H. C. RIPPLE, TRUSTEE IN BANKRUPTCY V. MORTGAGE ACCEPTANCE CORPORATION.

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North Carolina Supreme Court, March 23, 1927.

No. 367.

TITLE TO PROPERTY-RIGHT OF ACTION TO RECOVER USURIOUS INTEREST PASSES TO TRUSTEE.

The right of action given by the North Carolina statute (C. S., N. Car., § 2306), to recover twice the amount of usurious interest paid passes to the trustee in bankruptcy of the borrower under section 70 of the Bankruptcy Act.

(See Collier, 13th Ed., p. 1723 (4); Am. B. R. Digest, § 376.) SAME-USURY-FINANCE CHARGES' EXCEEDING LEGAL INTEREST ON FICTITIOUS CONDITIONAL SALE CONTRACTS ARE RECOVERABLE.

Where finance company loaned money to bankrupt at rates in excess of legal rate of interest under the guise of "finance charges," taking as security "conditional sale contracts" although it never had title to or possession of the automobiles covered by such contracts, the transaction was manifestly for the purpose of concealing usurious interest and the right to recover twice the amount thereof passed to the bankrupts' trustee in bankruptcy.

(See Collier, 13th Ed., p. 1723 (4); Am. B. R. Digest, § 376.)

Action by trustee in bankruptcy to recover twice amount of interest paid by bank on the ground that it was usurious. Judgment for plaintiff, and defendant appeals. Affirmed.

STATEMENT OF FACTS:

Action by plaintiff, trustee in bankruptcy to recover of defendant twice the amount paid to defendant by the bankrupt prior to its adjudication, upon the allegation that said amount was usury.

The action was begun and tried in Forsyth county court before Parker, J., and a jury. The issues submitted to the jury at said trial were answered as follows:

"(1) Were the contracts sued upon executed in the state of Maryland, as alleged in the answer? A. No.

(2) Were the contracts to be performed in the state of Maryland, as alleged in the answer? A. No.

"(3) Did the defendant own and sell 'the automobiles to the George H.

* 137 S. E. 156.

Willard Motor Company, and take conditional sales contracts therefor, as alleged in the answer? A. No.

"(4) Did the defendant knowingly take, receive, reserve, or charge the George H. Willard Motor Company a greater rate of interest than 6 per cent per annum, as alleged in the complaint? A. Yes.

(5) What amount of penalty, if any, is the plaintiff entitled to recover of the defendant for usurious interest paid? A. $2.290.80."'

From judgment on the verdict, defendant appealed to the Superior Court of Forsyth county. Upon said appeal, its assignments of error, based upon exceptions taken during the trial in the county court, were not sustained. From judgment of the Superior Court, affirming the judgment of the county court, defendant appealed to the Supreme Court. Upon its appeal to this court, defendant assigns as error, first, the refusal of the judge of the Superior Court to sustain its assignments of error, based upon exceptions taken during the trial in the county court; and, second, the signing of the judgment affirming the judgment of the county court.

W. T. Wilson, Edward Duffy, and A. B. Justice, for appellant.

R. M. Weaver, and Hastings & Booe, for appellee.

CONNOR, J.:

Interest is the compensation allowed by law, or fixed by the parties, for the use, or forbearance, or detention of money. Black's Law Dictionary. The legal rate of interest in North Carolina is 6 per cent per annum for such time as interest may accrue, and no more. C. S. § 2305. An agreement by the parties for the payment of interest in excess of the legal rate, made in this state and to be performed therein, is unlawful. Such an agreement is in violation of the statute and is contrary to the public policy of this state, as declared by its General Assembly. No cause of action founded upon such an agreement can be maintained in the courts of this state. The agreement is void. There can be no recovery in any court in North Carolina upon a promise or agreement by a borrower to pay as compensation for the use of money a sum in excess of interest at the legal rate, where such agreement is made within this state, and both parties contemplate that it shall be performed therein. The law in this respect is well settled, and generally understood by all persons, firms, or corporations doing business in North Carolina. From time to time, however, our courts are called upon to determine whether or not the law has been successfully evaded by those who are

not content to lend money in North Carolina at the legal rate of interest. Attempts to evade the law have not been generally successful. Our courts do not hesitate to look beneath the forms of transactions alleged to be usurious in order to determine whether or not such transactions are in truth and in reality usurious. In Bank v. Wysong, 177 N. C. 380, 99 S. E. 199, 12 A. L. R. 1412, Justice Walker, speaking of a transaction alleged to be usurious, says:

"This kind of usurious agreement has been cast in various forms, but the courts have invariably stripped it of its flimsy disguise, and decided according to its substance and its necessary tendency and effect, when the purpose and intent of the lender are unmistakable. And this is the correct rule."

See Lumber Co. v. Trust Co., 179 N. C. 211, 102 S. E. 205; Monk v. Goldstein, 172 N. C. 516, 90 S. E. 519; Riley v. Sears, 154 N. C. 509, 70 S. E. 997; Burwell v. Burgwyn, 100 N. C. 389, 6 S. E. 409.

Where a transaction is in reality a loan of money, whatever may be its form, and the lender charges for the use of his money a sum in excess of interest at the legal rate, by whatever name the charge may be called, the transaction will be held to be usurious. The law considers the substance and not the mere form or outward appearance of the transaction in order to determine what it in reality is. If this were not so, the usury laws of the state would be easily evaded by lenders of money who would exact from borrowers with impunity compensation for money loaned in excess of interest at the legal rate.

In North Carolina, the penalty, as prescribed by statute, for taking, receiving, reserving, or charging for the use of money a sum in excess of interest at the legal rate, is forfeiture of the entire interest which the note or other evidence of debt carries with it, or which has been agreed to be paid. The forfeiture will be enforced against the usurer, when he seeks to recover upon the usurious contract or transaction. His debt will be stripped of all its interest-bearing quality and he will be permitted to recover only the principal sum loaned. If a sum in excess of interest at the legal rate has not only been charged by the lender, but has also been paid by the borrower for the use of money, then the person, or his legal representative, or the corporation by whom

the same has been paid, may recover twice the amount paid in an action in the nature of action for debt. C. S. § 2306. Sloan v. Insurance Co., 189 N. C. 690, 128 S. E. 2; Waters v. Garris, 188 N. C. 305, 124 S. E. 334.

This action is for the recovery of twice the amount paid by the George H. Willard Motor Company, a corporation organi.ed under the laws of the state of North Carolina, with its principal place of business at Winston-Salem, N. C., to defendant, a corporation organized under the laws of the state of Delaware, with its principal place of business in the city of Baltimore, in the state of Maryland, as compensation for the use of money; the amount so paid being in excess of interest at the legal rate upon the amounts loaned. The transactions upon which the several amounts were paid extended from June 23, 1924, to January 23, 1925. The aggregate of the amounts so paid between said dates is $1,145.40. The George H. Willard Motor Company was adjudged a bankrupt on March 6, 1925, and plaintiff, a resident of Forsyth county, has been duly appointed a trustee in bankruptcy for said company. This action was begun on April 22, 1925.

Defendant's first assignment of error, upon its appeal to the superior court, was based upon its exception to the refusal of the county court to sustain its motion made in said court, before the jury was impaneled, that the action be dismissed on the ground that plaintiff, trustee in bankruptcy, cannot maintain the action; it being for the recovery of a penalty prescribed by statute. Defendant contends that this penalty can be recovered only by the person or corporation by whom the usury has been paid, and that the right to recover same does not pass to or vest in the trustee in bankruptcy of such person or corporation. Upon its appeal to this court, defendant assigns as error the refusal of the judge presiding in the superior court to sustain this assignment of error.

Upon the facts alleged in the complaint the George H. Willard Motor Company, by the express provisions of the statute (C. S. § 2306), at the date of its adjudication as a bankrupt, had a right of action, in the nature of an action for debt, against the defendant, for the recovery of the amount demanded in the complaint. This right of action, together with all other rights of action arising on contract, or from the unlawful taking or detention

of, or injury to, the property of the bankrupt, passed to and vested in the trustee in bankruptcy, upon his appointment and qualification as such trustee. National Bankruptcy Act, § 70 (U. S. Comp. St. § 9654). The cause of action alleged in the complaint is founded upon a statute. The statute, however, defines the action as one in the nature of an action for debt. It is for the recovery of twice the amount unlawfully taken by defendant from the bankrupt. The amount so taken is wrongfully detained by defendant, to the injury of the estate of the bankrupt. The right to recover twice this amount, by operation of law, has vested in the plaintiff, who, as trustee in bankruptcy, may maintain the

action.

In Black on Bankruptcy, the author says:

"A right of action under a state statute to recover back usurious interest paid (or double the amount of it, or a penalty for exacting it, as the case may be), will vest in the trustee in bankruptcy of the borrower, since the injury done by the usurer is an injury to the property or estate of the borrower, and not a personal tort." Section 344.

This statement of the law taken from the text is supported by authorities cited in the note. The identical question presented by defendants' assignment of error was decided in Reed v. American-German National Bank (C. C., Ky.), 19 Am. B. R. 140, 155 F. 233. It is there held that a trustee in bankruptcy may maintain an action to recover usurious interest paid by the bankrupt. In Lasater v. First National Bank, 96 Tex. 345, 72 S. W. 1057, it is held that a right of action for the recovery of a statutory penalty for taking usurious interest passes to the trustee in bankruptcy. In the opinion of the court in that case, it is said that

"The weight of authority sustains the proposition that, when such a cause of action as that asserted has accrued, it will, upon bankruptcy of the owner, pass to the trustee in bankruptcy."

See, also, Collier on Bankruptcy (1925 Ed.) p. 1724.

In Cleland v. Anderson, 66 Neb. 252, 92 N. W. 306, 96 N. W. 212, 98 N. W. 1075, 5 L. R. A. (N. S.) 136, it was held by the Supreme Court of Nebraska that a right of action founded upon a statute of that state, for the recovery of damages resulting from a conspiracy to injure the bankrupt's business or property, passed to his trustee in bankruptcy, under the provisions of the National