Source: http://openjurist.org/509/f2d/872
Timestamp: 2015-04-27 05:39:02
Document Index: 224650084

Matched Legal Cases: ['§ 21', '§ 86', '§ 85', '§ 86', '§ 85', '§ 86', '§ 85', '§ 85', '§ 85']

509 F2d 872 First National Bank in Mena v. A Nowlin | OpenJurist
509 F. 2d 872 - First National Bank in Mena v. A Nowlin	Home509 f2d 872 first national bank in mena v. a nowlin
509 F2d 872 First National Bank in Mena v. A Nowlin 509 F.2d 872
FIRST NATIONAL BANK IN MENA, Appellant, Cross-Appellee,v.Jack A. NOWLIN, Appellee, Cross-Appellant.
Nos. 74--1397 and 74--1427.
Submitted Nov. 12, 1974.Decided Jan. 17, 1975.
C. J. Giroir, Jr., Little Rock, Ark., for appellant, cross-appellee.
Jerry D. Jackson, Little Rock, Ark., for appellee, cross-appellant.
Is a note which is usurious under state law also usurious when made to a national bank? With the limited exception of a short-term single payment note, we think it is. The central issue presented by this litigation is whether the National Bank Act, 12 U.S.C. § 21 et seq., permits a national bank in Arkansas to reserve interest in advance on installment loans calculated at a numerical rate not in excess of the statutory Arkansas usury limits but yielding an effective rate of return substantially in excess of the state limit.
The First National Bank in Mena (Bank), Mena, Arkansas, an association organized and operating pursuant to the National Bank Act, appeals from a judgment of the District Court1 finding two installment notes usurious and granting the bank recovery only on the principal of the notes and denying recovery of any interest. The debtor defendant, Jack A. Nowlin, cross-appeals, seeking more extensive relief in the form of forfeiture of the principal due on the notes or, in the alternative, recovery of double the interest reserved on the notes.
In this diversity action the Bank sought declaratory relief and a money judgment for principal and interest due it as payee on the two notes executed January 11, 1974, by Nowlin, a Tennessee citizen. One note evidenced an installment loan of $11,000 payable in twelve equal monthly installments, from which the bank had discounted 8% annual interest, thus making an effective yield of 16.05% per annum; the other evidenced a $2,000 loan payable in thirty-six equal monthly installments to which the bank had added 8% interest in advance, raising the face of the note to $2,480, resulting in an effective interest rate of 15.57%.
Nowlin made no payments and renounced his obligations by letters dated January 15, 1974, claiming both notes were usurious and void under Arkansas law. After the Bank accelerated both notes and filed suit, Nowlin counterclaimed for forfeiture of both the principal of the notes and interest as provided by Arkansas law, or a penalty of twice the amount of interest paid, pursuant to the sanctions of 12 U.S.C. § 86 (1970).
The District Court in this non-jury trial determined that if these installment loans yielding in excess of 10% annually had been made by any Arkansas lender other than a national bank, they would have been usurious under the Arkansas constitution and Arkansas cases construing the constitutional provision. The court further held that because the purpose of 12 U.S.C. § 85 (1970) is to permit national banks to charge as much, but no more, interest than the most favored lenders operating under state laws, a loan by a national bank is usurious under federal law if usurious under state law were it made by such a favored state lender. Consequently, the court held that both Nowlin notes were usurious and thus void with respect to interest but not principal. Nowlin's counterclaim under § 86 was denied because he had not in fact paid any interest. The Bank does not contest that the loans, as evidenced by the notes, would be usurious if made by any lender operating solely under state law.
Under 12 U.S.C. § 85 (1970), national banks may charge 'interest at the rate allowed by the laws of the State * * * where the bank is located * * * and no more * * *.'2 The penalty under 12 U.S.C. § 86 for knowingly charging a rate of interest greater than allowed by law is a forfeiture of the entire interest where the interest has not been paid and a penalty of double the amount of interest if it actually has been paid on the usurious loan.3
The pertinent Arkansas law incorporated by reference in § 85 is a constitutional provision restricting interest rates to an amount not greater than 10% per annum,4 and the statutory law implementing that constitutional provision setting the maximum state interest rate at 10% per annum.5 Other state statutory provisions prohibit usurious interest and make all notes and evidence of indebtedness or contracts violative of the usury prohibition void.6 The test for ascertaining whether a loan or transaction is usurious an Arkansas is a simple one of comparing the amount the borrower is required to pay with the total amount he could be required to pay at the maximum rate of interest (10%), figured at simple interest per annum for the term.7
I. The Bank's Appeal.
The Bank contends that the term 'rate' of interest 'allowed by the laws of the State,' as used in 12 U.S.C. § 85 should be construed not to apply the maximum 'effective rate' or 'yield' allowed by state law, but rather merely to incorporate the numerical rate permitted the most favored state lender, as it appears in the state statutes, applying it on a discount basis without taking notice of the state's cases construing those statutes. The Bank does not dispute that lenders under Arkansas law are prohibited from adding-on or discounting interest to increase the yield on installment notes above the 10% limit. It argues, however, that the 1919 Supreme Court decision in Evans v. National Bank, 251 U.S. 108, 40 S.Ct. 58, 64 L.Ed. 171 (1919), permits national banks to discount loans at the maximum state rate without regard to state prohibitions on discounting which prevent yields in excess of the maximum state rate.
We think that determination of the 'rate allowed by the laws of the State' can only be accomplished with reference to state court interpretations of the state's own constitution and statutes. The primary principle of construction of 12 U.S.C. § 85, to which Evans might be considered a narrow exception, is that the federal Act adopts the entire case law of the state interpreting the state's limitations on usury; it does not merely incorporate the numerical rate adopted by the state. Citizens' National Bank v. Donnell,195 U.S. 369, 374, 24 S.Ct. 49, 49 L.Ed. 238 (1904); Daggs v. Phoenix National Bank, 177 U.S. 549, 555, 20 S.Ct. 732, 44 L.Ed. 882 (1900). As expressed by Mr. Justice McKenna for a unanimous court in Daggs:
The intention of the national law is to adopt the state law, and permit to national banks what the state law allows to its citizens and to the banks organized by it. Tiffany v. National Bank of Missouri, (85 U.S. (18 Wall.) 409, 21 L.Ed. 862 (1873)).
Daggs, supra at 555, 20 S.Ct. at 735.
The rationale of Evans, based on the long standing mercantile practice of discounting short-term single payment commercial paper, should not now be extended to permit usurious discounting practices on installment notes. While many question the soundness of the Evans 6--3 holding and feel that Mr. Justice Pitney's dissent, concurred in by Justices Brandeis and Clarke, presents a more rational view, we cannot overrule Evans, but we do feel that Evans should be confined to its own facts of single payment short-term paper. To extend Evans' rationale, as the Bank urges, in order to allow discounting of installment paper would be to extend it to a materially different factual situation and into a new economic setting.
Installment credit as it is extended and utilized today was for all practical purposes nonexistent at the time of Evans. The discounting of short-term single payment commercial paper, however, was a prevalent and widespread practice at that time and has continued to the present time. The now common practice of lending on installment paper of varying terms, including long-terms, and of figuring the interest rate on a discount basis is of fairly recent origin. The practice has only become widespread with the advent of consumer credit, making almost anyone without an extremely dismal credit record eligible to purchase almost any item or service on a comparatively long-term installment credit basis. This practice has only recently found widespread acceptance, increasingly so in the last two decades.
Evans was a 1919 lawsuit by receivers of a state bank to recover the federal usury penalty from a national bank lender which had reserved interest in advance at 8%, the maximum rate permitted in Georgia, to achieve a slightly higher effective yield. Each loan was paid at maturity. The Supreme Court affirmed judgment on the pleadings for the defendant national bank, holding that by discounting 'short-time' notes at the maximum 8% rate allo