In Re International Raw Material Corporation

AUGUSTUS N. HAND, Circuit Judge (after stating the facts as above). Four questions of law are presented upon this record : (1) Can an agreement by a corporation to pay a rate of interest or a commission in excess of the legal mte bo held invalid by a •court of bankruptcy, having the custody of a fund which is collateral security for the performance of the agreement, upon the ground that a lien upon that fund for an ■excessive rate is unconscionable and should not be sanctioned by a court of equity? (2) Is an agreement to pay legal expenses incurred by a lienor in enforcing his lien, •or in obtaining advice as to its enforcement, illegal, irrespective of the Bankruptcy Act? (3) Was parol evidence admissible to prove what was the rate of the commissions provided for in the contract of August 31, 1925? (4) Is an agreement providing that collateral shall be security for the amount advanced with interest, as well as for payment of commissions and for necessary services of attorneys, forbidden by section 67d of the Bankruptcy Act? The contention that an agreement by the bankrupt corporation to pay more than 6 per cent., be it called commissions or interest, was illegal, and should not be enforced against the collateral, is largely based upon the recent decision of the Circuit Court of Appeals of the Eighth Circuit in the ease of In re Chicago Reed & Furniture Co., supra. The court there held that, irrespective of the usury law of Illinois, a court of bankruptcy would not enforce an agreement which in that case involved payment from the proceeds of mortgaged property of an amount due' for commissions and interest calculated at a rate of over 40 per cent, per annum. Here there seems to be no doubt that the parties agreed among themselves to pay 6 per cent, as interest on the loan and the additional sum of 1% per cent, per month as a so-called commission. We know of nothing to prevent such an agreement. The New York statute provides that no corporation shall interpose the defense of usury, and this has been held in effect to repeal the usury laws so far as the contracts of corporations are concerned. Neither the corporations, nor those who may succeed to their rights, nor their sureties, are heard to object to their bargain, either at law or in equity, because of usury. Curtis v. Leavitt, 15 N. Y. 9; Stewart v. Bramhall, 74 N. Y. 85; Gamble v. Queens County Water Co., 123 N. Y. 108, 25 N. E. 201, 9 L. R. A. 527; Hubbard v. Tod, 171 U. S. 474, 19 S. Ct. 14, 43 L. Ed. 246; The Vigilancia (C. C. A.) 73 F. 452. In Boise v. Talcott, 264 F. 61, this court allowed interest charges of 6 per cent., plus commissions of 10 per cent, for acting as selling agents, together with a discount of 10 per cent, on each loan to the bankrupt. There seems no justification in nullifying the agreement of the parties here, because the interest and commissions which they deliberately arranged were too large to satisfy the ideas of a court. Here, as in other similar cases, the competition of the market fixes rates. The statute has not attempted to control usury contracts made by corporations. Any decision by a court as to what would be a reasonable rate would either have to vary with the kind of security furnished or else be a mere doctrinaire pronouncement. Corporate contracts to pay more than the statutory rate of interest have been, and we believe should be, left to the agreement of the parties, and not disturbed, in the absence of fraud or duress. The agreement to pay legal expenses is set forth in the contract of August 31, 1925, which provides that “the bankers may employ counsel to advise them, and charge the account of the client with attorney’s fees actually incurred, or reasonable prospective attorney’s fees, and the amount thereof shall be added to the lien of the bankers and be secured by the collateral.” This clause is broader than the usual provision, and in terms covers the services rendered in this case. The fee charged was coneededly reasonable in amount. In Boise v. Talcott, supra, this court allowed compensation to attorneys of the lienor under an agreement for the payment of “all legal expenses and reasonable counsel fees,” and we can see no objection to such an allowance, if the services plainly come within the terms of the agreement of the parties, as they seem to have done here. The decision in Mercantile, etc., Corp. v. Warner Bros. Pictures, Inc., 215 App. Div. 530, 214 N. Y. S. 273 (affirmed without opinion in 244 N. Y. 504, 155 N. E. 873), is not in point as to the effect and general validity of a clause like the present, for there the agreement contained no reference to attorney’s fees. The contract of August 31, 1925, recites that “the parties desire to evidence the terms *924 and conditions which are to govern the advance, other than as the same are to be embodied in the notes,” and it provides at paragraph 5 that, in the event of failure to pay the notes, “the bankers shall be entitled tó full additional commission and interest charges at the original rates agreed upon, until the loan is fully paid.” No rate for these “additional commissions” is specified in the contract, and “commissions” are not even, ref erred to in the notes. It is evident that parol testimony was necessary to explain what was the rate of the “additional commissions” agreed upon. The District Judge treated commissions and interest indistinguishably, but the oral testimony in the ease did not (though some of the letters between the parties did, Creditor’s Exhibit 4), and the written contract specifically differentiated them. We can find no justification in not adopting the same course, particularly when it is argued that our failure to do so would prevent proof of the rate of commissions agreed upon. Where the contract professes to cover terms “other than as the same are to be embodied in the notes,” and then provides for the payment of commissions nowhere even mentioned in the notes, the contention that the notes embody the whole contract of the parties would seem to be unfounded. The contract of August 31, supra, was manifestly incomplete, and the statement to the contrary in article 7 thereof, being plainly erroneous, must therefore be disregarded. In such circumstances there can be no doubt of the necessity of ascertaining by extrinsic evidence what the commissions were to be. While we do not suggest that the omission to fill in the blanks in the notes could not have been supplied by parol evidence, we have no reason to decide this point. Assuming, as the District Judge did, that the statutory rate of interest should be read into the notes, irrespective of the blank, yet the parties had agreed upon payment of commissions in a contract defining their relations, and had nowhere indicated in writing what those commissions were to be. The eases of Chelsea Exchange Bank v. Warner, 202 App. Div. 499, 195 N. Y. S. 419, Furstenfeld v. Furstenfeld, 152 Mo. App. 726, 131 S. W. 359, and Haas v. Commerce Trust Co., 194 Ala. 672, 69 So. 894, all relate to the effe.et upon interest-bearing notes of a blank left for the insertion of the rate, and have nothing to do with a case like the present, where a contract is involved that could not be made complete by any implication of law, but must be supplemented in its terms by extrinsic evidence. The foregoing discussion relates only to the validity of the lienor’s agreement, irrespective of section 67d of the Bankruptcy Act, which provides that: “Liens given or accepted in good faith and not in contemplation of or in fraud upon this act, and for a present consideration, which have been recorded according to law, if record thereof was necessary in order to impart notice, shall to the extent of such present consideration only, not be affected by this act.” The above provision was apparently inserted in the act to save liens to the extent indicated, whieh might be thought invalid under other provisions of law. Mr. Eemington, in his treatise on the Bankruptcy Law (3d Ed., § 1944), explains the words “to the extent of such present consideration only” added to section 67d by the amendment of 1910, by saying that “some of the decisions had gone to the extent of holding an entire lien valid, if any portion of it were given on present consideration, thus affording a ready means of defeating the Bankruptcy Law in reference to preferential liens.” The amendment, therefore, was merely to avoid the erroneous decisions above mentioned, and really added nothing to the words “present consideration” already appearing in section 67d. No words of the clause purport to invalidate any lien, and to hold that it has that effect as to all contracts, except to the extent of the consideration advanced, would be to render transfers by way of paying past indebtedness, though made to persons having no “reasonable cause to believe that the * * * transfer would effect a preference,” voidable at the instance of a trustee. It was distinctly held by the Circuit Court of Appeals of the Eighth Circuit, in C der v. Arts (C. C. A.) 152 F. 943 (affirmed 213 U. S. 223, 29 S. Ct. 436, 53 L. Ed. 772, 16 Ann. Cas. 1008), that a mortgage taken within the four months period by a creditor was valid, when the creditor had no reasonable cause to believe that a preference was intended. Judge Sanborn said that “ * * * mortgages or transfers, to secure pre-existing debts made within four months of the filing of a petition in bankruptcy, are legal and valid, unless voidable by reason of some provision of the bankruptcy law, or of some state law, notwithstanding the fact that they create preferences. They are valid unless avoided; not void unless validated. The provision of section 67d, that liens for present considerations given and accepted in good *925 faith shall not be affected by the bankruptcy law, floes not strike down or render voidable those given and accepted for past considerations. * * " ” See, to the same effect, Stedman v. Bank of Monroe (C. C. A.) 117 F. 237. In Boise v. Talcott, 261 F. 61, we allowed both commissions and attorney’s fees for collecting pledged accounts, where the agreement was made more than four months before bankruptcy. In Van Iderstine v. National Discount Co., 174 F. 518, we upheld an agreement pledging accounts for advances made on the eve of bankruptcy, where both a commission of 5 per cent, was charged on the advances and attorney’s fees were charged for collection of the accounts. It is true that the transaction was attacked on the ground that it was in fraud of creditors, and not because of the provisions of section 67d; but the bill by the trustee to recover from the money lender was Anally ordered dismissed in toto by the Supreme Court. Van Iderstine v. National Discount Co., 227 U. S. 575, 33 S. Ct. 343, 57 L. Ed. 652. It was held that there was no intent to defraud creditors, and, that being absent, the transaction stood. We have discovered no case which has allowed any relief against a lender who was not seeking to defraud creditors, except In re Murcott Steel Products Co. (C. C. A.) 294 F. 84, and there only where the transaction occurred within four months and the lienor had knowledge of the insolvency of the borrower. In that case a money lender had advanced $1,200 to an insolvent two weeks before bankruptcy, and taken back a chattel mortgage for $1,500. The mortgage contained the following clause: “And out of the moneys arising therefrom [the sale] to retain and pay to the party of the second part the said moneys above mentioned, with interest and all charges touching the same and the keeping and sale thereof, rendering the over-plus, if any, unto it or its executors, administrators, successors and assigns.” The mortgagee had full knowledge of the fact that the corporation was unable to moot its indebtedness. Ho sought to recover out of the proceeds of the mortgaged property (a) $1,200 and interest; (b) the difference between tho amount actually advanced and tho face of the mortgage' (to wit, $300) as a bonus for the loan; (e) counsel fees as a charge provided for in tho mortgage. He was allowed to recover $1,200 and interest, hut denied the $300 bonus, because of the provisions of section 67d of the Bankruptcy Act, and was not allowed attorney’s fees because the language of tho mortgage could not be construed as covering such an item. In view of the purposes of section 67d, to which we have adverted, whatever may be said of the disallowance of the bonus in the Murcott Case, or of the rationale of the decision, that caso is confined to transactions where the lienor has reason to believe that the borrower is insolvent, and where the lien is obtained within four months of the filing of the petition in bankruptcy. In Boise v. Talcott, supra, we allowed commissions and legal expenses whore the lien was created prior to four months, and in Van Iderstine v. National Discount Co., supra, the same items were not disturbed, where the lien was ereated only four or five days before the filing of the petition in bankruptcy, and the lender was not shown to have had any knowledge of the bankrupt’s insolvency, and no intention of the latter to defraud creditors was established. In the case at bar, the original loans seem to have been made before the four months period; but, if that was not the case in respect to all of the advances, no proof was offered to show that Wormser & Go. had knowledge, of the insolvency of the International Raw Material Corporation when they made the advances. Therefore the claim of Wormser & Co., both as to interest, commissions, and counsel fees, should be allowed, and the order of the District Court is reversed accordingly.