Opinion ID: 2392884
Heading Depth: 1
Heading Rank: 2

Heading: The Usury Issue

Text: Turning to the law applicable to the rate of interest called for by the C&E, [14] we agree with the approach of the parties that this question may, within certain limits, be resolved by contract. This Court has previously given recognition, in effect, to party autonomy in conflict of laws relating to contracts. In Williams v. New York Life Insurance Co., 122 Md. 141, 89 A. 97 (1913) we applied internal New York law to determine the amount of cash payable to the owner under an option of a paid-up life insurance policy and said: Nor is this situation relieved by the fact that the contract was a Maryland one, for it was expressly stipulated in the application, that the contract contained in the application and policy shall be construed according to the law of the state of New York, an agreement which it was perfectly competent for the parties to make. [ Id. at 147, 89 A. at 99]. Judge Prescott, writing for the Court in a case involving conflict of laws as to checks, observed that [i]t seems generally to be conceded that the proper law governing a bill or note is the law which the parties to the instrument intended to govern. John Hancock Mutual Life Insurance Company v. Fidelity-Baltimore National Bank & Trust Company, 212 Md. 506, 511, 129 A.2d 815, 819 (1957). An employment contract in Globe Slicing Machine Company v. Murphy, 161 Md. 667, 158 A. 26 (1932) provided that its validity, construction, interpretation or performance should be governed by the laws of New York. The defendant employer argued that the plaintiff's case failed for lack of proof of New York law. In rejecting that argument we observed that the express adoption of the foreign law by the parties has the same effect as adoption by rule of law but that, absent proof of the foreign law, this Court would look to the law of the forum. Id. at 671-72, 158 A. at 28. However, we have refused to apply the contractual choice of law where it was contrary to the public policy of this state. Mutual Life Insurance Co. v. Mullan, 107 Md. 457, 69 A. 385 (1908) (Maryland statute making statements in an application for life insurance representations and not warranties applied over common law of the chosen state which considered application statements to be warranties). [15] It is now generally accepted that the parties to a contract may agree as to the law which will govern their transaction, even as to issues going to the validity of the contract. [16] The rule has been adopted by Restatement (Second) of Conflict of Laws § 187 (1971), which in subsection (2) provides: (2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties. The comment on subsection (2) clarifies that an issue ... which the parties could not have resolved by an explicit provision is illustrated by capacity, formality and substantial validity. Appellants contend, as a legal matter, that the Maryland Clause cannot reflect an intent that Maryland law govern interest and usury because Maryland lacks the necessary substantial relationship to the contract. They point out that the C&E was negotiated and made in New York, and is to be performed by payment in New York at Jamaica's principal place of business. In the view which we take, there are other contacts which mount up to a sufficiently substantial relationship with Maryland for the parties effectively, under Maryland conflict of laws principles, to have chosen the law of this state as to interest. The real estate which secures the debt has its situs here. [17] The maker of Note A, as modified, and of Notes B, C and D is Twin Towers. Twin Towers is a Maryland limited partnership. More importantly, its purpose and its sole business activity were the construction and operation of Presidential Towers in Maryland. Its general partner at the time of the C&E was Americana, a Maryland corporation. At a minimum, $6,500,000 of the original indebtedness to Jamaica arises out of the construction loan, the purpose of which was to build Presidential Towers. The co-grantor under each of the four deeds of trust was Land Corp., a Maryland corporation. The contractual choice of the law of the state which is both the domicile of the borrower and the situs of the security, but which was not the state of contract formation or performance by payment, has been applied to determine usury questions. Armstrong v. Alliance Trust Co., 88 F.2d 449 (5th Cir.1937); Kellogg v. Miller, 13 Fed. 198 (D. Neb. 1881); McDougall v. Hachmeister, 184 Ark. 28, 41 S.W.2d 1088 (1931); Lanier v. Union Mortgage Banking & Trust Co., 64 Ark. 39, 40 S.W. 466 (1897); Dugan v. Lewis, 79 Tex. 246, 14 S.W. 1024 (1891); see also Harvard v. Davis, 145 Ga. 580, 89 S.E. 740 (1916); Arnold v. Potter, 22 Iowa 194, 200 (1867). We hold that the transaction presented here has sufficiently substantial contacts with Maryland to permit the parties effectively to have chosen Maryland law to apply to the issue of interest and usury. [18] Under § 187 of the Restatement, a contractual choice of law may not be violative of the fundamental policy of a state having a materially greater interest in determining the issue and which would be the state having the most significant (as contrasted with a substantial) relationship to the transaction, absent the contractual choice. If it is assumed here that New York is that state, it is our opinion that legal efficacy is not denied to a selection of Maryland law, since decision of the usury issue under Maryland law would not be contrary to a fundamental policy of New York. It is for the forum to apply its own legal principles in determining whether a given policy is a fundamental one.... Restatement, supra, § 187, at Comment g. Initially, we note that the New York statutes were amended, effective June 7, 1974, to remove any interest rate ceiling from a loan of $250,000 or more, secured by other than a one or two family residence. [19] Such a substantial change in statutory law indicates that the New York policy in August 1971 was not a fundamental one with respect to the type of large commercial transaction presented here. Further under the internal law of New York, the individual guarantor of a loan made to a shell corporation is precluded from pleading usury if the proceeds are applied in a business enterprise and not to satisfy personal obligations. Schneider v. Phelps, 41 N.Y.2d 238, 242-3, 391 N.Y.S.2d 568, 571, 359 N.E.2d 1361, 1364 (1977); Jenkins v. Moyse, 254 N.Y. 319, 172 N.E. 521 (1930). [20] In addition, under the New York conflict of laws decisions involving usury, New York's internal usury policy is not treated as so fundamental that it prevents New York courts from applying the law of another state which will validate the transaction or impose a lesser penalty on a transaction invalid under both laws. Speare v. Consolidated Assets Corp., 367 F.2d 208 (2d Cir.1966); Wiltsek v. Anglo-American Properties, Inc., 277 F. Supp. 78 (S.D.N.Y. 1967); Crisafulli v. Childs, 33 App. Div.2d 293, 307 N.Y.S.2d 701 (1970); Pioneer Credit Corp. v. Catalano, 51 Misc.2d 407, 273 N.Y.S.2d 310 (1966), aff'd mem., 28 App. Div.2d 595, 282 N.Y.S.2d 214 (1967). Even though the parties could, with legal effectiveness, have chosen Maryland law as to the interest aspect of their transaction, the question remains whether the parties did in fact intend by their contract to have Maryland law apply to that issue. Appellants contend that the limited purpose of the Maryland Clause in the C&E was to consolidate and make uniform the provisions of the notes and deeds of trust for the four loans, some of which did not contain the reference to the Maryland usury statute prior to modification by the C&E. [21] While the Maryland Clause has the effect ascribed to it by appellants, it is still necessary to determine why there is any reference at all to the Maryland statutory exclusion from usury for certain commercial loans if the New York Clause is intended to carry within its terms the New York interest limitations. For purposes of this analysis we shall assume that the New York Clause refers us to the internal law of New York for principles of contract interpretation. However, we perceive no substantial difference between it and the law of this state relative to the interpretation of the two clauses. [22] The court below rendered findings of fact including finding the ultimate fact that the parties intended all matters of interest and usury pertaining to the secured indebtedness ... to be governed by the laws of the State of Maryland. The findings of the trial court are fully supported by evidence relating to pre-closing, closing and post-closing conduct of the parties and by the expert testimony. Shortly after Jamaica had committed, John Bond (Bond), the attorney for Jamaica, contacted Franklin Bass (Bass), the attorney for Twin Towers. Bond told Bass that an opinion of Maryland counsel would be required, at the expense of Twin Towers, since this was a Maryland transaction involving Maryland law  as to interest.... Bass replied, according to Bond, that Bass understood, inasmuch as it was a Maryland transaction. The opinion of Maryland counsel was by letter dated March 9, 1971 which stated, in part, that the proposed transaction does not constitute a usurious transaction under the Law of Maryland. A similar opinion from Maryland counsel was obtained one week before closing. Bond also sent to Bass and his legal colleague, Bernard Jacobs (Jacobs), a draft of the C&E containing the Maryland Clause. Bond testified that in a subsequent discussion Bond told Jacobs that the Maryland Clause was for the purpose of making it absolutely clear that this was not a usurious transaction but rather excepted therefrom by Section 7 of Article 49 ..., and that Jacobs responded by saying that he understood the inclusion was because of the usury factor of Maryland law. At the closing, Bond became involved in a discussion with the representative of the mortgagee title insurer who was conducting the closing. The proposed form of title policy contained an exclusion for usury. Bond was urging removal of the exclusion so that coverage would be consistent with the form of policy in use in New York. Jacobs, and Ronald Unger, an attorney at Kronovet's law firm who was representing the limited partners of Twin Towers at the closing, interrupted the discussion. Bond testified they in effect said to him as follows: What the hell are you objecting to, Jack? You know damn well this is a Maryland transaction. We want to close the damn thing, and being a Maryland transaction, we have already got the Article 49 statement in the Consolidation and Extension Agreement regarding what portion of the Maryland law it falls under. You've got an opinion of counsel telling you it is not usurious, and this is a Maryland transaction on Maryland real estate. So, would you stop arguing and please let's get on with the closing utilizing the ALTA form. On April 25, 1972 the trustees under the deeds of trust securing Loans A through D, the nominee for Presidential, Twin Towers and Jamaica entered into a modification of the C&E in order to permit Twin Towers to defer interest up to $100,000. The deferred interest was to bear interest at an increased rate over the 8.375% of the C&E. In connection with the modification, Bond requested of Ronald Unger, representing Twin Towers, that an opinion of Maryland counsel on the question of usury be obtained. Bond states Unger agreed that the opinion was necessary because it was a Maryland transaction. Maryland counsel opined that the modification was not usurious under Maryland law. Appellants also received from Jamaica annual statements of mortgage account, without making objection on the ground of usury. The trial court also held that the parties to the transaction by which Jamaica purchased by assignment the existing indebtedness ... intended that the existing indebtedness ... would be valid and binding in all respects and there was no intention on the part of the parties to enter into or to create an invalid or usurious transaction. That finding is supported not only by the admissions reviewed above, but also by the form of the transaction. Motivated at least in part by the desire to avoid recordation and transfer taxes, [23] Jamaica purchased existing notes secured by existing deeds of trust. The note for Loan A, as modified, and the other three notes, all contained provisions adopting Maryland law under which the loans were not usurious. The trial court could properly infer that the parties did not intend to make invalid that which was previously valid or intend that the New York Clause prevail over the more specific Maryland Clause in the C&E. When one considers that Twin Towers under the C&E was obtaining an extension from December 31, 1971 to August 25, 1994 during which to pay the indebtedness, and was achieving a reduction to 8.375% in the rate of interest from the 8.75% under the AS&T loans and from the 14% under the Guardian loans, the trial court's finding was entirely permissible. Expert testimony also supported the decree.