Court Opinion

ID: 9629693
Source: CourtListenerOpinion
Date Created: 2023-08-22 09:47:26.754489+00
Date Added: 2024-06-11T09:17:57.082428
License: Public Domain

Horowitz, J.
(concurring in part; dissenting in part)— The majority agrees the state of New York has a substantial relationship to the securities margin contract between the defendant stockbroker and this plaintiff, as well as similar contracts between the defendant and Washington residents. Accordingly, under Restatement (Second) Conflict of Laws § 203 (1971), relied upon by the majority as a *693correct expression of the rule determining whether a usurious rate has been charged, the relationship between New York's usury law and Washington's usury law must be considered.
Prior to the American Law Institute's adoption of section 203, this court long ago adopted the rule that "the parties to a contract may make the same with reference to the laws of any state or country and have their contractual rights governed thereby, provided only that such laws have a real and not a mere fictitious connection with the subject-matter of the transaction." Crawford v. Seattle, R. & S. Ry., 86 Wash. 628, 635, 150 P. 1155 (1915). Since the majority holds that the state of New York has a substantial relationship to the securities margin contract, the New York law would govern under the rule just quoted if the rate of interest charged were lawful under New York law.
Restatement (Second) Conflict of Laws § 203 (1971), however, adds a further requirement, namely, that the rate of interest permissible in the state to which the contract has a substantial relationship must be one "not greatly in excess of the rate permitted by the general usury law of the state of the otherwise applicable law under the rule of § 188" (in this case, Washington).
In explaining the rationale of section 203, section 203(b) states:
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.
. . . Upholding a contract against the charge of usury by the application of the local law of one state, which has a substantial relationship to the transaction and the parties, can hardly affect adversely the interests of another state when the stipulated interest is only a few percentage points higher than would be permitted by the local law of the other state. Under these circumstances, the courts deem it more important to sustain the validity of a *694contract, and thus to protect the expectations of the parties, than to apply the usury law of any particular state.[1]
When we look to New York law on the question of permissible rates of interest we find that the legal rate is prescribed by the banking board at not less than 5 percent nor more than 8.5 percent per annum. If no rate is prescribed it is 6 percent per annum. General Obligations Law § 5.501(1); Banking Code § 14-a; 7 Martindale-Hubbell Law Directory 1765 (1978). In the case of a securities margin contract for the purchase of stock, however, when the unpaid balance of the loan is payable on demand, a different section of the General Obligations Law applies, namely section 5-525. It provides that the applicable rate of interest may not exceed 25 percent per annum. A sharp distinction is thus made between ordinary contracts involving loans of money and securities margin contracts. For the latter, any rate up to a maximum of 25 percent per annum is lawful.
The question that presents itself is therefore whether the words "permissible in the state to which the contract has a substantial relationship" as contained in section 203 refer only to the maximum permissible rate even if that rate has not been charged, rather than to the actual (also permissible) rate charged to and paid by the purchaser under the securities margin contract. Neither Restatement section 203 nor the comments on that section in the Restatement deal specifically with this question.
The answer emerges however, when generally understood policy reasons, which lie at the bases of usury statutes and their interpretation are considered.
A basic reason for a limitation of interest rates we must consider is the protection of borrowers from oppression. See Restatement (Second) Conflict of Laws § 203 (1971); *695RCW 19.52.020; Baske v. Russell, 67 Wn.2d 268, 273, 407 P.2d 434 (1965). No oppression occurs when a rate of interest is neither charged nor paid. Hence, the fact that a very high maximum rate of interest is permissible under New York law can hardly be grounds for claiming oppression when that rate has not in fact been charged and the rate actually charged is lawful but not oppressive. What has been said is especially true when a securities margin contract is involved. Such a contract has a particular function for a particular kind of stock purchaser. Respondent stockbroker points out that an investment of $1,000 in a margin purchase of stock, plus a loan from the stockbroker to the customer secured by the stock purchased to pay for the remaining balance of the purchase price, enables the purchaser to buy approximately $2,000 worth of stock with the resulting possibility of receiving twice the dividends and twice the profits from stock appreciation. No unavoidable urgency compels a customer to buy stock on margin. He simply seeks to obtain the benefits of what he considers to be an attractive speculation knowing the risks involved should the price of the stock go down. If the customer likes, he may avoid incurring interest charges at any time during the life of the loan by selling other securities he owns to satisfy his debit balance owing to the stockbroker, or borrowing sufficient funds from other sources to pay that debit balance. There is nothing compulsory about the customer entering into a margin contract with a choice of law provision. The customer is not in the position of one buying necessities or other consumer goods. See Gamer v. duPont Walston, Inc., 65 Cal. App. 3d 280, 286, 135 Cal. Rptr. 230 (1976), upholding the validity of the interest rate charged for a loan made under a securities margin contract containing a provision that New York law governs.
Considered in this light, it is understandable that New York law makes a sharp distinction between interest chargeable on ordinary loan contracts and interest chargeable on a securities margin contract. Accordingly, if we are to compare New York's authorized interest rate with *696Washington's maximum interest rate, it makes much more sense to look to the rate actually charged rather than a higher rate not charged which plays no role in the transactions entered into. In this case the effective rate of interest charged to the plaintiff, using the formula which the majority approves, was 14 percent per annum. This rate was not contrived; it came about because of an unanticipated short term rise in call money rates in New York beyond the stockbroker's control. When those rates went down, the stockbroker's interest rates to its margin account customers on their debit balances also went down. Fourteen percent per annum is not greatly in excess of 12 percent per annum, as was properly conceded by plaintiff's counsel during oral argument.
As noted in the Restatement (Second) Conflict of Laws § 203 (1971), already quoted:
Upholding a contract against the charge of usury by the application of the local law of one state, which has a substantial relationship to the transaction and the parties, can hardly affect adversely the interests of another state when the stipulated interest is only a few percentage points higher than would be permitted by the local law of the other state.
A second basic reason to be considered is that when no unlawful rate has been charged, access to credit from out-of-state sources should be protected by upholding the validity of the rate charged. Restatement (Second) Conflict of Laws (1971) at page 650 states:
A prime objective of both choice of law . . . and of contract law is to protect the justified expectations of the parties.
The discussion, after noting the insignificance of a few percentage points difference between the law of the- state of substantial relationship and the law of the state of the otherwise governing law, also stated at page 650:
Under these circumstances, the 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.
*697When, therefore, we seek to ascertain the meaning of the words "a rate of interest that is permissible" found in section 203, in relation to the words "not greatly in excess of [the otherwise permitted rate, i.e., Washington's]" the words used address themselves to the actual rate charged rather than to an uncharged maximum rate. This construction gives effect to the realities of the transaction. A customer does not complain of something that has not happened to him, he complains of something that has happened to him. In this case, New York's 25 percent maximum rate was not used. It had no effect on the plaintiff or on any Washington resident.
In sum, the majority relying on Restatement (Second) Conflict of Laws § 188(3) (1971), upholds the security margin account provision that New York law governs — that law having a substantial relationship to the contract. That law is relevant to the facts of this case in which the effective rate of interest charged was 14 percent per annum. That rate was permitted and lawful under New York law even if higher rates that might have been charged but were not in fact charged, were also permitted and lawful. Restatement (Second) Conflict of Laws § 203 (1971), which the majority adopts as Washington law, if construed to require application of New York's uncharged 25 percent per annum maximum interest rate would needlessly frustrate the justified expectation of the parties that the security margin contracts were binding — a frustration not required by the policy considerations which underlie the protection against the exaction of usury.
Accordingly, the proposed subclass in plaintiff's class suit could consist only of Washington residents who are margin account customers who have heretofore executed a security margin contract with the defendant or its predecessors for whom it is liable, the contract providing that New York law would govern, provided further, however, that the effective rate charged is more than a "few percentage points higher than would be permitted by the local law of [Washington]." Restatement (Second) Conflict of Laws § 203(b) (1971).
*698Except in respects noted, I concur in the majority opinion.
Stafford, Utter, and Brachtenbach, JJ., concur with Horowitz, J.
Reconsideration granted January 5, 1979.

For a description of the theoretical justification for protecting the justified expectations of the parties to a contract, see H. Berman & W. Greiner, The Nature and Functions of Law 608-14 (3d ed. 1972) under the heading "Why Should the Law Ever Protect the Expectation Interest?"