Opinion ID: 303769
Heading Depth: 1
Heading Rank: 3

Heading: Claim of the Equitable Life Insurance Company

Text: 36
37 On 22 December 1959 Potomac Cooperators, Inc., borrowed $375,000.00 from Acacia Mutual Life Insurance Co., executing a note at an interest rate of 6 1/4% per year, the loan being secured by a deed of trust on real estate in Maryland. Acacia is a District of Columbia corporation with its sole office in the District. On 22 March 1961 Equitable purchased the promissory note from Acacia at full value. On 28 August 1961 the promissory note was renegotiated and amended to provide for payment of interest at the rate of 6% per year, with new release provisions, new monthly payments, and a new maturity date. Potomac as the maker of the original note and the amended note ratified, confirmed and fully assumed the amended note and deed of trust. 38 On 5 December 1963, Sec. 26-610 of the D.C.Code, the so-called Loan Shark Act, was amended expressly to exclude life insurance companies from the coverage of Sec. 26-601. 39 On 20 February 1964, Parkwood, Inc., purchased the property subject to the deed of trust securing the note held by Equitable, the interest thereon at this time being 6%. Parkwood did not assume the note. 40 At the time the loan was made (1959), Acacia was engaged in the insurance business in the District of Columbia and also engaged in the business of loaning money, the evidence showing that from its sole office in the District substantial loans (from $500,000.00 to several million dollars per year) were made. Acacia did not possess the license required by Sec. 26-601. The amendment of Sec. 26-610 on 5 December 1963 exempting loans made by life insurance companies from the coverage of Sec. 26-601 was prospective only. 41
42 On this appeal Equitable represents that it purchased the note at Potomac's request pursuant to a prior agreement to amend the note. The prior agreement is claimed to have been evidenced in a commitment letter whereby Equitable agreed to take over the loan at a new rate of 6% interest and thus to reform the note and amend the deed of trust. However, because the Referee, affirmed by the District Court, decided that the Trustee's objection to Equitable's claim was insufficient as a matter of law, and thus granted Equitable's motion to dismiss the objection on the ground that the Loan Shark Act did not apply to the original loan transaction here, there is no evidence in the record before us which bears upon the claimed prior agreement between Potomac and Equitable to reform the note to provide for interest at the rate of 6%. We are therefore unable to determine whether the effect of the transaction between Equitable and Potomac was to bring about a novation or to otherwise cure the invalidity of the loan under the Loan Shark Act. 43 Since Equitable has not had an opportunity to introduce evidence to establish the facts relevant to the amendment of the note, we have determined that the case must be remanded for factual findings and, based on the facts as established on remand, a determination as to whether the effect of the transaction between Equitable and Potomac was to render the note valid and enforceable as a result of the amendment. 44 The Trustee argues that the amendment to provide for 6% interest could not in any event validate the loan, since prior to the purchase of the note interest was paid at 6 1/4%, a rate higher than permitted to an unlicensed lender under the Loan Shark Act. Because the excess interest thus paid has never been restored, it is maintained that the total interest paid over the life of the loan must inevitably be greater than 6%, notwithstanding the amendment. In support of this position, the Trustee cites authorities indicating that prior payment of usury renders any subsequent renewal of the transaction usurious, even though the usurious rate of interest is eliminated by the renewal, unless the previously paid usurious interest is restored. 22 45 The instant case, however, does not involve a violation of the usury law, which in the District of Columbia sets an absolute limitation of 8% on the amount of interest that may be collected by any lender, but rather concerns the loan shark statute which imposes a disability on certain lenders, i. e., non-exempt, unlicensed lenders, to charge interest in excess of 6%. Because Acacia was nonexempt and unlicensed, its loan at a rate of 6 1/4% was illegal under the Loan Shark Act and as a consequence it could not recover on the note, which was void as to both principal and interest. 46 It does not follow, however, that Potomac, which actually received the money lent, could not, in fulfillment of its moral obligation, 23 contract with a third party to assume the note at a legal rate of interest in consideration of the reformation of the note. Potomac could, after all, have made the same original loan contract with an exempt or licensed lender and have no basis for avoiding its obligation to repay the loan. This distinguishes the instant case from the usury situation where any loan made at a rate of interest in excess of 8% would be invalid regardless of who the lender might be. 47 We think that the defense of violation of the Loan Shark Act, thus avoiding the obligation to repay the loan, must be limited in effectiveness to use against those unlicensed, non-exempt lenders who actually contract for or receive interest in excess of 6%. If Equitable, at Potomac's request and with Potomac's express assent and agreement, had purchased the note without any reduction of interest amendment being contemplated or made, but at that time was licensed or exempt under the Loan Shark Law, we do not think Potomac could have avoided payment of the loan on the grounds that it was originally made by an unlicensed lender. Similarly here, where Equitable was unlicensed, if when it agreed to purchase the note it was contemplated and agreed by both it and Potomac that the note would be amended to provide for a legal rate of interest for unlicensed lenders (6%), we think that Potomac, by agreeing to such a transfer and ratifying it could no longer avoid its obligation of repayment on the ground of violation of the Loan Shark Act. If the note and deed of trust thus became valid as to Potomac, as a result of the amendment and ratification, the deed of trust would likewise be valid as to Parkwood, which purchased the property subject to the deed of trust from Potomac subsequent to the amendment of the note. 48 On remand Equitable should have an opportunity to establish that the intent of the parties at the time Equitable purchased the note was to reform the transaction, so as to eliminate any further payment of interest at a rate in excess of 6%, and that Potomac through its ratification intended to be bound on the note to repay the remainder of the loan to Equitable at a legal rate of interest. 24 49