Court Opinion

ID: 9650765
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:51:12.090738+00
Date Added: 2024-06-11T18:12:26.007817
License: Public Domain

Dissenting Opinion by
Me. Justice Bobeets:
“May individual sureties to a usurious loan made to a corporation raise the defense of usury where the *347corporation itself is precluded from raising the defense of usury?” As the majority views this case, that is the issue confronting the Court today. I, too, would so style the issue were it not for the fact that I strongly believe the time has come to eliminate the distinction between primary obligors and accommodation parties for purposes of determining which individuals may raise the defense of usury. As I view the statutes prohibiting the charging of interest in excess of six per cent, except to corporations, no individual, whatever may be the hat he wears, can be forced to pay such interest. I reach this conclusion not only because I think it is dictated by our strong public policy against usurious interest rates, but also because the current doctrine, as formulated by two recent Superior Court cases,1 is totally unrealistic and, as a practical matter, unworkable.
To decide whether an individual may raise the defense of usury, it is under the majority approach now necessary to determine the status of that individual vis-a-vis the lender. If he is found to be the primary obligor, he may avail himself of the usury defense; but if he is merely a surety or an accommodation party to a legitimate corporate loan, he is bound just as is the corporation. The genesis of this test in Pennsylvania can be found in Walnut Discount Co. v. Weiss, 205 Pa. Superior Ct. 161, 208 A. 2d 26 (1965). Weiss involved a usurious loan made to a closed corporation whose sole stockholder was the son of the appellee-defendants. The parents of this sole stockholder were named on the loan agreement as “guarantors”. Thus, when the corporation defaulted and these guarantors resisted payment of any interest over six per cent, the lender *348contended that they should be bound just as would be the corporation whose obligation they guaranteed. In striking down this contention, the Superior Court noted that this corporation was specially formed to borrow money, that the so-called “guarantors” were really the true borrowers, and that the entire transaction was engineered by the parents to bail their son out' of financial disaster. Of course, although the issue was not decided, the clear implication of this decision was that a true surety to a legitimate corporate loan could not raise the defense of usury. Such implication .blossomed into a true holding in Raby v. Commercial Banking Corp., 208 Pa. Superior Ct. 52, 220 A. 2d 659 (1966). This case involved a legitimate loan to an established construction company, and an accommodation. party having no financial interests in that company. It was held that Maude Raby, the accommodation party, was bound to repay the full amount of the loan with all interest.
'. Whatever may have been the wisdom of the rule set down in Raby, it first appeared easy to apply. Perhaps this was so because the facts in Weiss and Raby represented the very opposite poles of the problem. Unfortunately, filling in the grey areas has clearly demonstrated the unworkability of this rule. In the present case, for example, the majority has decided that these facts fall on the Raby side of the line. It is true that the corporate borrower here, Jay-Bee Corp., was not created just to borrow money. But, the majority seems to ignore completely the significant fact that while Raby concerned a surety who had no connection whatsoever with the corporation, the accommodation parties here are the sole stockholders of Jay-Bee. When in fact the corporation and the sureties are really but one entity, a distinction based solely on the label “accommodation party” is meaningless.
*3491 will not further belabor what I think should now be elear. For purposes of the availability of a usury defense, any rule of law requiring courts to distinguish between primary obligors and accommodation parties can only lead to inconsistent decisions and haphazard line drawing, especially in the face of clever money lenders, complicated refinancing of previously existing loans, family corporations, and prefabricated corporate shells.2
Nevertheless, if a more careful factual analysis of each case could repair this area of law, I would not so strongly dissent. However, a test designed to make judges and fact finders “tilt at windmills” is often indicative of a more fundamental defect. The fundamental defect present in the Weiss-Baby test goes to the very heart of this Commonwealth’s public policy against usury, for it assumes that certain individuals may still be compelled to pay interest in excess of six per cent. Since 1858 a borrower could recover any interest paid in excess of the lawful rate. The Act of May 28, 1858, P. L. 622, §2, 41 P.S. §4, originally contained no exceptions to that rule. Today, §313 of the Business Corporation Act3 contains the only exception relevant to this case. The words of that statute are clear: “No business corporation shall plead or set up usury ... as a defense . . . .” These words say nothing about an individual who acts as surety for a corporate loan. As to such a party, the basic 1858 law still ap*350plies. And well it should. In each of the three cases discussed in this opinion thus far, one fact remains constant: an individual is asked by the money lender to reach into his own pocket and pay interest at a usurious rate. It should be immaterial whether the lender originally expected a corporation to pay the loan, or whether the individual was always the prime target. The usury statute must concern itself with actuality, not expectations.
As early as 1855 this Court, when called upon to interpret New York’s usury law and its corporate exception, made the following observation: “Regarding such laws as the means adopted by the state to protect people against their own weakness, and against the power of money lenders, we must suppose that corporations are excluded from this protection, because they have not the same need of it that individuals have: perhaps because of their being usually powerful associations, and the associates not usually being personally-liable for their contracts.” Bock v. Lauman, 24 Pa. 435, 448 (1855). These reasons for the corporate exception remain just as valid today.4 The corporation does not need the protection of the usury statute because it has its own, built in protections. But an individual, no matter how he is classified or labelled, does not have limited liability. He cannot pass his risks to a collection of stockholders.
Time and again this Court has said that “the statute against usury forms a part of the public policy of the state and cannot be evaded by any circumvention *351or waived by the debtor.” Simpson v. Penn Discount Corp., 335 Pa. 172, 175, 5 A. 2d 796, 798 (1939). So also have we said that it is the duty of this Court to examine the substance of a transaction, as well as the form. To do this adequately required that we strip away the shackles of the parol evidence rule in order to uncover usury. Simpson v. Penn Discount Corp., supra. We have gone behind false recitals of inflated principal to uphold the usury statute. Fitzsimons v. Baum, 44 Pa. 32 (1863). In Richman v. Watkins, 376 Pa. 510, 103 A. 2d 688 (1954), the Court struck down a so-called “broker’s commission” when it was discovered that the broker was in reality the lender himself. Finally, renewed judgments which cleverly incorporated usurious interest have been declared violative of the statute. Moll v. Lafferty, 302 Pa. 354, 153 Atl. 557 (1931). In all these cases this Court has remained conscious of the fact that “usury is generally accompanied by subterfuge and circumvention of one kind or another to present the color of legality, . . .” Simpson v. Penn Discount Corp., supra. Yet, by the rule which the majority has approved today, we have carved out a single area of usury where the subterfuge, so vigorously uprooted in the past, is now permitted to blossom with flowers of the brightest colors.
In my opinion, the usury statute and its corporate exception permit but a single rule: If a man loans money to a corporation, the interest rate on that loan can be whatever the market will bear; but, this lender is on notice that whenever an individual is asked to repay the loan, no interest above six per cent may be recovered. The lender’s plea that such a rule would foreclose loans to small corporations is simply without merit. If a lender balks at loaning money to a company because of its allegedly weak financial structure, such a lender can certainly require sufficient collateral, advanced by individuals if that is desired, to *352insure the return of principal as well as the legal rate of interest.5 On the other hand, if more than this amount is sought by the lender, his recourse must be to the Legislature for a revision of the lawful interest rate vis-a-vis individual sureties to corporate obligations. This Court is empowered only to read and interpret statutes, not to redraft and amend them.
More than one hundred years ago, in striking down an attempt to evade the usury laws by the false inflation of principal, we said: “Courts of justice would be very stupid if they could not see through so transparent a device to evade the statute, and very feeble if, seeing the usury, they could not reach it . . . .”6 In my opinion, the Weiss-Raby test comes dangerously close to fulfilling this disturbing prediction.
I dissent.

 Walnut Discount Co. v. Weiss, 205 Pa. Superior Ct. 161, 208 A. 2d 26 (1965); Raby v. Commercial Banking Corp., 208 Pa. Superior Ct. 52, 220 A. 2d 659 (1966).

 Pennsylvania has not been the only jurisdiction forced to engage in unrealistic line drawing to effectuate similar rules. For example, in New Jersey, it seems that the test for determining when the corporate shell will bo pierced turns not so much on whether the company was formed to borrow money as on whether it was formed at the suggestion of the borrower or lender. Compare Monmouth Capital Corp. v. Holmdel Village Shops, Inc., 92 N. J. Super. 480, 224 A. 2d 35 (1966) with Gelber v. Kugel’s Tavern, Inc., 10 N.J. 191, 89 A. 2d 654 (1952).

 Act of May 5, 1933, P. D. 364, §313, 15 P.S. §1313.

 In sustaining the constitutionality of the corporate exception statute in the face of a Fourteenth Amendment Equal Protection argument, a federal court distinguished corporations from individuals in the same way for purposes of protection from usury. Brierley v. Commercial Credit Co., 43 F. 2d 724 (E.D. Pa. 1929), aff’d, 43 F. 2d 730 (3d Cir.), cert. denied, 282 U.S. 897, 51 S. Ct. 182 (1930).

 The president of the All Purpose Finance Co., Samuel Allan-off, admitted that his interest in the financial condition of the borrower went only to whether they could put up enough collateral to insure a return of the money loaned. See N.T. 59a: “Q. I understand. Now as far as this Jay-Bee Plumbing was concerned, did they present a financial statement to you? A. We don’t need no financial statement. Our loan must be based on real estate security. Financial statement is — we are not required, a financial statement, when we make a loan. Only thing we require is enough collateral for our money.”

 Fitzsimons v. Baum, 44 Pa. 32, 42 (1862).