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JAMES MANDELINO v. LOUIS M. FRIBOURG ET AL. (11/14/68)

COURT OF APPEALS OF NEW YORK 1968.NY.43529 <http://www.versuslaw.com>; 242 N.E.2d 823; 23 N.Y.2d 145 decided: November 14, 1968. JAMES MANDELINO, RESPONDENT,v.LOUIS M. FRIBOURG ET AL., APPELLANTS Mandelino v. Fribourg, 29 A.D.2d 677, reversed. Counsel Albert W. Fribourg and Louis M. Fribourg, in person, for appellants. Bernard Meyerson and Milton S. Leibel for respondent. Bergan, J. Chief Judge Fuld and Judges Burke, Scileppi, Keating, Breitel and Jasen concur. Author: Bergan


Mandelino v. Fribourg, 29 A.D.2d 677, reversed.

Bergan, J. Chief Judge Fuld and Judges Burke, Scileppi, Keating, Breitel and Jasen concur.

Author: Bergan

 Plaintiff, a real estate broker, purchased from defendants a building in Flatbush Avenue, Brooklyn, for $15,500. He paid $1,000 in cash and executed a purchase-money mortgage for $14,500. The purchase-money mortgage in terms required the payment of 7% interest. This was in January, 1964. The statute on usury then in effect (General Business Law, former §§ 370, 371) prescribed the rate of interest "upon the loan or forbearance of any money, goods, or things, in action" should be 6%. (Cf. General Obligations Law, § 5-501, as amd. by L. 1968, chs. 349, 944, 1072.)

The action is to declare the mortgage and the accompanying mortgage note executed on the same terms "usurious and void". At Special Term the complaint was dismissed on the ground a purchase-money mortgage, reflecting the agreement of the parties on the price of the land, did not come within the scope of the statutory clause "loan or forbearance" and hence was not usurious. The Appellate Division reversed the Special Term, holding that while the sellers were free to "enlarge the purchase money mortgage obligation" by reason of "the extension of credit thereon" they could not "exact interest in excess of the lawful rate prescribed in the statute".

This ruling means that the parties could have fixed mortgage principal of any amount agreeable to themselves but, having fixed it, could not in terms agree to interest at more than 6%. The Special Term's ruling meant that interest and principal were integral parts of the purchase price on the sale of land and that the mortgage in these circumstances was not a "loan" within the terms of the statute. It was not, of course, a "forbearance" in any event.

The basic question, then, is whether a purchase-money mortgage is to be regarded in law as a loan. A fairly well definable line of decisional law suggests it is not a loan. There never seems to have been a case in this court, however, where, as part of the expression of a sale of property made and entirely performable by a non-corporate individual within the State, a rate of interest has been stated baldly and explicitly on the face of the paper in excess of the statutory rate.

The cases that have usually arisen are those in which the excess interest was absorbed, in one way or another, in the total obligation; and occasionally an interest rate authorized in another State has played some part. In rigidly logical terms, whether the interest reflects itself in the total obligation or in an expressed percentage seems indistinguishable in principle. The statute prohibits the proscribed rate "directly or indirectly" (General Business Law, former § 371; General Obligations Law, 5-501, subd. 2).

If it be held that the weight of authority of the decided cases in New York has in the past been not to treat a true purchase-money mortgage as a loan, the further question for the court is whether, as a matter of policy, this apparent exception to the interdiction of the usury statute should be continued in contemporary law.

It cannot be doubted that the question is of importance to the community in the purchase and sale of real property and, indeed, of sales of all kinds of property, and there is much to be said for the stability and certainty in commercial transactions that would result if the laws regulating interest be made apply universally to all transactions according to the terms of the recently revised statute.

But if stare decisis remains a guiding principle and the logic of past cases is to be honored, it is difficult, indeed, to escape holding that the purchase-money mortgage in this present case is not a "loan" within the terms of the usury statute.

It has been noted that there seems no case in this court in which interest was stated baldly in the instrument above the statutory rate; but Weaver Hardware Co. v. Solomovitz (235 N. Y. 321) comes very close to that. One of four notes there considered is pertinent to the present problem. It was found, and this court stated explicitly by Hiscock, Ch. J., that there was "an agreement * * * for the payment of interest * * * in excess of the legal rate" (p. 327). Such a finding is the equivalent of a statement on the face of the instruments.

Nevertheless, in the claim by the payee who sold building material for which that note was given reflecting in its amount interest higher than the lawful rate, it was held insofar as it expressed an agreement as to price of material it was not usurious. "The laws against usury pertain to the loan and forbearance of money and not to the purchase price of building materials", said the Chief Judge (p. 331). Since there was a segregation between other loans which had been made and the sale of goods, it was concluded that "the note under discussion was given solely and simply for the former price. There is no way in which usury could be injected into the note thus given so as to make it void" (p. 331).

From an analysis of cases stemming from the Statute of Anne in 1713, on which most American usury statutes are modeled, Williston reaches the conclusion that where property is sold "the parties may agree that the price, if paid after a certain time, shall be a sum greater by more than legal interest than the price payable at an earlier day" (6 Williston, Contracts [rev. ed.], § 1685, p. 4766). This is so, he notes, even though "stated in the form of interest" greater than the legal rate. A leading English case on the usury statute of that country, consistent with Williston's view, is Beete v. Bidgood (7 B. & C. 453, 108 Eng. Rep. 792).

The general American rule is drawn together in the statement: "An owner of property may sell it at such a price and on such terms as he may see fit, and such a sale, if bona fide, is not usurious, but a usurious loan in the form of a sale will ...


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