Scott v. Kennedy , 201 Pa. 462 ( 1902 )

Opinion by

Mb. Justice Fell,

The question presented by this appeal is whether, under the facts agreed upon and embodied in a ease stated, a contract to loan money to a partnership and take a share of the profits in lieu of interest is usurious. In 1888, Scott, the appellant, sold to Kennedy & Bro., the appellees, his interest in certain goods for $18,000, and agreed in writing to accept in payment a judgment note payable one day after date, which, however, was not to be entered of record nor collected for five years, except in case of default in the payment monthly of a share of the profits of the business of the borrowers in lieu of interest. The provision for the payment of a share of the profits was as follows : “ And said Kennedy & Bro. agree to pay Scott in lieu and place of interest on said note a proportion of the profits of said business equal to one hundred and fifty dollars per month payable on the Twenty-first day of each month, the first payment to be made on the Twenty-first day of June, A. D. 1888. This agreement in no sense however to constitute said Scott a partner nor is he to be held out to the world as such in any manner. In case of default in the payment of any of said monthly payments for thirty days after any monthly payment falls due the whole principal sum shall become due and recoverable in the usual manner prescribed by law.” A judgment note was given with the agreement bearing even date therewith, due one day after date, which contained the usual provisions for entering judgment and waiving the right to exemption and to stay of execution. In 1897, a new note was substituted for this one, but there was no intention to change in any manner the relation of the parties, the sole purpose being to retain the transaction as it stood with a change of date only, in order that the appellant could more effectively use the note if necessary for the protection of his interest secured by the agreement.

The act of April 6, 1870, which permits the receipt of a share of the profits of a partnership in lieu of interest without making the lender liable as a partner, is as follows: “ From and after the passage of this act, it shall be lawful for any person or persons to loan money to any individual, firm, association or corporation doing business in the commonwealth, upon agreement to receive a share of the profits of such business as compensation for the use of the money so loaned, in lieu of interest; and such agreement, or the reception of profits under such agreement, shall not render the person or persons making such loans liable as a copartner in such business to other creditors of such individual, firm, association or corporation, except as to the money so loaned: Provided, that such agreement for loan shall be in writing ; and that this act shall not apply to any loan made by a member of any such firm, association or corporation, or to one who holds himself out as such, and shall not be construed to repeal or affect any portion of the law relating to special partnerships : Provided, however, that any person so loaning money under this act shall not hold himself out as a general partner, so as to induce credit to be given to any party or parties, association or corporation, to whom the said loan shall be made.” The purpose of the act no doubt was to modify the rule established in England in 1798 by the decision in Waugh v. Carver, 2 H. Blaekstone, 235, which' had been uniformly followed in this state, that a participant in profits directly as such, no matter what may be the arrangement between the parties, is as to third persons a partner. But the act authorizes the receipt of a share of the profits in lieu of interest without limitation as to amount, and a contract cannot be deemed usurious because the share of the profits stipulated for exceeds the legal interest on the sum loaned. We are not in this ease embarrassed by questions which may arise between general creditors of the partnership and creditors under the act, the determination of which may require the marshaling of the assets of the business. There are no other creditors whose rights are to be considered, and it is agreed that the yearly profits have been largely in excess of the amount paid the appellant.

The act of 1870 protects a loan to a partnership on an agreement to receive a share of the profits of the business in lieu of interest, from the charge of usury. The only question then to be determined is whether the appellant in making the loan brought himself within the protection of the act. On questions of partnership the act has been strictly construed. In Poundstone v. Hamburger, 139 Pa. 324, it was held that it did not exempt from liability as a partner one who had loaned money and by agreement secured the same control of the business as if he were an actual partner, and that a lender is liable to the creditors of the business to the extent of the money loaned and afterwards withdrawn, and in Wessels v. Weiss, 166 Pa. 490, that an agreement partly in writing and partly oral, by which a lender was given a share of the profits in addition to interest, was not within the letter nor the spirit of the act. An equally strict construction should be given when the question is that of usury, and no one should have the protection of the act who has not observed its requirements and in entire good faith loaned money under its provisions. Otherwise the act will become a mere cover for usurious agreements.

The agreement was in strict conformity with the act. It was in writing and the stipulation was for a share of the profits in lieu of interest. Whether the sum to be paid was fixed in advance, or left to be determined by a fixed percentage is unimportant as long as it was a share of the profits only. The judgment note was a part of the agreement and not a separate instrument which added to or varied it. It is mentioned in the agreement as the means of payment, but not to be used to secure a lien or collect the debt except in case of default in complying with the terms of the agreement. It did not bear interest either by its terms or by implication after it became due, as the agreement expressly provided that the profits were in lieu of interest on the note. Profits were not payable unless earned. If there had been no profits, no monthly payment could have been demanded, and as the principal could be collected only in default of the monthly payments, the appellees would have had the use of the money for five years for nothing. The principal was at the risk of the business as to creditors : Poundstone v. Hamburger, supra, and compensation for the money loaned depended wholly upon the success of the undertaking.

Unless then the agreement was a device to evade the statute against usury, it was valid. There is not a fact in the case stated that is even suggestive of such an attempt. When men do what the law expressly authorizes them to do, and in the manner provided by it, there is no possible ground for the inference of an unlawful intent.

The judgment entered on the case stated is reversed, and the rule to open the judgment entered in the common pleas is discharged.