172 U.S. 351
MISSOURI, K. & T. TRUST CO.
KRUMSEIG et al.
January 3, 1899. [172 U.S. 351, 352] In May, 1894, Theodore M. Krumseig and Louise Krumseig filed in the district court of the Eleventh judicial district of Minnesota a bill of complaint against the Missouri, Kansas & Texas Trust Company, a corporation of the state of Missouri, praying that, for reasons alleged in the bill, a certain mortgage made by complainants on the 5th day of September, 1890, and delivered to the defendant, and by it recorded, and certain notes therein mentioned, might be canceled, and the defendant be permanently enjoined from enforcing the same. The defendant thereupon, by due proceedings, removed the cause to the circuit court of the United States for the district of Minnesota, where the Union Trust Company of Philadelphia was made a co-defendant, and the case was so proceeded in that, on October 22, 1895, a final decree was entered, granting the prayers of the complainants, declaring the said mortgage and notes to be void, and enjoining the defendants from ever taking any action or proceeding for their enforcement. 71 Fed. 350.
From this decree an appeal was taken to the circuit court of appeals for the Eighth circuit, where, on November 5, 1896, the decree of the circuit court was affirmed. 23 C. C. A. 1, 77 Fed. 32. On March 20, 1897, on petition of the Missouri, Kansas & Texas Trust Company, a writ of certiorari was awarded, whereby the record and proceedings in said cause were brought for review into this court.
Wm. C. White, for petitioner.
J. B. Richards, for respondent.
Mr. Justice SHIRAS, after stating the facts in the foregoing language, delivered the opinion of the court.
The bill of complaint alleged that on July 27, 1890, Theodore M. Krumseig, one of the complainants, made a written [172 U.S. 351, 353] application to defendant, a corporation of the state of Missouri, for a loan of $2,000, to be secured upon real estate in the city of Duluth, minn ., and among the conditions in the said application was the following:
The bill further alleged that thereupon Krumseig passed the medical examination required, paid the fee demanded, and complainants then executed 10 certain promissory notes, each for the sum of $360, dated September 5, 1890, payable in monthly installments of $30, with interest at 10 per cent. after due, 41 of which installments, amounting to $1,230, have been paid. On the same day, in order to secure these notes, they executed and delivered to the defendant a mortgage on the premises, with the usual covenants of warranty and defeasance, reciting the indebtedness of $3,600, in manner and form aforesaid, and containing the following clause:
The bill further alleged that the sole consideration for the notes and mortgage was (1) the sum of $1,970, together with the interest thereon from date until maturity of the installment notes; and (2) the clause in the mortgage last referred to, which latter was in fact an arrangement between the respondent and the Prudential Life Insurance Company of Newark, N. J., to save the former harmless from any loss that might occur to it in case of the death of the complainant Theodore M. Krumseig during the term covered by the mortgage. It was also alleged that the defendant company had not complied with the laws of the state of Minnesota governing life insurance companies, and that the contract was therefore void. The bill prayed that the mortgage be canceled of record and the remaining notes should be delivered up to them.
The answer denied that the contract was usurious, and alleged that the sum of $1,970 received by complainants, with the legal interest thereon and the cost of the guaranty of defendant to cancel the loan in case of the death of Theodore M. Krumseig during the continuance of the contract, consti- [172 U.S. 351, 355] tuted a full and ample consideration for the notes and mortgage in question, and that the same was so understood and agreed to by complainants at the time of the execution of the contract.
The circuit court did not consider it necessary to pass upon the question whether the contract was one of life insurance, and hence void, for the admitted fact that the defendant company had not complied with the laws of Minnesota respecting life insurance companies; but regarded the contract as one for the security and payment of borrowed money, and, under the facts, as usurious and void, under the statute of Minnesota, and granted the relief prayed for in the bill. 71 Fed. 350.
The circuit court of appeals affirmed the decree of the circuit court. Two of the judges concurred in holding that the contract was usurious, and that the complainants were therefore entitled to the relief prayed for. One of the two judges so holding construed the contract as one of life insurance, and hence also void under the Minnesota laws. The third judge, while apparently concurring in the view that the contract was usurious, thought that the complainants were not entitled to a remedy for a reason which we shall presently consider. 40 U. S. App. 620, 23 C. C. A. 1, and 77 Fed. 32.
Usury is, of course, merely a statutory offense, and federal courts in dealing with such a question must look to the laws of the state where the transaction took place, and follow the construction put upon such laws by the state courts. De Wolf v. Johnson, 10 Wheat. 367; Scudder v. Bank, 91 U.S. 406 .
Section 2212, Gen. St. Minn. 1894, provides that upon the loan of money any charge above 10 per cent. shall be usurious; and section 2217 provides that 'whenever it satisfactorily appears to a court that any bond, will, note, assurance, pledge, conveyance, contract, security, or evidence of debt has been taken or received in violation of the provisions of this act, the court shall declare the same to be void, and enjoin any proceedings thereon, and shall order the same to be canceled and given up.'
As was said in De Wolf v. Johnson, above cited, it does not, [172 U.S. 351, 356] in general, comport with a negotiation for a loan of money that anything should enter into the views of the parties but money, or those substitutes which, from their approximation to money, circulate with corresponding, if not equal, facility. Still, however, like every other case, it is open to explanation, and the question always is whether it was or was not a subterfuge to evade the laws against usury. The books contain many cases where artful contrivances have been resorted to, whereby the lender is to receive some other advantage or thing of value beyond the repayment of the loan with legal interest. Sometimes the agreement has taken the form of the purchase of an annuity. More frequently there is a collateral agreement whereby the borrower is to purchase an article of property and to pay therefor more than its intrinsic value. It has been frequently held that to constitute usury, where the contract is fair on its face, there must be an intention knowingly to contract for or to take usurious interest, but mere ignorance of the law will not protect a party from the penalties of usury. Lloyd v. Scott, 4 Pet. 205.
The precise character of the contract between the present parties is not clear. It has some of the features of a loan of money; in other respects it resembles a contract of life insurance. But our examination of its various provisions and of their legal import has led us to accept the conclusion of courts below that the scheme embodied in the application, notes, and mortgage was merely a colorable device to cover usury. The supreme court of Minnesota has more than once had occasion to consider this very question. In the case of Trust Co. v. McLachlan, 59 Minn. 468, 61 N. W. 560, that court said:
Similar views were expressed in the subsequent case of Mathews v. Trust Co., 72 N. W. 121, where the supreme court of Minnesota again reached the conclusion that the notes and mortgage, forming a contract between the same trust company and one Mathews, were usurious and void.
The next question for our consideration is one not free from difficulty. Can a borrower of money upon usurious interest successfully seek the aid of a court of equity in canceling the debt without making an offer to repay the loan with lawful interest?
Undoubtedly the general rule is that courts of equity have a discretion on this subject, and have prescribed the terms on which their powers can be brought into activity. They will give no relief to the borrower if the contract be executory, except on the condition that he pay to the lender the money lent, with legal interest. Nor, if the contract be executed, will they enable him to recover any more than the excess he has paid over the legal interest. Tiffany v. Insurance Co., 18 Wall. 375.
But what, in such a case, is held to be the law by the courts of the state of Minnesota? Under the statutory provision already cited, that whenever it satisfactorily appears to a court that any bond, bill, note, assurance, pledge, conveyance, security, or evidence of debt has been taken or received in violation of the provisions of this act, the court shall declare the same to be void, and enjoin any proceeding thereon, and shall order the same to be canceled and given up, the supreme court of Minnesota has repeatedly held that a plaintiff suing to cancel a Minnesota contract for usury need not offer to repay the money loaned. Scott v. Austin, 36 Minn. 460, 32 N. W. 89, 864; [172 U.S. 351, 358] Exley v. Berryhill, 37 Minn. 182, 33 N. W. 567; Mathews v. Trust Co. (Minn .) 72 N. W. 121.
Under statutes providing that, in cases of usury, the borrower is entitled to relief without being required to pay any part of the usurious debt or interest as a condition thereof, it has been held by the courts of New York and of Arkansas that courts of equity are constrained by the statutes, and must grant the relief provided for therein without applying the general rule that a bill or other proceeding in equity, to set aside or affect a usurious contract, cannot be maintained without paying or offering to pay the amount actually owed. Williams v. Fitzhugh, 37 N. Y. 444; Lowe v. Loomis, 53 Ark. 454, 14 S. W. 674.
But it is strenuously argued, and of that opinion was Circuit Judge Sanborn in the present case, that federal courts, in the exercise of their equity jurisdiction, do not receive any modification from the legislation of the states or the practice of their courts having similar powers, and that consequently no act of the legislature of Minnesota could deprive the federal courts sitting in equity of the power or relieve them of the duty to enforce and apply the established principle of equity jurisprudence to this case that he who seeks equity must do equity, and to require the appellees to pay to the appellant what they justly owe for principal and lawful interest as a condition of granting the relief they ask.
We think it a satisfactory reply to such a proposition that the complainants in the present case were not seeking equity, but to avail themselves of a substantive right under the statutory law of the state. It seems to be conceded, or, if not conceded, it is plainly evident, that if the cause had remained in the state court, where it was originally brought, the complainant would have been entitled, under the public policy of the state of Minnesota, manifested by its statutes as construed by its courts, to have this usurious contract canceled and surrendered, without tendering payment of the whole or any part of the original indebtedness. The defendant company could not, by removing the case to the federal court, on the ground that it was a citizen of another state, deprive the complainants of such a substantive right. With the policy of the state [172 U.S. 351, 359] legislation the federal courts have nothing to do. If the states, whether New York, Arkansas, Minnesota, or others, think that the evils of usury are best prevented by making usurious contracts void, and by giving a right to the borrowers to have such contracts unconditionally nullified and canceled by the courts, such a view of public policy, in respect to contracts made within the state and sought to be enforced therein, is obligatory on the federal courts, whether acting in equity or at law. The local law, consisting of the applicable statutes as construed by the supreme court of the state, furnishes the rule of decision.
In Clark v. Smith, 13 Pet. 195, it was said that, 'when the legislature declares certain instruments illegal and void, there is inherent in the courts of equity a jurisdiction to order them to be delivered up, and thereby give effect to the policy of the legislature; that the state legislatures have, certainly, no authority to prescribe the forms or modes of proceeding in the courts of the United States; but having created a right, and at the same time prescribed a remedy to enforce it, if the remedy prescribed is substantially consistent with the ordinary modes of proceeding on the chancery side of the federal courts, no reason exists why it should not be pursued in the same form as in the state courts; and that the undoubted truth is that when investigating and decreeing on titles in this country the court must deal with them in practice as it finds them, and accommodate the modes of proceeding to the nature of the case, and to the character of the equities involved in the controversy, so as to give effect to state legislation and state policy, not departing, however, from what legitimately belongs to the practice of a court of chancery.'
The question in Brine v. Insurance Co., 96 U.S. 627 , was whether a state statute which allowed to the mortgagor twelve months to redeem, after a sale under a decree of foreclosure, and to his creditor three months after that, conferred a substantial right; and it was so held, and that such right of redemption after sale was as obligatory on the federal courts [172 U.S. 351, 360] sitting in equity as on the state courts; and that their rules of practice must be made to conform to the law of the state so far as may be necessary to give full effect to the right. The opinion of the court was delivered by Mr. Justice Miller, who said:
Of course, these views are not applicable to cases arising out of interstate commerce, where the policy to be enforced is federal. Nor has it been found necessary to consider whether the agreement between these parties was, as a contract of life insurance, void because the defendant had not complied with the statutes of Minnesota.
The decree of the circuit court of appeals, affirming that of the circuit court, is accordingly affirmed.