Petition for Writ of Certiorari — Coral Gables First National Bank v. Constructors of Florida, Inc.

Supreme Court brief1962

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Text

No. 652] |

IN THE’ DEC 21 i

- SUPREME COURT OF THE UNITED] STATES..: cs

OCTOBER TERM, 196)

THE CORAL GABLES FIRST NATIONAL BANK, 3. banking institution

organized under the laws of the United States of America, having its

principal place- of business i. the City of Coral Gables, Florida, and ¥

PAN AMERICAN BANK OF MIAMI, a banking institution organized

and existing under the iaws of .he State of Florida. having its principal

place 9; business in the City of Miami. Dade County, Florida, ahd a

member of ihe Federal Reserve System >f the United States,

_ Petitioners, « ue See ; :

‘ ——

vs.

CONSTRUCTORS OF FLORIDA, INC., a Florida corporation having its

principal place of business in ithe City of Coral Gables, Dade County,

Florida, and JOHN NICHOLAS, as Trustee under Chapter X, Federal

Bankruptcy Reorganization Proceedings now pending in the United

Stgtes District Court, Southern District ‘of Florida, CITY OF WEST, PALM

BEACH, FLORIDA, a municipal corporation organized and existing “under

the laws of the State of Florida, AMERICAN SURETY COMPANY OF

NEW YORK, a Mew York‘corporation authorized to-do business in the a

State of Florida, TOM MAXEY, RUSSELL A. ORTMAYER, RICHARD R. :

REYNOLDS, JIM M. LANCASTER, JR., EARL L. GOODWIN, ISLAND

CONSTRUCTION COMPANY, a corporation organized under the laws

of Puerto Rico and having its principal piace of business in Dade County,

Florida. H. S. FLAGG and UNITED STATES OF AMERICA,

Respondents. /

PETITION FOR WRIT OF CERTIORARI TO THE

DISTRICT COURT OF APPEAL OF FLORIDA, A °

THIRD DISTRICT. °

W. G. WARD,

Alfred |. duPont Building,

Miami, Florida;

Atforney for Petitioner, The Coral

Gables First Natianal Bank

WILLIAM B. ROMAN,

Pan American Bank Building,

Miami, Florida

LEO L. FOSTER.

Brock Building,

Tallahassee, Florida, —

‘Attorneys for Petitioner, Pan

American Bank of Miami.

WARD & WARD,. ,

duPont Building, Miami, Florida,

Of Counsel: . \ ‘

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.” eral Question sought to be reviewed was raised, and —

INDEX |

. The Opinions Below . . . becadhithitinnons SE

- Grounds on Which Jurisdiction of This Court is In-

ae : — 6-11

; Qieetion Presented aoe eoomascRin ©

; Statutes and Rules Involved wees 13-17

. Statement of the Case | _ 17-24

Specification as to the stage of the proceeding in the

Court of the First Instancé and in the Appellate .

Court at which and the manner in which the Fed-

the method d of raising same————— eae ’ 25-27

Reasons for Granting the Writ = 27-31

Argument—

Point 1—Has the District Court of Appeal of

_ Florida, Third District, ia its opinion of March 22.

1960. effective September 19, 1960, as inter-

preted and finalized by the order on the mandate

_ entered on April 14, 1961, and as reconstrued

by the District Court of Appeal of Florida, Third

District, by its opinion quashing the interlocu-

tory appeal dated May 25, 1961, petition for cer-

tiorari and rehearing thereon denied by the Su-

preme Court of Florida September 26, 1961,

- Violated the specific provisions of United States

Statute, Title 12, US.C.A., Paragraph 86, in al-

lowing excessive counterclaims and set-offs

_ and penalties not authorized under said stat-

ute? ‘- ‘ 32-40

Rice

INDEX

- Point 2—Has the District Court of Appeal af Flor-

' ida, Third District, in its opinion and mandate

of March 22, 1960, effective September 19, 1960,

__as interpreted and finalized by the order on the

_ mandate entered on April 14, 1961, and as recon- ~

‘strued by the District Court of Appeal! of Flor-

ida, Third District, by its opinion quashing the

interlocutory appeal dated May 25, 1961, petition |

_ for certiorari and rehearing thereon ‘denied by

the Supreme ‘Court. of Florida, September. 26,

1961, so construed the effect and operation of

the United States Statute, US.C.A., Title 12,’

Paragraphs 85 and 86, limiting the amount of

allowance of usury penalty against a National

Bank, in such a way as to make it void and in-

operative for all practical purposes? 40-43

Point. 3—Where the Federal Statute covering al-

: lowable usury penalties against a National Bank

_under the provisions of U.S.C.A., Title 12, Para-

‘graph 86, is restricted to a defense in an action

to enforce the debt, to a forfeiture of the interest

unpaid but contracted for, without any invasion

of the principal amount due, or where in the

| event any usurious interest is actually paid, to

a separate suit by the one making the’ payment

for double the amount of the interest actually

paid, may a State Court upon alleged equitable

grounds by way of penal or compensatory dam-

ages, impose callateral damages and penalties

against a National ‘Bank in excess of the total

amount of the principal involved in the trans-

action? peo : 44-51

Point 4"May a State Court, in addition to allow-

ing. interest penalties and forfeiture of the

o———

a aan es : .

amount of the principal (all in excess of the

original amount of the lean from the National

Bank), impose additional penalties by way of

punitive or _exemplary damages by forfeiting

other collateral which the Bank holds, because.

it is claimed that the National Bank came into

a State Court of Equity without clean hands? .51-53

Point 5—Where, after a loan has been consum-

. ~* mated by a ‘National Bank to a corporation, and

where the privity of contract is solely between

the National Bank and the corporate borrower,

and where several weeks after’ the loan is con-

summated the National Bank, pursuant to’ ‘its

- Iwex an

- general banking praciice urider the Fede al Re-— --

serve System, grants a simple trust receipt or

participation for a part of this loan on a straight

simple 5% interest participation, does that sub-

sequent transaction with the State Bank relate

the whole transaction from | the. inception as a

cé-adventure or joint adventure or agency con-

tract so as to avoid the direct application of the

federal statute on usury, and bring into play

the state — applicable only to a State

Bank? = - §3-67

Conclusion | ° 68-69

. a

Cases CITED

Brown v. Marion National Bank of Lebanon, Kentucky.

169 U.S. 416, 18 S. Ct. 390 + .39

Butler v. Smith, 104 So.2d 868 10

Carter v. Leon Loan & Finance Company, 146 So. 664 50

Conner Air Lines, Inc.; et al. v. Aviation Credit. Corp.

et al., 280 F.2d 895, 81 S. Ct. 274 © aes 35

i | INDEX

, Coral Gables -First National Bank and Pan American

Bank of Miami et al. v. Constructors of Florida et al., I's

119 So.2d 741 | 2, 6, 25, 26, 37, 41

Coral Gables First National Bank et al. v. Constructors

of Florida et al., 132 So.2d 806; 133 So.2d 319 «6,27

Deitrick v. Greaney, 309 U.S. 190, 84 L. Ed. 694, 60 S. °

Ct. 480 14 '

Department of hin State of Nebraska, v. Pink, 63 r

S. Ct. 233, 317 U.S. 264, 87 L. Ed. 254 8,9 P

Farmers & Mechanics National Bank v. Dearing, 91 ; 2

US. 29, 23 L. Ed. 196° ~~ 39 eee

Federal Reserve Bank of Richmond, Va., v. Duffy et al., <a

188 S.E. 82, 210 North Carolina "598 a 58

First National Bank of Jacksboro- v. Lasater, 196 US.

115, 25S.Ct.206 39

Lavender, Admr., vy. Kurn, 67 S. Ct. 111, 329 US. 762;

° 326 US. 713, 66 S. Ct. 232; 327 US. 645, 66 S. Ct.

- 740; 189 S.W.2d 253; 195 S.W.2d 460 : 9

Lucas v. Federal Reserve Bank, 59 F.2d 617, 620 59-60

McCarthy v. First National Bank of Rapid City, South

_ Dakota, 32'S. Ct. 240, 223 U.S. 493 40

McCollum v. Hamilton National Bank of Chattanooga,

58 S. Ct. 568, 303 U.S. 245, 82 L. Ed. 819 27, 30, 37, 38, 42

McGillick v. Chapman, 134 Fla. 220, 184 So. 26 35 ’

Rosenblum v. Hart. 95 So.2d 18 = 35

Ross v. Atlas Finance’ Corp., 113 Fla. 793, 152 So. 410 . 35

Schumacher v. Lawrence, 108 F.2d 576 30, 31°

Schuyler Nqt: Bank v. Gadsden, 191 US. 451, 24S. Ct. .

129, 48 L. Ed. 258 , 16

Shorr v, Skafte, 90 So.2d 604 , 50

Small Business Administration, Petitioner, v. McClel-

lan, Trustee, 81 S. Ct. 191 . 62-67

Smith v. Butler, 81 S. Ct. 937 : eee

Talbot v. First National Bank of Sioux City, Iowa, 22

S. Ct. 612,185 U.S.172 - . 39, 40

Wenck v. Insurance Agents Finance: Corporation, 99

So.2d 883 35, 36

Wilson v. Conner, 106 Fla. 6, 142 So. 606 <_< ss

° ae INDEX Wes.

STATUTES | :

ida Statutes, ‘Sec. 687.03 « 32, 33

2 \Florida Statutes, Sec. 687.04 . 18, 33°

Florida Statutes, Sec. 687.07 wt k, *

United States Code, 1257, Par. 3 14.

US.C.A.. Title 12; Pars. 85 and 86

12. 15, 16, 25, 27. 28, 30. 32, 40. 44, 58. 66.67.68 |

USC.A., Title 12, Par. 1 aetna 14, 54 F

- USC.A.,.Title 12, Par. 21. S| 14, Sb

RULES | |

Comptroller of Currency Ruling 1135A «17, 55-56

‘Opinion of Comptkpller of Currency 9530 ; 54

IN THE

SUPREME COURT OF THE UNTED STATES

OCTOBER TERM, 1961.

THE CORAL GABLES FIRST NATIONAL BANK, a banking institution -

organized. under the lows of the United States of America, having its

principal place of business in the City of Coral Gables, Florida, and

PAN AMERICAN BANK OF MIAMI, a banking institution organized

and existing under the laws of the State of Florida, having its principal -

place of business in the City of Miami, Dade County, Florida, ond o

member of the Federal Reserve System of the United Stotes,

- Petitioners, :

. vs:

CONSTRUCTORS OF FLORIDA, INC., a Florida corporation having its

principal place of business in the City of Coral Gables, Dade County,

Florida, and JOHN NICHOLAS, os Trustee under Chapter X, Federal

Bankruptcy Reorganization Proceedings. now pending in. the United

States District Court, Southern District of Florida, CITY OF WEST PALM

BEACH, FLORIDA, a municipal corporation organized and existing under

the laws of the State of Florida, AMERICAN SURETY COMPANY OF

NEW YORK, a New-York corporation authorized to do business in the

Stote of Florida, TOM MAXEY, RUSSELL A. ORTMAYER, RICHARD R. ~

REYNOLDS, JIM M. LANCASTER, JR., EARL L. GOODWIN, ISLAND

" CONSTRUCTION COMPANY, o corporation otgonized under the laws

of Puerto Rico and having its principal place of business in Dade County,

Florida, H. S. FLAGG ond UNITED STATES OF AMERICA,

Respondents. -

. PETITION F FOR WRIT OF CERTIORARI TO THE

DISTRICT COURT OF APPEAL OF FLORIDA,

THIRD DISTRICT.

To tre Honorable. the Chief Saami of the United States

and the Associate Justices of the Supreme Court of

the United States:

9 “<,

A. THE OPINIONS BELOW.

en sae

’ In the October Term, 1960, of this Court a Petition

for Writ of Certiorari was directed by the same petitioners

- against the same respondents. The Petitign and the ac-

companying record were numbered No. 559/ October Term,

. 1960.

The record submitted in that case, and as shown in

the index, begun with the complaint for the foreclosure of .

three mortgages, filed September 20, 1957, in the Circuit

Court of the Eleventh Judicial Circuit, Dade County,

Florida, in chancery, No. 205613-E. Plaintiff was The Coral

Gables First National Bank, a national banking institution,

and the Pan American Bank of Miami, a State banking in-

stitution under -the laws of Florida, and a member of th

Federal Reserve System was joined as a party. plainti

because that State Bank held certain participati

cates invelved in the three mortgage loan held by the Na-

~ tional Bank: The claim of the State Bank was based upon

its participation in. the assets which were mortgaged as

security for the original loans with the National Bank.

This proceeding resulted in a-.decree by the Circuit

Court of Dade County, Flurjda, the first decree being

dated June 26, 1958 and designated “Partial Final Decree

of the Circuit Court of the Eleventh Judicial Circuit in

and for Dade County, Florida”. A second érder amending

the Partial Final Decree of June 26, ae was entered on

July 2, 1958.

The opinion of the District Court of Appeal of Florida,

. Third District, was rendered on March 22. 1960. Petition

for rehearing .was er on May 4, 1960 (See 119 a0. 2d

741).

é. 7

- A petition. was then filed by both The Coral Gables .

First National Bank and the Pan American Bank of Miami

to the Supreme Court of Florida on May 18, 1960, which

opinion operated as a supersedeas and stayed all proceed-

ings in the lower court. as will*show by order of the Su-

preme Court of Florida of May 24, 1960. _ |

_ The Supreme Court of Florida denied the petition for

certiorari without an opinion, and denied a petition for

rehearing, final order being dated September 19, 1966.

Under the rulings of the Supreme Court of Florida, this

denial was not on the merits, and left the opinion and -

' decision of the District Court of Appeal of Florida, Third

District, originally dated March 22, 1960, as the final opin- -

ion of the highest court of Florida then having jurisdiction

of the subject matter and the parties. - =

- Petitioners herein filed their petition for writ of

* certiorari in this Court on or about December 2, 1960, in

which petitioners submitted 4 record beginning with the

‘filing of the complaint of September 20, 1957 through Mav

4, 1960. Attached to the appendix to the petition for

certiorari in case No. 559, October Term, 1960, were copies

of the order denying the petition for certiorari by the Su- ,

preme Court..of Florida on September 19, 1960. Briefs

for the respondents were filed in this Court in January,

1961, and petitioners’ reply brief was filed on February. 10,

1961. This Court entered its order denying the petition

for certiorari on February 20, 1961. |

After this Court denied the petition for certiorari. to

the District Court of Appeal of Florida, Third District, on

the date above set forth, the cause was set for hearing

again in the Circuit Court of the Eleventh Judicial ‘Circuit

in and for Dade County, Florida,- which resulted in the -

entry of a new decree by the said Circuit Court dated .

April 14, 1961 (Tr. supporting. this Petition for Certiorari,

p. 175). :

An interlocutory appeal was entered from this judg-

ment or decree of April 14, 1961, to the District Court of

Appeal of Florida, Third District, and on May 25, 1961,

that Court entered an order gianting the motion of ap-

pellees to quash the interlocutory appeal from the final

order of the Circuit Court of the Eleventh Judicial Circuit

of Dade County, Florida, dated April 14, 1961.

A petition for certiorari was filed in the Supreme Court

of Florida. within: 15 days from the order of the District.

Court of- Appeal of Florida quashing the appeal, and the ©

Supreme Court of Florida entered its order denying the

said petition. The order was announced on July 24. 1961.

Filing of the same was delayed pending the disposition

of the petition for rehearing filed by the petitioners, and

both orders were then certified by the Clerk of the Su-

preme Court to the District Court of Appeal of Florida,

_ Third District, on the 26th day of, September, 1961, and

lodged in the Clerk’s Office of the District Court of Appeal

of Florida’ at Miami,. Florida, on September 27, 1961.

We are sited as an appendix to this petition for

certiorari:

Original! “Partial Final Decree” of June 26, 1958. of

the Circuit Court of the Eleventh Judicial Circuit,

Dade County, Florida, and Order of July 2. 1958, .

amending said Decree (Appendix A1l-A19). ;

Opinion of District Court of Appeal of Florida, Third

District, dated March 22,1960 (Appendix A19-A34).

‘ Mandate of District Court of Appeal of Florida, Third

_ District, based upon that opinion (Appendix A35-A36).

Note:

The said written opinion of the District Court of ‘Ap-

peal of Florida, Third District; contains a detailed dis-

cussion of portions of the issues involved, but affirms

in part and reverses in part the original decisions of

the lower court, so that the opinion. of the Appellate

. Court is not completely self-contained. References to

‘the decree as amended in the lower court. together

with reference to the mandate of the’ District Court

of Appeal issued pursuant to that opinion of March

_ 22, 1960. are necessary in order to ascertain just what

was determined.

In our original peititon for certiorari filed in this

Court in December, 1960, we attached as an appendix these

same opinions. We are now attaching to the — sup-

porting this petition for. certiorari.

Final Decree of the Circuit Court of ‘ae Eleventh

Judicial Circuit, Dade County, Florida. entered on

. the 14th day of April, 1961 4 Appendix A37-A41). .

Notice of Interlocutory Appeal to the District t Court ©

of Appeal of ‘Florida, Third District, to review the

Order and Judgment on the Mandate, entered on ‘the

14th day of April; 1961 (Appendix A42-A43).

_ Assignments of Error filed on.the 17th day of April,

1961 (Appendix (A44-A47).

Order of District Court of Appeal oi Florida. Third

‘ District, entered May 25, 1961, quashing this inter-

locutory appeal, based upon the assignments of error

and appeal proceeding hereinbefore referred to (132 So.

2d 806) (Appendix A48). -

- The petition for certiorari filed in the Supreme Court

of Florida in June, 1961, copy of which was simultane-

ously filed with the Clerk of the District Court of

Appeal of Florida, Third District. is voluminous, but

is a part of the transcript of record submitted herewith

under separate cov er. The Federal questions involved

were again raised in that petition for certiorari as re-

flected in the record (Fr. 231-300).

Order of Supreme Court of Florida dated July 24,

1961, denying the petition for certiorari. and the order

of the Supreme Court of Florida of September 26,

1961 (133 So.2d 319), denying the petition for rehear-

ing; showing certification -of mailing of both orders -

- to the District Court of Appeal of Florida, Third Dis- ~~

trict, and filing therein on September 27, 1961 (Ap-

pendix A49-A50).

B. GROUNDS ON WHICH JURISDICTION OF

THIS COURT IS INVOKED.

i. At the time the original petition for certiorari Was

filed in this Court in gase No: 559, October Term, 1960, peti-

tioners were confronted with-the question as to whether or

not the opinion. of the District Court of Appeal of Florida.

_ Third District, dated March 22,. 1960. reported 119 So.2d

741, was a final judgment or decree to which a petition for

certiorari to the Supreme Court of the United States would

lie, or did this decree fall into the category of the granting

of a new trial by the Appellate Court?

: ; : e

.The mandate of the District Court of Appeal of Florida,

Third District (Appendix A35-A36) is as follows:

“MANDATE FROM DISTRICT COURT OF APPEAL OF

FLORIDA, THIRD DISTRICT.

To the Honorable, the Judges of the Circuit Court for the

Eleventh Judicial Circuit of Florida. Greeting:

Whereas, Lately in the Circuit Court of The Eleventh

Judicial Circuit in and for the ve di of Dade in a cause

wherein

THE CORAL GABLES FIRST NATIONAL BANK, etc.

and PAN AMERICAN BANK OF. MIAMI, etc.,

.Plaintiffs.and Defendants

CONSTRUCTORS ‘OF FLORIDA. INC., et al.

(Chancery, No. -2056139-—— a

the decree of said Circuit Court was rendered June 30,

- 1958, as by the inspection of the transcript of the record

of the said Circuit Court which was brought into the Dis-

trict Court of Appeal, Third District of the State of Flor-

ida. ‘by virtue of appeals agreeably to the laws of said

State in such case made and prévided, fully and at large —

appears. Davie Noes ta G.

, And Whereas, at the January Term of said District

Court. of Appeal hqlden at Miami, A. D. 1960, the said

cause’ came on to be heard before thessaid District Court

- of Appeal on the said record of March, A.D., 1960. the

said District Court of Appeal rendered its opinion and

judgment in said cause as per COPY ‘thereof hereto attached .

apd fade a part hereof.

In Consideration Whereof, It Is Ordered by the Court

that the appellants do have and recover of and from the

appellees costs in this behalf expended herein taxed at

Twenty-five Dollars. and that -all other costs shall be

taxed in the court in which the. appeal was entered, there-

fore

You Are Hereby Commanded, That such further pro-

ceedings be had in said cause as according to right, justice.

the iudgment of said District Court of Appeal and the

laws of the State of Florida. ought to be had. the said

decree of the Circuit Court notwithstanding.

« Witness, The Honorable Mallory Horton, Chief Judge

of Said District Court of Appeal, and the seal of said Court

at Miami. this 4th day of May. 1960. .- ,

ete ng WILLIAM P. CARTER

Clerk District Court of Ap-

peal of Florida. Third Dis-

trict.

A True Copy

ATTEST:

William P. Carter

Clerk District Court of

Appeal. Third District.”

At this stage of the proceeding. petitioners were.con-

fronted with the opinion of this Court of Department of

Banking, State of Nebraska, y. ‘Pink, 63 S. Ct. 233, 317 U.S.

°64,. 87 L, Ed. 254, which in effect-held that where a de-

cision of a State Appellate Court was final, with the mere

exception as provided for certain administrative or minis-

terial functions to be performed by the lower court, then .

the petition for certiorari should be filed within 90 days

from the date of that appellate court decision. In the case

above mentioned. the Court of Appeals of New York af-

firmed the decision of the lower courts, but ordered a

remittitur, entered.

In the case at bar, ‘the District. Court of hima of

Florida, Third District. although reversing ‘the lower court

‘in manvy factors. including the reversal on the construc-

tion of the Federal Statute for usury, attempted to define

the tormula under the Federal Statute for the assessment

_ of usury penalties. which appeared to be contrary to the

_ plain language of that statute as interpreted by the severai

decisions of the Supreme Court of the United States.

ap.

‘

\".

i 7 4

®, es

We were also confronted with a case which was de-’

cided by the Supreme Court of’ the United States sub-

oe to the Department of Banking, State of Nebraska,

‘v. Pink decrsion, supra;-which seemed to’change or seri-

‘aim confuse the decisies of that case. This was the case

of Levender; Admr., v. Kurn, 67 S, Ct. 111, 329 US. 762;

326 US. 713. 66 S. Ct. 232; 327 US: 645, 66 S. Ct. 740; 189

‘S.W.2d 253. 195 S.W.2d 460. This decision, which first

"arose fram litigation in the Missouri State Courts, seemed

to definitely hold that where the petition for certiorari was

dyjrected to the final appeilate court of a State. there must

te a definite finality before the Supreme Court of the

inited States would even ronsider the granting_of a peti-

tion for certiorari

Because-of the uncertainty of the, two decisions of

‘this Court, the petitioners submitted the petition’ for cer.

tiorati to this Court even before the cause was reconsid-

ered in the lower court under the mandate

It is respectfully shown that the exact application

of the ruling of this Court on that subject matter involv-

ing the granting of a petition for-certiorari in State Court

proceedings was not fully clarified as applicable to a situ- |

ation ‘such as presented here. until the opmicn of this.

Court in the case of Bert Smith v. J. Tur icr Butler et a: .

Trustees, 81 S. Ct..937. Case’ No. 313, decided April 24.

. 1961. Tins was a very similar type of procedure, involv-

ing «nN epinion and proceedings in the District Court of

Appeal of Florida. Third District wherein this Court °

“ranted certiorari (364 U.S. 869. 81S. Ct. 113. 5 L. Ed.

“Yd 9

In that ‘case-a suit had been, prosecuted in the ‘Cir-

cuit Court of the Eleventh Judicial Circuit, Dade County.

Florida. resulting in a verdict for the plaintiff. .An ap-

0 *

+. .

peal was taken to the District Court of Appeal of Florida.

‘Third District, and that Court reversed the judgment of

the Cirevit Court without passing upon the question of

which of two Federal Statutes was applicable. Its de-

cision, was based uper the fact that there was not suf-

ficient evidence to’ ‘stain a verdict for the plaintiffs. See

Butler. v. Smith, 1°4 So2d 868. The case was then sent

back for a new trial. The plaintiff again submitted the

same record to the trial. judge without amendment, and

the trial judge. following the reasoning of the Appellate

Court. then entered a judgment in favor of the defendant...

The plaintiff thereupon took an interlocutory appeal pro~

vided for under. the Florida Appellate Rules back to the —

District Court’ of Appeal of. Florida, Third District, and

~1n that appeal alleged that the sole pur pose of the appeal

was for the purpose of obtaining a record’upon which the

Court's prior decision of Butler v. Smith, 104 So.2d 868.

could: be reviewed by the Supreme Ccurt of the United

States. The District Court of Appeal. as aforesaid, af-

firmed the judgment on the second appeal (118 So,2d

237). In that opinion it was pointed out. by the District

. Court of Appeal of Florida. Third District. that they noted

counsel for the plaintiff was taking the appeal only to

satisiy the requirements of the United States Supreme

Court rules and statutes applicable thereto. That pro-

vision is mentiéned irt the opinion. Then counsel for the

appellants. after that Appellate Court. had affirmed the

‘ new decision of the lower court. sued out a petition for

certiorari to the Supreme Court of Florida, which was

denied) Then. and then only. did plaintiff's counsel sue

out the petition for certiorari in the Supteme Court of

the United States. and this Court2ranted that certiorari.

In the dissenting opinion it was pointed out (81 3.°Ct.

937. 939) that under these proceedings in the State Duaik.

“-

" and since the first appeal fromi the lower court to the Dis-

trict Court. of Appeal of Florida resulted. in a prior re-

versal and a new trial, there could be no final judgment.

the review of which might have been sought in the Su-

, preme Court of the United States, until a judgment was _

entered on a¢re-trial. This Court «ranted the petition

for certiorari directed to the District Court. of Appeal of

. Florida, Third District, and upheld that type of procedure,

but the Court did by a divided opinion rule out the merits ¢

. of the controversy. but not on the question of the ctaaed

dure. . - £%

Counsel for the petitioners in. this case have proceeded

on exactly the same routine of exhausting their remedy

from the ‘new decree of April 14, 1961, by making appro-

priate attempt to have the District Court of Appeal of

Florida review. that final judgment and decree, and also —

thereafter to have the Supreme Court of Florida take

_ jurisdiction. As above set forth, the District Court of Ap-

peal of Florida, Third District, quashed the appeal from the.

second final decree of April 14, 1961, and the Supreme Court |

of Florida refused to take jurisdiction ‘on certiorari di-

rected to that Court. as wil] show bv its order of Septer:-

ber 26.1961. ,

2. The statutory provision believed to confer jfris-

diction of this Court to review the judgment i estion

by writ of. certiorari is 28 U.S.C. 1257, Paragralph 3.

@ :

C. QUESTIONS PRESENTED.

1. Has the District Court of Appeal of Florida, Third

District. in its opinion of March 22, 1960, effective Sep-

tember 19. 1960, as interpreted and finalized, by the order

on the mandate entered on April 14. 1961. and ‘as recon-

”

strued by the District Cou-t. of Appeal of Florida, Third

District, by its opinion quashing the interlocutory appeal.

dated May 25, 1961, petition for certiorari and rehearing

thereon denied by. the Supreme Court of Florida Sep-

- tember 26, 1961, violated the specific provisions of United

States Statute, Title 12, U.S.C.A., Paragraph 86, in allow-

. ing excessive counterclaims and set-offs and penalties not

authorized under said statute? -

2. Has the District Court of Appeal of Florida, Third :

District, in its opinion and mandate of March 22, 1960; ef-

fective September 19. 1960, as interpreted and finalized

by the order on the mandate entered on April 14, 1961.

and. as reconstrued by the District Court of Appeal of ,

Florida, Third District, by its opinion quashing the inter-

locutory appeal dated May 25, 1961, petition for certiorari |

and rehearing thereon denied by the Supreme Court of

- Florida, September 26; 1961, so construed the effect and

operation of the United States Statute, US.CA., Title 12.

of usury penalty santiat. a National Bank, in such a way

as to make _ _it void and inoperative for all practical pur-

poses? ¢ -

3. Where the Federal Statute covering + ieee us-

ury penalties against a National Bank. under.the provisions

of US.C.A.. Title 12, Paragraph 86, is restricted to a de-

fense in an action to enforce the debt. to a forfeiture of the

interest unpaid but contracted for. without any invasion .

of the principal amount due, or’where in the event any

usurious interest is actually paid, to a separate suit by the

one making the payment for doubie the amount of the

snterest actually paid. may a State Court upon alleged

equitable grounds by way of penal or compensatory dam-

ages impose collateral pce gre penalties against a

National Bank fn excess of the total amount of the princi-

pal involved in the transaction?

4. May a State Court, in addition to allowing inter-

est penalties and forfeiture of the amount of the princi-

pal (all in excess of the original amount of the loan from

the National Bank), impose additional penalties by way

of. punitive or exemplary damages by forfeiting other

collateral which the Bank holds, becatsse it is claimed that

the National Bank came into a State Court of Equity with-_

* out clean hands? —

5. Where, after a loan has been spaiaiitiad by a

National Bank to a corporation, and where the privity of

contract is solely between the National Bank 4nd the cor-

porate borrower, and where several weeks after the loan

is consummated the National Bank, pursuant to its general

banking practice under the Federal Reserve System, grants

a simple trust receipt or participation for a part of this

loan on a straight simple 5% interest participation, does |

that subsequent transaction with the State Bank relate

the whole transaction from the inception as a co-adventure

or joint adventure or ‘agency contract so as to avoid the

direct application of the Federal Statute on ‘usury, and

bring into play the State penalties siitonens only to a

State Bank?

Ds 7

D. STATUTES AND RULES INVOLVED.

. The control question involved which presents / the

Federal question is the fact that the courts of Florida have

ignored the provisions of an Act of Congress affecting and

applicable to National Banks, which act has limited and

defined the amount of usury penalties which may be

“ invoked by a State or a Federal Court where it is claimed

that usury has been collected by a National Bank in a

‘loan made by that Bank to a borrower which is in excess

of the laws of the State in which the prationsl Bank made

- the loan. .

For the purpose of this petition for castionnr’ SO as to

simplify, and pinpoint the violation of the Federal Statute

by a State Court, counsel will assume, for the sake of

argument, but without zany admission at this stage, of the

procedure, that the usury statute? of Florida were violated

by the National Bank. Under that assumption the ques-

tion arises as to what penalties could a State Court assess

against the National Bank, or parties in participation with

it, who participated subsequent to the time the initial loan

was made by the National Bank to a corporate borrower

in the State of Florida.

A .brief reference to several controlling statutes of

the United States will- clarify the background of this ques-

tion. :

United States Code Annotated, Title 12, §1, creates

the Bureau of the Comptroller of the “Currency, which

under the general supervision of the Board of Governors

of the Federal Reserve System created the Comptroller of

the Currency as the chief officer of the banking system -

for National Banks under the,Federal Reserve System.

United States Code Annotated, Title; 12, §21, provides

for the creation of National Banks through the operatjon

of the Comptroller of the Currency, which authorized the

creation of a cornplete system. for the establishment and

government of National Banks as distinct and separate from

any power of the State Courts or the laws of the State to

interfere with their operation or control except insofar

as it may be permitted by the Congress (See Deitrick v.

Greaney, 309 US. 190, 84 L. Ed. 694, 60 S. Ct. 480).

Once a National Bank is established, it is solely under

‘the supervision of the Comptroller of Currency, the Fed-

eral Reserve Board and the specific acts of Congress, and-

may be sued. taxed or controlled by State laws or State

Courts only as specifically authorized bythe Acts of Con-

gress. 3 :

Congress adopted two sections which are applicable te .

‘usuty claims or penalties against. National Banks, regard-

less

of what State the banks may be operating in. US.C.A.,

. Title 12, ¥ 85, is as follows:

Rate of interest on loays, discounts and purchases

Any association may take, receive, reserve, and charge

on any loan or discount made,,or upon arty notes, bills

of exchange, or other. evidences of. debt, interest at the

‘rate allgwed by the laws of the State, Territory, or

' District where the bank is located. or at a tate of 1

per centum in excess of the discount rate ow ninety -

day commercial paper in effect at the Federal reserve

bank in the Federal reserve district where the bank is

located, whichever ray be the greater; and no more,

except that where by the laws of any State a different

rate is limited for banks organized under-State laws,

the rate so limited shall be allowed for associations

organized or existing in any such State under this _

chapter. When no fate is fixed by the laws of-the

Stat¢, or Territory...or District, the bank may take, —

receive, reserve. or charge a rate not exceeding 7 per. ©

centum, or. 1 per centiim in excess of the discount © *

rate on ninety-day commercial paper in effect at the

Federal reserve. bank in the Federal feserve district

where~the bank is located, whichever may be the

greater. and such interest may be taken in ‘advance,

reckoning the days for which the note, bill, or other

evidence of debt has to fun. The maximum amount of

interest or discount to be charged at a branch of an .

association located butside of the States of the United

States and the District df Columbia shall be at the rate

allowed by the laws of the country, territory, depend-

ency, province, dominion, insular possession, or other

political subdivision where the branch is located. And

- the purchase. discount. or sale of a bona fide bill of ex-

change. payable at another place than the place of such

purchase, discount, or sale, at not more than the cur- -

rent rate of exchange for sight drafts in addition to

the interest. shall not be considered as taking or re-

ceiving a greater rate of interest.”

Title 12, § 86, is as follows:

“Usyylous interest; penalty for ‘taking; limitations

The taking, receiving, reserving, or charging a rate of

interest greater than is allowed by the preceding sec-

tion, when “knowingly done, shall be deemed a for-

feiture of the entire interest which the note, bill, or

_other evidence of debt carries, with it, or which: has

been agreed to be paid thereon. In.case the greater

rate of interest has been paid, the person by whom it

has been paid. or his legal representatives, may re-

cover back, in an action in the nature of an action of

~ debt, twice the amount of the interest thus’ paid from

the association taking or receiving the same: Provided,

that such action is commenced within two,years. from

the time the usurious transaction ogcurred.”

It has been judicially determined over a period of many

years that the provisions of Section 85 of Title 12 and Sec-

tion 86 fixing the rate of interest which may be. taken by a-

National Bank, and imposing penalties for taking usurious

interest. are exclusive of State legislation and supersede

. the State laws so far as National Banks are concerned. See

. Schuyler Nat. Bank v. Gadsden, 191 US. 451. 24 S. Ct. 129,

48 L. Ed. 258.

In addition to the above, there is involved the con-

struction of Comptroller of Currency Ruling 1135A, pro-

viding for, and defining the status of, and participation

permitted by a National Bank with members of the Fed-

eral Reserve System. whether State or Federal. This is as

follows (see Official Rules and Regulations of Comptroller

_ of Currency. United States of America):

“Comptroller of ‘Currency Ruling 1135A.

1135A. Sale of loan participations to other banks on a

‘last in-first out’ basis.

The sale of a participation in a. loan to another bank:

(usually the sale of the ‘overline’ cr legally excessive

portion of a.loan) under an arrangement whereby the:

. “ placed portion of the debt must first be extinguished

subordinates the interest of the selling bank. It is

_unsound to place:the selling. bank in a position whereby ©

any loss that .may occur on the entire loan up to the

amount of the selling bank’s participation must be

borne by it, and ‘overline’ participations the intent and

purpose of R.S. 5200 would be nullified under.an agree-

nient having this effect. To avoid this possibility, par-

ticipation arrangements giving to one of the participat-

ing banks an earlier maturity or preference: with re-

spect to payment of the obligation(s) in the regular

course of business, should provide that in the event of

default (intergst and or principal payments: past due

and unpaid for. such period as the participants may

by agreement determine) on the loan, the appoint-

ment of a. receiver, or bankruptcy of the borrower,

the participating banks shall share in all subsequent

loan payments and collections in proportion to the

percentage of*participation held-by each bank at the |

time of the default, the appointment of a receiver, or

pankruptcy. With respect “to ee in real

estate loans see Paragraph 2715.”

E. STATEMENT OF THE CASE.

This: suit was instituted in the Circuit Court of the

Eleventh Judicial Circuit in and for Dade County, Florida.

- by The Coral Gabies First National Bank, séeking to fore-

_ close three separate and distinct notes and mortgages.’ The

mortgages encumbered primarily. equipment belonging to

Constructors of Florida, Inc.. the mortgagor. One of the

18 7.

notes was also secured by the assigriment of a public con-

tract for. sewer construction work for the City of West

Palm Beach, Florida, which contract had been awarded to

Constructors of Florida, Inc. The other co-plaintiff, Pan

American Bank of Miami, a Florida state banking corpora.

tion, also joined as co-plaintiff because it held a certificate

of participation from The Coral Gables First National Bank

evidencing the purchase of a participation in the loans in

question. The notes and mortgages, however, ran solely

to The CofMl Gables First National Bank. The defendant.

Constructors of Florida, Inc., filed an answer setting up

the defense of usury and also filed a counter-claim in

which it was alleged that the loan transactions in question

were usurious in violation of Section 687.04. Florida °

- Statutes, and 687.07, Florida Statutes, and prayed that the

Court invoke both statutes, not only against The Coral

Gables First National Bank, _ but as against any equitable

right of distribution in favor of the Pan American Bank of

Miami by virtue of its participation agreement with The

Coral Gables First National Bank. |

Briefly, the pertinent facts are that on July 25. 1956,

Constructors of Florida borrowed $22,222.32 fi rom The Coral

Gables First National Bank, and secured the same by a

chattel mortgage on certain equipment of Constructors of

Florida. One day prior thereto, on July 24, 1956, the said

. National Bank, had made a loan in the principal amount of

.$148,305.36, also secured by chattel mortgage upon equip-

ment of Constructors of Florida. Shortly thereafter The

Coral Gables First National’ Bank made an additional loan

to Constructors in the amount of $442,400.00, which loan

was secured by an assignment of a water and sewer con-

tract which Constructors had entered into with the City

of West Palm Beach, Florida. Also, as collateral security

for this loan: there was a chattel mortgage encumbering.

_ ana a

certain machinery. and equipment of Constructors upon |

which The Coral Gables First National Bank held two .

prior liens by reason of two prior loans made in July of

1956. The promissory note evidencing the loan was pay-

_ able in twenty-three monthly installments of $3,000.00 each

and a balloon installment at the end of the twenty-fourth —

month of $373,400.00, with interest at the rate of 5% per

annum. The.Coral Gables First National Bank disbursed

' proceeds of this loan as follows:

“ A. Sixty Thousand Dollars was utilized to repay a

‘ prior loan made by Constructors from The Cora! Gables

First National Bank in the amount of Sixty Thousand Dol-

lars. ;

B. Two Hundred Two Thousand Five Hundred Sixty-

Two Dollars and Thirty-Eight Cents was deposited. di-

rectly to the account of Constructors of Florida in The Coral

Gables First National Bank.

| C. Forty-Four Thousand Two Hundred Forty Dollars

was retained by The Coral Gables First National Bank as ~

advance interest for two years.

D. One Hundred Thirty-Five Thousand Five Hundred

Ninety-Seven Dollars and Sixty-Two Cents was deposited

into an account of Constructors of Florida known as Col-

lateral Account ‘No. 1. This accouni required the signa-

ture of an officer of The Coral Gables First National Bank“

- and an officer of Coristructors of Florida. The funds in

Collateral Account No. 1 were to be disbursed as the water

and sewer contract progressed, in the nature of a con-

$truction advance. Disbursements were made from Col-

lateral Account No. 1 upon request of Constructors from

November 23, 1956 through «January 7. 1957.. when the

entire Collateral Account No. 1 was exhausted by reason

of disbursing the same to Constructors of Florida.

On November 19, 1956, The Coral Gables First National

Bank offered a participation to Petitioner, Pan American

Bank of Miami, a State bank, in the loan to Constructors

to the extent of $243,320.00, the same being a 55% partici-

pation in the loan. The Pan American, Bank was to re-

ceive 5% simple interest on its participation. It did not re-

ceive any part of the $44,240.00 retained by The Coral

Gables First National Bank as advance interest. The

atk participation certificate, was approved by the Board of

Directors of Pan American Bank of Miami on November .

28, 1956, and accepted on that same date. Beginning about

November 29, 1956. and continuing through March 1, 1957,

various payments became due to Constructors of Florida

from the City of ‘West Palm Beach. and these moneys were

deposited by prior agreement between The Coral Gables

First National Bank and Constructors of Florida into an

_ account of Constructors known as Collateral ‘Account No.

2. ° This account also required the signature of one offi-

- cer of Constructors and one officer of The Coral Gables

First National Bank. As the monthly payments became

due, there was disbursed from Collateral Account No. 2

the amount of each monthly payment. This situation con-

tinued. until March of 1957. At that time Constructors, by

- reason of other jobs which it had undertaken, was in fi-.

nancial difficulty and in default under both the prior

mortgages given in July, 1956, to secure loans in the.

original principal amounts of $22,222.32 and $148.305.38,

' respectively. The Coral Gables First National Bank, exer-

cising its rights under its agreement with Constructors of '

Florida 2s contained in the promissory note, applied all of

the moneys in Collateral Account No. 2 in reduction of the

indebtedness of Constructors on its ncte of November 14.

1956. thereby reducing the principal] balance outstanding

‘to $253,859.33. At this point, pursuant to the contractual

agreement between Constructors of Florida and The Coral

Gables First National Bank, the Bank was obligated to

adjust the interest. This was done, and a credit was given

to Constructors of Florida of $35,584.06, as is evidenced

by the new agreement entered into March 20, 1957, be-.

tween Constructors of Florida, The Coral Gables First

National Bank and American Surety Company of New

York, which was the surety for Constructors on certain

_’ bonds. This: new ,agreement accomplished basically the

following:

‘All of the proceeds becoming available to Construc-

tors of Florida as work progressed on the water and sewer

contract of the City of West Palm Beach were to be paid

to’ American Surety Company. as Trustee. The $442.,-

410.00 loan of November 14. 1956, which had been reduced

by payments and credits to $218.275.27, was. rewritten |

on a demand basis. with the provision that no demand

' would be made by The Coral Gables First National Bank

so long as the water and sewer contract with the City of

West Palm Beach was not n default. The payments

" coming into the hands of the Trustee were then allocated

so that a certain amount was to be paid to The’ Corai

Gables First National Bank in order to keep the payments

current-on the two July, 1956. loans which were secured

by a first mortgage on the equipment of Constructors.

_ (This is the first time that the July, 1956. loans were in

.any way connected with the November 14, 1956. loan. |

Sixty-five per cent. of the payments received by the

‘American Surety Company -were then to be appiied

- against the new demand note of $218.275.27. and the ©

balance of the funds was to be available to American

Surety Company end Constructors of Florida for use in

completing the City of West Palm Beach contracts. *

This new arrangement continued until on or about

August 25. 1957. at which time the City of West Palm

ees

”

——

Beach claimed certain breaches by Constructors of the

“water and sewer contracts. and attempted to take over

ahi

_the remaining work itself. Thereafter. The Coral Gables

First National Bank. and Pan American Bank of Miami.

as a participant, brought foreclosure proceedings against

Constructors. It was at this time that Constructors

pleacted the defense of usury.

The lower Court found that the loan transaction of

November 14. 1956, was usurious; that the re-negotiated

agreement of March 20, 1957, did” ‘not ctre the «usurious

taint. and assessed damages against The Coral Gables First

National Bank for doubie the interest received by that

bank (which included the $44.240:00 which was retained

by_the, bank as advance interest although never ‘actually

paid . and gave credit against the amount so computed

for the interest credited to Constructors upon the re-nego-

tiation on March 20, 1957. The lower Court also awarded

damages against the Pan American Bank of Miami in the

total sum of $265,999.27, representing the principal and

interest received by both the Pan American Bank of

Miami and The Coral Gables First Nationgl Bank. ‘The

Court als6é cancelled the os unpaid principal and

interest. and referred to this as a‘ hese ese' of both Plaintiff

banks.” . ; om .

* In addition to the above damages, the Court awarded

attorneys’fees against the banks in the amount of $45.-

0 and $27,547.58 respectively. The District Court

of Appeal of Florida, Third District. reversed the lower

Court-as to the award for attorneys’ fees, and found *’.at

the National Bank Act applied to The Coral Gables First

_ National Bank and, theréfore. the forfeiture of the prin-

cipal! amount would be reversed as to The Coral Gables

First National Bank, and that bank could recover that

percentage of the principal amount of the loan which it

——e.

had furnished. The balance of thé findings of the lower

Court were affirmed, including a finding by the lower

_ Court that the plaintiff banks could not foreclose the mort.

gages securing the loans of July 24. 1956. and July 25.

1956, to which no defense of usury had been raised, on the |

theory that the banks had not come into equity with clean

hands-—-not with respect to the two loans in question, but

with respect to the subsequent transaction of November

14. 1956

On April 14, 1961, the lower Court entered its finai

order-and judgment’ on the mandate, which purported to

be in conformity with the opinion of the District Court of

“Appeal of Florida, Third District. However. the, lower

Court dia not follow the mandate of the District ¢-ourt of

Appeal and review’the entire question of usury, but pro-

ceeded to enter a ‘final judgment against The Cora) Gables

First National Bank in the amount of $74,867.52, with in-

terest from July 2,° 1958. and a judgment against Pan

~ American: Bank of Mgami in the amount of $265,999.27.

with interest from July 2. 1958. The lower Court did.

however. reserve unto The Coral Gables First Nationa!

Bank the sum of $11,271.20, on the theory that this repre-

sented the unpaid balance of the principal amount ad-

_ vanced by The.Coral Gables First National Bank. How.

ever as an additional usury penalty. the lower Court held

that the len of The Coral Gables First National Bank se

curing the indebtedness was not enforceable. not only as

to the Novembey 14. 1956, loan transaction. but also as to

the two prior chattel mortgazes of July. 1956) «For copy «1

cecree Of April 14, 1961. see Appendix A37-A41. Tr 176-

186). .

The lower Court then went on to igject several new

features which had not been passed upon bv the Distric:

Court of Appeal. - First. the *»wer court stated that it

was not determining whether the two prior loan trans-

actions of July, 1956, were in default, inasmuch as the

United States. District Court for the Southern District of

Florida. in proceedings for the reorganization of Con-

structors of Florida, Inc., had assumed jurisdiction of that

claim. Secondly the lower court affirmatively held that

tee judgments awarded to John Nicholas. as Trustee for

‘‘oxstructors of Florida, Inc.. were not subject to off-set ©

by reason of the claims of the’ banks against Constructors

of Florida. Inc. ‘Thirdly, the iower court found that the

lien of American Surety Company ef New York on the

chattels and equipment of Constructors of Florida, Inc.. in

the amount of $1,367,379.19 and interest thereon, and at

torneys’ fees in the amount of $72.347.58. were superio:

to anv claim of the banks. . ;

An interlocutory appeal under the Florida Appellate

Rules was immediately filed seeking the review of the de-

creé of April 14.-1961; to the District Court of Appeal of Flor-

‘ida, Third District (See Appendix A42-A43. Tr. 197-198).

The assignments of error in which the construction of the

Federal Statute. Title 12, Sections 85 and 86, by the lower

court was complained of, are shown at Appendix A44-A47.

Tr. 199-202. These assignments of error.squarely raise the

points that the decision and final judgment upon which

execution issued, by the Circuit Court of Dade County,

Florida, on April 14. 1961. purporting. té&¢arry out the opin-

ion, decision and mandate of the District Court of Appeal

of Florida, Third District. resulted in a construction of the

_ Federal Statutes which vioiated the plain terms and

conditions, of the Federal Statute as to _ penalties imposed

and inconsistent With’ the opinions of this Court on the

same subject matter.

F. SPECIFICATION AS TO THE STAGE OF THE

PROCEEDING IN THE COURT OF THE FIRST IN- |

STANCE AND IN THE APPELLATE COURT AT WHICH

AND THE MANNER IN WHICH THE FEDERAL QUES-

TION SOUGHT TO BE REVIEWED WAS RAISED, AND

. ‘THE METHOD OF RAISING SAME.

At the time the first petition for certiorari was filed

in this Court under the October Term, 1960, Cause No.

559, a certified typewritten copy of the record of the pro-

ceedings in the trial court, as well as the proceedings in

the District Court of Appeal of Florida, Third District, on

the first appeal, were set forth. These records reflect that

in the initial pleadings in the trial court when the plea of

usury was interposed by Constructors of Florida, extensive

motions to dismiss the counterclaim for usury were filed,

setting up the Federal Statutes_Title 12, Sections 85 and

86, U.S.C.A. The opinions and partial final decree of fhe

trial court, to-wit, the Circuit Court of Dade County. Flor-

ida, and in particular the amended decree of July 2, 1958

(Appendix /1-A19, Tr. 1-21). reflect that the issues with

reference to the construction of the Federal] Statutes were

raised. were considered by the lower court. and applied in

such a way as to render the Federal Statutes and the con-

struction placed thereon by this Court in a previous’ de

cision, as a nullity.. When the appeal was taken from that

order. the opinion of the District’ Court of Appeal of

Florida, Third District (119 So.2d 741+ reflects that. under

the assignments of error filed. the question of the construc-

tion of the Federal Statutes was squarely raised and

squarely- passed upon by the said AppeMate Court. A copy .

of that opinion is set forth in the Appendix to this petition

(Appendix A19, Tr. 230).

ae Sr a - | .

- 26

The same question of the erroneous construction of

the Federal Statute was raised in the petition for certiorari

tiled in June of 1960 in the Supreme Court of the State

of Florida, but that Court refused to take jurisdiction, leav-

ing the opiriion of the District Court of Appeal of Florida,

Third District, as above mentioned (119 So.2d 741). as

the opinion of the court of last resort. _ crea, ;

: When the new proceedings were then commenced on |

April 14, 1961, in the Circuit Court of Dade County, Florida.

pursuant to the mandate of the District Court of Appeal

of Florida, Third District, the opinions reflect that that

Court acted in a summary capacity without actually con-

ducting any new proceedings or. re-trial of the issue. A

petition for rehearing was filed in that Court (Tr. 182-

192). Ground 2 of that petition for rehearing directed to

the lower court raised the specific federal question, and

pointed out that the lower court had dgain failed to recog-

nize or properly construe the said Federal Statutes. That

petition for rehearing was denied by. the Circuit Judge and

‘ was stricken by order of the Court dated the 17th day

‘of April, 1961 (Tr. 196). — :

When the interlocutory appeal was filed to review the

decision of the lower court of Apri! 14. 1961. and the-order

denying the petition for rehearing of April 17, 1961. as

above mentioned, appeal was taken from both orders, one

the final judgment and execution above menticned datéd

April 14, 1961, and order striking the petition for rehearing

on the 17th day of April, 1961. The assignments of error sup-

porting that notice of appeal, (Appendix A44-A47, Tr. 199-

202) reflect that the Federal question was asserted in as-

signments of error numbers 1, 4, 6. 9, 13 and 14. As above

pointed out, the District Court of Appeal of Florida, Third

District, grarfted.a motion to quash this appeal and refused

-“e

to pass upon any of the points raised, including the Fed-

eral questions raised bythe assignments of error concern-

ing the improper construction of the penalty features per-

mitted under US.C.A.. Title 12. Sections 85 and 86.

' The same Federal questions’ were presented in the

lengthy petition for-certiorari: filed with the Supreme

Court ofthe State of Florida on the 8th day of June, 1961.

copy of which was required.to be filed with the District

Court of Appeal of Florida, Third District. as a condition

for the application to the Supreme Court of the State of |

Florida. This is a voluminous petition and is attached as

a, part of the record in this case (Tr. 231-300). However.

the Supreme Court of Florida, without taking jurisdic-

tion, denied the petition for certiorari as reflected by its

final orders of July 24, 1961, rehearing denied September

26, 1961 (132 So.2d 806; 133 So.2d 319: Tr. 301-302. Ap-

pendix A49-A50).

As reflected by the aboye references, the Federal!

question was raised in every stage of the proceedings.

G. REASONS FOR GRANTING THE WRIT.

‘The District Court of Appeal of Florida, Third District.

has decided’an important and a novel Federal question in

‘the construction of Title 12, U.S.C.A., Paragraphs 85 and

86 (which limits the right of a State Court to impose pen-

alties for alleged usurious contract upon a‘ National Bank ©

doing business within the State), which +s in direct con-

flict with the plain and unambiguous provisions of that

statute, as construed by this Court in the case of McCollum’

«Vv. Hamilton National Bank of Chattanooga, 58 S. Ct. 568.

303 U.S, 245, 82 L. Ed. Si8. and many prior cpinions cited *

therein.

As established by the’doctrines of this Court in said |

opinion and in prior opinions referred to, a National Bank

operating within the State of Florida, even if guilty of vio-*

lating the Florida State Usury Laws (which is not con-

ceded by the petitioners in this case), could only. be denied

in a foreclosure action in equity in the State Cougt the

right to recovery of the amount of interest contracted for

but not paid, leaving the principal sum intact and subject

to foreclosure ard judgment.

In the event any interest is paid which is found to be

usurious or in violation of the State Usury Statutes, then

under the provisions of Title 12, US.C.A., Paragraph 86.

the statute makes this clear and unambiguous provision:

“In case the greater cate of interest has been paid,

the person by whom it has been paid, or his legal

representatives, may recover back, in an action in the

na of 4n action of debt, twice the amount of the

in thus paid from the association taking or re-

ceiving the same.”

In the case at bar, the highest court of Florida having -

jurisdiction over this subject matter has by its ruling per-

mitted affirmative relief against the National Bank bv

way of set-off and counterclaim in the foreclosure action |

in the equity courts of Florida; not simply a denial of the

right t6 recover the interest contracted for but unpaid.

but a discharge of the principal amounts involved, together

with a penalty forfeiture of the taking of security away —

from the Nationa! Bank on other mortgages not involved

in the usury claim in excess of a value of $110,000.00.

As further grounds for granting the certiorarj. the

record in this tase discloses that the National Bank held

two chattel mortgages given by Constructors of Florida.

one on the 24th of July, 1956, and one on July 25, 1956,

’ securing separate notes. and upon which separate mort-

Ein

. 29

gages were given on separate personal property and equip-

ment. Both of these mortgages calling for approximately

$7,000.00 per month total payments were in default on

September 20. 1957, when this foreclosure action was in-

stituted on the third loan of November 14, 1956..

As part of the security for this third loan transaction,

in addition to other collateral, Constructors of Florida

had given a second mortgage in the nature of a blanket

-moitgage upon the same equipment that had been covered

by the first two mortgages of July, 1956. Under the re-

quirements 6f the Florida law, the plaintiff is required

to foreclose all of his mortgages against the same security

at the same time and in the same action. and thus these

lwo mortgages about which there-was no question of usury

ever raised. were sought to be foreclosed inthe same equity

action. During the progress of the foreclosure, Construc-

tors of Flerida became a bankrupt, and a trustee in bank-

ruptcy was appointed in December, 1957. ¥,

No issues were raised in the pleadings concerning the

validity of the first two mortgages or the first priority lien

which those mortgages created on the personal property

and equipment. The opinions of the Lower Court, affirmed

by the District Court of Appeal of Florida. sought to be

reviewed, imposed a collateral penalty upon the National

_ Bank by cancelling the first mortgage lien which the

National Bank held against the persenal property, ma-

chinery and equipment of the two July mortgages, citing

_ as the only reason therefor that the National Bank had’

come into equity with unclean hands. This resulted in a

loss to the Bank of its first mortgage on equipment which

was worth the amount of the unpaid balances on the first

two mortgages. and deprived the National Bank of its

opportunity and contractual right to be satisfied as to those

first two mortgages out of the collateral security at a time

30 .

-when the maker of,the note was in bankruptcy and totally

insolvent as far as the general creditors’ claims were con-

cerned. This amounted to depriving the petitioners -of a

valuable property right without due cheng of law or

combensation. . ’

These actions collectively, not only violated the “pro-

visions of the 5th and 14th Amendments cf the Constitu-

tién of the United States for protection of the petitioners

'. under those amendments, but were a clear and clean-cut

violation of Title 12, U.S.C.A.. Paragraph 86,

The case of McCollum. v. Hamilton National Bank of

Chattanooga, 303 U.S. 245, 58 S. Ct. 568, 82 L. Ed. 819, de-

cided in 1938, was the last expression by this Court upon

the issues involved in this case. That- decision has been

the recognized authority, controlling the operation and ;

management .of National Banks ever since. This decision

of the Supreme Court of the United States has since been

recognized by the Court of Appeals of the Sixth Circuit

in the case of “Schumacher v. Lawrence, 108 F.2d 576, a

1940 decision, in which that Court reiterated and applied

to a similar case the principles laid down by this ge

in ‘the McCollum decision, Under the Schumacher

cision and construing this Court’s opinion in the McCollum

case, the Court of Appeals for the Sixth Circuit again.

applied the Federal doctrine holding that under the Fed- ©

eral Stattite 12, U.S.C.A., 86, usurious interest which. has

been paid to a National Bank must be recovered back in

an .@ependent action, which remedy is exclusive since

the Federal Statute controls. and again nasa: from the |

McC ollum case as holding (577):

‘‘One paying @ national bank usurious interest and —

sated to enforce the penalty may not recover it by

way of set-off in a suit brought. upon his note to the -

bank.”

It was also held in the Schumacher case that where a

National Bank brought a foreclosure action.in a State Court

(in Michigan), any ciaim for interest paid under a usurious

loan could not be set off ir the mortgage foreclosure suit.

The usury penalty invoked in this case in the defense

_ and counterclaim was not réstricted as against the National

Bank to double the ammount of the interest ‘actually ‘paid, |

which would have been only a nominal amount and-was

not restricted to a denial to the Bank Bank of ¢ of its right to collect

interest contracted for, but not t paid, bu but concluded in a

judgment against the National Bank forfeiting an amount

in excess of the principal of the note, together with col-

. lateral damages of over $110, ,000.00 penalty on other issues

and other securities held by the Bank, purely as punitive

' - penalties. This decision by the District Court of Appeal

of Florida flaunts the Federal Statute, flaunts the long

series of opinions by this Court, and if allowed to stand,

would create a precedent that would be disastrous to

National Banking interests throughout the United States,

and particularly in the, State of Florida.

H. ARGUMENT.

POINT 1. .

Has the District Court of Appeal of Florida, Third Dis-

trict, in Its Opinion of March 22, 1960, Effective Septem-

ber 19, 1960, As Interpreted and Finalized by the Order

on the Mandate Entered on April 14, 1961, and As Re-

Construed by the District Court of Appeal of Florida,

Third District, by Its Opinion Quashing the Interlocutory

Appeal Dated May 25, 1961, Petition for Certiorari and

Rehearing Thereon Denied by the Supreme Court of

Florida September 26, 1961, Violated the Specific Pro-

~ visions of United States Statute, Title 12, U.S.C.A., Para-

graph 86, in Allowing Excessive Counterclaims and Set-

"Offs and Penalties Not Authorized under Said Statute? —

‘The United States Statute reflected in Title 12, Para-

graph 86, must be read in relationship to Paragraph 85

which just precedes it. Paragraph 85 in general provides |

that any National Bank may:

“take, receive, reserve, and charge on any loan or

discount made * * * interest at the rate allowed by

the laws of the State. Territory. or District where

the bank is located. or ah 2 rate of I per centum in

excess of the discount rate on ninety-day commercial

paper in effect at the Federal Reserve Bank in the

federal Reserve Distriet where the bank is located.

which ever may be the greater. and:no more, ex-

cept that where by the laws of any State a different

rate is limited’ for banks organized under. State laws.

ihe rate so limited shall be allowed for .associations

organized or existing in anv such State under this

mene Se

In Florida. the rate of interest fixed on loans to cor-

porations is covered in Section 687.03. as shown in the

1955 Florida Statute.

Prior to 1953, a corporation under the Florida law

was prohibited from pleading usury. This law was

amended, effective October 1, 1953, and that law was ip—

Nevember, 1956, as follows:

“Section 687.03. Uniawful rates of interest defined;

-proviso.—It shall be ‘usury and uglawful for any per-

son, or for any agent. officer or. other representative

of any person, to reserve, charge or take for any loan,

or for any advance of money. or for forbearance to

enforce the collection of any sum of money, except

upon an obligation of a corporation, a rate ‘of interest

greater than ten per cent per annum, either directly

or indirectly. by- way of commission for advances,

discounts, exchange. or by any contract, contrivance

or device whatever, whereby the debtor is required

or obligated to pay a sum of money greater than the

actual principal sum received. together. with interest

at the rate of ten per cent; and such transactions with

a corporation shall, whereby the corporation pays in-

terest, be usury and unlawful if for a rate of interest

ereater than fifteen per cent per.annum, The pro-

risions of this section shall not apply to sales of bonds

in excess of one hundred dollars and mortgages secur-

ing the same, or money loaned on bonds.”

The penalty for one class of usury under the Florida

law is set forth in Section 687.04, as follows:

“Penalty for usury: not to apply: to transferee of ne-

gotiable paper unless usury appears on face——Any

person. or any agent. officer or other representative

of any person, willfully violating the - provisions of

Section 687.93 shall forfeit the entire interest sp

charged, or contracted to be charged or reserved, and

only the actual principal sum of such usurious con-

tract can be enforced in any court in this state, either

at law or in equity: and when said usurious: interest —

is taken or reserved. or has been paid, then and in

that event the person. who has taken or reserved, or

‘

has been paid. either directly or. indirectly, such

usurious interest, shell forfeit to the party from whom

such usurious ‘interest has been reserved, taken or

exacted in any way. double the amount of interest so

reserved, taken.or exacted; * * *.”

‘Where the interest is alleged to be in excess of 25‘,

then Section 687.07 applies, which is as follows:

“Forfeiture and penalty in case ‘of excessive interest

or charges.—Any person, or the agent, officer or other

representative of any person.“lending money in this

_State who shall willfully and knowingly charge or. ac-

cept any sum of money greater than the sum of money

loaned, and an additional sum of money equal to

twenty-five per cent per annum upon the principal -

sum loaned, by any contract, contrivance or device

whatever. directly or indirectly. by way of commis-

sions, discount, exchange. interest. pretended sale of

any article. assignment of salarv or wages. inspection

fees or other. fees or otherwise. or for forbearing to.

enforce the collection of such moneys or otherwise.

shall forfeit the entire sum, both the principal and

interest, to the party charged such, usurious interest.

and shall be deemed guilty. of a misdemeanor, and

on conviction, be fined not .more than’ one hundred

dollars, or be imprisoned in the county jail not more -

than ninety davs:"

Under the Florida law as above set forth, if,there is

usury in a normal loan transaction in Florida, or where

a State Bank is directly involved and is a primary lender,

there are three classifications:

(1) If the usury is above the. legal rate as far as a

corporation is concerned of 15% per annum and under

25. the interest contracted for shall be forfeited arid

only the principal amount may be collected.

(2) If the interest has been paid or reserved in such

2 way as to he the equivalent of payment. then that amount

pee a . 35

so paid may be recovered back in a sum double the-amount,

that is to say, the actual interest paid and a one time

penalty. If $1,000 has been paid, then the total recovery

would be $2,000. with the principal intact.

-(3) If, on the other hand, the interest. is computed

and found to be in excess of 25°;. then Section 687.07 ap-

plies, and if it shall be established that the lender has. wil-

fully and knowingly charged’ or accepted any sum of

money greater than the sum of money loaned, and an ad-

ditional sum of money equal to 25°’ per annum, etc.. the

lender shall forfeit to the party charged such usurious jn-

terest, the entire sum, both principal and interest. In that

event, even though interest has been paid, the amount paid —

. is not doubled. See Rosenblum v.-Hart, 95 So.2d 18.

Interest which is simply contracted for in advance,

such as the discount involved in this case, is not under the |

Florida law interest paid or reserved.. See Wenck v. In-

surance Agents Finance Corporation, 99 So.2d, 883. and. as

interpreted also by a recent decision of the United States

Court of Appeals, Fifth Circuit, Case No. 18071, Conner

Air Lines, Inc., and F. A. Conner, Appellants, v. Aviation

Credit Corporation et al., Appellees, Opinion rendered June

30, 1960, 280 F.2d 895, petition for certiorari denied. 81 S.

Ct. 274. a

* This case involved other: issues. but in, the aie of

that opinion as printed and issued by the United States

Court of Appeals, Fifth Circuit, in construing the two ..

Florida Statutes, 687.03 and 687.04, that Court said: ;

“If there was not any payment, or any taking or re-

serving of usurious interest,-then the full amount of

the principal. without interest, may be recovered.”

quoting Wilson v. Conner, 106 Fla. 6. 142 So. 606; Ross v.

Atlas Finance Corporation, 113 Fla. 793. 152 So. 410; Mc-

Gillick v. Chapman, 134 Fla. 220. 184 So. 26.

“Then. further quoting from said opinie , that Court

said

“The provision for the forfeiture of double the amount

of the interest exists only if the usurious interest has

been paid or has been taken or reserved. Certainly

Conner did not pay the so-called’ bonus to Aviation

Credit. Was it otherwise paid. taken or reserved? It

was not, unless it can be said that a paving, taking or

reserving resulted from the transfer of the amount of

the bonus frem Aviation Credit to Smith Aircraft.

The undertaking of Conner to pay Aviation Credit the

$33,310.18 constituted usury, but only because of the

relationship between the two Smith corporations. By

reason of that same relationship we are precluded

from saying that the transfer by one of them to the

other is the paying. taking or reserving of the usurious

bonus.”

The doctrine of that case. quoting the Supreme Court

of Florida decisions, is exactly the same doctrine as laid

down by the District Court of Appeal! of Flor ida. Third Dis-

trict. in the case of Wenck vy. Insurance Aaents Finance

Corp., 29 So.2d 883, above mentioned.

So that in the case at bar. there was no taking of pav-

ment of anv interest up te March 7. 1957. except $5615.44

Thereafter by the contract.of March 20. 19°57. a new note

‘ was entered into on a straight 15° rate on unpaid prin-|

cipal balances. Even under that concept. there was an

additional interest’ paid on the new note of March 20, 1957:

of $5,370.35 (119 So.2d 741, 745). So that from the begin-

‘ning of the loan of November 14, 1956, until all parties

ceased making payments in June of 1957, the total amount

of interest actually paid either under the November 14, 1956

arrangement or the March 20. 1957, arrangement. was

$10.985.79. a

If a separate suit had been filed by Constructors

of Florida or its Trustee in Bankruptcy. and if all issues

eed

had been determined against the Coral-Gables First National

Bank, the total recovery would tave been twice that amount

of money. In addition to that. of course if there was any. .

unpaid interest contracted for but not paid, that amount

and that amount only. coyld have been offset in the fore-

closure action

The computations contained in the opinion of the Dis-

trict Court of Appeal.of Florida. Third District (119 So.2d

745). are utterly confused and provide for at least three

times the amount of interest that-could be charged under

any concept of the Florida law. °

In the case of Mel “ollum v. Hamilton National Bunk of

Chattanooga, 303 US "245, 58 S: Ct. 568. a very similar

situation -was involved. This case. was heard on writ of

certiorari to the Sapreme Court of the State of Tennessee

McCollum was the Trustee in Bankruptey of Lookout Plan-

inig Mills. He brought a suit in the’ chancery court of

Hamilton County. Tennessee. to recover from the Hamilton

National Bank .of Chattanooga. but he confined his suit to

a claim under Federal Statute. 12 U.S.C.A.. Paragraphs 85 —

and 85. The State Court followed that statute but after

finding that the bank had received $5,235.55 in interest

which was usurious under the Tennessee iaw. gave a judg-

ment against the bank for double that amount. At that .

time there was still $25.4923.70 left on notes. and the State

Court permitted a set-off. simply crediting twice $5,225.55 |

as against the total claim for approximately $25.000

This Court reversed the Low er Court on the question of

set-off, but in the body of the opinion this Court laid down

certain definite rules in which it said (570)

“The penalts is to be enforced aecording to the terms

of the statute. Guilt being established. the law itself

fixes the punishment at precisely twice the usurious

exac tion paid, it may not be enhanced or me ated he-

cause of aggravating circumstances or equitable con-

siderations. As the surn demanded is certain, recovery

in an action of debt is authorized. though the claim

arises not in contract but in tort. * * * The liability

can oniv be enforced in am action ‘brought specially

and exclusively for that purpose—where the sole issue’

is the guilt or innocence of the accused, without the

presence of any extraneous facts which might confuse

‘ the case. Barnet v. National Bank, 98 U.S. 555, 559.

25 L. Ed. 212.° One paying a national bank usurious

interest ana entitled to enforce the penalty may not re- -

cover it by way of set-off in a suit brought upon his ~~

‘ note to the bank. Haseltine v. Central Bank of Spring- |

field. 183 U:S. 152. 137. 22 S. Ct. 50. 46 L. Ed. 118:

Then the Court said (570).

“The right of set-off here involved does not at all de-

rend upon the Tennessee statute upon which, at. least

in part, the state supreme court rested its ruling.”

. Then the Court said (5713:

“Liability for the penalty, does not arise in contract but

is laid in invitum as a disciplinary measure. * * * As

‘the penalty may be enforced only in a suit brought ex-

clusively for that purpose so that the trial, of guilt or

innocencé may not be embarrassed by any other ques-

tion, it is plain that the payment of any debt owed by

the plaintiff to the bank may not-be held a condition

precedent to the determination of that’ issue. Punish-

ment for usury does not depend upon pay ment of the

‘borrower's debt.”

The case was reverse”.

Prior thereto, in a long line of decisions. this Court has

established the doctrine that while the Federal law permits

certain suits affécting National Banks to be tried in the co-

ordinating State Courts, yet that power is restricted to

the right of the State Court to enforce the provisions of

ag °

' the Federal Statute, irrespective of any State laws. See

Farmers & Mechanics National Bank v. Dearing, 91 US. 29.

“23 L. Ed. 196, in which this Court said:

“The rational banks organized under *the Act are in-

struments designed to be used to aid the government in

the administration of an important branch of the public

_ service. They are means appropriate to that end. Of

the degree of the necessity which existed for creating

them. Congress is the sole judge.

. Being such means. brought into existence for this pur-

_ pose. and intended to be so employed. the States can

‘exercise no contro! over them, nor in anywise affect

their operation. except in so far as°Congress may see

proper to permit. Anything beyond this is ‘an abuse,

because it is the usurpation of power which a single

State cannot give.’ Against the national will ‘the States

have no power, by taxation or otherwise, to retard, im- .

‘pede, burthen or in any manner control the operation of

the constitutional laws enacted by Congress to carry

into execution the powers vested in the General Gov-

ernment.’ ”

In many other cases which we will simply’mention. this |

- Court.has taken jurisdiction either by writ of error under

the old-procedure, or by writ of certiorari under the general

procedure to review and to reverse the decisions of State

Courts when the State Courts have gone beyond the restric-

tions in the Federal Statute. See Brown v. Marion National

Bank of Lebanon, Kentucky, 169 U.S. 416, 18 S. Ct. 390. First

National Bank of Jacksboro v. Lasater, 196 U.S. 115, 25S. Ct.

206. Talbot v. First National Bank of Sioux City, lowa.

22S. Ct. 612, 185 U.S..172. ©

There is-one statement from this opinion which is per-

tinent, in which the Court said:

“The denial by a state court of a right of action ex-

presslv based on an‘act of Congress presents a Federal

question which gives the Supreme Court of the United

States jurisdiction to review a decision of such state

court.”

Further in the body of the opinion. this Court said (p.

616): .

“Two cases are provided for (1) where illegal inferest

has been taken, received, or charged; (2) where illegal

intérest has been paid. In the first case the entire

interest which the ‘evidence of debt carries with it’

shall be deemed forfeited. In the second case’the person

who has paid ‘the greater rate of interest may recover

twice the amount of interest thus paid.’ ”

In a later case, this Court passed upon the same sub-

ject in reversing the Supreme Court of South Dakota—Pa-

_ trick B. McCarthy v. First National Bank of Rapid City.

South Dakota, 32 S. Ct. 240. 222 U.S. 493.

POINT 2.

Has the District Court of Appeal of Florida, Third Dis-

trict, in Its Opinion and Mandate of March 22, 1960, Ef-

fective September 19, 1960¢ As Interpreted and Finalized

‘by the Order on the Mandate Entered on April 14, 1961,

and As Reconstructed by the District Court of Appeal of

Florida, Third District, by Its Opinion Quashing the Inter-

locutory Appeal Dated May 25, 1961, Petition for Certiorari

and Rehearing Thereon Denied by the Supreme Court

of Florida, September 26, 1961, So Construed the Effect

- and Operation of the United States Statute, U.S.C.A., Title

12, Paragraphs 85 and 86, Limiting the Amount of Allow- .

ance of Usury Penalty Against a National Bank, in Such

a Way As to Make It Void and Inoperative for All __

Practical Purposes?

In the statement of the case we have clearly pointed

out that the Florida Courts. as set forth in the opinion

‘ ‘by the District Court of Appeal of Florida. Third District.

while recognizing that a Federal Statute exists, completely

ignored the effect of that statute by attempting to say

that when the National Bank loaned $442,400 on Novem-

ber 14, 1956. and charged as advance interest $44,240, that

that was interest paid. That was in violation of the Fed-

eral Statute.

If the State Court had simply denied thé right of the

National Bank to collect the $44,240. or denied it the right

to collect an additional 5% for the period of time the loan

was in force and effect, this case would have presented

a different question. But the Court attempted to double

that amount, claiming that there had been $99,710.88

penalty and double the interest collected subsequent to

March 20, 1957. of $10,740.70, making a total of double

the interest paid of $110,451.78. ‘

The schedule as shown ‘in the reported opinion (119

S6.2d 741, 745) contdins a figure as’ the liability of. the

Coral Gables First National Bank. Then the Court ye

a eredit termed:

“Less” arnount. credited to "principal on ,

renegotiation ' . $35,584.06,”

or a total of alleged recovery. for interest paid, or double

the amount of the interest paid, less credits, of $74,867.52.

This claim was not based simply upon forbearance, be-

cause admitting $35,584.06 credit as against the original

$44.240 interest taken in advance, tnere could only have

-been an amount of interest of the difference, or about $9,-

000."which would come under the classification of interest

contracted for. but not paid.

Applying the Federal Statute, and if there was usury, -

the State Court might have been within its rights to have

* permitted the National Bank to collect some $400,000 of

principal, but denied its ‘right to collect the contractual

balance of some “9,000. That is the only result that could

havé been reacHed by the State Court consistent with the

Fejeral Statute. During that interim, taking an over-al:

figure of an additional $11,000 interest actually paid, that

amount could only have been collected, not by offset or

counterclaim in the equity foreclosure action. but must

-be the subject matter of a separate and distinct action’

under the McCollum decision.

- In addition to this glaring error in conflict with the

Federal Statute. we have heretofore pointed out in the * |

’ Statement of the case that the State Court caused a for-

‘feiture of approximately $110,000 in’ value of collateral

to the two mortgages of July 24 and 25, 1956, respectively.

and decreed that the National Bank would forfeit or lose

all of its principal claim, balance due of $151,802.46, with

the exception of 7% thereof, or an eres —

penalty of approximately $140,000. .

in addition to those penalties, the State Bank, which

only had a trust interest participation of $243,000, ap-

proximately. out of the $442,400, was decreed to be sean

For the return of principal and interest eis

paid to March 20, 1957 © $194,156.11.

For principal paid subsequent to March |

20. 1957 66,472.81

Interest paid subsequent to March 20,

1957 5,370.35 |

* Or a total of $265,999.27,

apparently upon the theory that the Pan Américan Bank's

subsequent participation amounted to 92%° of $263,000,

which figure was drawn out of the thin air.

These payments are duplications, because there was

never any money paid by Constructors of Florida to the

Pan American Bank. All payments were: paid to’ and

handled in the name of and by the Coral Gables First

National Bank. These items are double charses of er-

roneous figures from the inception.

We can only demonstrate the complete error by point-

‘ng out by reference to the computations in 119 So.2d 745,

that counting the item of liability to Pan American Bank

of principal and interest paid to March 20, 1957, as $194,-

156.11. and deducting therefrom the gross interest paid-on

the whole contract of $5,615.44, that.would be a net yield

of principal repayment to Pan American Bank of $188,-

540.67, Adding the next item of principal alleged to have -

been paid to Pan American Bank after March 20, 1957—

$66,472.81, to the item of $188,540.67, would result in a

total of $255,013.48 principal repaid to the Pan American

_ Bank, when they did not advance on the interim certificate

‘of November 28, 1956, but $243,000.

In addition to these erratic figures, the Court then

cancelled the balance of $151,802.46 principal and interest

iri addition thereto, making a total of-$172,585.29 cancelled.

POINT 3.

Where the Federal Statute Covering Allowable Usury Pen-

alties Against a National Bank under the Provisions of

_ US.C.A., Title 12, Paragraph 86, Is Restricted to a Defense

un an Action to Enforce the Debt, to a Forfeiture of the

Interest Unpaid but Contracted for, Without Any Invasion

of the Principal Amount Pue, or Where in the Event Any

Usurious Interest Is Actually Paid, toa Separate Suit by

the One Making the Payment for Double the Amount of -

‘the Interest Actually Paid, May a State Court upon Al- -

leged Equitable Greunds by Way of Renal or Compensatory —

Damages, Impose Collateral Damages and Penalties Against |

a National Bank in Excess of the Total Amount of the

Principal Involved in the Transaction?

There are -certain portions of. the argument directed

to the first two points which are directly applicable to

-questions raised under: Point 3. We will not. reiterate all

of those arguments, but we will adopt that portion in

Points 1 and { which is applicable to the first phase of

~ Point .3. .

The specific difference in Point 3 is the fact'that the

State Court in the opinions ‘appealed from has adorted

some new and unheard of doctrine of granting punish-

ment against a National Bank unheard of in the State prac-

tice. not applicable to State Banks, or. other lenders of

moneys in the State of Florida. We have covered the tech-

«nical phases of the ‘Usury Statutes of Florida, and 4 casua!

examination of the provisions of Title 12. US.C.. Section

86, will demonstrate that even under that statute the com-

putation of penalties is exorbitant and clearly violative of

the spirit and letter of that’ Federa! Statute. ° Other phases,

however. which are Wot so apparent on the surface. upon

analysis have an effect that is even more shocking.

45°: _

‘ 4 - : .

The National Bank, as demonstrated from this record,

had had a long period of dealing with Constructors of

Florida. In July, 1956, the National Bank had financed |

Constructors of Florida on the two mortgages which we

‘have heretofore described. Chattel mortgages granting ad-

mitted first lien upon the equipment were given‘to secure

that debt, as evidenced, by. the two mortgages. The con-

tract with the City of West Palm Beach was not even in

existence in July, 1956.. The contract performance bond,

wherein ‘the American Surety Company bonded Con-

structors of Florida on the West Palm Beach Sewer Job,

was dated: August 29, 1956 (Tr. ). This was well over

one month after the chattel mortgages ‘of July, 24 and 25, -

1956, respectively. had been executed and recorded in the

- Public Records of Dade County, Florida.

After that bond had been executed by the American

Surety Company on behalf of Constructors of Florida, Con-

structors borrowed $60,000 in the first part of October,

1956, from the National Bank, and an agreement was -

worked out whereby the City of West Palm Beach, in order

to secure the National Bank on that loan, agreed to send

all the checks which would be due to Constructors ‘of

_ Florida, to the Coral Gables First Natienal Bank. This

“was pursuant to a resolution of the board of directors of

Constructors of Florida (Tr. ° |.

In these prior transactions, running over a pertiod of

months, Pan American Bank of Miami was not a party in

privity with Constructors of Florida or with the American

Surety Company. We do not question that over a period

of years these banks. as well as many other banks. had,

interchanged trust receipts or certificates in the nature of

participation certificates, but these were matters solely

controlled by contracts between the parties, that is to say,

the banks involved. and these inter-company : transactions

had nothing to do with the primary handling of these deals

by the National Bank: ‘

When the loan of November 14, 1956. the one now In

question, was made, copies of these papers were all sent

to the Surety Company. Their attorney-in-fact. Mr. Har- .

old S. Flagg. with full knowledge of all the transactions,

subordinated the claim of ‘the Surety Company. The

Surety Company at.that time had ro mortgage and had no

type of assignment oF contract from Constructors of

orida, which could have in any way been deemed to

have been prior to the mortgages held by the ‘National

Bank executed and recorded in July. 1956. -Withouf, how-

ever, waiting for the consent of the Surety, or even the

‘ consent of the: City of West Palm Beach, the National

Bank in good faith made the loan of November 14. 1956,

took the agreement of Constructors of Florida as to the as-

signment of the proceeds of the West Palm Beach contract,

> and advanced some $400,000. out of which the $60,000 loan

was repaid. | %

- The Coral Gables First National Bank did not attempt

to participate the Pan American Bank until it had received

the letter of Novembet 27. 1956, from the Surety Company

(Tr. 26-29). It continued to make payments out of Con-

structors of Florida Coltateral Account, No. 1 until over

half of that account had been disbursed at the request of *

Constructors of Florida. When the final formal consent

to the assignment was received on January » 1957, from

the City of West Palm Beach, the balance of that account,’

totaling as we have before set forth, $135.597.62 over-all.

was finally distributed by January 77,1957. |

On November 14. 1956. there was no certainty as to the

time when payment of funds would be forthcoming from .

the City of West Palm Beach contract. Those checks

which were subsequently received prior to January 2, 1957.

were represented by checks payable to Constructors of

Florida and simply deposited with their knowledge arid

ronsent in their bank aecount,at the Coral Gables. First

National Bank. called Constructors of Florida. Inc.. Col-

lateral Account No. . &

As we have heretofore pointed out, some substitution

of collatetal was permitted by agreement. and under the

terms of the note and mortgage contract itself of Novem-

ber 14, 1956. Constructors had the right to substitute ac-

ceptable collateral’ in lieu of the cash payments coming in.

The Bank could not have used that money. _ The title to

that money was in Constructors of Florida, simply with

4 hold’ order requiring the approval of a bank officer be; -

fore those funds could be converted to otner collateral. .

On March 4, 1957, when Constructors of Florida was

in financial difficulty, not on the West Palm Beach job, but

on other of its contracts, the President of that corpora-

tien, as we have heretofore pointed cut. directed a letter

in which for the first time they asked for a distribution of

$50,000 from the funds on hand in the controlled account.

At that time the National Bank still holding the first two

mortgages of July. 1956. found that those mortgages were

in default for failure to make the February payments, and

the National Bank called the loan. as it had a right to do. -

It could have immediately foreclosed for the balance after

the application of approximately $179.000.

The Surety Company. which was then involved under

its commitments on other contracts. as well as commit-

ments on the West Palm Beach contract, joined with Con-

structors of Florida in arranging a new program which .

would vield a possibility of some current funds for their

‘operations. The American Surety Company could not -

claim usury in the contract and did not at that time make

any contention as to USUTY. Neither did Constructors of

Florida. Under these circumstances, the contract of March

90. 1957, was renegotiated, in which the Surety Company, |

as well as Constructors of Florida, confirmed the prior

position of the National Bank on all of its mfortgages, being

three in number. —

‘Fhe Appellate Court decision affirmed the findings of

the Lower Court that while that contract had beer made,

it was void. This was the first time in Florida that anv

court has ever held that a contract itself was void because -

of a usury implication. Certainly the ‘parties had a right

‘to contract. Certainly the American Surety Company had

‘ a right to enter into that contract and confirm its inferior

position. Certainly all the parties had a right to contract

with reference to the handling of the proceeds from the

West Palm Beach contract. 7

‘Whether that contract clarified the former alleged us-

ury is not the question. The Florida Court voided, the

contract, which was a clear violation not enly of the .pro-

tection of the United States Constitution on the right of

parties to contract, but the voiding of that contract in

favor of the American Surety Company and ‘its subordi-

nating of its alleged lien protection. was the taking of a

valuable property. right of the National Bank and was the

collateral infliction of an additional penalty for usury

prohibited by the Federal Statute. |

If the Florida Court had upheld the validity of the °

contract and simply held that the usury penalties of the.

State law would still be applicable to that contract, then

we would have a different situation. The ‘Florida Court

was not content with doing that. Sut it voided the contract

in its entirety. even though the original note of November

49.

14, 1956, was cancelled and an entirely new note in the.

amount of $218,000:approximately was issued under dif- _

ferent terms, different security arrangements and with

different parties involved in the contract. That was a

collateral penalty not authorized or permitted under the

Federal Statutes or even under the State Statutes.

In ‘addition to that forfeiture, and in addition to the

complete cancellation of the National Bank’s position as a

first mortgagee under the notes and mortgages of July,

1956, the Appellate Court decision completely ignored the

fact that the $135,597.62 represented by the funds which

were originally deposited in Collateral Account No. 1 on

November 14, 1956, had actually been paid to and used-by ©

Constructors of Florida. That money has been lost. It

is obvious.that the National Bank did not make avail-

_able to or for the use and benefit of Constructors of Florida,

$263,000. It actually, from its funds, gave to Constructors

of Florida $400,000. If the Florida Court had given rec-

ognition to the fact that the principal: amount of $400,000

had been given to Constructors of Florida instead of $263,- .

000, then there would have been no usury in the contract

of November 14, 1956, even under the admitted decision of

the: Appellate Court applying other Florida decisions.

What ‘happened to the $135.597.62? The “Appellate

Court of Florida simply wiped that amount out of any

consideration, and this is a clear-cut penalty violation in ~

which the Florida Court must have forfeited that money

also. How could the Florida Court forfeit $135.597.62, for-

feit $110,000 worth of prime prior security on the two

mortgages of July, 1956. and also voidethe.contract of

March 20, 1957. in relationship to the American Surety

Company and .its subordination? These are all penalties

in the nature of equitable punishment against the National

Bank which find no precedent in the Federal decisions or ,

- in the State Court decisions. If the Florida Court in ‘this

computation had given consideration to that sum of $135.- .

597.62. then there would have been no usury in the first

place. How, then, can such a procedure be justified in the

face ef decisions of this Court and the clear mandates pro- ~

vided by the Federal Statute; i2 U.S.C.A. 86”

We have heretofore pointed out that under the Florida

decisions of Shorr vy. Skafte, Florida Supreme Court de-

cision, 90 So.2d 604, Clark v. Grey. 132 So. 832 and Carter

"yy. Leon Loan & Finance Company, 146 So. 664, the new

contract under the Florida law was free of usury, if there

had been any usury in the first place. The Lower Court

had based its conclusion as to usury in the initial contract

’ by recognizing that sorne $400,000 had been advanced by

the National Bank in the first instance. but attempted to

create a usury violation by the fact that the Bank had

called the loan before its maturity date. In doing this. the

Lower Court utterly ignored the contractual provisions

contained in the note of November 14, 1956. which re-

quired, by contract. that the National Bank would refund

or rebate or prorate any interest paid in advance in such

event.” So that there was never any contract by which

the National Bank could have sued for or collected any

usurious interest in the event of acceleration, nor was

there any interest paid which was in violation of the

Usury Statutes. :

The higher court. District Court of Appeal of Florida, -

Third District. not basing its opinion on the same theory .

upon which the Lower Court opinion was based, simply

ignored the fact that $400,000 had been paid by the

-National Bank, and reconverted the loan to $263,000. Then

it held that since the State Bank by its subsequent trust

participation had on or after November 28, 1956, paid to the

National Bank $243.000, that they became the actual own-

>»

ers of 93° of the total loan and that the ‘National Bank

only had 7%, or the difference between $243,000 and

$263,000. :

Again we able, what happened to the $135,597.62?+ This

sum cannot be found in the computation and final con-

clusions and orders of the Appellate Court. Not only is

this a violation of the fundamental constitutional protec-

tion, but it is an additional penalty str ictly in Violation of

the Federal Statute. Title 12, US.C.A. 86.

POINT 4.

May a State Court, in Addition to AHowing Interest Penal-

ties and Forfeiture of the Amount of the Principal (All in

Excess of the Original Amount of the Loan from the Na-

tional Bank), Impose Additional Penalties by Way of Puni-

tive or Exemplary Damages by Forfeiting Other Collateral

Which the Bank Holds, Because It Is Claimed That the

National Bank Came into a State Court of Equity Without

Clean Hands?

In our-arguments in support of Point 3. we have

covered most of the issues presented in Point 4, with one

exception. That lies in.the fact that after the March 20.

1957. tri-party agreement in which the Surety Company ~

had jvined, the National Bank changed its position, waived

its right to foreclose for then existing breaches in the first’

two mortgages, changed its distribution of the collateral

to be received from the West Palm Beach contract. and

operated under that new. arrangement for approximately

two months.- In that two months period approxin.utelv

$100,000 additional funds had been received from the City

of West Palm Beach from March 20 up until the early

part of June, 1957. and distribution had been made in ac-

cordance with the March 20. 1957, agreement

, 52

Then the American Surety Company, Constructors of

Florida and City of West Palm Beach, directly in viola-

tion of the conditions of the March 20, 1957, agreement,

diverted all funds coming due from that contract, which.

funds would have been more than sufficient to ‘thave paid

off and discharged the National. Bank’s claims against

Constructors of Florida. The Surety Company was re-

sponsible for the completion of the. West Palm Beach con-

tracts. It had subordinated its position to that of the

National Bank, and yet the Appellate Court, in voiding .

the agreement of March 20, 1957, held that the Bank’s |

priority position, as far as the American Surety Company

was concerned, was ineffective, and p!acéd its $tamp of

_ approval upon the assignment or diversion of the Bank’s

trust fund securities from the West Palm Beach contract.

‘to the direct benefit of the American Surety Company.

The Appellate Court, in additidn to all of the other

penalties which had been inflicted upon the National Bank,

as we. have heretofore pointed out, in conflict. with Title

‘12, U.S.C., Paragraph 86, approved the confiscation of val- @

uable trust and security rights of the Bank. —

- So that as the opinion now stands, even though this

Court would reverse the statutory usury penalties, as’

fixed by the Florida Appellate Court, and grant to the

National Bank its full right to recover its principal of

some $400,000, we find that Constructors of Florida is

hopelessly insolvent. in bankruptcy, and there is no fund

‘now in existence out of which the Bank could satisfy its

claim. That is a further so-called equitable punishment

which results in defrauding the National Bank and its

depositors and stockholders. for the benefit of the American

Surety Company. ;

That phase results in one of the most drastic penalties

that could be’conceived. The entire National Bank system

in the State of Florida would be wrecked, and the con-

trol by Congress of a National Bank under its protective

. Statutes would be flaunted, ignored and reduced to, ab-

_ surdity. The Lower Court and the Appellate’ Court cited

no authorities for such a drastic forfeiture, and there are

no authorities in the State of Florida or within the realm

of the decisions of this Court which support such a for-

feiture. ,

POINT 5. .

Where, After a Loan Has Been Consummated by a National

Bank to a Corporation, and Where the Privity of Contract

Is Solely Between the National Bank and the Corporate

Borrower, and Where Several Weeks After the Loan Is

Consummated the National Bank, Pursuant to Its General

Banking Practice under the Federal Resetve System.

Grants a Simple Trust Receipt or Participation for a Part

of This Loan on a Straight Simple 5% Interest Participa-

- tion, Does That Subsequent Transaction with the State

Bank Relate the Whole Transaction from the Inception As

a Co-Adventure or Joint Adventure or Agency Contract So

As to Av id the Direct Application of the Federal Statute

on Usury, and Bring into Play the State Penalties Applica-

* ble Only to a State Bank?

This point necessarily inyolves some of the same fac-

tors discussed in the argument on the previous points.

But in addition, it raises one specific point upon. which

we will comment. That is the effect upon the Federal

Statute where a National Bank, after a loan has been

consummated with a borrower, grants a irust certificate

either to a State or Federal Bank. or even to some in-

' dividual.

The National Bank in making this loan of November

14, 1956.. was subject to the rules of the Federal Reserve

ere

- Act and the rules of the Comptroller of Currency under

the National Banking Act. . Under the rules‘ of the Na-

tional Banking Act reflected in Title 12, U.S.C.A., Sections

1 and 21, there was vested in the Comptroller of Currency

the power to make rules and regulations Under -this

authority. the Comptroiler had issued his- opinion +9530,

which ‘was in force and effect at the time this loan was

made on November 14. 1956. in which it was provided as

follows: ao .

“There is no legal prohibition against a national bank

making a loan in periodic installments instead of in

a single lump sum, although the latter is the usual

practice. Likewise, it is not illegal to accomplish the

same end by placing the entire amount of a loan in a

special account out of which the borrower may make

limited periodic withdrawals. ;

However, under the latter arrangement the bank must

be careful that the total charges imposed upon the

horrower (whether such charges are described as ‘in-

terest,’ ‘service charges’,’or otherwise) do not exceed

the legal rate of interest. * * *”

When the National Bank made this loan on November

. 14, 1956, it was acting solely and clearly within the pur-

view of the Federal Banking Statutes and the Comptroller's

rulings. Some $263.000 was immediately given “to the

-eredit of the borrower. Simultaneously, $135.597.62 was

placed in the name of Constructors of Florida, Inc.. the

_ borrower. The title to the money ‘was in the borrower, .

and there was simply a control provision for disbursement ..

of that sum awaiting ‘the receipt of the formal assign-

ment documents. However, without waiting for this as-

" signment document, which did not reach the Bank until

- January 2, 1957, the Bank had in good faith, at the request

of the borrower, advanced approximately 50‘; of that

_ amount. and on January 7. 1957. paid out the entire bal-

ance. Whether interest was charged by the Bank on those

additional] sums or not would make no difference in the

usury computation. If the Bank had the right to charge

interest on the funds in Collateral Account No. 1, interest

computed over the life of the loan of two years was only

11.2%. If it would not be perinitted to charge interest

until all the funds had actually been paid out, then, tak-

ing into consideration that there were two installment

payments made out of that account in November and

December, 1956, and interest only computed from the

date the money actua'ly left the account, the Bénk would

have charged unauthorized interest amounting to less than

one-half of 1% on the over-all loan.

So, whether ‘the interest charged was 12, or 12%,

‘or some figure in hetween, would have no bearing upon

. the question of usury, since the Florida Usury Statute

permitted an over-all interest charge against a corpora-

tion loangf i5“ per annum. °

Participations, either whole or in part, are a standard

practice of all members of the Federal Reserve System.

These participations are in the nature of-a re-discouint.

totally or partially. except that the holder of the Pparticipa-

tion certificate does not take any legal title to the <e-

curities or to the basic Hote. They may be dealt with by

_ private contract on such terms and conditions as the two .

contra@ting Banks may agree upon. The only provision

under the Federal Law and the Comptroller of Currency

Rulings is that contained im, Ruling or Regulation 1135A. —

We copy this in full at this point for the convenience of

the Court.

“1135A. Sale of loan participations to other banks on a

‘last in-first uut’ basis ;

The sale of a participation in a loan to another

bank (usually the sale of the ‘overline’ or legally ex-

ll,

cessive portion of a loan) under an arrangement

whereby the placed portiori of the debt must first be.

&xtinguished subordinates the interest of the selling.

bank. - It is unsound to place fhe. selling .bank in a

position whereby any loss that may occur on the en-

tire loan ‘up to the amount of the selling bank’s. par-

ticipation must be borne by it, arid, in ‘overline’

_ participations the intent and purpose of R.S. 5200

_ would be nullified’ under an agreement having this

effect. To avoid this possibility, participation arrange-

ments giving to one of the participating banks an ear-

lier maturity or preference “with respect to payment

of the obligation(s) in the regular course of business,

should provide tha@ in the event of default’ (interest

and/or principal pagPents past due and unpaid for

‘such period as the participants may by agreement

determine) on the loan,.the appointment of a receiver.

or bankruptcy of the borrower, the participating banks

shall share in. all subsequent loan payments: and col- —

- lections,in proportion to the percentage of participation

‘- held by each ‘bank at the time of the default. the

‘appointment of a receiver, or bankruptcy. With respect

to participations in real estate loans see Paragraph

2715.”

“It can be seen trom the application of this ruling.

that the soycalled participant, who has taken the overline

or legally excessive portion of the loan, does not have

any legal title’to the original note or the security pledged

therefor, but that under this regulation, until a default.

. occurs, the Banks. are free to deal among themselves with-

out regard to.the maker of the original note held by the

National Bank. The regulation simply pfovides that where

the payments are past due and unpaid, or where there is

an appointment of a receiver or a bankruptcv of ‘the bor- ’

- rewer, the participating Banks shall share in all subse-

, quent loan payments. and collections in proportion to the

‘percentage of participation held by each Bank at the time

eve . ;

of the default, the appointment, of a receiver or bank-”

- ruptcy. .

It was because of this one provision of. the National

Banking Law and Comptroller's Rulings that the Pan

American Bank of Miami, a State Bank, was even made

a proper party to the foreclosure action. It had no privity

of contract with Constructors of Florida, City of West.

- Palm Beach or the American Surety Company. —

The State Court in its opinion has created an en- |

tirely new concept of the ‘egal position of a subsequent

participant with a National Bank. It finds no foundation

_.in any reported decisions and is in dead conflict with the

_ Federal Statutes and the Ruilings of the Comptroller of

Currency. The agreement of Pan American Bank in its

‘ participation was not on the terms of sharing” ‘pro. rata

bes! as in the deal or contract with the National Bank. ‘It was not

a party to the original contract. It never could share in

any of the interest accumulations or contracts of. the .

_ National Bank with the borrower. It could never hope to

~ recover more than $243 000 plus interest at-5’;. There

was no provision whereby any of the. interest te be

received from Constructors of Florida was ever to -be —

transferred on a pro rata basis, nor was there any agree-

ment in that participation certificate whereby the Na-

_ tional Bank ever legally assigned or even equitably as-

signed any of the direct payments made by Construc-

tors of Florida or the City of West Palm Beach. - ‘No part

of that ¢ollateral consisting of funds from the City . of

West Palm Beach: or the second lien on the equipment,

was ever assigned to the Pan American Bank. There was

’ no agency and not one iota of testimony produced in this,

record to show any antitipatory agreements or under-~

>... standings between the Pan American Bank, .as “a “State

. Bank, and the Coral Gables. First seein ore Bank, on No- °

vember 14. 1956, at the time the loan was consummated ‘

- between the National Bank and the borrower:

‘These two Banks were free to deal with- themselves .

and between themselves. The Coral Gables First National

Bank under the Federal Regulations: -could have participated

the balance of the 45% to other banks, ‘either State or

National, have paid those participants whatever interest

it agreed to pay; and could have kept the benefit of any

overage interest. That was a matter with which the maker .

of the note had no concern. It-is a standard live of bank-

_ ing practice, and to apply the rule of equitable penalties. .

equitable damages, such as applied by the Appellate Court

’ of- Florida in this case would ‘shatter the method of _— . ¥

business under the Federal Banking System. |

The ruling, therefore, of the Appellate Court of Flor-

ida, under the doctrine of usury, npt: only shatters the

concept of Title 12, U.S.C’A., Paragraph 86, but shatters

and holds to be null and void the acts of a National. Bank

when it is acting solely and well within the purview and

directions of the Comptroller of Currency who was in

‘charge of the operation of National Banks.. If the actions

of the National Bank were in full accordance with the

rules and regulations governing’ National Banks or State

Banks which were under the Federal Reserve System.

to hold for naught and to void or to place extraneous |

constructions. upen the control factors of the National

Banks. 3

The Appéilate Co 2 of Florida in its opinion (119

So.2d 747, first colunin) referred to subsequent cases col-—

lected at 12 U.S.C“A. 343. The only case referred ta under

that heading is Federal Reserve Bank of Richmond, Va., v.

Duffy et al., 188 S.E. 82, 210 North Carolina 598: The

‘ ease does not support the statements made by the Ap-

pellate Court in its opinion, but the effect of the case is

to hold just to the contrary.

In this case there was an action brought by.the Federal _

Reserve Bank of Richmond, Virginia, in the State Court

of North Carolina. F. S.. Duffy had executed a note pavy-

able to-the First National Bank of New Bern, North

Carolina, and that bank thereafter transferred the note

by endorsement to the Federal Reserve Bank of Richmond. *

This note was secured by a mortgage on real estate. The

note was dated September 12, 1929. and was assigned for

‘discount to the Federal Reserve Bank of Richmond gn

September 14, 1929. The credit: was extended from the

‘Federal Reserve Bank to the New Bern Bank as of’ the

date September -14, 1929. About six. weeks later, on Oc-

tober 26, 1929, the First National Bank of New Bern

closed its doors. The makers of ‘the note above referred

to had: on’ deposit - with that bank certain sums which

they claimed they had a right to set off against any in-

debtedness due to the bank, including the indebtedness »

represented by the note of September 12, 1929, which had

been assigned and discounted to the Federal Reserve Bank.

The Federal Reserve Bank then brought suit, and the

defendants contended that the Federal Reserve Bank acted

in bad faith when it took this note for discount. They con-

~~tended that the note was ineligible for discount, and that

therefore-the Federal Reserve Bank, the plaintiff, was not

entitled to the position of a holder-in due course so as to

deprive the defendants of the right of set-off to the amount

" of their deposit in the closed bank. |

" The Supreme Court ef North Carolina held that even

if the plaintiff had accepted for discount paper declared il-

legal by the act or by the rules under federal procedure, the

defendant who owed the debt could not complain’. They

relied upon a' decision by Circuit Judge Parker jn Lucas vy.

ie de

Federal Reserve Bank, 59 F.2d 617, 620. In this case; which

was quoted in detail in the opinion of the North Carolina

Court, the fundamental rule was laid down that the ex-

ercise of powers or incidental powers under the Federal Re-

serve Act was solely a matter for federal determination,

and held that’even though there were technical rules in

‘the discounting of paper that might have caused the Comp-

-troller of Currency or the Federal Banking Examiners to

question the validity of the transaction, yet the borrower

had no position ‘to question it, stating (p. 84, column 2):

, “It is equally clear that whatever the power of the

Federal Reserve Bank with respect to taking as col-

lateral paper not eligible for discount, no one can com-

plain of such action except the government, the sov-

ereign which created = limited its powers. * * *”

Then the Court said:

“Defendants contend further that the relationship be-

tween the Federal Reserve Bank of Richmond, Va.,

and member bdnks was such as to constitute the latter:

_the agent of the former, and thus impute notice to the

principal of all facts known to the member bank. * * *” |

But the Supteine Court of North Carolina rejected that

doctrine, stating:

“Where the agent is dealing in his own behalf, or has

personal interest to serve, the knowledge of agent is

not imputable to the principal. * * *

Here the First National Bank of New Bern, seek-

ing to secure additional funds. to continue a failing

business, negotiates a valid paper, which, on its- face,

is entirely proper and eligible for discount by the plain- -

_ tiff, but fails to disclose facts which might have pre-

vented its discount, and thereby obtains advances

from the plaintiff for its own purposes. The New Bern

bank was acting in its own interest, adversely to the -

plaintiff, in selling to the plaintiff the’ New Bern bank’s

property,’and hence knowledge of bad faith, if any, on

its part-cannot in law be imputed to the —, Re-

serve Bank.” — ys :

: pers ing that nero of ae expressed in said opin-

ion and supported by Federal authorities, how could it be

~ said that the Pan’ American Bank of Miami had constituted -

- The Coral Gables First National Bank its agent, ‘when it~

did not evén come into the loan transaction until two weeks

after the National Bank had already consummated the

loan and had made advances of $400,000 in principal sum

to the borrower. The State Bank had nothing to do with

the original loan and nothing to do with the securing of

the collateral, and had nothing’ to do with the interest rate

fixed between the borrower and the National Bank. How

could that subsequent transaction relate back to establish

the two essential points found by the State Court—

1. That the subsequent participation of the State Bank

by a retroactive measure constituted the National Bank

its agent, or a .

“How couid that subsequent participation créate a

pre net where the National Bank was used as a sub-

terfuge or as a conduit by which the State Bank sought to”

iénd its money at a usurious rate of interest under the

_ guise of protection of the: National Bank, and Title 12,

U.S.C.A.. Paragraph 86. /

. These are simply imaginary and fictitious conclusions”

drawn by the Appellate Court of Florida, not based upon

any facts, but asserted as a flimsy and unsupported founda-

tion for assessing collateral punitive damages against the

National Bank. ;

While not definitely pointed out. there seems to be a

“trend running through the theory of both the lower court

62 :

and the Appellate Court of Florida that if The Coral Gables

First National Bank, as a National Bank, had handled this

_ deal by itself, then the Federal Act would apply. How-

ever, it seems to be intimated, if not actually held, that

where the National Bank, after the loan was made, subse-

~ quently-participated some of that loan,as_it-had-a right to

do, to any member of the Federal Reserve System, and the

‘actual participation was made to a Florida State Bank, that

then the National Bank lost alli of its rights or protection,

as it may ‘be called, under the Federal Statute.

been decided by this Court since the filing of the petition

in this‘cause. On December 5, 1960, which was several days

after this petition was filed, this Court -rendgred_ its opinion

in the case of Small Business Administration, Petitioner v._

G. M. McClellan, Trustee, 81 S. Ct. 191 (Supreme Court

Supreme Court of the United States reversed the decision

of the United States Court sal Appeals for the Tenth Cir-

cuit (272 F.2d 143).

Referring to the facts set forth in the Court of Ap-

peals opinion, it appears that one Byquist had made an

application on a Small Business Administration form, en-

titled “Limited Loan Participation Application for Loan”,

.to the Brookville State Bank of Brookville, Kansas, for a

$20,000 Ican. On October 30, 1956, the Bank endorsed the

application to show that it was willing to make the loan

upon the participation of SBA therein to the extent of

75°7. On November 19. 1956. SBA agreed and entered into

a participation agreement with the Bank. It was agreed

that upon request by the Bank. SBA would purchase a 75%

interest; that the. Bank would hold the note and on 5 days

written demand would transfer it to SBA: that the holder

of the note. whoever it might be. would service it and ‘re-

mit promptly to the other party its pro rata’share. SBA

and the Bank were to bear any loss’ incurred ratably accord-

ing to their respective interests in the loan.

On Nov ember.21, 1956, SBA sent the Bank its check in

‘the amount of $15,000 for the e sole purpose of purchasing a

—75°% interest in the loan. The State Bank then loaned

$20,000 to Byquist who executed and delivered a note

payable to the Bank. This loan was on the form authorized

by SBA.

On September 5. ae Byquist was adjudicated a bank- .

rupt and subsequent to the date of bankruptcy the Bank

assigned the note to SBA. SBA then filed its claim on Oc-

- tober 15, 1957, for the entire unpaid _balance-on the note

ithe sum of $16,788.42, and claimed priority therefor.

The. Referee and: the United States District Court, as

well as the United States Court of Appeals, Tenth Circuit.

_ held that the State Bank was the primary creditor. and

thatthe United States in its participation through SBA was ~

‘only a beneficial owner of a part of the debt. The opinion

of the United States Court.of Appeals, Tenth Circuit.

pointed out .(p. 145) that the United States, through SBA,

was bound by its written contract to account to the State

Bank for 25 of any coHections made under the note, and

that therefore the Bank would share to tiiait extent in any

proceeds resulting from the award of a priority to the

United States. That Court pointed out that no such priority

. to a private creditor is provided for. That Court.ended its

opinion as follows (146):

“The United States has engaged in a commercial

enterprise and made no effort to safeguard its rights

under £3466. In a contract made on its own forms it:

has agreed to share ratably proceeds and losses. It

may not assert a priority which will produce a re-

covery that by contract must be divided with a private.

entity.”

However, the Supreme Court of the United States re-

-.versed that decision, and. the question ‘was squarely put in

_ the opinion by Mr. Justice Black (83 S: Ct. 193):

“The basic question this case presents is whether,

‘when the Administration has joined a private bank ~

in a loan and the borrower becomes -a bankrupt, the

Administration’s interest in the unpaid balance of the

loan is entitled. to the priority provided for ‘debts due

to the United States’ in R.S. £3466 and $64 of the Bank-- *

ruptcy Act, even though the Administration has

agreed to share any money collected on the loan with ‘

the private bank.” ‘

The-Court in its opinion vstenial out that the District

‘Cet had concluded that since the bankrupt’s note evi-

dencing the loan was not assigned by the Bank +o the Ad-

ministration until after the commentement of the bank-

ruptcy proceedings, the debt was not entitled to priority.

Then the Court in its opinion pointed out that the Court

of Appeals upheld that general order, holding that the Ad-

ministration having contracted to pay to the participating.

private bank one-fourth of any distribution received, it

could not assert its priority and thus have a private party

benefit from the priority. But this Court overruled those -

contentions ‘and said that where the debt was sought to be

' collected by a Federal Agency, the fact that the Admin-

_ istration had ‘contracted to pay to the participating private

. bank one-fourth of any mone} it later collects on the loan,

does not mean that the Government must lose its eeaemy.

the Court stating (195): \.

“Respondent's argument to the contrary seems to

’ rest upon the assumption that the Government is de-

"prived of its priority by making a contract to pay a

part of its funds to another cmubitine of the bankrupt

who has no priority.”

‘Then, further, this Court said (196). MO

“The purpose of these sections is simply to protect __

the interest of the Government in collecting money ”

due to it. Once-that money is collected. and placed

in the Government’ Treasury, the end sought: to be

achieved by £3466 and £64-of the- Bankruptcy Act is

- completely satisfied. At that peint, there is no dif-

ference between the money so received and money re-

ceived from any other source and, like other money,

jt may be disbursed in any way the Government sees

fit, including the satisfacti { obligations already

incurred, so long as the purpose is lawful. The Small -

_ Business Administration ‘is authorized to enter into

contracts calculated to induce private banks’ to make

loans to small businesses. The contract involved in |

this case, by providing- additional securj y to the pri-

vate. bank at the Government's experise. is well

adapted tq-that ‘end. Indeed, in many cases such a

contract may be the only way the .Administration

could induce private bank participation in a necessary

_loan. In ‘those cases, acceptance of respondent’s argu- . -

ment would make it more difficult for the Administra--

tion to perform its statutory duties. Clearly Congress

did not intend, by the very act of imposing duties upon

the Administration, to take away a privilege necessary -

- to the effective performance of those duties. _

* * * Respondent's argument from the policy of

equality of distribution for similar creditors expressed

true that the allowance of the priority asserted here

will place the bank, a private unsecured creditor, in

a better position than other. private unsecured ¢red-

_itors. But this position is a resuJt, not of any” in-

equality of distribution on the part of the bankruptcy

court, but of the bank’s valid contract with the Small

Business Administration.” — -

- g

‘ 6s

Applying the theory of that case to the situation now

at hand, we find thatthe position of a National Bank under

Sections 89 and 866f Title 12, U.S.C.A., is stronger than the

facts presented in the Small Business Administration case.

Here the N&tional Bank made the initial loan. It expended.

out of the National Bank’s assets $400,000 approximately

for advances on the $442,400 loan. At that point the Na-

Ational Bank was the only party in privity with Construc-

_ tors of Florida, Inc., the borrower. The,-note was in its .

name and the security pledged was in the name of the

. ‘National Bank. It was then no concern of the borrower ._

what disposition the National Bank made of that loan. It

could have assigned that loan either to a National Bank or

any other member of the Federal Reserve. It could have’

sold it outright to third parties or it could hold the note

and grant participations which were allowed under the

Federal Reserve Act to either State or Federal Banks in

whole or in part under the doctrine. of participations. It

had the right to make any terms as to the participation and

interest return that it saw fit. This did not render any

of the holders of the: participation certificates in privity

with the original borrower.

Admittedly, some two weeks after the loan had been

consummated, on November 14th, a State Bank, also a

member of the Federal Reserve System, took a participa-

tion for 55%., but at a restricted 5 interest agreement.

- This was a matter solely between the National Bank as

the holder of the -note and the collateral,. and its- par-

ticipant. This did not amount to an assignment of the

loan or any transfer of any legal title to the note or to the

security. Whatever protection the National Bank had at

the time the loan was consummated on November 14th, .

1956, was not lost or waived by the National Bank. When

a the National Bank, pursuant to the terms of its note con-

tract, c this loan, it was acting pursuant to its con-

tractudl \rights, and the State Bank ‘had nothing to say’

‘about the action which the National Bank took. The

. State Bank was not even a party to the so-called rene-

gotiated loan or the new loan of March 20, 1957. The State

Bank did take a small participation in that loan, but that

was by. separate contract. After Constructors of Florida,

Ine:, became insolvent and thé foreclosure was instituted

by the National Bank jp the fall of 1957, the National Bank

was thepei plaintiff in that foreclosure. The only

reason State Bank wag required to be joined as.a

proper, but not a necessary, jarty plaintiff was because of

the rulings of the ComptrgHer of Currency, Ruling 1135A,

which in simple“and concise language, as we interpret it,

provides that where there are defaults of interest or prin-

cipal payments under the loan which is held by the Na-

tional Bank, then the participating banks shall share in

all subsequent loan payments. and collections in propor-

tion to the percentage of participation held by each bank

at the time of the default’ the appointment of a receiver or

bankruptcy. This rule applied to loans secured by personal

property as distinct from real! estate loans.

Applying these same principles as laid down by this

Court in the Small Business Administration case, supta,

the total claim of the Coral Gables First National Bank

came squarely under the provisions of Sections 85 and

86 of Title 12, U.S.C.A.* The opinion of the Courts of

Florida attempting ‘to strip the National Bank of its pro-

tection is clearly violative of the Federal law.

“c

CONCLUSION:

,1n a preliminary part of this petition for certiorari we’

emphasized that we were submitting this question to the

Supreme Court of the United States solely on the point

that, assuming but not admitting that usury was found to _

have been“exacted by the National Bank by the State.

Court decision, and that approximately $11,000 of interest.

was paid by’ Constructors to the ‘Cora] Gables. First Na-

tional Bank, did the Federal Statute, Title 12, U.S.C.A.,

Par. 86, restrict the’ penalty of recovery against the Na-

tional Bank to twice the amountzpf the interest fos cata

paid, which would have approximated $22,000? * _

If that is the limit of the penalty, then the National

Bank was entitled to recaver approximately $110,000 of

principal, which was the balance due on the undisputed

mortgages of July, 1956, plus interest and attorneys’ fees.

The National Bank would be éntitled to recover approxi-

— $151,000, which was the balance of the principal

ar, 4 the re-negotiated mortgage note of November 14,

Pe take as revised by the note” of March 20. 1957, plus at-

torneys’ fees, less the credit of approximately $22,000,

which is double the amount of the interest,actually paid

. “by Constructors of Florida to the Coral Gables First Na-

tional Benk.

If this Court holds that the Federal Statute iimits the

penalties to that amount since the title to all of the mort- .

- gages and, notes was in ‘the Coral Gabies First National.

Bank. then the Coral Gables First National Bank could

*. pecover, and the Pan American Bank of Miami as the par-

* ticipanf would then have its percentage of the participa-

tion.

aa ‘

In this event that part of the decrees and opinions of

the Florida Courts extinguishing the lien and priority of |

~- the National Bank’s mortgages as a penalty for coming into

equity with unclean hands, would be automatically

‘- avoided: Thus also would be- avoided the’ affirmative

judgment against the Pan. American Bank which was not

even in privity with Constructors of Florida, and the off- .

set: judgment against the National Bank would be reduced

from some $74,000 down to approximately $22,000.

Réspectfully submitted,

W. G. War,

_ Alfred I. duPont Building,

" Attorney for Petitioner, The~

Coral Gables First National

Bank.

WILLIAM B. Roman,

Pan. American Bank Building,

Miami. Florida,

Ree

ast. FOSTER,

Brock Building, -

Tallahassee, Florida.

Attorneys for Petitioner, ‘on

American Bank of Miami.

, By joven

| 3 ieee as W. G. Warp

Warp & Warp,.

duPont Building, ~

' Miami, Florida,

Of Counsel.

INDEX TO APPENDIX

Partial Final ‘ens of the Circuit Court of the Elev-

enth Judicial Circuit, Dade County, Florida, Dated

June 26, 1958 Al-Al4

Order Amending Partial Final Decrée, Dated July

2, 1958 . A15-A19

- Opinion of District: Court of Appeal of Florida. ‘Third

District, Filed March 22, 1960. A19-A34

Mandate from District-Court of Appeal of Florida,

‘Third District, of May 4, 1960. a A35-A36 |

_ Order and Judgment on Mandate, April 14, 1961 A37-A41

Notice of Interlocutory Appeal Filed April 17. 1961 A42-A43

Assignments of Error Filed April 17. 1961 ' “A44-A47 |

Order of District Court of Appeal of Florida, Third

District, May 25, 1961 «AB

Order of Supreme Court of. Florida July’ 24. 1961.

Denying Petition for Writ of Certiorari A49

Order -of Supreme Court of Florida oar. 26,

1961, Denving Petition for Rehearing A56

IN THE CIRCUIT COURT OF THE ELEVENTH

JUDICIAL CIRCUIT, IN AND’FOR DADE

COUNTY, FLORIDA. :

IN CHANCERY No. 205613-E. =

(Judge Crawford. )

THE CORAL GABLES FIRST NATIONAL BANK, etc.,

‘and PAN AMERICAN BANK OF °

MIAMI, etc.,

—

VS.

CONSTRUCTORS OF FLORIDA, INC.:; et al.,

° ‘ Defendants.

PARTIAL FINAL DECREE. :

THIS CAUSE coming on to be tried before the Court

and The Coral Gables First National Bank, the Pan Ameri-

can Bank of Miami, Constructors of Florida, Inc., City of

West Palm Béach, American Surety Company of New

York, Richard R. Reynolds, James M: Lancaster, Jr., Earl

L. Goodwin, Russell A. Ortmayer, Harold S. Flagg and

Tom Maxey having presented their testimony together

with that of their witnesses and presented the docu-

mentary exhibits to be considered by the Court, and after

consideration of the matter, the briefs-of counsel, the

Court

FINDS:

On September 20, 1957, the Coral Gables First Na-

tional Bank, and the Pan American Bank of Miami, as

Plaintiffs, filed their Bill of Complaint against Construc-

tors of Flérida, Inc., City of West Palm Beach, American |

Surety Company of New York, Richard R. Reynolds, Jim

M. Lancaster, Jr., Earl L. Goodwin, Island Construction

er ere Pecon~-Construction Company, J. C. Biedsde,

Rissell A. Ortmayer, Harold S.: Flagg, Tom Maxey, and

the United States of America, as Defendants, seeking to

foreclose three (3) chattel mortgages, in the amount of

$13,888.95, $92,690.85 and $151,802.46, and to impose liabil-

ity for any deficiency on ‘American Surety Company of

New York and the City of West Palm Beach.

All defendants who were served with process filed .

their answers denying liability; and, in addition, setting

up counterclaims against the Banks.

Constructors of Florida, Inc. and Messrs. Reynvlds,

Lancaster, Goodwin, by their counterclaim,: alleged that

the larger. of the three (3) loans sought to be foreclosed, in

the original principal amount of $442, 400. 00 was in fact

usurious; that the Banks breached their contract to- loan

“money to Constructors of Florida, Inc. by withholding

from Constructors of Florida, Inc. the major portion of —

the proceeds’ of said larger loan; and that- by said breach

the Banks impaired the working capital of Constructors

of Florida, Inc., thus. ruining Constructors of Florida, Inc.

and causing substantial damages; moreover, that the

’ Banks, as a part of their conspiracy and scheme to collect

.usurious interest, caused Messrs. Reynolds,’ Lancaster, and

‘* Goodwin to. decline a bona fide offer to purchase forty

(40° ) percent of the stock of Constructors of Florida, Inc.

for thé sum of $400,000.00, all to the damage of Construc-

tors of Florida, Inc., and its principals, in the amount of

$3,674,480.76 as to the corporation, and $2,342,379.19 as to

its principals. ,

_ American Surety Company of New York, in elites:

to adopting the allegations of the counterctaim’ filed by

A3_

ry ; sd

' Constructors of Florida, Inc., and its principals, also by its

counterclaim, alleged fraud and deceit on the part of the

pany of New York false and fraudulent information con-

cerning the financial conditipn of Constructors: of Florida,

Inc., which information American ° Surety Company of

‘New York believed and acted upon, thus causing American

Surety Company of New York to refrain from taking action

to prevent losses on its then outstanding bonds, and, further

causing American Surety Company of New York to write

additional bonds on the strength of the credit and quick

assets of Constructors of Florida, Inc., all to the damage of

American Surety Company of New York in the amount of

$1.367.379.19.

The City of West Palm Beach, in its counterclaim.

adopted the factual allegations of the counterclaims ‘filed

by the other defendants and counterclaimants, and alleged

that the actions of the Banks were the direct and proxi-

mate cause of the City’s being forced to take over the con-

tracts held by Constructors of Florida, Inc. with the City

of West Palm Beach, all to the damage of the City of West

Palm Beach in the amount of $279,423.58.

John Nicholas, as Receiver in Bankruptcy of Construc-

tors of Florida, Inc. was allowed to intervene by the Court

and filed his answer and counterclaim against the Plaintiffs

and adopted the pleadings, answer and counterclaim filed

_ inthe cause’ on behalf of Constructors of ‘Florida, Inc. to-

gether with answer and counterclaim slirected against ‘the

other Defendants.

Pecon Construction Company and J. C. Bledsoe were

- never served with .process.

The trial of the first phase of the suit was limited to

‘the “primary” issues between the principal parties:

Constructors of Florida, Inc.,‘a Florida corporation was

organized in 1955 with Richard R. Reynolds. Jim M. Lan--

caster, Jr. and Earl L..Goodwin as principals. The Corpo-

ration was very busy and in October 1956 it was engaged

_ in the completion of some eighteen (18) municipal, state

and federal governmental contracts throughout the State

of Florida. having a total value of about $3.800,000.00. The

Corporation needed a large amount of working capital.

. In negotiations between the Corporation and The Coral

Gables First National Bank, a loan was entered into on

November 14, 1956, in-the principal amount of $442,400.00.

repayable at $3,000.00 per month principal, plus interest at

5% per annum for twenty-three (23) months with a balloon

or final payment on the twenty-fourth month of $373,406.00,

plus interest at 5% per annum. This loan was Secured by

chattel mortgage on all motors and equipment of the Cor-

- poration and by “assignment” of payments due: from the

City of West Palm Beach to the Corporation on sewer con-.

tracts 7 and 9. At that time the Corporation was in-

debted to The Coral: Gables First National Bank on ac-

fount of the remaining principal balance of two equipment

payment consolidating loans made in July 1956, in the

amounts of $19,444.53 and $129.767.19 or a total of $149.-

211.72. Preliminary to the large loan of November 14.

1956, the Banks also granted a $60. 000.00 interim Ioan to

the Corporation on October 5. 1956. This interim loan

was secured by a corporate resoiution directing the City

of West Palm Beach to mail checks pavable to Constructors

of Florida, Inc. for work done .on contracts 7 and 9 to The

Coral’ Gables First National Bank. This resolution plus

agreement to so mail said checks by the City of West Palm

' Beach constituted the “assignment” refepted to above.

The Coral Gables First National Bank in making the

loan of $442.400.00 actually paid to Constructors of Florida.

Inc. $202,562.38. since thev paid to themselves from the

| proceeds of the loan the existing $60,000.00 indebtedness

of the Corporation. . In addition,. the Banks deducted

_ $44,240.00 as a commitment fee and $44.854.44 as disepunt

or interest paid in advance. ‘ Furthermore $90,743.18 was

pesto in’ a new account called “Collateral Account No.

" which was a controlled account requiring the signature

2 a Vice-President of the Banks-and-an-officer of Con- *

structors of ‘Florida. Inc. Upon the Corporation’s asking

the Banks for an explanation of these charges, it was ex- |

plained that there was an error in making the commitment

fee charge of $44,854.44 and that this afount would be paid

into. Collateral Account No. 1. This was done increasing

this account to a total balance of $135.597.62. The Banks

further stated that the charge of $44,240.00 would be

treated as pre-paid interest, i. e.,5% per year for two years |

or a total of 1077. The face of the $442,400.09 note provided

only for interest at the rate of 5% per annum, payable

monthly for twenty-three months with the small $3,000.00 —

per month principal pavment with the balance of interest

and principal due on the twenty -fourth month. The dis-"

count interest charge was in addition to the ‘interest rate

shown on the face of the note.

The Coral Gables First National Bank also created

“Collateral Account No. 2” which was a controlled account

requiring the joint signature of an officer of ‘the Banks

and of the Corporation, and into this account was paid on

' November , 29," 1956, $36.488.11: Decemiger 24. 1956.

» $42,750.32; January 24, 1957, $53.247.39: February 26, 1957,

$24,168.04: and on March 1, 1957, $37.502.25, making a total

Florida, Inc. by the City of West Palm Beach. The under-

stood terms of the loan ‘at the time of its making did not °

contemplate such‘ controlled accounts and there was. no”

such provisions set forth in any contract documents.

_ ori

over to

_No. 1, the Ban

would be

During the months of December 1956 and January

1957, the affairs of Constructors of Florida, Inc. appeared

to progress well. From time to time. the Corporation called

‘upon the Banks to release to their.use certain of the funds

held by the Banks in Collateral Account No. 1.

These requests were granted and the entire amount

withheld in Collateral Account No. 1 was paid

structors of Florida, Inc. by January 7, 1957.

e of these advances from Collateral Account

During the

Account No. 2, the sum of $122,749.34, and by the end of

Februaty 1957, 4 net balance of $179,540.67; the Banks

receiving in Collateral Account No. 2 more money than

disbursed from Collateral Account No. 1. About this time

the Corporation requested the Banks to advance $100,000.00

of the amount held \in Collateral.Account No. 2, which the

Banks claimed was being held as additional security. and

which the Corporation thought was capital available for

its use. Through/ continuous negotiations between the

Corporation ard the Banks, the request was reduced to

$50,000.00 and indications were made by the Banks that it

ted. On March 4, 1957, an officer of the

Corporation left a signed check, in blank and undated,

with the Banks so that funds in the amount of $50,000.00

’ could be deposited in the corporate account and withdrawn

by the Corporation on the following day. The Banks, how-

ever, completed | the check for the total amount remaining —

in Collateral Account No. 2 of $179,540.67 and without the.

knowledge or consent of the Corporation applied the same

to the reduction of the face amount of the $442,400.00 loan.

The Banks had, up to this time, apparently thought that

the Corporation loans were joel 4 by guarantee of the

. American Surety Company of New York and on March 4,

1957, realized that this was not true in fact.

had: received and deposited in Collateral

When the $442,400.00 loan was made, it was beyond

the legal lending limits of The Coral Gables First National

As of November 14, 1956, Constructors of Florida, Inc.

was indebted to Coral Gables First National Bank in the

amounts of $19.444.53 and $129.767.19, the unpaid balance

in the amount of $60,000.00 on the interim.loan. $202,562.38

was actually paid to Constructors of Florida, Inc. on ac- _

count of the $442.400.00 lonn of November 14, 1956, so that

the actual net cash which had been paid over to Construc- ~

tors of Florida, Inc. by Coral Gables First National Bank,

as of November 14, 1956, was $411,774.10. However, Pan

American Bank of Miami, as participant in‘each of, these

three (3) — was debited by Coral Gables First National

Bank with

320.00, or a total of $392.531.72. Actually. therefore. Coral

Gables First National, Bank was merely a conduit, and

_ agent; the new loan of $442,400.00.did not, according to the

books and records of Coral Gables First National Bank.

increase the net amount of the indebtedness of Constructors

of Florida, Inc.: rather the net amount of indebtedness to

Coral Gables First National Bank, after the new loan of

$442,400.00, actually decreased from $209,211.62 to $19.-

242.38. a net decrease of $188,969.24. In other words, im-

mediately prior to the consummation of the alleged $442,-

Inc. wes indebted to Coral Gables First National Bank in

the amount of $209,211.62: immediately after the consum-

_mation of the alleged $442,400.00 loan. Constructors of

- FloridaInc. was indebted to Coral Gables First National

Bank only -in' the small amount of $19,242.38. By loan-

ing $393.531.72. of the money of Pan American Bank of

Miami, Coral Gables First National Bank decreased its

outstanding loans by $188,969.24

the sum of $19,444.53, $129.767.19, and $243,- —

‘A8

In early March of 1957, Constructors of Florida, Inc.

was in financial difficulty finding itself eaahas to meet the

current payroll. After- The Coral Gables First Nationa!

Bank had applied °$179,540.67, the balance of Collateral

Account. No. 2, to the payment of the outstanding loan,

a meeting was held by the officials of The Coral Gables

First National Bank, Pan American Bank of Miami, Con-

structors: of Florida, Inc. and American Surety Company

of New York. Mr. Eduardo Morales of Pan American

Bank, Mr. Riley and Mr. McGoogan of The Coral Gables

First National Bank, Messrs. Reynolds, Lancaster and

Goodwin for the Corporation and Mr. Harold S: Flagg for .

the Surety Company participated in a general discussion of.

the financial position of the various parties at that time.

It was then agreed. that out of the remaining amounts to .

be collected on the City of West Palm Beach sewer con-

tracts 7 and 9, approximately 65% thereof would | go to

_ the indebtedness to the Banks and approximately

. thereof would be deposited into a- controlled trust

pees to be’ used by Constructors of Florida, “Inc. The

loan repayment agreement of March 20, 1957 was executed

together with the renewal contract note of that date in the

amount of $218.275.25 provid.ng for a straight 15% inter-

est per annum. A usury release was executed together

with personal guarantees by the three officers of Construc-

tors of Florida, Inc. These documents wéte executed un- |

der compulsion and force of the precarious financial cir-

cumstances then existing due to the wrongful manner in

which the loan accounts had been handled by the Plain-

tiff-Banks. are void and without consideration.

The Corporation never recovered from this point. on

and shortly thereafter complete default occurred on con-

tracts and corporate business. . ~ |

The Plaintiff-Banks, on account 6f the loan of $442.-

400.00 of November 14, 1956. had actually charged Con-

AQ /

> :

F ceuees of Florida, Inc., total interest in the amount of

$49,855.44, which is fifty-six and 27/100ths (56.27% ) per-

‘ cent per annum on the actual moneys disbursed to Con-

_sructors of Florida. Inc. on account of said loan, ‘based on

‘a 365 day year, or fifty-five aid 5/10ths (55.5% ) percent

“per annum based on a 360 da: year.

The total interest reseived on the face of the note.

when edded to the $44,240.00 retained by the Banks as »

interest taken in advance, discount,-or commitment fee.

amounted’ to a total of $85,029.92 actually. reserved,

charged, or taken by the Banks.

The transfer of $135,597.62 by the Banks on November

14, 1956 to Collateral Account No. 1, a controlled account

requiring the signature of an officer of the Banks, was

not a payment to the account of the Corporation for which

"interest could be charged. Title to the funds did not be-.

long to the Corporation until delivered to them free of con-

‘trol.

The payments by the City of West Palm Beach in

periodical installments between November 29, 1956 and

‘March 1, 1957 of $194,156.11 into Collateral Account No. 2

a controlled account requiring the- signature of an officer

of the Banks. did amount to payments to the Banks of-cash

collateral requiring a rebate of narent charged, on like

; amounts outstanding.

It appears that under any lawful and Heieiaibihe con-

tention the Banks charged Constructors of Florida, Inc. at

least thirty-eight and.40 100ths (38.40% ) percent interest

on the $442,400.00 loan and fifty-six and 27/100ths (56.27% |

percent if you use only the actual amount of the said lean

which was made available to the uncontrolled account of .

Constructors of “Florida,.Inc: It seems without questian

Al0

that the interest charged and reserved exceeds twenty-

five (25%) percent per annum.

It therefore follows that under Sec. 687.04 and 687.07,

Florida Statutes 1957 the notes and mortgages sued upon

by the Plaintiff-Banks are void and of no force and effect.

The Plaintiff-Banks are liable to Constructors of Flor-

ida, Inc. as follows:

(a) Fer double the amount of discount, commit-

ment fee or interest paid in advance, in the

amount of $44,240.00 $88,480.00

(b) For double the interest reserved on the face

of the note, in the amount of $40,789.92, as

shown by Schedule 2, Column 1 of Pentland,

Purvis, meller & Co. audit, Plaintiffs’ Exhibit

No. 47 = , 81,479.84

{c) For cancellation of the principal amount al-

legedly remaining due thereon 151,802.46

(d) For recovery of al] amounts previously paid .

- thereon, as follows:

Amount of note $442,400.00

Less balance 151,802.46

Principal paid ~— $290,597.54

Interest paid per Schedule 1,

Plaintiffs’ Exhibit No. 47 . ' 14,271.38

Total previous paid : $304,868.92

’ Total Usury Damages _ / $626,731.22

Inasmuch as the Plaintiffs were joint adventurers, and

agent and principal each for the. other, each is liable for

_the total amount of such damage, and the Federal Banking

Code has no application to prevent imposition of the stat-.

utes ‘of the State of Florida as to usury penalties.

At the time the Banks wrongfully applied the balance

of $179,540.67 remaining in Collateral Account No. 2 to

the reduction of the face amount due of the $442.400.00

. _ All = '

loan, neither of the notes of July 25, 1956 and July 24, 1956

held by the Banks and secured by chattel equipment mort-

gages, were due or in default. The action of the Banks

helped bring about the subsequent defaults in these loans

ind the amount seized by the Banks from Collateral Ac-

count No. 2 was more than enough to pay said loans in

full cr keep them current and in good standing. The debts

-are still due on said notes by the Corporation to the Banks —

in the amounts of $14,326.77 and $95,636.77 principal and

interest included to May 1, 1958, respectively, but the notes

_and mortgages are not in default and not subject to fore-

closure in this action. They may be paid in accordance

with their respective terms with principal payments held

to be in abeyance from time of alleged default to time of

the entry of complete Final Decree in this case. The lien

of the mortgages securing said debts are unenforceable as

the Banks are not in equity with clean hands. The lien of

the City of West Palm Beach and American Surety Com-

pany of New York against such chattel and equipment of

the Corporation are superior to any claims of the Banks

asserted in this proceeding.

The evidence is not sufficient. to prove to the satis-

faction of this Court by a preponderance that the Plaintiff-

Counter-Defendant Banks are solely responsible or liable

for all damages suffered by Censtructors of Florida, Inc.,

‘resulting from the collapse of its business and forfeiture

of its contracts.

The evidence is not sufficient to prove to the satis-

faction of this Court by a preponderance that the Plaintiff-

Counter-Defendants Banks are solely -responsible or liable

for all damages suffered by Richard R. Reynolds, Jim M...

Lancaster, Jr. and Ear] L. Goodwin resulting ffam the loss

. of value of the stock of Constructors of Florida, Inc., loss

- Al2

of profits, or liability on personal guarantees other than

those giv en to said Banks.

The evidence is not sufficient to prove to the satis-

faction of this Court by a preponderance that the Plain-

tiffs-Counter-Defendants Banks are - solely responsible or

liable for all damages suffered by: the City of West Palm

Beach in connection with the completion of sewer con-

tracts 7 and 9: |

The evidence does show that the City of West Palm

Beach did not agree in any way to guarantee. any part of

the loan made by the Banks to Constructors of Florida, Inc.

There is no basis whatever for any equitable subrogation

in favor of the cia: and against the City of West Palm

Beach. ©

~The evidence is show that the City of West Palm

Be.ch is protected in the amounts expended to complete

sewer contracts 7°and 9 by ‘bonds written by the American

Surety Company of New York. As secondary security, in

case the American Surety Company of New York did not

make good on said bonds. the City of West Palm Beach has

‘ an equitable lien, superior in right and dignity to any othe

lien or mortgages held by the Banks herein (except that

of American .Surety Company of New York after having

made good on said bonds) covering all machinery and

equipment of Constructors of Florida, Inc. located at West

Palm Beach as of August 26, 1957.

The evidence is not sufficient to prove to the satisfac-

tion of this Court: by a preponderance that the Plaintiff-

Counter-Defendant Banks are solely responsible or liable

for all damages suffered by the American Surety Com,any

*. of New York on account of the various. bonds written and

continued for Constructors of Florida..Inc.. and Island Con- .

struction Co.

Al3

The ‘evidence does show that the American Surety

Company of New York did not agree in any way to guaran-

tee any part of the loans made by the Banks to Constructors -

of Florida, Inc. There is no basis whatéver for any equit-

able subrogation in favor of the Banks and against Ameri-

can Surety Company of New York.

The evidence further shows that Constructors of Flor-

ida, Inc. are indebted to American Surety Company, of

_ New York in the amount of $1,367,379.19 on account of the

- various bonds written and continued for said Corporation

or guaranteed by said Corporation. This amount is se-

cured by the General Indemnity Agreement held by ‘the

Surety Company:

The evidencé further shows that the General Indem-

nity Agreement (marked Defendant's Exhibit B) provides.

that Constructors of Florida, Inc. pay to American Surety

Company of New York all reasonable. attorneys’ fees, costs

and expenses incurred by, American Surety Company of

Néw York in defénse, of any action brought on or in con-

nection with any of the bonds written on behalf of Con-

structors of Florida, Inc. As a part of the consequential |

damages which proximately and naturally flow from the

Banks usurious charges and the improper manner in which

the loan accounts were -handled by them, such attorneys’

. fees are found to be a part of the damages which Construc-

/tors of Florida: Inc. should recover against the Banks’ in

‘ that Constructors of Florida, Inc. has obligated itself to

pay such attornevs’ fees to American Surety Company

of New York. “A reasonabie fee is hereby fixed in the

_-—“Amount of $45,000.00.

The evidence further shows that under the terms and

- provisions of the mortgage. which American Surety Com-

pany of New York is foreclosing by this action against Con-

structors of Florida, Inc. in the principal amount of ap-

Al4

proximately $1,367,379.19, Constructors ‘of Florida, Inc.

is obligated to pay American Surety Company of New York

such reasonable attorneys’ fees as may be fixed by this

Court for the. foreclosure of said mortgage. The amount

of these attorneys’ fees are found to be a part of the conse-

quential damages which proximately and naturally flow

from the Banks usurious charges and the improper man-

. ner in which the loan accounts were handled by them, and -

such attorneys’ fees should be recovered by Constructors

of Florida, Inc. from said Banks. A reasonable fee is hereby

fixed in the amount of. $27.3 347.58 (2% of amount fore-

closed ). ;

The charges and actions of the Banks in the handling

of the loan ‘accoupts contributed materially to the collapse’

of Constructors of Florida, Inc. anid the attorneys’ fees fixed |

herein together with the costs of this proceeding should

be and are taxed against said .Banks.

The motions of the various parties made throughout

the proceedings upon which ruling was reserved by the

Court in two prior orders are al] hereby denied.

This Partial Final Decree is subject to the undeter-

mined claims and counterclaims of the “secondary issues’

and parties not herein decided: A°“Final Decree” will be

issued by the Court at the conclusion of the ‘entire matter

implementing ‘the findings made herein and disposing of

all issues between all parties. .

DONE AND ORDERED at Miami. Dade County, Flor-

ida, this 26th day of June, 1958.

s GRADY L. CRAWFORD

° Circuit Judge

Ald

IN THE CIRCUIT COURT OF THE 11TH JUDICIAL

CIRCUIT IN AND FOR DADE COUNTY,

FLORIDA. IN CHANCERY.

5 Case No. 205613-E.

(Judge Crawford)

CORAL GABLES FIRST NATIONAL BANK, etc..

and PAN AMERICAN BANK OF MIAMI. etc..

Plaintiffs,

VS.

CONSTRUCTORS OF FLORIDA, INC.. et al.

‘ORDER AMENDING PARTIAL FINAL DECREE.

THIS COURT having. again consf@ered the case. of

. Rosenblum v. Hart, (Supreme Court of Florida, May 8.

1957) 95-So.2d 18, hereby amends that Partial Final De-

cree entered herein on the 26th day of June. 1958, by sub-

stituting new pages 9 and 9-a attached hereto and made

a part hereof for and in lieu of page 9 which is contained

in the said Partial Final Decree. and herépy orders and

decrees,

That except as provided herein the said Partial Firial

Dec

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