Bundy v. Commercial Credit Co., 202 N.C. 604 (1932)

April 13, 1932 · Supreme Court of North Carolina
202 N.C. 604


(Filed 13 April, 1932.)

1. States A a — Definition of “bad faitli” held correct on issue of whether contract was executed in another state in bad faith to avoid usury laws.

In an action involving the question as to whether a contract was made in another state in bad faith to avoid the usury statute of North Carolina : Held, the definition of the words “bad faith” depends largely upon, the facts of each particular case and is not capable of definite definition, and a charge in this case is not erroneous which substantially instructs *605the jury that “bad faith” as used in the issue imports an intent to deceive the other party to the transaction and that the transaction was dishonestly conceived and consummated with knowledge of a fraudulent purpose to evade the usury laws of North Carolina.

2. Pledges A a — Essential elements of valid pledge of securities.

In order to a valid pledge of property the possession thereof must be given the pledgee, and if possession is returned to the pledgor it must be kept separate and distinct from other property and the pledgor must hold it as agent of the pledgee, and where the property consists of notes which are returned to the pledgor for collection, the proceeds must be kept separate, distinct and intact.

3. Pledges A d — Transaction in this case held to constitute a pledge of security giving pledgor lien and not requiring x*egistration.

"Where, under an agreement between a business concern and a credit company, the former sends notes made to it by its customers to the credit company, which immediately remits a certain per cent of their face value and returns the notes to the business concern for collection upon maturity, and the credit company requires that the proceeds from collection be kept separate and intact and sent to it for its check and approval and requires the business concern to “buy the notes back” if not paid within a certain time: Held, the transaction is in effect a pledge of security for borrowed money, and is not a chattel mortgage requiring registration as against creditors and third persons, C. S., 3311, and the pledgee has a lien on the notes in the hands of the business concern or its receiver, the latter’s possession being as agent for the credit company, and the fact that the makers of the collateral notes were not notified of the collateral pledge is not important.

4. Costs A b — Costs in this action held correctly taxed against the plaintiff.

The cost in an action follows the judgment, and where the controversy between the parties narrows itself down to the issue of usury which is decided in the defendant’s favor, an order taxing the cost against the plaintiff is correct. C. S., 1241, 1248.

Civil actioN, before Schenclc, J., at Fall Term, 1931, of Mecklenburg.

This cause was considered by the Court in a former appeal, reported in 200 N. C., 511, 157 S. E., 860.. The facts are substantially the same and no extended restatement of them will be attempted upon this appeal.

The issues submitted were as follows:

1. “Was the contract between the Commercial Credit Company and the Triplett Lumber Company (Exhibit No. 1) lastly executed in the State of Maryland, as alleged in the answer?”

2. “If so, was said contract (Exhibit No. 1) executed by the defendant, Commercial Credit Company, in the State of Maryland in bad faith with the intent and purpose of evading the usury laws of North Carolina ?”

*6063. “Did tbe defendant, Commercial Credit Company, knowingly take, receive; reserve, or charge tbe Triplett Lumber Company a greater rate of interest than 6 per cent per annum, as alleged in tbe amendment to tbe complaint?”

4. “What amount of penalty, if any, is tbe plaintiff, C. W. Bundy, receiver for tbe Triplett Lumber Company, entitled to recover of tbe defendant, Commercial Credit Company, for usurious interest paid?”

5. “Wbat amount is tbe Triplett Lumber Company, indebted to tbe defendant, Commercial Credit Company?”

Tbe jury answered tbe first issue “Yes,” tbe second issue “No,” and tbe fifth issue “$11,942.70.”

Thereupon, judgment was entered decreeing (a) that tbe plaintiff, receiver, is tbe owner of tbe accounts in controversy “free and clear of any lien or claim of-the defendant”; (b) that tbe defendant, Credit Company, is entitled to file an unsecured claim against tbe receiver for tbe sum of $11,942.70; (c) that tbe plaintiff is not entitled to recover anything of tbe defendant upon tbe allegations of usury; (d) that the costs be paid by tbe plaintiff.

From tbe judgment so rendered both parties appealed, assigning errors.

J ohn M. Robinson and Hunter M. Jones for plaintiff.

Duane R. Dills, J ack J. Levinson, J. Laurence J ones and J. L. Delaney for defendant.

BkogdeN, J.

Tbe determinative questions presented by tbe record may be stated as follows:

1. Did tbe trial judge correctly instruct the jury upon tbe second issue ?

2. Was tbe defendant, Credit Company, entitled to a lien upon tbe proceeds realized from tbe collection of accounts and evidences of indebtedness described in tbe exhibit?

3. Did tbe trial judge properly tax tbe costs?

Tbe second issue is as follows: “Was said contract executed by tbe defendant, Commercial Credit Company, in tbe State of Maryland in bad faith with tbe intent and purpose of evading tbe usury laws of North Carolina?” Upon said issue tbe judge instructed tbe jury as follows: (1) “Now, gentlemen of tbe jury, you will note that tbe conjunction 'and’ is used, and not tbe alternative 'or,’ and tbe issue raises tbe query whether tbe action was in bad faith and with tbe intent to evade tbe usury laws of North Carolina.” (2) “If upon consideration of all tbe evidence it has satisfied you, by its greater weight, that in so doing tbe Credit Company did act in bad faith and did act with tbe *607intent and purpose of evading tbe usury laws of North Carolina, then, gentlemen of the jury, it will bé your duty to answer the second issue ‘Yes’ as contended for by the plaintiff.” (3) “In this connection the court repeats that'the phrase ‘in bad faith’ imports that the transaction involved was dishonestly conceived and consummated with knowledge of a fraudulent design or deception. The term ‘in bad faith’ means to mislead and deceive, and before the plaintiff can successfully ask you to answer this issue ‘Yes/ the plaintiff must satisfy you, by the greater weight of the evidence, that the defendant, Commercial Credit Company, had the intent to deceive the Triplett Lumber Company in the execution of the contract in Maryland, and also that the transaction was dishonestly conceived.” (4) “The court charges you that the phrase ‘in bad faith,’ as used in this second issue, imports that the transaction involved was dishonestly conceived and consummated with knowledge of a fraudulent design or deception. The term ‘bad faith’ also means ‘with inten.t to mislead or deceive another!’ ”

The attack made by the plaintiff upon the foregoing instructions is grounded upon the contention that bad faith was improperly defined. The general definition given in Black’s Law Dictionary, second edition, is as follows: “The opposite of ‘good faith,’ generally implying or involving actual or constructive fraud, or a design to mislead or deceive another, or a neglect or refusal to fulfill some duty or some contractual obligation, not prompted by an honest mistake as to one’s rights or duties, but by some interested or sinister motive.” The Georgia Court in Copeland, v. Dunehoo, 138 S. E., 267, said: “Counsel for the defendants say that ‘bad faith involves fraud, deceit, duress, or some such act, and is a state of mind,’ and with this we agree.” There are several decisions in this State discussing good faith as affecting the jurisdiction of courts. See Wiseman v. Witherow, 90 N. C., 140; Sloan v. R. R., 126 N. C., 487, 36 S. E., 21; Thompson v. Express Co., 144 N. C., 389, 57 S. E., 18; Wooten v. Drug Co., 169 N. C., 64, 85 S. E., 140. In the Sloan case the Court held that jurisdiction is not ousted “except when the sum demanded is so palpably in bad faith as to amount to a ‘fraud on the jurisdiction.’ ” In the Wooten case, supra, the Court intimated that good faith not only meant an honest purpose, but that such purpose must appear from the allegations and surrounding facts.

Bad faith cannot be defined with mathematical precision. The ultimate definition of the term would depend upon the facts and circumstances of a given controversy. Certainly, it implies a false motive or a false purpose, and hence it is a species of fraudulent conduct. Technically, there is, of course, a legal distinction between bad faith and fraud, but for all practical purposes bad faith usually hunts in the fraud pack. *608The practical question developed by the evidence in this case is whether the Credit Company, impelled by a false and dishonest motive and not by a legitimate business purpose, undertook to have the contract executed in Maryland in order to evade the usury laws of North Carolina and thus oust the jurisdiction of her courts upon a claim of usury. The Court is of the opinion that the instructions were substantially in accordance with the correct principles approved by the authorities.

Upon the second question the plaintiff contends that the covering agreement or assignment contract was in the nature of a chattel mortgage and governed by C. S., 3311, requiring registration, and hence, as the instrument was not recorded, the defendant is entitled to no lien upon the proceeds of collection. The contract provided that the defendant, Credit Company, should purchase from the Lumber Company certain notes or accounts of customers of the Lumber Company. These accounts, notes and other evidences of indebtedness were to be forwarded to the defendant at Baltimore, Maryland, and if they were approved the defendant would immediately pay to the Lumber Company seventy-seven per cent of the face value of the papers. If the payment of the notes and accounts was more than sixty days in default, the Credit Company required the Lumber Company “to buy them back”; that is to say, the Lumber Company would guarantee the payment and either send a check to pay the same to the Credit Company or the amount would be deducted by the Credit Company from the proceeds of the next batch of notes sold, etc. The Credit Company sent the notes for collection to the Lumber Company and did not notify the original debtors that the accounts had been assigned, but the records of the Lumber Company showed at all times that every account or note purchased by the Credit Company had been assigned or sold. When the notes or accounts became due, the Credit Company sent them to the Lumber Company for collection, but when an account was collected by the Lumber Company the president of the Lumber Company said: “We always sent the identical remittance to them for their check. They required us to do that.”

Hence the evidence raises the question as to whether the contract between the parties constituted a chattel mortgage or a pledge. If the instrument was in the nature of a chattel mortgage, then registration was required, and the judgment was correct. Upon the other hand, if the contract constituted a pledge of the notes, accounts and evidences of indebtedness as collateral security for a loan of money, then the registration law would not apply. The defendant insisted upon the former appeal, and now insists, that the transactions and course of dealing between the parties constituted an absolute sale of accounts and not a loan. *609After a careful reexamination of the entire evidence, the Court sees no reason for changing the opinion expressed in the former appeal that the transaction contemplated a loan of money. The defendant was not engaged in the lumber business, but was primarily engaged in the money business so far as the evidence in this case is concerned. The distinction between a pledge and a chattel mortgage was pointed out in Doak v. Bank, 28 N. C., 309, in the following language: “A mortgage of personal property in law differs from a pledge; the former is a conditional transfer or conveyance of the property itself; and if the condition is not duly performed, the whole title vests absolutely at law in the mortgagee, exactly as it does in a mortgage of lands; the latter, a pledge, only passes the possession, or at most is a special property in the pledge, with the right of retainer, until the debt is paid. A mortgage is a pledge and more, for it is an absolute pledge, to become an absolute interest, if not redeemed in a certain time. A pledge is a deposit of personal effects, not to be taken back, but on payment of a certain sum, by express stipulation, to be a lien upon it.”

Certain well defined tests of a pledge have been established by various decisions of this Court. They may be classified broadly as follows: (1) The pledged property must be .actually delivered to the pledgee; (2) If the pledged property is returned to the pledgor, it must not be commingled or mixed with other property of the pledgor, but it must be understood that the pledgor holds it as agent for the pledgee; (3) If the pledged property consists of notes, accounts or other evidence of indebtedness, and the pledgee places such accounts or notes in the hands of the pledgor for collection, the funds arising from the collection of the pledged property must be kept separate, distinct and intact. Rose v. Coble, 61 N. C., 517; Bizzell v. Roberts, 156 N. C., 272, 72 S. E., 378; Milling Co. v. Stevenson, 161 N. C., 510, 77 S. E., 676. For example, in Milling Co. v. Stevenson, supra, where there was a pledge of certain merchandise, the Court held that the pledge was invalid “because there was no delivery of the pledged property to the bank to be held by it as security, for ‘delivery is the essence of a pledge/ and because the goods were intermingled with other goods and had no identifying marks upon them by which they could be distinguished from other goods of like nature belonging to the Stevenson Company,” etc. The last utterance upon the subject is contained in Sneeden v. Nurnberger’s Market, 192 N. C., 439, 135 S. E., 328. The pledge in that ease was defeated because the facts disclosed that the pledgee did not retain possession of the accounts, but permitted them to be generally and indiscriminately mixed and intermingled with the accounts and other business transactions of the pledgor.

*610In tbe case at bar tbe notes beld by tbe pledgee were sent to tbe pledgor for collection. Tbe identity of tbe property and tbe identity of tbe proceeds of collection was carefully safeguarded. Therefore, upon tbe second question of law, tbe court is of tbe opinion that tbe defendant bad not lost its lien upon tbe proceeds of tbe -collection, and that tbe judgment of tbe court denying to tbe defendant tbe right of lien was erroneous.

Upon tbe question of costs, tbe plaintiff was not entitled to recover costs upon tbe usury allegation. C. S., 1248. Costs are regulated by C. S., 1241 et seq. This Court beld in Patterson v. Ramsey, 136 N. C., 561, 48 S. E., 811, that “in order -to determine who should pay tbe costs, we must consider tbe general result and inquire as to who has, in tbe view of tbe law, succeeded in tbe action.” Tbe action was originally instituted to restrain tbe defendant from collecting certain accounts. Tbe defendant filed an answer asserting a right to collect by virtue of a written contract. Thereupon tbe plaintiff sought to recover tbe penalty prescribed by law for usurious loans. -As tbe case developed, tbe allegations of usury raised tbe real controversy and issue between tbe parties. Tbe verdict of tbe jury has declared tbe defendant to be tbe winner in tbe contest, and, therefore, tbe costs follow tbe judgment, and tbe trial judge correctly taxed tbe costs against tbe pláintiff.

Plaintiff’s appeal: No error.

Defendant’s appeal: Error.