Opinion ID: 303769
Heading Depth: 1
Heading Rank: 5

Heading: The Claim of the Hartford Life Insurance Company

Text: 70
71 On 28 November 1960 Suburban Motors, Inc., borrowed $100,000.00 from Walker & Dunlop, Inc., a District of Columbia real estate broker-mortgage banker with its principal office in the District. A note at 6 1/2% and deed of trust on real estate in Maryland were executed. On 19 January 1961 Walker & Dunlop transferred the note and deed of trust to Hartford. On 2 March 1962 Suburban sold the real estate to Adams, which took the property subject to the deed of trust but did not assume the note. 72 The loan was made by Walker & Dunlop from its principal office in the District for itself and on its own account. As of 28 November 1960 Walker & Dunlop were not licensed to engage in the business of lending money under Sec. 26-601. However, under Sec. 26-610 real estate brokers are included in the category of businesses exempt from the requirement of a license under Sec. 26-601. It is undenied that Walker & Dunlop was at all relevant times a real estate broker, and it also appears it was in the business of mortgage banking. 73 The Trustee contended that since it was unquestioned that Walker & Dunlop made the loan with its own money and for its own account, Walker & Dunlop was acting as a mortgage banker and therefore was not exempt from the licensing requirement of Sec. 26-601. The Trustee argued that a real estate broker, as a matter of general law and understanding, is one who acts for another with respect to real estate in making or negotiating a loan or otherwise, and that the phraseology of the District of Columbia statute Sec. 26-610 was intended only to exempt a person or company acting for another in making or negotiating a loan. The District Court found that under Sec. 26-610 anyone who makes a loan for himself, secured by real estate, falls within the exemption of a real estate broker, which position Hartford argues here. 74 Hartford also argues that irrespective of whether the loan was originally exempt under Sec. 26-610 as made in a real estate broker's business, it took as a holder in due course and thus its security is valid and cannot be set aside. This the District Court did not find. 75
76 Hartford argues that an integral part of the real estate brokerage business includes not only negotiation of loans on behalf of other investors, but also the placing of loans on behalf of the brokers themselves. This may be true, but this part of the real estate brokerage business is more properly described as the mortgage banking business. 77 Semantics aside, the District of Columbia statute involved does not say that making loans on real estate is exempt. When originally passed, the exemption section 26-610, listed the exempted organizations as defined in the Act of Congress of July First, 1902, 32 Stat. 621. Paragraph 15 of that Act defines real estate brokers as follows: 78 . . . That real estate brokers or agents shall pay a license tax of $50.00 per annum. Every person who sells, or offers for sale, as the agent for others, real estate, wherever located, including mining and quarry property, or who makes or negotiates loans thereon, or who rents houses, buildings, stores, or real estate, or who collects rent for others, shall be regarded as a real estate broker or agent. 30 79 The key questions revolve around the italicized words. 80 First, if, as Hartford contends, the words makes or negotiates loans thereon mean that the making or negotiating of the loan may be for the broker's own account, then anyone who makes or negotiates loans thereon . . . shall be regarded as a real estate broker or agent. This simply cannot have been the legislative intention, to define as a real estate broker or agent anyone who is in the business of making or negotiating loans on real estate for his own account. 81 Second, in the interpretation of this clause, the words as the agent for others, although dreadfully misplaced, must modify all of the activities described in this one sentence, i. e., who sells or offers for sale, who rents houses, buildings, stores, or real estate, or who collects rent for others. The concept of agent for others must apply to all of these activities, which, if done for others, do constitute proper functions of a real estate broker or agent. 82 Third, if as the agent for others does not refer also to who makes or negotiates thereon, then we have the peculiar situation that the person who is a real estate broker or agent is one who makes or negotiates loans for his own account, but there is no clause in this entire sentence referring to the broker or agent making or negotiating loans as the agent for others. The interpretation urged by Hartford, i. e., that agent for others only refers to the part preceding who makes or negotiates, would leave out completely the authority of the broker or agent to make or negotiate loans for others, which is the whole sense of the business. 83 So we conclude that the loan as originally made by Walker & Dunlop did not fall within the exemption of Sec. 26-610, and therefore the loan was subject to the licensing requirement of Sec. 26-601. In contrast to the position of the insurance companies, real estate brokerage firms have always been exempt from licensing under Sec. 26-610. Mortgage banking, however, has never been exempt from Sec. 26-601. Thus the loan in question, as it was a result of mortgage banking activity, was not exempt from Sec. 26-601, and the security instrument executed in connection with the loan is void under Sec. 26-601, unless the claim of Hartford as a holder in due course can prevail. 84
85 There is much argument in the briefs as to whether the effect of Sec. 26-601 is to make security instruments given in violation thereof truly void or merely voidable, allowing defenses to be asserted, and, even if the security instruments are truly void, whether a holder in due course can still prevail. We need decide none of these questions here, because we conclude that Hartford was not found to be a holder in due course and on the facts could not have been so found. 86 The question whether a holder is a holder in due course is a question of fact. 31 The burden was on Hartford to prove to the fact-finder, the Referee, and the District Court, that it was a holder in due course. 32 The District of Columbia Uniform Commercial Code provides: 87 After it is shown that a defense exists a person claiming the rights of a holder in due course has the burden of establishing that he    is in all respects a holder in due course. 33 88 Hartford argued to the Referee that its rights under the deed of trust are not affected by any invalidity stemming from Sec. 26-601 because Hartford is a holder in due course, but the Referee as the original finder of fact made no such finding, and the District Court made no fact-finding or conclusions of law of its own, merely adopting those of the Referee. 89 Nor do we see that the Referee or District Court could have made any such finding of fact. When Hartford purchased the note and deed of trust, it appeared on the face of the instrument that the loan was made at over six percent. On the face of the note the lender of the note was described as Walker & Dunlop, Inc., of Washington, D.C., and Hartford knew from its negotiations with Walker & Dunlop in making the loan that this company was engaged in making such loans in the District of Columbia. The loan is also shown on the face to be payable in Washington, D.C. Thus, from all of the uncontradicted facts, Hartford knew that it was purchasing a note and accompanying security covered at its inception by the laws of the District of Columbia, and Hartford should have been on notice that by virtue of Sec. 26-601 a defense existed against the note. Since to have been a holder in due course Hartford would have had to have taken the note with no notice of any infirmity in the instrument or defect in the title of the person negotiating it, 34 Hartford could not have qualified for holder in due course status. 90 Hartford asserts that it did not know that the loan was illegal under Sec. 26-601 and that in the exercise of reasonable diligence it could not be expected to know. At the time of the note's execution (1960) and at the time of its negotiation to Hartford (1961) the governing law for commercial paper in the District of Columbia was the Negotiable Instruments Law. 35 Hartford claims that it became a holder in due course because at that time it met all the required conditions, including that at the time when the note was negotiated to it, Hartford had no notice of any infirmity in the instrument or defect in the title of Walker & Dunlop. 91 But the burden of establishing this was on Hartford; it could hardly plead ignorance of the law as an excuse, a holder cannot convert himself into a holder in due course by being ignorant of the law. While the question of whether Walker & Dunlop, Inc., as a real estate broker was entitled to an exemption under Sec. 26-610 may not be perfectly plain on its face, it was perfectly plain that Walker & Dunlop had acted for itself in making the loan originally, and the whole tenor of the real estate broker's exemption under Sec. 26-610 is to take the real estate broker out from the licensing requirement of Sec. 26-601 simply because the real estate broker is an agent and does not act for himself. Where persons are in the business of making loans on real estate themselves, Sec. 26-601 requires them to be licensed, unless they are specifically exempt under Sec. 26-610. We have held that transactions and obligations in violation of Sec. 26-601 are void, 36 and therefore the maker of the note or the security instrument, or his assignee, would have had a defense. This should have been apparent from the face of the note and the governing District of Columbia law, and Hartford should have been on notice of this defense, and on notice that it was not a holder in due course. It is possible to argue, as the Trustee strenuously has, that the obligations incurred in violation of Sec. 26-601 are void and of no effect even in the hands of a holder in due course. We have not passed upon this question, as it is not necessary under the disposition we now make. But all of this was the law when Hartford purchased the note and accompanying deed of trust. Under these circumstances it is not surprising that, although Hartford sought it, neither the Referee nor the District Court made a finding of fact that it was a holder in due course. Nor do we so find here. 92
93 Unlike our conclusion in regard to the situation of Manufacturers, we find Hartford's argument that the transaction was not subject to District of Columbia law to be unpersuasive, and we therefore decline to overrule the referee's position that the Hartford transaction is governed by D.C. law. 37 94 In the case of Manufacturers, it did not maintain a Washington office for the purpose of making real estate loans, and the decision to make the loan was made by Manufacturers at its home office in Toronto, Canada. Manufacturers had no agent in the District of Columbia, at that time, authorized or empowered to make such loans. 38 The referee also specifically found The Manufacturers Life Insurance Company made no loans in the District of Columbia between January 1, 1959 and May 7, 1968 at a rate of interest in excess of 6% per annum. 39 95 No such specific finding as the latter was made in the case of Hartford. In further contrast, the referee referred to Walker & Dunlop, Inc., who unquestionably made the Hartford loan originally, as a corporation with its principal office in the District of Columbia. 40 There is little doubt that D.C. law is designed to regulate this kind of lender, and the weight of whatever countervailing factors which may exist 41 is not sufficient to upset the premise of the referee and District Court that District of Columbia law applied to the Hartford (Walker & Dunlop) loan. 96 We therefore conclude that Hartford not having established itself as a holder in due course, Walker & Dunlop's actions not being exempt under Sec. 26-610, and the applicable law being that of the District of Columbia, that the loan and accompanying deed of trust are therefore subject to Sec. 26-601. We hold that the objection of the Trustee to the allowance of the claim of Hartford as a secured claim on the basis of the deed of trust was valid, the action of the District Court in denying the objection was erroneous, and we therefore remand to the District Court for the entry of the proper order. 97