On motion to strike defenses.
Plaintiff sues defendant corporation on a series of promissory notes, of which the individual defendants are endorsers. These notes contain acceleration-on-default clauses, provide for 15% attorneys' collection fees, and were, in part at least, secured by a chattel mortgage.
The defendant, among other defenses, has pleaded that of usury. In reply, plaintiff relies on the so-called corporate usury statute, which provides: "No corporation shall plead or set up the defense of usury to any action or suit brought against it to recover damages or enforce a remedy on any obligation executed by said corporation." R.S. 31:1-6. Plaintiff moves to strike the usury defenses.
This statute has been the subject of much litigation, as have its analogues in other jurisdictions. But the leading
decision thereon in this State is that of our highest court in Lembeck v. Jarvis Terminal Cold Storage Co. , 70 N.J. Eq. 757 (E. & A. 1905), where the purpose of the statute is stated as follows: "It is obvious, however, that the statute was passed to protect those that had made loans of money and had taken the paper or bonds of a corporation." This decision was shortly followed by that in Mazarin v. Hudson County R.E. & B. Co. , 80 N.J.L. 35 (Sup. Ct. 1910), where the court said: "In view of the uniform legislative policy of the state in the matter of usury, the words 'obligation executed' by a corporation refers to corporate obligations in the sense of bonds, mortgages, debentures and the like that go on the market and into the hands of the public. It is not rational to suppose that the legislature intended to go further and weaken its public policy against usury by the construction that would make 'obligation' apply to an agreement to pay a usurious commission to an agent. The words 'obligation executed' in the context do not lend themselves naturally to such a meaning."
Had plaintiff's suit here been upon a mortgage or a bond, such as were involved in the Lembeck case, supra , clearly the statute would apply, and the defense of usury should be stricken. Note also the following mortgage cases to the same effect: Silberman v. Isaac Cades, Inc. , 107 N.J. Eq. 575 (E. & A. 1930); Richmond Bldg., &c., Ass'n. v. Aurora, &c., Corp. , 9 N.J. Misc. 1015 (Ch. 1931); General Motors Acceptance Corp. v. Larson , 110 N.J. Eq. 305 (Ch. 1932); Heilos v. State Land Co. , 113 N.J. Eq. 239 (Ch. 1933).
But since the proceedings here are on promissory notes, even though secured originally by chattel mortgage, defendant claims the statute does not apply, and the defense of usury can be raised. More narrowly, therefore, the issue is whether a corporate promissory note is an "obligation executed" by said corporation within the meaning of the statute.
No decision by the courts of this State on this point involving corporate promissory notes has been brought to the attention of the court. In Seacoast Real Estate Co. v. American Timber Co. , 89 N.J. Eq. 293 (Ch. 1918), the note in question was a personal, not corporate, one, the only corporate instrument
involved being a deed. In Ovsiovitch v. Federal Tool and Mfg. Co. , 94 N.J. Eq. 744 (E. & A. 1923), while promissory notes secured by a chattel mortgage were involved, our highest court in reversing the Court of Chancery, expressly passed the question as to whether the statute covered promissory notes, holding that the statute did apply to the chattel mortgage there involved. Since the chattel mortgage originally involved in the case at bar has been foreclosed, defendant apparently contends that the Ovsiovitch decision is inapplicable. However, the New Jersey statute has been held to apply to corporate notes in two cases, one decided by the Third Federal Circuit Court of Appeals, one by the New York Supreme Court. In re Tastyeast, Inc. , 126 F.2d 879 (C.C.A. 3 rd 1941); Ollendorf v. Lissberger , 28 N.Y.S. 2d 455 (N.Y. Sup. 1941).
In the absence of a controlling decision, the purpose of the statute should, therefore, be examined to reach a conclusion as to its true meaning. In 1902, when the statute was adopted, the transaction of the business of this country in the corporate form was, compared to the present, in its infancy. The underlying purpose of the statute doubtless was not to have this infant method of conducting the business of the country starved out by depriving it of the essential nourishment of credit, through the public's fear of purchasing corporate "paper," if affected by the defense of usury. ...