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McNellis v. Merchants National Bank and Trust Co.

decided: February 16, 1968.


Lumbard, Chief Judge, and Smith and Feinberg, Circuit Judges.

Author: Feinberg

FEINBERG, Circuit Judge.

This is an appeal by plaintiff Phillip J. McNellis, as bankruptcy trustee of Donald S. Potter, from orders of the United States District Court for the Northern District of New York, granting a motion for summary judgment by defendants The Merchants National Bank and Trust Company of Syracuse and Manufacturers Hanover Trust Company. The matter was first before us a few months ago; at that time, we reluctantly concluded that the trustee could not then appeal because his claim had not yet been fully resolved. McNellis v. Merchants Nat'l Bank & Trust Co., 385 F.2d 916 (2d Cir. 1967). We suggested that if the parties could dispose of the remaining issues quickly, a new appeal could be submitted on the briefs already filed, together with whatever additional papers were necessary. This has been done; the previously undetermined claim of the trustee for $3,439.63 has been settled. The case has been referred to the panel that heard the original appeal, and we proceed to a determination of the merits.

For a statement of facts, we repeat substantially what was stated in our earlier opinion, 385 F.2d at 917-918. In the spring of 1963, Donald S. Potter, a real estate broker, filed a voluntary petition in bankruptcy; he was adjudicated bankrupt and Phillip J. McNellis was appointed trustee of the estate. Since then, McNellis has been attempting to recover moneys he claims Potter paid on allegedly usurious loans. E.g., In re Potter, 367 F.2d 513 (2d Cir. 1966); McNellis v. First Fed. Sav. & Loan Ass'n, 364 F.2d 251 (2d Cir.), cert. denied, 385 U.S. 970, 87 S. Ct. 504, 17 L. Ed. 2d 434 (1966). In this case, the trustee's basic claim for relief is that Donald Potter paid interest on a loan by defendant banks in fact made to him although in form to a corporation named Potter Securities Corporation; in other words, the trustee alleges that the Corporation was a dummy for Donald Potter. The trustee's complaint contains two causes of action, both seeking recovery from the banks of allegedly usurious interest payments to them.*fn1 The first cause of action alleges two payments of interest on the loan at an annual rate of eight and one-half per cent: one of $62,526.67 for the period from January 1 to April 1, 1962, and the other of $53,446.35 for the period from April 1 to June 25, 1962. Pursuant to 12 U.S.C. § 86, the trustee seeks damages of double these amounts, or $231,946.04.*fn2 The second cause of action alleges that the two payments were fraudulent under sections 273-276 of the New York Debtor and Creditor Law, McKinney's Consol. Laws, c. 12, and that the later one also violated section 67d(2) of the Bankruptcy Act, 11 U.S.C. § 107(d) (2).

Both plaintiff and defendants moved for summary judgment in the district court before Judge Port. In his opinion, the judge found that:

The principal if not the sole use to which [the Corporation] was put was to hold title to various parcels of realty for relatively short times in order to borrow money, secured by mortgages, on that property.

Moreover, he recognized that:

Many of these loans * * * were made at rates of interest which would have been usurious if charged to an individual borrower.

On the papers before him, the judge concluded that:

The circumstances surrounding the execution of the May 3, 1961 building loan agreement inescapably lead to the conclusion that the loan was made to Potter Corporation and not to Donald Potter.

Judge Port found, therefore, that since under New York law the defense of usury is not available to a corporation, the building loan was not usurious; he dismissed the first cause of action.

As to the second cause of action, the judge held that insofar as it rested on the premise that the two payments were made without fair consideration because they were usurious, it must also fall. See In re Potter, 367 F.2d 513 (2d Cir. 1966). According to Judge Port, however, the second cause of action sets forth another theory: Even if the building loan was made to the Corporation, the payments of interest were actually made by Donald Potter individually; since he was under no personal obligation, the payments were transfers of his property without fair consideration. As to this, the judge held that, except for payments of $3,439.63, the papers before him offered "no support for the contention." As already indicated, the trustee's sole remaining claim for $3,439.63 on the second cause of action has since been settled. An order of Judge Timbers*fn3 discontinued that portion of the trustee's action, and accordingly granted defendants' motion for summary judgment "in its entirety." Therefore, Judge Port's earlier order disposing of both causes of action is now squarely before us.

As to the first cause of action, the trustee and the banks agree on the substance of the relevant law but not its application. The New York law of usury is controlling as to national bank Merchants because 12 U.S.C. § 85 so provides.*fn4 Under New York law, the maximum rate of interest that generally may be charged is six per cent per year. See N.Y. General Obligations Law, McKinney's Consol.Laws, c. 24-A, § 5-501. A specific statute regulating New York State banks has the same limitation. N.Y. Banking Law, McKinney's Consol. Laws, c. 2, § 108. Nevertheless, for many years corporations in New York have been barred from claiming usury. The General Obligations Law § 5-521 now provides: "No corporation shall hereafter interpose the defense of usury in any action. * * *"*fn5 Therefore, if the building loan here was to the Corporation, it cannot recover the payments of eight and one-half per cent interest as usurious; if the loan was to Donald Potter, his trustee can make such a claim.*fn6 Since Judge Port granted summary judgment on the first assumption, the precise issue before us is whether there were genuine issues as to any facts material to this determination.

Judge Port had a "mass of material" before him, including not only the motion papers but also transcripts of depositions and examinations of witnesses before the Referee in the bankruptcy proceedings. Among the facts that were undisputed, or that the judge emphasized in reaching his conclusion, are the following: The Corporation was formed in 1946, and since then its principal function has been to hold title from time to time to various parcels of real estate in order to borrow money, secured by mortgages, on such property; in 1960-1961, it negotiated with the defendant banks to provide interim financing for the construction of a motor hotel near Syracuse, New York; the banks required the Corporation to obtain permanent mortgage commitments in advance from other lenders for long-term financing, which the Corporation did (including a commitment for $2,390,000 from Columbia University); on April 17, 1961, Donald Potter conveyed the property in question by deed to the Corporation, and the latter contracted with two construction companies for the building of the motor hotel; on May 3, 1961, the Corporation entered into the building loan agreement and executed three notes and mortgages in connection therewith; every document relating to the loan was executed by Jackson M. Potter as president of the Corporation; at the time of the loan a title company certified title in the Corporation and the consent of the stockholders was filed; before each advance, the Corporation had to supply the lenders with an architect's certificate showing percentage of completion; and the building loan was replaced in June 1962 by permanent financing by another institutional lender. Appellant trustee stresses other matters in the record; e.g., the land that became subject to the mortgage securing the loan was first purchased by Donald Potter; it ...

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