Opinion
William Biel, of New York City (A. Norman Somers and Joseph I. Green, both of New York City, of counsel), for Davis Drug Stores, Inc.
Raphael S. Sternfield, of New York City (Edwin M. Slote, of New York City, of counsel), for Nathaniel Agris.
This is a petition by Davis Drug Stores, Inc. (hereinafter called 'Davis'), as second mortgagee of the fixtures of the bankrupt's drug store to review a decision of the referee in bankruptcy granting the motion of Nathaniel Agris as assignee of first mortgagee, to compel the trustee in bankruptcy to turn over to him, in payment of the first mortgage, the proceeds of the sale of the mortgaged fixtures. Davis, the second mortgagee, opposed the motion upon the ground that the first mortgage had been assigned to Agris as security for a usurious loan made to one Shapiro & Greenstein, the predecessors in title of the bankrupt, and was therefore unenforceable as against the second mortgagee.
The first mortgage, now attacked by Davis on the ground of usury, prior to the assignment thereof to Agris, had been owned by Davis, itself. The mortgage had been executed to Davis on February 2, 1931, by Shapiro to secure the payment of the balance amounting to $22,000 of the purchase price of the sale of the drug store in question on that day by Davis to Shapiro. Before October 8, 1932, Shapiro acquired a partner in the ownership of the store, by the name of Greenstein. There was then due on the mortgage the sum of $17,250. On that day, a written agreement was entered into whereby Davis agreed to take from Shapiro and Greenstein in full satisfaction of the mortgage the sum of $7,000, of which $2,000 was to be paid in cash and $5,000 in two series of notes made by Shapiro and Greenstein and secured by certain indorsements. At the same time Shapiro and Greenstein obtained a loan from Agris necessary to make the above-mentioned initial cash payment to Davis in satisfaction of its mortgage. On behalf of Shapiro and Greenstein, Agris gave Davis his check for $2,500, and, as that was $500 above the required initial cash payment, Davis returned the excess $500 by its own check in that amount to Shapiro and Greenstein's designee. At the same time, Davis, pursuant to the written agreement, assigned the mortgage, reduced to $2,500 to Agris, giving back to Shapiro and Greenstein the last $15,000 of the notes, and indorsing to Agris without recourse the first $2,500 of the notes. These notes were replaced by new notes in the amount of $2,500 made and delivered to Agris by Shapiro and Greenstein, and were secured by the mortgage of $2,500 which Davis had assigned to Agris. Subsequently, Shapiro and Greenstein, in consideration of certain concessions given by Davis to them on October 8, 1932, gave to Davis additional security on those notes in the form of a second mortgage on the fixtures subordinate to that held by Agris. Davis claims its second mortgage to take precedence over Agris' mortgage by reason of the alleged usuriousness of the latter mortgage.
The bankrupt, Langer, later acquired the store and fixtures from Shapiro and Greenstein subject to the two mortgages, and, after Langer went into bankruptcy, the mortgaged fixtures were duly sold, and then Agris made his present motion to compel the trustee to turn over the proceeds of the sale to him.
Davis, in opposition to the motion, submitted the affidavit of Greenstein to the effect that on the closing of October 8, 1932, Agris, before advancing the $2,500 check to Davis, exacted from Greenstein the sum of $500 in cash as a bonus for the loan, so that the amount actually advanced by Agris for the $2,500 in notes, secured by the mortgage assigned to him by Davis, was $2,000, rendering the loan usurious.
The referee overruled the objection of Davis and granted the motion of Agris on the ground, among others, that 'Davis Drug Stores, Inc., cannot raise the defense of usury, being a stranger to this transaction. ' Davis then petitioned to this court for a review of the referee's order.
GALSTON, District Judge.
The referee found that the transaction between Agris and Shapiro & Greenstein was usurious, as it clearly was. The effect, however, of that conclusion inevitably taints the chattel mortgage held as security for the loan. To hold the loan itself void because it was usurious, and at the same time to permit the lender to avail himself of the collateral security, would present a most contradictory situation. If the transaction is void, it falls in all its aspects, and the security in the hands of the lender cannot be enforced. So much seems to be clearly indicated in De Witt v. Brisbane, 16 N.Y. 508.
The effort to prove that Agris held the mortgage as a purchaser and not as collateral for the Shapiro & Greenstein notes is specious. No one can envision the transaction as other than a loan by Agris to Shapiro & Greenstein, in which the chattel mortgage was to be security for the loan.
Nor can I agree with the conclusion of the referee that the Davis Drug Stores, Inc., cannot raise the defense of usury, on the ground that it is a stranger to the transaction. The cited authorities, Yormark v. Waldman, 127 Misc. 748, 217 N.Y.S. 501, Levy v. Hallager, 119 Misc. 695, 197 N.Y.S. 257, and Williams v. Tilt, 36 N.Y. 319, certainly do hold that a stranger to the transaction cannot raise the defense of usury; but they do not hold that in such circumstances as are presented herein the Davis Drug Stores, Inc., should be classified as a stranger to the transaction. Here the Davis Drug Stores, Inc., is a junior mortgagee. I agree with counsel for the Davis Drug Stores, Inc., that Williams v. Tilt, cited above, holds that a junior lienor is in privity with the borrower, even when the junior lien was obtained by virtue of an execution upon a judgment against the borrower. Dix v. Van Wyck, 2 Hill, 522, and Post v. Dart, 8 Paige(N.Y.) 639), cited in Williams v. Tilt. See, also, Thompson v. Van Vechten, 27 N.Y. 568; Union Dime Savings Institution v. Wilmot, 94 N.Y. 221, 46 Am.Rep. 137; Toner v. Ehrgott, 226 A.D. 244, 235 N.Y.S. 17.
Accordingly, the order directing the trustee to pay Agris the sum of $2,225.25 with interest should be reversed. Settle order on notice.