Court Opinion

ID: 8792759
Source: CourtListenerOpinion
Date Created: 2022-11-26 13:57:41.65548+00
Date Added: 2024-06-11T17:03:26.823689
License: Public Domain

MACK, Circuit Judge.
In this case, one who appears on the face of the papers to be a vendor and guarantor of open mercantile accounts and commercial paper at a discount greater than the legal interest rate is seeking to rescind the transactions and to recover back the accounts or the proceeds thereof on repayment of the purchase price with legal interest, on the ground that the transactions were ultra vires.
The basis for the charge of ultra vires is that such sales, viewed from the standpoint of the purchaser, are discounts; that discounting is a banking function; that defendant, although empowered to purchase accounts, could not lawfully engage in the business of purchasing accounts because that is a banking business and corporations cannot be organized, under the general incorporation act of Illinois, to do a banking business.
There are several answers to these contentions:
[1] First. Discounting accounts and commercial paper, while the proper function of a bank or banker, is not exclusively a banking operation. The banking business in which an ordinary Illinois corporation cannot engage involves the receipt of deposits from customers and the use of money so obtained for banking purposes. An individual or a corporation, using its own funds or moneys borrowed-in the ordinary course of business' for the purchase of commercial paper for investment or other purpose, does not thereby engage in the banking business. Lending money is one of the most important banking functions. The Illinois act, however, clearly does not regard the prohibition of doing a banking business as sufficient to prevent the organization of corporations to engage in the business of lending their own *638capital; in express terms it forbids the creation of corporations under the general act for either purpose.
[2] Second. But if this were a banking business, and if these deals were ultra vires, whatever defense the plaintiff might have if sued on its guaranty, it could not rescind the executed sales or recover back collateral security delivered by it to secure the obligations of its debtors sold by it and now due to the defendant. Plaintiff had power to sell even if defendant had no power to buy the accounts. Plaintiff does not thereby become revested with title to the accounts; the title to the obligations had passed; if defendant is powerless to hold them, if it usurped powers not conferred upon it, the state alone can call it to account.
[3] There is nothing executory in the transactions except plaintiff’s obligation as guarantor, and’ that is not now sought to be enforced. The collateral held by defendant, 20 per cent, of the part purchase price of the accounts, is held as collateral, not for plaintiff’s guaranty, but for the obligations of plaintiff’s debtors, in which plaintiff, as vendor, no longer has any interest.
B. But in the alternative plaintiff seeks an accounting on the charge that these apparent, sales were, in fact, only devices or subterfuges to conceal loans; that such loans were usurious; that they were also ultra vires, inasmuch as defendant was not and could not be organized under the general incorporation act to engage in the business of loaning money.
[4] 1. A court of equity will not be frustrated in ascertaining the real intention of the parties to make a usurious loan by the fact that parol proof thereof would contradict the written evidence of the apparent transaction; nqt only, .however, must such proof be clear, but it must go to the real intent of both parties. If, in fact, both parties intended a usurious loan, then, in so far as the transactions are still executory, the debtor may recover his collateral on payment of the debt with legal interest.
The ninth paragraph of the amended bill falls short however, of making any clear charges that both parties actually contemplated and made loans disguised as sales with guaranties; it merely gives plaintiff’s conclusion of law that the transactions amounted to loans.
[5] If it is intended to charge that oh the face of the documents the transactions were loans, then clearly the exhibits contradict the averments. They clearly indicate an apparent intention to make an outright sale of open accounts; to permit a part of the purchase money to be held as security for the performance of the debtor’s obligation; and in addition, to guarantee the accounts sold.
The decision in Re American Fiber Reed Co. (D. C.) 206 Fed. 309, affirmed in .the Court of Appeals, that the transactions were loans, not sales, was based not merely on the documents- but on an agreed statement of facts. Moreover, the documents are not identical with those in the present case. Both courts emphasize the importance of a provision deemed-by them to indicate that the entire title to the accounts did not pass. This provision, that in case an account is not paid at maturity it shall be repurchased at the amount theretofore actually *639paid thereon, about 75 per cent, of the face value, is replaced by the positive agreement to repurchase accounts sold at their full face value. So far as the apparent intention of the parties is thereby indicated, this provision negatives any possibility of an apparent intent to retain title to any part of the account.
The sale and guaranty are separate and distinct ; the former is executed, the latter executory. While there is a conflict in the authorities as to whether one who sells commercial paper or open accounts at a discount greater than the legal interest rate and also indorses or guarantees payment may defend on the ground of usury when sued on his conditional executory obligation, clearly usury, even if a shield against such liability, cannot be used as a sword to destroy the executed sale. Usury involves a loan; an actual sale cannot be usurious.
Leave will, however, be given to amend paragraph 9 of the bill so as properly to charge, if plaintiff be so advised, that the transactions were in fact usurious loans.
[6, 7] 2. The original agreement under which defendant was to purchase such accounts as plaintiff offered it, even if proven to be only a subterfuge for an agreement to make such loans as plaintiff might require and for which it could give the kind of collateral specified, and the provision that 20 per cent, of the amount might be retained as collateral for all the deals would not make the entire series of transactions a single one. Each loan would have to be dealt with separately in determining the question of its usurious character and also whether it had been repaid. In so far as any transaction was executed by repayment, it could not be reopened because of usury. The law is well settled that usurious interest actually paid on a completed transaction is deemed to have been voluntarily paid and is therefore not recoverable.
[0-10] 3. Ultra vires no more than usury will justify the reopening of a completely executed transaction. In so far as any loan has been fully repaid, whether at a legal or usurious rate of interest, there can be no recovery. In so far as any loan is still outstanding, repayment of principal with legal interest is concededly a prerequisite, whether it be ultra vires or within the powers of the lender corporation and whether it be at a legal or usurious rate of interest.
Leave will be granted to plaintiff to amend paragraph 9 in accordance with the views herein expressed within ten days. In default thereof, the bill will be dismissed.