No. 91-070 IN THE SUPREME COURT OF THE STATE OF MONTANA

L. E. SCARR a/k/a

, , ROBERT SCARR, Plaintiff and Appellant,

v. 

# oc'; --ti

### ig91 JAMES W. BOYER and JOANN BOYER, CLERK 

# 2.2

OFSUPREME 

# -5ki-!A COSRT STATEOFMONTANA Defendants and Respondents.

APPEAL FROM: District Court of theThirteenthJudicial District, In and for the County of Yellowstone, The Honorable William J. Speare, Judge presiding.

COUNSEL OF RECORD: For Appellant: 

### J. Reuss, Wright, Tolliver & GuthaLs, Billings, Montana For Respondents: James 

### P. Healow, Sweeney & Healow, Billings, Montana

Filed: Submitted on Briefs: June 13, 1991 Decided: October 8, 1991

<."% j ClerkJustice 

### TerryN. Trieweiler delivered the opinion of the Court. L.E. Scarr sued James and JoAnn Boyer to recover $70,000 due under a promissory note. The Boyers 

### filed a counterclaim alleging usury. Both parties moved for summary judgment. The ~istrict Court for the ~hirteenth Judicial ~istrict in Yellowstone County granted summary judgment for Scarr on the note itself and granted summary judgment for the Boyers on their counterclaim for usury. Scarr appeals from the order of the District Court. We affirm. The issues are: 1. Did the District Court err in applying the usury penalty to a contractualprovision for post-default interest? 2. Did the District Court err 

### in applying the 

### usury penalty to a contract 

### in which the creditor did not intend to circumvent the usury statute? InAugust 1983, Scarr sold subdivided land in Billings toRim Creek Investors,apartnership that includeddefendantJamesBoyer. Scarr was given a mortgage on the property in the amount of $412,500. Thepartnership agreed tomake annual interestpayments. The balance of 

### all remaining principal and interest was due on December 5, 1988. A dispute about foreclosure arose as the date of the balloon payment approached. By that time $375,000 of principal remained due. James Boyer and another partner 

### went to Scarrts residence in Washington and negotiated a compromise agreement.Under the terms of this compromise, Scarr forgave $175,000 of principal in exchange for a $50,000 cash payment from the partnership and promissory notes from the individual partners for the remaining $150,000 of principal. The District Court treated this compromiseagreement as a novation that cancelled the earlier mortgage, and neither party appeals from that determination. The Boyers' individual share of the new principal debt was $70,000. They executed a note for that amount and agreed to pay interest at the rate of 10percent prior to any default. The note provided that in the event of default, the interest rate would increase to 18 percent. None of the partners made the first semi-annual interest payment when it was due on April 25, 1989. Scarr told the partnershiphewould accelerate the notes ifhedid notreceivethe first semi-annual interest payment by May 15, 1989. On May 11, 1989, the partnership tendered a check drawn on the partnership account for approximately one-half of the total amount of all the semi-annual interestdue from all of thepartners. Scarr returned this check and said he preferred to have payment from thepartners

as individuals. On May 19, 1989, Scarr accelerated the notes and filed suit against the individualpartners. His complaint against theBoyers demanded all of the principal, plus 10 percent interest up to April 25, 1989, and 18 percent interest from that date forward. Specifically, Scarr demanded interest of $37.3687 for every daythat elapsed after April 25, 1989. In their counterclaim the Boyers alleged that the post-default interest rate of 18 percent was usurious. Both parties moved for summary judgment. The District Court granted summary judgment for Scarr on the note itself, but also granted summary judgment for theBoyers on their counterclaim. The penalty for usury is twice the amount of the usurious interest charges. Section 31-1-108, MCA. Five hundred and fourteen days elapsed between April 25, 1989, and the date during pre-trial proceedings when Scarr finally abandoned his claim to 18 percent interest. Pursuant to the statute, the District Court doubled the usurious post-default interest sought by Scarr and subtracted it from the $70,000 principal and $4,737.46 in non-usurious pre-default interest. Thus, the court reduced Scarrls recoveryby $38,415.02. He appeals. I Did the District Court err in applying the usury penalty to

a contractual provision for post-default interest? In Montana, interest is "the compensation allowed by law or fixed by the parties for the use or forbearance or detention of money." Section 31-1-104, MCA. Non-regulated lenders cannot charge more than six percentage points above the New York prime rate as reported in the Wall Street Journal three business days before the transaction in question. Section 31-1-107,MCA.

### Usury is "[t]he taking,receiving,resewing,or chargingw

### of an interest rate greater than the limit set by § 31-1-107, MCA. Section 31-1-108,MCA. 

### The New York 

### prime rate was 10.5 percent three 

### days before the Boyers signed their promissory note. Thus, the maximum allowable interest rate applicable to the Boyer note

was 16.5 percent. However, Scarr argues that we should not apply the usury statuteto the 18 percent post-default interest ratebecause it is merely a late-payment penalty that the Boyers could have avoided by paying on time. He cites the cases collected in 28A.L.R. 3d 449 for the proposition that post-default interest is not subject to usury statutes. InMetro

### Hauling,

### Inc.v. Daffem (1986)

### , 44 Wash. App. 719, 722, 723 P.2d 32, 33, for example, the court said: [A] provision in a note by which the debtor agrees to pay, aftermaturity, interest at 

### a ratehigher than that allowed by law, does not render the transactionusurious provided the parties acted in good faith and did not intend to evade the usury law. 

### The debtor has itwithin 

### his power 

### to avoid 

### the additional interest 

### charge 

### by prompt 

### payment of 

### his obligation, 

### and therefore, the contingency upon which the excessive interest comes into existence is not solely within the lender's control. [Citationomitted.] Scarr assures us that this 

### is by far the majority rule. But in Washington, the usury statutes apply to "every loan or forbearance of money.l1 Wash. Rev. Code 

### 5 19.52.010. Montana, by contrast, makes its 

### usury statutes applicable to "detentiorzs" of money as weff

as loans and forbearances. Section 31-1-104,MCA. We find this difference significant.InParksv.Lubbock (1899), 92 Tex. 635, 51 S.W. 322, the court construed a statute that was virtually identical to Montana's present statutory definition of interest. The court held that: The detention of money arises in a case when a debt 

### has becomedue, and the debtor withholds its payment, without a new contract giving him a right to do so. 

# . .. [Tlhe conclusion isnot tobe resisted that therewas apurpose in addingtheword 'Idetention1l totheaccepted definition of and that thispurposewas tomeet the case when the debtor should detain themoney owed beyond the stipulatedperiod of forbearance,and so toprovide that 

### apromise to

### pay an additional

### sumfir 

### suchdetentioiz~Izould

### be deemed interest, and not merely damages by way of a penalty to secure a prompt performance of the contract. [Emphasis added.) Parks, 51 S.W. at 323. The court concluded that the post-default interest at issue in that case was subject to the usury statutes. The SupremeCourt of South Dakota reached the same conclusion in Ulvildszv,Sorken (193l), 58 S.D. 466, 237 N.W. 565. The statutory definition of interest in South Dakota, like the statutes 

### in Texas and Montana, covered the "detention of money." The court cited 

### Parks with approval and added that: ~equiringthe maker of a note to pay a higher rate of interest after maturity for the use of money is likely tobe as oppressive aswhen required topay ahigher rate during the term of the loan. It may not be within the power of the borrower promptly to meet his obligations at maturity. If 

### a borrower 

### is to be protected from the extortion of 

### an excessive rate for the use of money, there 

### is no apparent reasonwhy it should be limited to the term of the loan.

### We agree. Usury statutes protect borrowers who lack real bargaining power against overreaching by creditors. 

### Daffem, 723 P.2d 

### at 34. 

### The occurrence of a default in no way affects this public policy in favor of protecting the debtor. Indeed, it is after default that thedebtorhas thegreatest need for protection;

a debtor who cannot retire a debt compounded by legal interest certainly lacks the resources to pay usurious interest. For these reasons we adopt the reasoning of the Texas and South Dakota courts and hold that Montana's statutory definition of interest includes post-default interest. Scarr charged the Boyers post-default interest in excess of Montana's statutory limit. This was usury. We conclude that the District Court was correct in applying the usury penalty. II 

### Did the District Court err in applying the usury penalty to

a contract in which the creditor did not intend to circumvent the usury statute? Scarr argues that itwould be inequitable to penalize him for usury because he did not intend to violate the usury statute. He admits that itwas his idea to charge 18percent, but asserts that he only wanted to charge as much interest as the law would allow. He says he did not know what the usury limit was in Montana and that not even the partnership or its attorney realized that the post-default interest provision was usurious.

### We disagree. The only intent required forusury is the intent to charge a particular rate of interest that is usurious in fact. Montana NationalBankofBozeman

### v. Kolokotrones (197 5)

## , 167 

### Mont

# . 92

## , 535 

### P.2d 1017. 

### The creditorneed not knowthat theparticular interest rate is usurious and illegal. Thus, whether Scarr intended to violate the law is irrelevant. It is enough that he intended to charge 18 

### percent. We hold that the District Courtwas correct in penalizing Scarr for usury despite his assertions that he did not intend to violate the law. Affirmed.

We concur:October 8,1991

Ihereby certify that the followingorder was sentbyUnited States mail,prepaid, tothe followingnamed:



### J.Reuss, Esq. WRIGHT, TOLLIVER &GUTHALS P.O. Box 1977 Billings,MT 59103 James P.Healow, Esq. SWEENEY &HEALOW 1250-15thSt.W.,Suite202 Billings,MT 59102 ED SMITH CLERK OFTHE SUPREME COURT STATE9FMONTANA 

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