Wellfare v. Realty Trust Co. , 85 S.W.2d 1067 ( 1935 )

I am unable to say that Judge LESLIE'S opinion is not in accord with some, if not all, of the decisions cited in its support. That the decision sustains recovery of interest upon a contract condemned by the Constitution and laws of this state as usurious I have no doubt. That no sound principle distinguishes the contract in this case and at least some of the cases cited in the opinion from the contracts involved in the cases of Shropshire v. Commerce Farm Credit Co., 120 Tex. 400,30 S.W.2d 282, 39 S.W.2d 11, 84 A. L. R. 1269; Deming Inv. Co. v. Giddens, 120 Tex. 9, 30 S.W.2d 287; Dallas Trust Sav. Bank v. Brashear (Tex.Com.App.) 65 S.W.2d 288; and Commerce Trust Company v. Best (Tex.Com.App.) 80 S.W.2d 942, I am equally free from doubt. I cannot read in any of the cases an intention to overrule the last-named decisions. On the contrary, there appears ample evidence that no such intention exists. Under these circumstances I feel justified in freely expressing my views.

Experience amply demonstrates that a legal question is never settled until it is settled right. Notwithstanding the great volume of recent litigation calling for interpretation of the law relating to usury, the law is less certain now than ever before. The uncertainty springs from no inherent difficulty in the subject, but rather, it seems to me, from incorrect assumptions or declarations in opinions of the courts, usually not necessary to a correct decision in the particular cases. There is no greater source of confusion and uncertainty than attempted distinctions which involve no substantial differences in principle.

There are but three factors necessary to be known in order to determine correctly whether any contract is free from the taint of usury. They are: (1) The amount of the loan; (2) the term of the loan; and (3) the amount of the agreed compensation. Nothing else is important except as an aid in determining one or more of these three things. (All italics hereinafter employed, whether in quotations or not, unless otherwise indicated, are the writer's.) In considering whether a contract be usurious, it iswholly immaterial as to when, according to its provisions, interest isto be paid. Many of the decisions erroneously assume the contrary. Thetime of the payment of compensation for the "use, forbearance or detention of money" is not an element in either of the definitions of "interest" or "usury." The assumption that the time of payment is material is evidently the result of confusing the "time of payment" of compensation with the "time of use" of the money loaned. The time of the use is important — the time of payment is unimportant.

If the time of payment of interest be immaterial, then it follows thata contract is not necessarily usurious which requires a borrower to paymore than 10 per cent. of a loan in any one year as interest. It would only be usurious, necessarily, if the contract requires him to pay (as interest) more than 10 per cent. of the loan for the use of the money for only one year or less. If by any payment or payments of interest made within a given year more than 10 per cent. of the loan be paid, it is not usury unless the total sum to be paid as interest be more than 10 per cent. per annum for the term of the loan.

The only importance of a provision for acceleration in the due dates for repayment of a loan, or parts thereof, is that it contingently shortens the term of the loan, and because thereof (and only because thereof) may have the effect of rendering an otherwise legal contract usurious. As to obligations to pay only interest in specified amounts at stated times, no acceleration provision can alone make an otherwise legal contract usurious. Only provisions in a contract for acceleration of the time of payment of the loan, as distinguished from interest upon the loan, are important upon a question of usury.

Under the decisions in Shropshire v. Commerce Farm Credit Co., supra, and Parks v. Lubbock, 92 Tex. 635, 637, 51 S.W. 322, in testing whether a particular contract be usurious or not, the shortest time in which, under any contingency specified in the contract, the borrower has the right to use the money without the duty to repay it, must be treated as the term of the loan. When such shortest term has been ascertained, the next inquiry is, How much is the total compensation which under the provisions of the contract the borrower has promised to pay at any time for the use of the money during such shortened term? The only other necessary inquiry is: Does such total amount of compensation for the use of the borrowed money during only the shortened term exceed a rate of 10 per cent. per annum? In other words, when the amount and the shortest term of the loan and the amount agreed upon as compensation for the loan for such shortened term are ascertained, it becomes a matter of simple calculation whether such compensation exceeds, or not, a rate of 10 per cent. per annum.

I know of no decision, in a case wherein the question was presented for determination, which holds that the usury statute forbids the prepayment of interest in any amount not exceeding a rate of 10 per cent. per annum for the full term of the loan. It seems to have been assumed in Shropshire v. Commerce Farm Credit Co., supra, and Bothwell v. F. M. State Bank Trust Co., 120 Tex. 1, 30 S.W.2d 289,76 A. L. R. 1480, that prepayment of the maximum amount of legal interest was in principle usurious, although sustained on the ground that repeated decisions had made it lawful. I am wholly unable to see any warrant for that assumption. A's wife gets a $500 bill as a birthday present from her father. She requests her husband to use it to purchase a supposedly valuable option, let us say, costing $1,000. A goes to a banker, proposes to borrow $1,000 for five years with 10 per cent. per annum interest payable in advance. The banker makes out a note in the terms of the offer, and, when it is signed, credits A's account with the full $1,000, and A hands him as full payment of interest the $500 bill belonging to his wife. The borrower thereby acquires the right to use for five years the $1,000. He is under no duty to repay any part of it during such term of the loan. He thereafter owes nothing as compensation for such use, since that has been fully paid. Only some optional right in the contract, by which the agreed term of five years could be shortened, would make such a contract offend against the law of usury under either of the statutory definitions of "interest" or "usury."

If it be conceded that full prepayment of interest might be made a device to cover a usurious contract, the fact would remain that, as the illustration shows, it is not necessarily such. The contract in the Bothwell Case was not condemned because of its provision for prepayment of full legal interest, but only because for the use of the money for a given time there was agreed to be paid, not only 10 per cent. per annum as interest, but an additional 10 per cent. of such interest, thus necessarily swelling the total amount of compensation for both the use of the borrowed money and detention of promised interest thereon to a sum in excess of the rate of 10 per cent. per annum for the term of the loan. If A applies to B for the loan of such a sum of money, to be repaid one year from date, with interest at the rate of 10 per cent. per annum in advance, as will enable him to pay such interest and have $90 for other uses, what would be the true amount of such loan? Would it not be $100? Is there any law which prohibits one from borrowing money to pay interest? If the $10 retained by B out of the note for $100 (due one year from date with interest from maturity) be full compensation paid by A for the use of the money borrowed for one year, how could it also be $10 never loaned to A? If the $10 remained the money of the bank at all stages of the transaction, which it would if only $90 was the total sum loaned, how could it serve as a payment of interest by A? At least, would not such a note, under the facts stated, be equally as susceptible to the construction that it evidenced a promise to repay a loan of $100 as a loan of $90? And, if so, should it not be given the one of two possible constructions which would make it legal, rather than illegal? But, upon this point, it is sufficient for the purposes of the present discussion to rely alone upon the proposition, undoubtedly established by the Bothwell Case itself, that a contract is not usurious in which a borrower promises to pay the maximum legal rate of interest in advance upon a loan for only one year, or less.

For the sake of emphasis and more detailed examination of its correctness, let me repeat here substantially the statement made before, that in determining whether a contract provides for the payment ofusurious interest it is wholly immaterial when the interest is to bepaid. A contrary assumption seems to have constituted the sole basis upon which the two contracts in the same form involved in Dallas Trust Sav. Bank v. Brashear (Tex.Com.App.) 65 S.W.2d 288, and Lincoln Nat. Life Ins. Co. v. Anderson (Tex.Com.App.) 80 S.W.2d 294 — the one declared usurious, and the other not — were distinguished. In the opinion denying a rehearing in the Anderson Case (Tex.Com.App.)81 S.W.2d 1112, 1113, the court said: "It is insisted that the form of contract in this case is identical with the form of contract which was involved in the Brashear Case. This may be true, but the significant feature of the Brashear Case was that the 2 per cent. additional interest on the principal loan for the ten-year period was `squeezed' into five installments, payable during the first five years of the loan. This resulted in the actual payment of more than 10 per cent. interest for the first year. * * * It is evident therefore that the decision in the Brashear Case did not turn upon the accelerative provisions of the deed of trust at all, but on the fact that there was actually a usurious rate of interest provided for and paid during the first year of the loan."

Here is clearly manifest the view that a contract may or may not be usurious, depending solely upon whether or not it embraces a promise to pay interest in certain installments within a particular time, or payment of the same amount of interest in smaller installments within a longerperiod of time. Upon this same view, it is stated or implied in a number of decisions that, if all the provisions of a contract may be performed without the borrower being required to pay more than 10 per cent. in any one year, the contract is not usurious. That this is incorrect is, I think, susceptible of absolute demonstration. A borrows of B $1,000, executing his note therefor, in which he agrees to repay same five years from date, with interest thereon at 8 per cent. per annum. At the same time, in a separate note, he promises to pay $180 of the interest upon the loan in 10 equal annual installments of $18. The first year he will pay $98 — a sum less than 10 per cent. of the loan. Each year thereafter, until the principal note is paid, he will pay $98 — a sum less than 10 per cent. of the loan for any year. The last five payments on the interest note, aggregating $90, will be made after the term of the loan has ended and after the obligation to repay the borrowed money has been fully discharged. When all notes have been paid, as provided in each, A will have paid less than 10 per cent. of the loan in any year, but will have paid a total amount of interest in the sum of $570. This amounts to a rate of 11 2/7 per cent. per annum for the five-year term of the loan. It is apparent from this illustration that, if the proposition which constituted the only answer to the contention that the decision in the Anderson Case was in conflict with the decision in the Brashear Case be sound then the law against usury may be completely evaded by the simple device of stringing out the interest payments over a number of years. It should require no argument to show that, if usury cannot be avoided by stringing out the interest payments, neither can an otherwise legal contract be made usurious by "pinching" the interest payments. If neither "stringing out" nor "pinching in" the interest payments, as provided in a contract, can affect the question of usury, that proposition at the same time establishes the further proposition above asserted, that a provision in an interest note, or the lien securing same, giving an option to accelerate payment of interest notes or installments, is of no importance.

An important fact to be kept in mind is that, when one only seeks release from his promises to pay interest in a contract claimed to be usurious, it is wholly immaterial whether any usurious interest has been paid or not. A contract is illegal, or not, from the very moment it is made. Whether usurious interest has in fact been paid, and, if so, the amount so paid, can only be important in a statutory penalty suit or where a question of the application of payments be involved. Where the last-mentioned questions are involved, they have no bearing upon, and afford no aid in, an inquiry as to whether the contract is, or is not, usurious. It therefore follows that each promise in a contract to pay a certain amount of interest at a specified future time is a promise, at the time it is made, to pay unearned interest. It is inconceivable that any interest upon a loan of money can be earned interest at the very time the loan is made and the promise given to repay it. Then how can any distinction be made in contracts based alone upon the proposition that those which provide for payment ofunearned interest are usurious, while those which do not provide for payment of unearned interest are legal, when all contracts at the time they are made provide for unearned interest alone? Will it be answered that such distinction has reference, not to whether interest be earned or unearned at the time the contract is made, but the time the payments, according to the promises, are to be made? Let this be granted, then what? It simply shows that the basis of the attempted distinction is the false assumption, before referred to, that the time of payment of interest is immaterial; the corollary of which proposition is that it is unlawful to promise to pay interest in advance, or until after it shall have been earned. To the writer, the proposition seems incontrovertible that as to promises to pay for a loan, interest in definite sums at stated times in the future, it makes no difference whether such installments of interest will, at the time the promises of such payments mature, be earned or unearned, provided only no more interest is promised to be paid than will amount to 10 per cent. per annum for the term of the loan.

In this case, for the sake of brevity, we may consider the last contract as representative of both. The amount of the loan was certainly $3,250. The promise to pay the full amount of the loan was represented by the four principal notes, called the "bond." The maximum term of the loan was from June 5, 1929, to July 1, 1934, and the minimum term was six months, as fixed by two provisions: (1) That interest payments were to be made semiannually; and (2) that upon a failure to pay, when due, any installment of interest the entire indebtedness, both principal and interest, should at once become due and payable. The total amount of the several obligations to pay interest, unless the contract contained aprovision to the effect that upon the contingency of the shortening of theterm of the loan there should be a corresponding abatement of a part ofthe interest and cancellation accordingly of interest notes and couponspromising to pay same, was the sum of $1,124.75 — a rate of over 34 per cent. per annum for the six-month term of the loan.

The trouble with many of the contracts recently attacked as usurious, and of the contract in the instant case, is that they contain provisions for shortening, upon certain contingencies, the term of the loan without making provision for a corresponding abatement or cancellation of promised interest payments based upon the full term of the loan. The real problem, therefore, is one involving the proper construction of such contracts. If a contract expressly and plainly provides for such abatement and cancellation of promised interest payments, there will, of course, be no difficulty. The contract in this case contains no such provision.

The only provision in any of the several parts of the contract which could be argued as expressing an agreement for the abatement or cancellation of anything is the one in the first deed of trust, which refers to the contingencies of the state levying taxes upon the principal notes or interest, or upon the deed of trust or lien, or declaring that the lien or interest should be real estate and taxable as such while the property of a nonresident, and in any such contingencies requires the grantor to discharge such taxes or assessment, and then expresses as an obligation of the lender that, if such payment, together with the rate of interest provided in the bond, should "be construed by the court finally having jurisdiction hereof as requiring payment of this loan of money represented by said bond, of interest in excess of 10 per cent. per annum, the holder of said bond shall pay such excess." It is plainly to be seen that such provision does not relate to an optional shortening of the term of the loan, and is therefore immaterial in the present inquiry. Parenthetically, it may be observed it is not a provision for the abatement or cancellation of anything. It amounts to no more than an agreement that, if upon the happening of the named contingencies the obligation imposed upon the borrower should be held to make the contract usurious, the lender, upon an adjudication of such fact, would himself pay (necessarily meaning refund) the excess above the highest legal rate. Would an otherwise clearly usurious contract be rendered legal by including an agreement on the part of the lender to the effect that, if and when the contract should be declared by a court to be usurious, the lender would pay the borrower the excess of the legal rate of interest? If so, by that simple device a money lender could always protect himself against the liability of forfeiting the highest legal rate of interest upon his loan. The question is, of course, one beside the present inquiry, but presents, it seems to me, a very doubtful proposition. At least it justifies the doubt that any provision has for its subject-matter the abatement or cancellation of interest payments. But, aside from all that, the provision so specifies the contingencies upon which it can operate as clearly to exclude as one of such contingencies default in payment and the consequent shortening of the term of the loan. If, therefore, the contract embraces any provision for abatement and cancellation of promised interest payments, it must necessarily do so by implication only.

Can such an agreement be implied? To me, it seems there is an insuperable obstacle to such a conclusion. By his signed notes the borrower promised (expressly) to pay certain sums at stated times as interest upon the loan. Suppose he had an oral agreement that upon the contingency that any of the promised payments were accelerated he was not to be liable for the payment of certain of the interest notes. Could proof of such oral agreement be received in evidence? The parol evidence rule forbids the proof of any oral agreement "reducing, or increasing the amount stipulated in the written contract to be paid, as for example * * * an agreement that a less sum is to be paid upon a certain contingency or providing for a remission or rebate of a portion of the principal or interest." Robert St. John Motor Co. v. Bumpass (Tex.Civ.App.)65 S.W.2d 399, 402, and authorities there cited. Or let us suppose the real agreement was that, if there was any acceleration, there was to be a corresponding abatement and cancellation of the promised interest payments, which last-named provision was left out of the written contract by fraud, accident, or mistake. Could proof thereof be made in the absence of a pleading of fraud, accident, or mistake? The point is that such an agreement would be one at variance with the contract as written. Can an agreement ever be implied, the effect of which would be to vary the written contract? The presumption of an intention of the parties to make a contract free from usury cannot of itself legitimately serve to render otherwise plainly expressed provisions of the contract, either ambiguous or conflicting one with another. Such ambiguity must exist in the provisions of the contract before any presumption can come into operation as an aid in determining the intention of the parties. In other words, no presumption of an intention on the part of the borrower and lender to make a lawful contract can exist contrary to any intention certainly shown by the provisions of the contract itself. The very existence of the parol evidence rule as well as the necessity of pleading fraud, accident, or mistake as a basis for the reformation of contracts would seem to require a negative answer to the question, Can an agreement to abate or cancel expressly promised interest payments be implied ?

But, even if an agreement to abate or cancel could, under some circumstances, be implied, surely it cannot be implied in a case where the contract plainly expresses an intention to the contrary. The contract in this case does express such contrary intention. There are provisions in both deeds of trust which, it seems to me, clearly show the intention was not to cancel any of the interest payments. The first deed of trust providing for sale of the property upon default in payment of either principal or interest directs that the proceeds be applied to "the debt, and all sums of money due or to become due hereunder with interest as agreed," etc. The grantor in said deed of trust expressly obligated himself, among other things, "to pay the sums maturing in said bond (that is, said four notes) according to the terms thereof with interest asspecified," etc. The interest was specified in the attached coupons. Again: Relating to insurance policies, the proceeds of which were payable to the Realty Trust Company, it was provided that: "The proceeds thereof to be applied upon the indebtedness secured hereby * * * whether said indebtedness be due or not." Another provision related to certain contingencies, one of which was, "if default be made in payment of said bond, or any one of them, or any interest thereon," and stipulated "then, at the option of the legal holder or holders of said bond, the whole indebtedness hereby secured, shall at once become due * * * and may be collected by suit or proceeding hereunder." By these provisions the due dates of all interest payments secured by the first deed of trust were expressly subject to being accelerated; i. e., made due and payable. How could they upon a named contingency be made due and payable and upon the same contingency be abated and canceled? The second deed of trust securing the several notes (the note) given exclusively as a part of the interest on the loan contained provisions as follows: "If default shall be made in the payment of any part of said indebtedness, or of any of said notes * * * the trustee at the request of the holder of any past due and unpaid charge or item secured hereby shall sell the property subject to the lien of said first deed of trust, and subject also to the lien of this instrument andunmatured notes or installments of the indebtedness hereby secured to the highest bidder for cash," etc. In the alternative, it was provided, "if the amount of interest paid and accrued on said first deed of trust bond (that is, the principal debt of $3,250) plus the amount of said note (that is, the $149.75 interest notes) shall not aggregate more than 10 per cent per annum on said bond for the time it shall have run, at the option of the legal owner and holder of said note, the whole amount thereof shall at once become due and payable and the trustee may sell said premises as herein set forth * * * that after such sale he shall make, execute and deliver * * * deed * * * subject, however, to the lien of said first deed of trust and to the lien of this instrument andunmatured notes or installments of the indebtedness hereby secured." Does this permit to be implied an agreement to cancel all interest obligations not already matured at the time of such sale? It merely evidences the mistaken notion that it was all right if the sale should be made for not exceeding the principal of the loan and 10 per cent. per annum interest to date of sale, even though the other promised interest payments were still outstanding, and continued to be secured by the loan. This is made absolutely certain by the provision which follows expressing as clearly as language could express the intention that the unmatured obligations should remain in effect and be finally collectible. Here is the provision: "It is expressly stipulated and agreed that foreclosure, pro tanto, of the lien of this deed of trust whether by action or by the exercise of the power herein contained shall not affect or impair thelien hereof for unmatured installments or notes herein recited to besecured * * * and sale of such lands and tenements shall not exhaustthe power of the trustee, but as often as default shall be made as aforesaid, the power of sale or to foreclose by action may be exercised, and the purchaser or purchasers at such sale shall take subject to such prior lien and to the unmatured notes and other sums secured hereby."

The election to accelerate payment of all the principal and interest of a loan and enforce payment thereof was held in Walker v. Temple Trust Co. (Tex.Com.App.) 80 S.W.2d 935, 937, to have the effect which the court emphasized in a quotation from Moore v. Cameron, 93 N.C. 51, as follows: "This election exercised involves the surrender of all the outstandinginterest bonds not required for what was then due, and so will the Courtadjudge." (Italics are the court's.) To so adjudge in this case would be to imply an agreement directly contrary to the intention clearly expressed in the contract that, upon default in the payment of certain installments of interest when due and foreclosure of the lien securing same, the foreclosure was only to be pro tanto, and the lien to remain in force as security for the installments of unearned interest not due.