In re Liberty Doll Co.

MAYER, District Judge (after stating the facts as above). Two questions are in controversy: (1) The validity of the chattel mortgage; and (2) the legal effect of paragraph ninth of the contract. I am satisfied that the mortgage was valid. The testimony of Sugarman, the attorney for Eevison & Co., is clear and convincing in respect of the history and details of the mortgage transaction, and the report of the referee need not be added to in that regard. [1] Paragraph Ninth. As the bankrupt is a corporation, the trustee, under the New York law, cannot plead usury. The provisions of the ninth paragraph are, however, different from those in such reported cases as have been called to my attention. Eevison & Co. were not under any binding obligation to advance a dollar, because under paragraph first of the contract the advances were to be made only if the orders received by the bankrupt were “acceptable to” Levison & Co. “as security.” This gave Levison & Co. uncontrolled discretion at any time to refuse to make further advances. Such a provision was, of course, not open to criticism, for, where the lender is financing a business on orders, he may, with propriety and wisdom, insist that he shall be the sole judge of the acceptability or character of the security upon which he is asked to make advances. But because this provision of paragraph first enabled Eevison & Co. to decline at any time to make further advances, it was possible under paragraph ninth for Eevison & Co. (quite irrespective of bankruptcy), to receive $2,500 and attorney’s fees, even though they had advanced far less than the $100,000 contemplated. I fully recognize that there are many persons in the same kind of business as Levison & Co., and that it is not the function of the courts to make contracts for grown-up persons. Doubtless there is an useful [700] field for lenders of this character, so long as their contracts are fair and commercially liveable; but, when these contracts are unconscionable on their face, the courts will scrutinize them closely, to determine, inter alia, whether a liability to pay is really in the nature of an agreement for liquidated damages or merely a penalty in an easily penetrated disguise. The referee was impressed with the argument of counsel for Levi-son & Co. as to the “unusual character” of the agreement, for in his opinion he stated: “In explanation of tlie apparently unconscionable terms of this agreement, by which, according to tbe trustee’s theory, these petitioners took advantage of the bankrupt’s necessity, the petitioners urge what they contend is the unusual character of the transaction. They point out that the advancements were made, not upon actual accounts receivable, but upon mere orders which had not been filled.” But a mere reading of the contract will show that the distinction suggested is of the most shadowy kind; that the lenders were fully protected, and the borrower bound hand and foot. In Matthews v. Coe, 49 N. Y. 57, and 70 N. Y. 239, 26 Am. Rep. 583, the action was for conversion, brought by the owner of the property, on the theory that the defendant had no right to hold it by virtue of a contract void for usury. “The agreement between the parties” said Judge Allen, in 70 N. Y. at page 242 [26 Am. Rep. 583], “was in form the usual commercial contract by which a commission merchant contracts with a dealer in produce or other merchantable commodity for the loan or advance of his money at the legal rate of interest, to enable the dealer to purchase or carry his merchandise, and also for an agreed commission to undertake the care, management, and sale of the commodity. Such contracts, proper and usual in form, may be made-covers for usury, and, when this fact is established by competent proof, they are within the condemnation of the laws against usury, and void. The question is upon contracts for the transaction of a commission business in connection with the use of money, whether a fair, reasonable, usual, and customary allowance for the trouble and inconvenience of transacting the business only has been secured, or whether, under the guise of a commission for services, trouble, and expenses, the lender has sought to and has reserved and secured to himself compensation for the use of his money in excess of the rate of interest allowed by law. The contracts are not necessarily usurious, and the onus is upon the party, seeking to impeach them for usury, to prove the guilty intent, and that the contract is a cover for usury, and for the loan of money upon usury.” The contract between the parties (see record on appeal) provided that the lender was to receive interest on his advances and 2% per cent, on the advances by way of commission. In Spain v. Talcott, 165 App. Div. 815, 152 N. Y. Supp. 611, Talcott (in addition to interest),, for his “services as factor, supervisor, and selling agent,” was to receive 3% Per cent, commission on the sale of consigned goods up to-$200,000 and 3 per cent, upon sales in excess of that amount. While Spain really conducted the business, nevertheless Talcott, if called upon, was obligated to act as factor and selling agent, and in fact collected the bills. See, also, Cockle v. Flack, 93 U. S. 344, 346, 33 L. Ed. 949. In Houghton v. Burden, 228 U. S. 161, 33 Sup. Ct. 491, 57 L. Ed. 780, the circumstances were peculiar, and the contract contemplated the actual services of Burden, a retired merchant and experi [701] enced accountant, who wished to secure light employment and wa? willing to lend money if he could secure such employment. The con tract will be found in the case reported under the title In re Canfield, 193 Fed. 934, 113 C. C. A. 562, and under paragraph VII thereof it was provided that Burden— “shall be entitled to compensation for the labor and services to be performed, - * * which compensation is to be measured by computing 1 per cent, per month npon whatever part of the advance shall remain uncollected on the said accounts. * 15 *" The contract in Re Mesibovsky, 200 Fed. 562, 119 C. C. A. 42, provided that the 2 per cent, commission was to be calculated on the amount due from the customer. In the case of In re Fishel, 198 Fed. 464, 117 C. C. A. 224, the commission was to be figured on “the gross amount of accounts of the customer assigned to the banker.” From the foregoing it will be seen (1) that all these conti'acts fixed the commissions or compensation upon the theory that such commission or compensation should be paid for services actually rendered by one obligated to render them if called upon, and (2) that the commission or compensation was to be calculated on some definite and reasonable basis. In none of the contracts considered in these cases can be found any provision such as the ninth paragraph, which obligates the borrower to pay a fixed amount, irrespective of services rendered. It will be noted that the services agreed' to be rendered under paragraph fourth are not the services of a factor. Where a factor sets aside a part of his warehouse, hires buyers or salesmen, or otherwise obligates himself to others genuinely (and not as a mere cover) to render real service to1 the borrower, it may be that the parties can contract that, in the event of a breach, a stated sum shall be the liquidated damage. In the case at bar, however, all that the lenders bound themselves to do was to collect the accounts, to advise as to credit, to keep books of account, and “to perform all such other services (ejusdem generis) usual in the business” of the borrower. [2, 3] I find no evidence as to what they did in this regard, except that, when insolvency overtook the bankrupt, the lenders had collected more than enough to cover their advances. Undoubtedly, as between private individuals, the provision of the ninth paragraph would be void for usury, because the obligation to pay, irrespective of service rendered, clearly would, make the S2,500 a bonus for a loan. As against this bankrupt corporation, the provision is certainly in the nature of a penalty. Two rules are well established: (1) That where the sum agreed upon is so great as to be unconscionable, it will be regarded as a penalty ; (2) that where the stipulated amount is disproportionate to presumable and possible damages, or to a readily ascertainable loss, the courts will treat it as a penalty. Cotheal v. Talmage, 9 N. Y. 554, 61 Am. Dec. 716; Ward v. Hudson River Bridge Co., 125 N. Y. 230, 26 N. E. 256 (in which Judge Gray points out the distinction between a “penalty” and “liquidated damages”); Curtis v. Van Bergh, 161 N. Y. 47, 52, 55 N. E. 398 (an interesting review by Judge Vann); Cæsar v. Rubinson, 174 N. Y. 492, 67 N. E. 58; Hicks v. Monarch Cycle Mfg. Co., 176 N. [702] Y. 111, 68 N. E. 127 (opinion by Judge Werner analogously in point here); Dunn v. Morgenthau, 73 App. Div. 147, 76 N. Y. Supp. 827, affirmed 175 N. Y. 518, 67 N. E. 1081; Perley v. Shubert, 121 App. Div. 786, 106 N. Y. Supp. 593. See, also, Poppenberg v. R. M. Owen & Co., 84 Misc. Rep. 126, 146 N. Y. Supp. at page 486. in the case at bar there should be no difficulty in ascertaining the value of the services (such as they were) actually rendered, and I cannot imagine any damages for the breach. The lenders have practically made their own rule of damages, for, in the event that the acceptable assigned orders or accounts reached over $100,000, Levison & Co. were to receive 2% per cent, on the gross amount thus assigned. To save the; expense of sending the matter back to the referee, I think on the evidence in this record that it can be found that Levison & Co. are entitled to 2% per cent, on $9,475.58, the gross amount of the assigned accounts — a reasonable compensation for the service they bound themselves to render. If, however, Levison & Co. desire to offer proof of damages in excess of this amount, the claim will be remitted to the referee; for that purpose only. [4] I am of opinion that Levison & Co. are entitled to recover a reasonable attorney’s fee, because they were compelled to defend the validity of the mortgage. While the services rendered to Levison & Co. in this connection by their attorney are not set forth in detail, the referee was undoubtedly sufficiently familiar with them to be able to fix the fee intelligently, and the sum of $250 seems to me to be reasonable. ■ [5] As neither litigant has been wholly successful, the disbursements will be taxed equally against the trustee and Levison & Co. Submit order in accordance herewith on two days’ notice.