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W. PERRY GALLOWAY AND LAKE GEORGE PLANTATION, INC. v. THE TRAVELERS INSURANCE COMPANY

JUNE 03, 1987

W. PERRY GALLOWAY AND LAKE GEORGE PLANTATION, INC.
v.
THE TRAVELERS INSURANCE COMPANY, RICHARD W. HICKMAN, KENNETH R. BRANTLEY AND C. MILTON BOYER



EN BANC

WALKER, C.J., FOR THE COURT:

Perry Galloway and Lake George Plantation, Inc., filed suit against the Travelers Insurance Company and certain of its agents, alleging usury and tortious interference with business. After discovery and on motion of the defendants, the Circuit Court of Washington County entered summary judgment for the defendants as to both causes of action. Perry Galloway and Lake George Plantation, Inc., have appealed. Finding no reversible error, we affirm the judgment of the trial court.

Perry Galloway (Galloway) and George Whitsett (Whitsett) first began participating in business ventures together in 1965. Over the years they operated a cotton merchandising and shipping company, owned interests in a textile mill and a plastics factory, and conducted a trucking business as an adjunct to their cotton-shipping operation. During the 1970's, Galloway and Whitsett acquired, through several purchases, approximately 16,000 acres of farm land in Yazoo, Humphreys and Holmes Counties in Mississippi. The land was used in their agricultural venture which was known as G & W Farms.

 The farming operation was a disaster and unprofitable, and by 1978 the land was heavily encumbered with debts which were in default; foreclosure was imminent. In the late fall of 1978, Richard Hickman (Hickman) and Danny Dew (Dew), agents of the Travelers Insurance Company (Travelers), approached Galloway to discuss a possible loan from Travelers. Hickman and Dew told Galloway that Travelers could lend $15,000,000.00 on two conditions: 1) a 5% brokerage fee would have to be paid to Hickman at closing, and 2) Galloway and Whitsett would have to form a corporation, to which all of the farm land would be deeded, and which would be the borrower of record. The necessity for forming a corporation was due to the restrictions of the applicable Mississippi usury statute discussed infra. Because the interest rate on the loan, calculated according to the actuarial method, was to be 11.7819%, the rate would be usurious if charged to an individual, but not usurious if charged to a corporation. Apparently the sole purpose of the incorporation was to make applicable the corporate, rather that the individual, ceiling on interest.

 Galloway had no objection to the procedure, and Lake George Plantation, Inc., (Lake George) was formed. On March 8, 1979 the loan was made to the corporation, and neither Galloway nor Whitsett was personally liable on

 the note. *fn1 The corporation never transacted any business, *fn2 and the payments on the note were made by Galloway as an individual. The proceeds of the loan were distributed immediately in the following manner:

 To Kenneth Rogers for mortgage on farm land $76,645.00

 To First Tennessee Bank for note representing accumulation of loans from past Galloway/Whitsett business ventures $1,750,000.00

 To John Deere Company for farm equipment debt $6,858.98

 To Connecticut General for mortgages on farm land $3,903,973.10

 To Northwestern Mutual for mortgage on farm land $472,766.41

 To the Farmers Home Administration for crop loans $6,559,000.00

 To Travelers and for various fees $224,522.00

 To Lake George Plantation, Inc. $1,980,434.21

 The loan from Travelers afforded Galloway/Lake George a temporary reprieve from financial woes. By September of 1980, however, the corporation was again in financial trouble, and Lake George Plantation, Inc., conveyed to Galloway the entire 16,000 acre tract, for which Galloway paid no consideration to the corporation. An attempt by Galloway to sell the land to a third party was unsuccessful, and Galloway was forced to convey the land to Travelers in lieu of foreclosure.

 Late in 1983, Galloway and Lake George filed suit against Travelers and certain of its agents. Of the four (4) original counts of the complaint, only two (2) are involved in the instant appeal: 1) a usury claim, alleging that the corporation was formed solely to circumvent the usury law and that the loan was therefore usurious, and 2) a claim for tortious interference with business, alleging that Travelers and its agents pretended to negotiate with Galloway for the orderly payment of the indebtedness while actually working to prevent him from obtaining financing, so he would be forced to convey the land to Travelers.

 After discovery and on motion of the defendants, the trial court entered summary judgment for the defendants on both causes of action, holding, as to the usury claim, that the loan was made to a corporation, and holding, as to the tortious interference with business claim, that once Galloway/Lake George defaulted neither Travelers nor its agents had any duty to enter into an agreement with Galloway to resolve the default.

 The instant appeal is a case of first impression in our State with regard to the issue which we now consider: when an individual has formed a shell corporation solely for the purpose of obtaining a loan which would otherwise be usurious, and when the individual has used the proceeds of the loan for a business purpose, is the loan usurious? We hold that it is not.

 The applicable *fn3 usury statute is Miss. Code Ann. 75-17-1 (Supp. 1979), which reads, in pertinent part, as follows:

 (2) Any borrower may contract for and agree to pay a finance charge for any loan or other extension of credit made directly or indirectly to a borrower, which will result in a yield not to exceed ten percent (10%) per annum, calculated according to the actuarial method, which shall be known as the contract rate.

 (3) Notwithstanding the foregoing and any other provision of law to the contrary, any domestic or foreign corporation organized for profit may agree to pay any rate of finance charge in excess of the maximum rate provided in this section, but not to exceed fifteen percent (15%) per annum, calculated according to the actuarial method, on any contract or other obligation under which the principal balance to be repaid shall originally exceed two thousand five hundred dollars ($2,500.00), or on any series of advances of money pursuant to a contract if the aggregate of sums advanced or originally proposed to be advanced shall exceed two thousand five hundred

 dollars ($2,500.00), or on any extension or renewal thereof; and as to any such agreement, the claim or defense of usury by such corporation, its successors, guarantors, assigns, or anyone on its behalf is prohibited.

 Under applicable law, the loan which Travelers made would have been usurious if made to an individual, but not if made to a corporation. Galloway, who formed a corporation to obtain the loan and then used the proceeds primarily to discharge debts incurred in his business ventures, argues on appeal, as he did below, that the corporation was formed solely to circumvent the usury statute, and that the loan was therefore usurious.

 Various state courts have considered this issue, and two lines of authority have developed. One, known as the "New Jersey Rule" had its origin in Gelber v. Kugel's Tavern, 10 N.J. 191, 89 A.2d 654 (1952). The lender in Gelber required the potential borrower, an individual, to incorporate. When the lender sued after default, the borrower counterclaimed, alleging usury. At the close of the proof, the trial court entered judgment for the lender on the counterclaim, on the ground that the loan had been made to a corporation. The New Jersey Supreme Court reversed, holding that a lender could not require an individual borrower to form a corporation which would "serve as a cloak to cover usurious transactions to evade the usury statute." Gelber, 10 N.J. at 197, 89 A.2d at 657. Since Gelber, the New Jersey Rule has been reaffirmed by the courts of that state, In Re Greenberg, 21 N.J. 213, 220, 121 A.2d 520, 524 (1956); Lesser v. Strubbe, 56 N.J. Super. 274, 285, 152 A.2d 409, 415 (1959), and has been followed in other jurisdictions, Walnut Discount Co. v. Weiss, 205 Pa. Super. 161, 208 A.2d 26 (1965), Havens v. Woolfield, 148 Ind. App. 366, 266 N.E.2d 221 (1971).

 We believe the better rule is that adopted by the New York Supreme Court in Jenkins v. Moyse, 254 N.Y. 319, 172 N.E. 521 (1930). In Jenkins the court held that the loan was not usurious, although made to a corporation which was formed solely for the purpose of charging the higher interest rate. "The law has not been evaded," the Jenkins court held, "but has been followed meticulously in order to accomplish a result which all parties desired and which the law does not forbid." Jenkins, 254 N.Y. at 325-26, 172 N.E. at 522. The New York Rule, like the New Jersey Rule, has found a following in other jurisdictions. RepublicBank of Dallas v. Shook, 653 S.W.2d 278 (Tex. 1983);

 Rabinowich v. Eliasberg, 159 Md. 655, 659, 152 A. 437, 438 (1930). The Fifth Circuit Court of Appeals considered the issue in 1980 and concluded that the great weight of authority would not allow the borrower to claim usury when he formed the corporation to obtain the loan for a business purpose. In the Matter of LeBlanc, 622 F.2d 872, 878 (1980) (applying Louisiana law).

 We agree with these authorities that the New York Rule is the better approach. The corporate form offers various options to those who choose it. Among these options is the opportunity to pursue financing which is unavailable to those who have not incorporated. When an individual acting in furtherance of a profit-oriented business venture chooses to incorporate solely for the purpose of obtaining such financing, he will not later be heard to complain that the loan was usurious.

 Our adoption of the New York Rule does not mean that usury as a claim or defense is never available to one who forms a corporation at the lender's request. Although one who forms a corporation to obtain a loan for business purposes may not assert usury, the claim or defense is available when the proceeds of the loan are used to meet the individual's personal, non-business needs and obligations. The dispositive question is this: is the money used to further a profit-oriented business venture. *fn4 If so, the borrower may not claim usury, even if the loan proceeds were utilized to discharge debts incurred by the profit-oriented business venture prior to incorporation.

 This aspect of the rule is well illustrated by the decision in a New York case, Schneider v. Phelps, 41 N.Y.2d 238, 391 N.Y.S.2d 568, 359 N.E.2d 1361 (1977). Alma G. Phelps was a seventy-five (75) year old widow whose only income consisted of Social Security benefits. In order to obtain a loan, she incorporated. The loan was personally guaranteed by Mrs. Phelps, and was secured by a second mortgage on her home. When the corporation defaulted, the lender sought to foreclose, and Mrs. Phelps interposed the defense of usury. The lender's motion for summary judgment was granted, but the Court of Appeals reversed and remanded, holding that a genuine issue of material fact existed as to the dispositive question: whether the loan was made in furtherance of a corporate or personal business enterprise, in which case the usury defense would be unavailable, or whether, on the other hand, it was made to discharge personal, non-business obligations, in which case the usury defense would be available. See also Buoninfante v. Hoffman, 48 A.D.2d 678, 367 N.Y.S.2d 984

 (1975) (usury defense available where loan was obtained to discharge personal obligations, rather than in furtherance of corporate enterprise), Leader v. Dinkler Management Corporation, 20 N.Y.2d 393, 283 N.Y.S.2d 281, 230 N.E.2d 120 (1967) (usury defense unavailable where proceeds used to further business ventures).

 The Fifth Circuit, in LeBlanc, held that the key, in that case, to determining whether Louisiana courts would allow the borrower to assert usury was that the $8,000,000.00 was loaned to a profit-oriented enterprise for a business purpose. 622 F.2d at 877. Applying Louisiana law to those facts, the court held that the usury defense was unavailable to the borrower.

 WAS SUMMARY JUDGMENT APPROPRIATE?

 Turning to the case at bar, we next consider whether summary judgment was appropriate on the usury claim. Summary judgment should be granted only where the pleadings, discovery materials, and affidavits if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Miss. R. Civ. P.; New Orleans Great Northern Railroad Co. v. Hathorn, 503 So. 2d 1201 (Miss. 1987); Brocato v. Mississippi Publishers Corp., 503 So. 2d 241 (Miss. 1987); Joseph v. Tennessee Partners Inc., 501 So. 2d 371 (Miss. 1987); Brown v. Credit Center, Inc., 444 So. 2d 358 (Miss. 1983). The pre-trial order in the case at bar enumerated certain facts that were established by the pleadings, admissions or stipulation. Among these were 1) that Galloway and Whitsett owned and farmed approximately 16,000 acres, 2) that in each crop year from 1977 on, income from the land was not sufficient to repay the production or crop loan for the year, 3) that at the time of the loan Lake George was a Mississippi corporation, and 4) that when the brokerage fee was included in determining the interest rate, that rate calculated according to the actuarial method was 11.7819%. It is apparent from these facts, as established by pleadings, admissions or stipulation, that Lake George was a corporation formed to obtain financing for a profit-oriented venture, and that the interest rate, though usurious as to an individual, was lawful for a loan made to a corporation. These matters having been established, there was no genuine issue of material fact, and Travelers was entitled to judgment as a matter of law on the usury claim.

 Finally, we must determine whether the trial court erred in entering summary judgment against Galloway on

 the claim of tortious interference with business. Galloway alleged that Travelers and certain of its agents, in an effort to acquire his land, carried out a plan of misrepresentation and deceit by pretending to negotiate with him for the orderly payment of the indebtedness, while actually working to prevent or delay him from obtaining an FmHA or other loan, so that he would be forced to convey the land to Travelers upon terms dictated by Travelers. The damages claimed by Galloway included 1) money damages caused by inability to plant some crops and delay in planting others, and 2) mental distress.

 In its final judgment on this claim, the trial court noted that it was undisputed that "[b]eginning on January 1, 1982, Lake George was in default on its loan to Travelers, and Travelers had the legal right to foreclose on its Deed of Trust because of that default." The following were enumerated in the agreed pre-trial order as undisputed facts: 1) that neither the 1980 payment nor the 1981 payment was made when due, but each was paid within a year of the due date, 2) that the 1982 payment was not paid on the due date, and 3) that Travelers was not legally obligated to enter into agreement with Galloway to end "the 1982 default" (emphasis added). It is undisputed that Galloway was in default beginning January 1, 1982, and that the alleged tortious interference with business occurred in 1982.

 The elements of tortious interference with ...


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