Appeal by defendants from Grist, Judge. Judgment entered 23 March 1978 in Superior Court, Mecklenburg County. Heard in the Court of Appeals 2 May 1979.
Morris, Chief Judge. Judges Hedrick and Webb concur.
On appeal, defendants rest primarily on their contention that the trial court erred in determining that the loan and security agreement were governed by New York law rather than North Carolina law, therefore concluding that the loan transaction was not usurious. Defendants rely upon three theories which they contend support a conclusion that North Carolina law governs the transaction, despite the fact that the language of the documents specifically recites that New York law governs. It is uncontroverted by defendants that, in the absence of an intent to evade
North Carolina usury laws by plaintiff, the transaction in question is not usurious if it is governed by the usury laws of New York.
It has been stated without qualification that in North Carolina a loan secured by real estate located in North Carolina is subject to the laws of this State with respect to interest and usury. south, Inc. v. Mortgage Corp., 11 N.C. App. 651, 182 S.E.2d 15 (1971), cert. denied, 279 N.C. 396, 183 S.E.2d 244 (1971). The authority for this apparently long-accepted rule is Meroney v. B. and L. Assn., 116 N.C. 882, 21 S.E. 924 (1895). That case has been cited and relied upon as authority for the principal stated above by numerous decisions of our Supreme Court, although reference to the rule sometimes has amounted to dictum. See e.g., Bundy v. Commercial Credit Co., 200 N.C. 511, 157 S.E. 860 (1931); Smith v. Ingram, 130 N.C. 100, 40 S.E. 984 (1902); Faison v. Grandy, 128 N.C. 438, 38 S.E. 897 (1901). See also, Note, 47 N.C.L. Rev. 761 at 789-90 (1969). Meroney involved an action to enjoin the foreclosure of a deed of trust on land in North Carolina by a Georgia building and loan association which maintained a branch office in North Carolina. The note and mortgage apparently provided, as in the case sub judice, that the contract would be governed under the laws of the State in which the lending institution maintained its headquarters. The Court concluded, in a meticulous and forceful opinion, that should the foreign lender be allowed to recover the usurious rate "then surely will it have come to pass that it is no longer true that there is no 'cover or device', by which the wholesome restraints put upon the money lenders by our statutes may be escaped." 116 N.C. at 888, 21 S.E. at 926. In stating the policy basis of its decision, the Court observed as follows:
"The rules of comity require us to allow foreign corporations a standing in our courts to enforce the valid contracts they may have made with our citizens, and all such liens upon property situated within this State as they have lawfully acquired. But that comity does not require that we should allow foreign corporations to enforce contracts here if such enforcement would be in conflict with our laws, and, being thus in conflict, the enforcement thereof would work against our own citizens, and give to the foreigner an advantage which the resident has not." 116 N.C. at 889, 21 S.E. at 926-27.
In Bundy v. Commercial Credit Co., supra, the Court recognized the general rule of law that the validity and legality of
a contract is to be determined by the law of the State in which it is made. Nevertheless, the Court noted an exception to this rule when a loan is made in a foreign jurisdiction and secured by a lien upon real estate in North Carolina. In support of the general rule, the Court expressed its understanding of the State's interest in enforcing usurious loans. "The mere fact that a loan was made to a citizen of this State by a citizen of a foreign State and a rate of interest in excess of [the legal rate] was reserved or charged, does not necessarily offend the public policy of this State." 200 N.C. at 518, 157 S.E. at 863.
The conflict of laws rule with respect to foreign contracts secured by North Carolina realty appears to be contrary to the prevailing authority in the nation. The prevailing rule with respect to loans involving a security interest in real or personal property is that the law to be applied is that intended by the parties, and in the absence of an express intent, the parties will be presumed to have intended the law of the place of performance of the contract to apply. McIlwaine v. Ellington, 111 F. 578 (4th Cir. 1901) (applying North Carolina law); see generally Annot., 125 A.L.R. 482 (1940); 45 Am. Jur. 2d, Interest and Usury §§ 30-31. The prevailing view, which does take into account the situs of the security when the parties have not specifically agreed upon the local law to be applied, does not penalize a foreign lender for seeking security for the loan in North Carolina property. According to the accepted rule in this State, if the plaintiff had not sought security for its loan, it appears that plaintiff in this action would have been entitled to interest at the contract rate. See Bundy v. Commercial Credit Co., supra. The record indicates that the note was executed for defendant in North Carolina through a broker, accepted and executed by plaintiff in New York, and payments were payable in New York. Moreover, the documents specified that New York law would govern. It appears that the Court in the seminal case of Meroney v. B. & L. Assn., supra, need not have relied upon the situs of the security as a basis for its ruling. It appears from the report of that case that the contract was made and to be performed in North Carolina. The Court concluded that it was evident that the borrower was expected to make payments to the local branch of the building and loan association. Although Meroney expressed disapproval of the notion that the transaction could be split by applying local law to
the effect of the security agreement and the law of the State of the contract for interpretation of the validity of the underlying obligation, to hold otherwise would, nevertheless, preserve this State's primary interest in applying its own property laws. It is a firmly established principle that the law of the situs of the real property or personal property governs the validity and effect of the security instrument. See generally Restatement (Second) of Conflict of Laws § 228 (1971); G.S. 25-9-102(1). Otherwise, according to the expressions of public policy in Bundy v. Commercial Credit Co., supra, this State does not have a compelling interest in preventing the enforcement of foreign contracts charging interest at a rate greater than permitted in North Carolina. See the discussion in McIlwaine v. Ellington, supra. Nevertheless, we find ourselves bound by the accepted rule of law in this State that a loan transaction secured by real estate in North Carolina is governed by the usury laws of this State. We decline to accept plaintiff's proposition that we are not bound by Meroney unless the lender ...