Houghton v. Burden

Background

A New York merchant who borrowed $10,000 assigned about $14,000 in book accounts as security and agreed to collect them for the lender, a retired merchant and accountant who also took an indemnity bond. The written contract promised the lender 6% interest and a separate one percent per month fee on uncollected accounts as compensation for monitoring and bookkeeping services. The borrower was soon declared bankrupt, the receiver seized the books, and the trustee claimed the assigned accounts because the borrower said the deal was usurious. The District Court ruled for the trustee, the Court of Appeals reversed for the lender, and the case came to this Court.

Reasoning

The key question was whether the written fee for bookkeeping services was really a hidden usury charge. The Court said the contract was lawful on its face and allowed outside evidence to test whether the service clause was a sham. The Court found the extra evidence conflicting and not convincing. Because the borrower had the heavy burden to prove usury clearly and satisfactorily, the Court agreed with the Court of Appeals that the borrower had not met that burden, so the contract stood and the lender’s claim to the assigned accounts survived.

Real world impact

Lenders who include documented fees for monitoring or collection services are less easily blocked by an usury claim if the contract looks genuine and the borrower cannot clearly prove it was a sham. Borrowers in bankruptcy must bring strong, convincing proof to void such provisions as disguised interest. The ruling resolves this dispute but does not announce a broad new rule beyond these facts.