Opinion ID: 1720576
Heading Depth: 1
Heading Rank: 2

Heading: Conflict of Laws: Usury

Text: As with most shibboleths, the invocation of strong public policy to avoid application of another state's law is unwarranted in this case. Although a few jurisdictions do attach such a public policy to their usury laws, it is generally held that usury laws are not so distinctive a part of a forum's public policy that a court, for public policy reasons, will not look to another jurisdiction's law which is sufficiently connected with a contract and will uphold the contract. See Ury v. Jewelers Acceptance Corp., 227 Cal. App.2d 11, 38 Cal. Rptr. 376 (1st Dist. 1964); Santoro v. Osman, 149 Conn. 9, 174 A.2d 800 (1961); Big Four Mills, Ltd. v. Commercial Credit Co., 307 Ky. 612, 211 S.W.2d 831 (1948); Exchange Bank & Trust Co. v. Tamerius, 200 Neb. 807, 265 N.W.2d 847 (1978); 45 Am.Jur.2d, Interest and Usury § 19 (1969). The few courts that do rely on a public policy exception in a usury-choice of law situation invariably are dealing with the individual, and often consumer, borrower. See, e.g., Lyles v. Union Planters National Bank, 239 Ark. 738, 393 S.W.2d 867 (1965). [4] We do not think the mere fact that there exists in Florida a usury statute which prohibits certain interest rates establishes a strong public policy against such conduct in this state where interstate loans are concerned. The usury statute itself, fraught as it is with exceptions, belies the imputation of a strong public policy. See § 687.031, Fla. Stat. (1975). In 1975 The Florida Consumer Finance Act allowed interest on small loans as high as 30% per annum, in contrast to the general usury ceiling of 10% per annum. § 516.031, Fla. Stat. (1975). The Savings Association Act made usury limits simply inapplicable to building and loan associations. §§ 665.395, 687.031, Fla. Stat. (1975). Under the Banking Code, banks could charge up to 18% per annum on certain loans. § 659.181, Fla. Stat. (1975). Florida has long recognized the general exception to usury laws of the time-price doctrine. See Davidson v. Davis, 59 Fla. 476, 52 So. 139 (1910). The usury law does not apply to the sale of bonds, or mortgages on those bonds, section 687.03(1), Florida Statutes (1975), or to the transfers of negotiable paper in certain cases, section 687.04, Florida Statutes (1975). The legislature recently raised the maximum interest rates allowable under the usury laws, demonstrating that this public policy is at very least relatively flexible in a confrontation with commercial reality. See Ch. 79-274, § 13, Laws of Florida. Nor do we consider usury protections fundamental to a legal system. The defense of usury is a creature entirely of statutory regulation, and is not founded upon any common-law right, either legal or equitable. Matlack Properties, Inc. v. Citizen & Southern National Bank, 120 Fla. 77, 162 So. 148 (1935). Finally, we note the limited effect of the usury laws upon a contract. [T]he usury statutes in this jurisdiction do not have the effect of invalidating contracts for [usurious] interest ... but only accord to the obligor the personal privilege of setting up ... affirmative defenses of usury in respect to such contracts. Yaffee v. International Co., 80 So.2d 910, 912 (Fla. 1955). The cases cited by the district court are not strong support for its invocation of public policy. Bond v. Koscot Interplanetary, Inc., 246 So.2d 631 (Fla. 4th DCA 1971), cert. denied, 283 So.2d 866 (Fla. 1973), merely stands for the truism that an agreement against public policy is unenforceable, but does not delineate public policy in terms of usury. Davis v. Ebsco Industries, Inc., 150 So.2d 460 (Fla. 3d DCA 1963) and C & D Farms, Inc. v. Cerniglia, 189 So.2d 384 (Fla. 3d DCA 1966), are inapposite since they deal with covenants-not-to-compete, and do not help us understand the strength of the very different policies underlying the usury laws. [5] Finding no real support in our case law for the use of the public policy exception under these circumstances, and in view of the pervasive exceptions to the usury laws and the actual operation of these laws, we are unable, particularly in the commercial setting of this case, to glean any overriding public policy against usury qua usury in a choice of law situation.
The courts of this state have never directly confronted conflict of laws in a usury setting when another state's law chosen by the parties will uphold the agreement. A general rule for choice of laws in a contracts situation might be derived from Thomson v. Kyle, 39 Fla. 582, 23 So. 12 (1897), which followed the traditional place of execution and place of performance. We have applied this rule in contractual choice of laws situations to which Florida could probably apply its usury penalties, and the parties did not indicate a controlling law. Goodman v. Olsen, 305 So.2d 753 (Fla. 1974), cert. denied, 423 U.S. 839, 96 S.Ct. 68, 46 L.Ed.2d 58 (1975) (applying New York law to find no usury). [6] But such a test is today of little practical value since these contacts are so easily manipulated in our mobile society. Courts in almost every jurisdiction recognize that a usury claim presents a distinct choice of laws question. The rule that the overwhelming majority follows may be stated as follows: [W]ith respect to the question of usury, it may be stated as a well-established rule that a provision in a contract for the payment of interest will be held valid in most states if it is permitted by the law of the place of contracting, the place of performance, or any other place with which the contract has any substantial connection. Fahs v. Martin, 224 F.2d 387, 397 (5th Cir.1955). This traditional or federal rule is derived directly from Seeman v. Philadelphia Warehouse Co., 274 U.S. 403, 47 S.Ct. 626, 71 L.Ed. 1123 (1927), in which a Pennsylvania corporation made a loan to a New York borrower who sought protection of New York usury laws. The Supreme Court concluded that the parties could contract for a higher rate of interest allowed by either place of performance, place of execution, or a place with a vital and natural connection. Id. at 408, 47 S.Ct. at 627. Citing Miller v. Tiffany, 68 U.S. (1 Wall.) 298, 17 L.Ed. 540 (1864), the court explained that the qualification of good faith required in that case must not be taken too literally: The effect of the qualification is merely to prevent the evasion or avoidance at will of the usury law otherwise applicable, by the parties' entering into the contract or stipulating for its performance at a place which has no normal relation to the transaction and to whose law they would not otherwise be subject. Id. at 408, 47 S.Ct. at 627 (emphasis added). This language makes clear that if a normal relation does exist, then good faith is not otherwise necessary to validate the transaction. There is no disagreement among commentators in the conflict of laws field that this view is generally followed. Professor Beale wrote: [T]he rule has become well settled in almost all jurisdictions, too well settled to be changed except by statute, that if a contract is made and to be performed in different states, and is usurious by the law of one of these places but not by that of the other, it is governed, according to the presumed intention of the parties, by the law of the place which makes it valid. 2 J. Beale, Conflict of Laws, § 347.4 (1935) (footnote to multitudinous citations omitted). See also H. Goodrich & E. Scoles, Conflict of Laws, § 111 (4th ed. 1964); G. Stumberg, Conflict of Laws, 237-40 (2d ed. 1951). As Professor Beale noted, the historical rationale underlying this rule of validation was the presumption that the parties had contracted with reference to the law of the place where the transaction would be valid. See Atlas Subsidiaries, Inc. v. O. & O., Inc., 166 So.2d 458, 461 (Fla. 1st DCA 1964). This rationale has become modified in modern times because of the frequent inclusion of specific choice of law provisions in commercial, multistate contracts. The focus is no longer on presumed intent, but rather on party expectations since the intentions of the parties are usually expressed. The Restatement (Second) has adopted a modified traditional rule in usury cases and justifies its position through preservation of party expectation. [7] A prime objective of both choice of law ... and of contract law is to protect the justified expectations of the parties. Subject only to rare exceptions, the parties will expect on entering a contract that the provisions of the contract will be binding upon them... . Usury is a field where this policy of validation is particularly apparent... . [T]he courts deem it more important to sustain the validity of a contract, and thus to protect the expectations of the parties, than to apply the usury law of any particular state. Restatement (Second) of Conflict of Laws, § 203, Comment b (1971). Thus, the rule of validation is generally viewed as the best means of furthering the parties' expectations. A final justification for the traditional rule is founded in the idea of commercial comity. Since practically every jurisdiction that has confronted this issue has adopted some form of the traditional rule, this state would be commercially singular if it did not apply favorable law of the state with a normal relation to a contract. Commercial stability in interstate trade depends on predictability and some degree of uniformity among the states in their willingness to honor commercial agreements. Federal courts in this state have followed the traditional rule, as stated in Fahs v. Martin, 224 F.2d 387, 397 (5th Cir.1955). In Your Construction Center, Inc. v. Dominion Mortgage & Realty Trust, 402 F. Supp. 757 (S.D.Fla. 1975), the district court applied New York law as contractually stipulated by the Florida corporate borrower and the New York lender, a Massachusetts business trust. Though relying partly on Thomson v. Kyle and the place of performance rule, the court also cited the language of Atlas Subsidiaries, 166 So.2d at 461, which laid out in dicta the general rule of validation in a usury situation. The rule of validation was effectively applied in a choice of lawusury case in Nicholas v. Publishers Collection Service, Inc., 320 F. Supp. 1200 (S.D.Fla. 1971), which again upheld party expectations. The United States Fifth Circuit Court of Appeals has historically followed the rule of validation in usury cases. Lubbock Hotel Co. v. Guaranty Bank & Trust Co., 77 F.2d 152 (5th Cir.1935), held that when usury is asserted, the law of the jurisdiction related to the transaction which upholds the contract is presumed to apply. Id. at 156. The influential case of Fahs v. Martin , which fully developed this choice of laws rule, followed Lubbock Hotel. Later, Blackford v. Commercial Credit Corp., 263 F.2d 97 (5th Cir.), cert. denied, 361 U.S. 825, 80 S.Ct. 74, 4 L.Ed.2d 69 (1959), stated simply, [A]s to questions of usurious interests on a loan transaction having contact with many states, the law upholding the contract is to be controlling. Id. at 113. [8] Support for the traditional rule in usury cases is found in the vast majority of other jurisdictions. See e.g., Speare v. Consolidated Assets Corp., 367 F.2d 208 (2d Cir.1966) (alternative holding, construing New York law); Cooper v. Cherokee Village Development Co., 236 Ark. 37, 364 S.W.2d 158 (1963); Ury v. Jewelers Acceptance Corp., 227 Cal. App.2d 11, 38 Cal. Rptr. 376 (1st Dist. 1964); Big Four Mills, Ltd. v. Commercial Credit Co., 307 Ky. 612, 211 S.W.2d 831 (1948); Ferdie Sievers & Lake Tahoe Land Co. v. Diversified Mortgage Investors, 603 P.2d 270 (Nev. 1979); and Goodwin Brothers Leasing, Inc. v. H & B Inc., 597 S.W.2d 303 (Tenn. 1980). In Ferdie Sievers, a Massachusetts business trust which transacted business throughout the country, with its principal place of business in Massachusetts, made a building construction loan to a Nevada corporation. The negotiations were carried on in Nevada, though the note was executed and made payable in Boston. The loan agreement stipulated Massachusetts law. Following Seeman, the Nevada Supreme Court upheld the agreement and refused to apply its own usury law since a substantial nexus with Massachusetts existed. Ferdie Sievers, 603 P.2d at 274. Goodwin Brothers involved a slightly different situation: a forum borrower, a Tennessee construction corporation; and out of state lender, a Kentucky corporation; a contractual stipulation to Kentucky law; and a Tennessee office of the Kentucky lender where the loan was negotiated. The transaction was actually closed in the forum state and the proceeds disbursed there. In spite of the many Tennessee contacts, the Tennessee court applied Kentucky law, avoiding application of its own usury laws, and recognized principles of party autonomy based on Seeman. The only contacts with Kentucky were the domicile of the lender and the place of payment. But the court noted that Seeman had distilled the good faith requirement to mean normal relation. Since the lender had its principal office in Kentucky, and it was this home office that approved the loan application, the court found a normal relation to Kentucky, and applied that state's laws. Goodwin Brothers, 597 S.W.2d at 308. We do not have to decide as difficult a case as the Tennessee court dealt with in Goodwin Brothers, and intimate no views as to such a case. But we do decide that this Court will follow under the circumstances of this case the traditional rule, which upholds an agreement against usury by applying foreign law if the foreign jurisdiction has a normal relation to the transaction and would also favor the agreement. To this we add the clarification offered by Seeman that good faith of the parties is not relevant to a choice of laws question in the usury area unless no substantial or normal relation exists between the foreign jurisdiction and the transaction.