Malmud v. Blackman

Close, J.

On April 8, 1927, Annie Malmud, as trustee of the trust created under the will of her husband, Nathan Malmud, deceased, accepted from defendants Blackman a usurious obligation. The obligation was in the form of a collateral agreement to pay to the trustee the sum of $25,000 in consideration of the trustee’s changing the terms and extending the time of payment of a mortgage on which the balance due was approximately $22,000. The trustee, who was not limited to legáis, acquired the mortgage upon the payment of this sum and at the same time accepted this collateral usurious obligation. By reason of a default in the mortgage the trustee brought an action to foreclose it and also asked for a deficiency judgment against the Blackmans, based on their collateral obligation. Defendants pleaded usury. This defense was overruled and judgment of foreclosure and sale entered. The property was bought in by the trustee and the beneficiaries of the trust in the name of a corporation, and a deficiency judgment of $12,778.68 was entered against the Blackmans. This court reversed the judgment and granted a new trial. (232 App. Div. 765, 782.) Upon the second trial the defense of usury was sustained and the complaint as to the Blackmans dismissed, and the judgment was affirmed. (235 App. Div. 871.)

Thereupon plaintiff, a beneficiary of the trust, on behalf of herself and others, instituted this action against the Blackmans, the trustee and others who participated in the original transaction, seeking to hold the Blackmans liable for the amount of the deficiency judgment less the amount of the usury, or, in the alternative, to have the trust placed in statu quo by conveying the property to the Blackmans upon the payment to the trust of all the sums paid and the expenses incurred. The basis of the complaint is that the usurious agreement was illegal and constituted a breach of the trust and that the Blackmans are liable because they were parties to the agreement and participated in the transaction with knowledge that it constituted a breach of the trust. The Special Term granted the relief prayed for in the complaint.

Usurious contracts are void. (General Business Law, § 373.) Usury laws are for the protection of the borrower, because the power of the lender to relieve the borrower’s needs creates the opportunity for oppression. (27 ft. C. L. 203.) But this action is not brought to enforce the usurious agreement. Its purpose is to compel restitution of the loss sustained by the illegal conduct of the trustee and the borrowers, whereby the trust estate has been despoiled. Every one actively concerned in such a transaction must answer for the loss to the trust estate. The borrowers knew they were dealing with a trustee. They knew also that they possessed the power to prevent, by a plea of usury, the trustee from realizing upon the security pledged. With this knowledge, they proceeded to accept the illegal loan, with a resulting loss to the trust estate and a resulting wrong to the innocent beneficiaries, at least two of whom had no knowledge of the usury. Thereby, the borrowers became liable to the beneficiaries of the trust. (Restatement, Trusts, §§ 288-294.) They were parties to a conversion. (National Surety Co. v. Manhattan Mortgage Co., 185 App. Div. 733; affd., 230 N. Y. 545.)

I To hold the borrowers liable, under such circumstances, for the loss sustained by the trust estate does not pervert the usury statutes by protecting the lender at the borrower’s expense. The result reached in this case merely prohibits the borrower from committing a greater wrong than usury. Usury is not wrongful in itself. It is merely malum prohibitum. (Rosa v. Butterfield, 33 N. Y. 665.) The borrowers were parties to the diversion of a trust fund, so as between a loss to the beneficiaries of the trust, who knew nothing of the transaction, and a gain to the borrowers under the usury law, the former represents a superior equity.

A close analogy is to be found in those cases in which it has been held that where the usurious contract is induced by false representations by the borrower, he will be held estopped from defending on the ground of usury. (Miller v. Zeimer, 111 N. Y. 441.) Of course in no case may the illegal premium be recovered, and the relief afforded goes no further than to restore the status quo. That is all the plaintiff seeks here.

The judgment should be modified so that the innocent beneficiaries will be protected and, at the same time, the guilty beneficiary prevented from • benefiting. This can be done by having the principal of the trust estate made whole and by giving to the defendants-appellants, during the lifetime of the trustee-beneficiary, the income of that part of the fund they are compelled to replace. The trustee-beneficiary is entitled to the income from the trust estate during her life. Therefore, she would presently benefit by any interest allowed. The judgment should be modified by reducing to $9,778.68, the amount to be recovered upon the deficiency after the foreclosure sale, by providing that the income from such amount shall be paid over to the defendants-appellants or their nominee annually by the trustee during her life, and by further providing that upon the election of the beneficiaries to convey to the defendants-appellants the fee to the foreclosed premises upon payment to the said trust estate of the sum of $15,200 without interest and upon receipt of said amount by the trustee, she shall pay the income therefrom annually to the defendants-appellants, or their nominee, during the life of such trustee. As so modified, the judgment should be afiirmed, without costs.

Lazansky, P. J., and Adel, J., concur; Johnston, J., with whom Taylor, J., concurs, dissents and writes for reversal and a dismissal of the complaint.