entered into an agreement in writing, reciting that the plaintiffs had brought an action, which was then pending, to foreclose two mortgages upon certain real estate which was specifically described ; that the mortgages were drawn for $15,999 and $3,-000 respectively; that other parties had brought actions affecting the defendants, the mortgagors, and the property covered by the mortgage, the pendency of which made the sale of property and the payment of the indebtedness impracticable. The agreement provides further that:
"Whereas, it is now desired (1) to stay proceedings in the foreclosure of the aforesaid mortgages, and (&) to stay and terminate all other litigation affecting said lands, and to deed Lakeside City to a trustee absolutely, with full power to sell said lands and apply the proceeds of the sale of said lands to the payment of said mortgages and other indebtedness in the manner prescribed in the deed of trust, and
"Whereas, in order to facilitate the sale of said lands by the trustee as aforesaid it is desired that Knight and Williams, the first parties, shall, in addition to staying proceedings for the foreclosure of said mortgages, agree to execute and deliver partial releases of said mortgages from time to time as herein more specifically stated.
"Now, therefore, in consideration of the premises it is agreed as follows:
"(1) That the first parties will stay proceedings in said foreclosure proceedings for the period of one year from this date.
"(2) That the first parties will release from the lien of said mortgages and each of them, as well as all other liens held by first parties, from time to time, within the period of one year, tracts or parcels of lands, upon payment to the first parties for the. amount so released as follows."
After providing the terms upon which the releases shall be given, the agreement continues:
"(4) That for the considerations and agreements herein contained the second party shall, from this date until said mortgages, interest, costs and attorneys fees are fully paid, pay to the first parties, or their assigns, the sum of $550 for each and every month or fraction of a month that the aforesaid mortgages, interest, costs and attorneys fees, or any part thereof, remain unpaid. Provided, however, that the total sum thus paid for the considerations herein expressed for the entire year during which proceedings are stayed shall not exceed the sum of $5,000. The sum so agreed to be paid shall bear interest at the rate of eight per cent per annum and shall be paid within the year during which proceedings are stayed, and before the full satisfaction of said mortgages, and if not so paid said obligation shall be construed to be a lien on the land described in the mortgage and platted as Lakeside City, and may be foreclosed in any manner provided by law, and said land may be sold and the proceeds thereof applied to the payment of said obligation, and in any suit or action which may be brought for the recovery of said payments there shall be included in any judgment which may be recovered a reasonable attorney's fee.
"(5) That Lakeside City shall be conveyed to a reputable trustee within thirty days from this date, which trustee shall have power to sell said lands and shall be instructed to apply the proceeds of said sale or sales to the payment of said mortgages, interest, costs and attorney's fees and other obligations of the second party as provided in the deed of trust.
"(6) It is understood that the American Investment & Improvement Company is now in the hands of a receiver, and if the court orders a sale of said lands, through the receiver, and such sale is made, this agreement shall be void."
The mortgages referred to in the agreement were executed by the defendant corporation to the plaintiffs, were purchase money mortgages, and secured the payment of two notes drawn respectively for $15,999 and $3,000, and bear interest at the rate of six per cent per annum, the former from a date several months anterior to the date of the note, the latter from the date of the note. The defendant Lee did not sign either the note or the mortgages. The mortgage indebtedness was paid prior to the commencement of the action, without the aid of the sale and release clause in the contract. At the time the contract was made, the defendant corporation was in default in the payment of interest on the two mortgage notes some $3,000, was heavily indebted to other parties in such a manner as to embarrass it in the sale of the land, and its property was in the hands of a receiver, but none of the property was sold through him. The plaintiffs seek to recover the $5,000 and interest stipulated in the contract, and to foreclose the lien which it purports to create. It is' alleged in the bill that the defendant Lee had acquired some interest in the mortgaged land before the date of the execution of the contract, which he would have lost through the mortgage foreclosure, and that he was the principal stockholder in the defendant corporation. The consideration for the contract is thus alleged in the bill:
"That thereupon, while the said defendants stood in great danger of losing said lands as aforesaid, the defendants agreed with the plaintiffs that if the plaintiffs would stay and suspend proceedings in said mortgage foreclosures for the period of one year, and would during the year within which proceedings were to be stayed, release from the lien of said mortgages the lands therein described in small tracts from time to time on the payment on said mortgages of the amounts agreed upon in said agreement, that the defendants would pay to the plaintiffs the sum of five thousand dollars ($5,000), with interest thereon from the date of such agreement until paid at the rate of eight per cent per annum."
The defendants pleaded affirmatively, that the mortgage notes bore interest at the rate of six per cent per annum; that the mortgages had been paid and discharged of record; that the real consideration for the promise to pay the $5,-000 was the extension of the time of payment of the mortgage notes for one year; that the amount agreed to be paid was largely in excess of the lawful rate of interest; that at the time the contract was executed, the property of the defendant corporation was in the hands of a receiver; and that the contract was usurious. Both mortgages provide for a release of certain lands upon the payment of stipulated sums of money. There was a judgment and decree for the plaintiffs, which the defendants have brought here for review.
The consideration for the contract was two-fold: (1) Extension of time of payment of the mortgage notes for a period of one year from the date of the execution of the contract, and (2) the agreement to release the property in parcels to conform to actual sales at fixed prices. The contract does not segregate these items. The amount which the appellants agreed to pay is almost treble the lawful rate of interest. We think the contract is usurious upon its face. This view is given prominence by the promise to pay at the rate of $550 pér month, "for each and every month or fraction of a month that the aforesaid mortgages, interest, costs and attorney's fees, or any part thereof, remain unpaid," not exceeding $5,-000. If the meat of the consideration was not the extension of time, why this provision. If sufficient property had been sold and released in one month to discharge the indebtedness, the liability would have been limited to $550. If the same object had been accomplished in two or three months as the evidence shows the parties anticipated, the liability would have been twice or thrice that sum, and $5,000 if it required one year. The lawful and the unlawful are so intermingled as to taint the entire transaction as usurious. If we look to the evidence we find it equally confusing. The case is within the rule announced in Inland Trading Co. v. Edgecombe, 57 Wash. 257, 106 Pac. 768. Wherever a disguise has been used to evade the statute, the courts will, as aptly observed by Judge Ailshie, in Ford v. Washington Nat. Bldg. & Loan Inv. Co., 10 Idaho 30, 76 Pac. 1010, 109 Am. St. 92, "look through a veneer of words" and find the real object sought. It is too apparent to require comment that the releases would have been unavailing without an extension of time.
Counsel for the respondents argue that the contract provided a scheme of liquidation, and that a charge of $1,440, the difference between the rate of interest in the mortgage notes and the rate allowed by law, could have been exacted. The latter part of the statement may be admitted, but this was not done, and the evidence shows that it was not even considered. He also argues that, in addition to the extension, the respondents lost their place upon the trial calendar. This, as counsel for appellants have pertinently suggested, is one of the incidents of the forbearance. The real case presented, however, is this: The respondents gave no releases and rendered no equivalent for the $5,000 which they seek to recover, other than a postponement of the maturity of the interest-bearing mortgage notes for one year. Any reasoning would be specious which would seek to give the exaction any name other than interest.
It is argued that the clause in the contract to the effect that, if the land is sold through the receiver, the agreement "shall be void," creates a contingency which makes the contract lawful. The word "void" as there used means only that, if the sale is made through the receiver, the contract shall terminate. The rule is, however, that the contingency provided for must put in peril some part of the principal or some part of the interest that may lawfully be reserved. This did neither. The interest reserved in the mortgage notes was subjected to no hazard. Where there is no contingency which subjects the lender to the hazard of a loss other than through a depreciation of the security or the inability of the borrower to pay, these not being classed as hazards- or contingencies, and the event happens which imposes a liability in excess of that which the statute permits, the contract is usurious. Bang v. Phelps & Bigelow Windmill Co., 96 Tenn. 361, 34 S. W. 516; Ford v. Washington Nat. Bldg. & Loan Inv. Co., supra; 29 Am. & Eng. Ency. Law (2d ed.), 486.
The respondents have cited in support of this contention Truby v. Mosgrove, 118 Pa. St. 89, 11 Atl. 806, 4 Am. St. 575. It affords them no comfort. The court there said that, where the lender risks the principal with the chance of getting interest exceeding the lawful rate, there is no taint of usury.
The last point pressed by the respondents is that the contract is lawful as to the appellant Lee, under the rule announced by this court in Grubb v. Stewart, 47 Wash. 103, 91 Pac. 662, and Fenby v. Hunt, 53 Wash. 127, 101 Pac. 492, to the effect that the defense of usury "is personal to the debtor or his privies and cannot be set up by a stranger." The appellant Lee was not a stranger to the transaction. The record shows that he was to all intents and purposes the corporation; that he owned nine-tenths of its capital, stock. The complaint states, and the evidence shows, that he united in the contract so as to relieve the property of certain entanglements. In his agreement to pay the $5,000 he stood in the relation of a surety, and may invoke the protection of the statute. 29 Am. & Eng. Ency. Law (2d ed.), 485. In the broad sense, there was a privity between the appellant corporation and the appellant Lee. Black's Law Dictionary (2d ed.), p. 941, subject "Privies." The lawful and the unlawful are so blended that there can be no segregation, and the entire contract falls within the ban of the statute. Rem. & Bal. Code, § 6251. Lay v. Bouton, ante p. 372, 131 Pac. 1153.
The judgment is reversed, with directions to dismiss the action.
Parker, Ellis, Main, Fullerton, and Chadwick, JJ., concur.