Case Name: Galveston and Houston Investment Company v. M. L. Grymes et al.
Court: Supreme Court of Texas
Jurisdiction: Texas
Decision Date: 1901-06-28
Citations: 94 Tex. 609
Docket Number: No. 886
Parties: Galveston and Houston Investment Company v. M. L. Grymes et al.
Judges: 
Reporter: Texas Reports
Volume: 94
Pages: 609–618

Head Matter:
Galveston and Houston Investment Company v. M. L. Grymes et al.
No. 886.
Decided June 28, 1901.
1. Usury—Contract.
In determining the question of usury the court must give to the terms of the contract, if fairly susceptible of it, a construction that will make it legal, but has no right to depart from the terms in which it is expressed to make legal a contract which, in the form the parties have given it, is unlawful. (P. 613.)
2. Same.
The compensation for the use or forbearance of money allowed in this State (Revised Statutes, article 3103) is not to exceed the rate of 10 per cent per annum for the period that the debtor has its use. (P. 613.)
3. Same—Installment Notes—Level Payments.
Where payments are arranged in installments running through ten years, and the total amount arrived at by adding to the principal 55 per cent thereof, being the interest computed at 10 per cent per annum on the basis of settlement of the principal by ten equal annual partial payments, is then divided into 120 installment notes for equal monthly payments, the contract is usurious, the debtor having had the use of the principal for a less time on the monthly than on the annual payment plan and being charged full lawful interest for more time than he had the money. Crider v. Association, 89 Texas, 597, distinguished. Gaines, C. J., dissents. (Pp. 611-615.)
4. Same—Dissenting Opinion.
In the opinion of Chief Justice Gaines the parties could contract for discharge of the debt by monthly partial payments which should be applied first to the satisfaction of all interest accrued to date at the rate of 10 per cent, applying balance only on principal; and an agreement for its discharge by 120 equal monthly installment notes, which did not, when so applied first to the monthly interest, more than pay the principal and interest at 10 per cent was not usurious; the contract actually made (the notes) was one which they could lawfully make, and the method by which they arrived at the amounts was not material. (Pp. 615-617.)
ON MOTION FOB BEHEABINQ.
5. Supreme Court—Disqualification of Judge. ,
A justice of the Supreme Court is not disqualified from sitting in a case by the fact that he participated in the decision below, being then a member of the Court of Civil Appeals. (P. 618.)
Errob to the Court of Civil Appeals for the First District, in an appeal from Harris County.
The investment company sued Grymes and another and appealed from a judgment for defendants; this being affirmed it obtained writ of error.
Hutcheson, Campbell & Meyer, for plaintiff in error.
The court erred in its decision upon the first assignment of error wherein it held that the court below properly construed the contract between the'parties and that it was correct in holding that the same was usurious. The error of the court, consisting both in misconception as to the facts in the record, and as to what does in law constitute usury, confounding, as we understand it, the question as to whether the interest put in a note violates the terms and expectations of the-contracting parties, or whether such interest so incorporated in the notes exceeded the maximum allowed by law.
As we interpret the opinion of the court, it seems to treat usury as being any sum of interest put into the notes in violation of the terms of the contract, whether such interest would violate the law regulating the highest rate of interest or not. We understand usury to mean the charging in the notes such a rate of interest as exceeds the highest rate which could be exacted under law without any regard to the measure or rate of interest provided for in the agreement. If the parties had stipulated for 6 per cent interest and the notes were drawn for 10 per cent, there would be no usury; and so if the parties had stipulated for a division of 120 payments, in each one of which it was contemplated one-half should be principal and one-half should be interest, but in fact they carried the contract into notes where they put two-thirds as interest and one-third as principal, yet if in fact the two-thirds representing interest did not exceed the earned interest on the entire debt, if computed to that date, and was not in excess of the rate of interest which might have been legitimately charged on partial payments, while it would be a violation of the contract, it would not be a violation of the law of usury. And not only was the amount charged less than the interest would be, calculated upon the partial payment plan of 120 payments, but we have just had completed a calculation, on the very construction which the court gives of the contract, which shows that the interest is less than interest at 10 per cent calculated on the plan which the court says the contract provided for, by the sum of $42.41, and as to whether this is a fact or not, is a matter of calculation which can be made here.
The Court of Civil Appeals erred in failing to consider the two assignments of error, and to sustain the objection therein urged, that the court below erred in not submitting the cause to the determination of a jury, to decide the question of the rate of interest, the knowledge and intent of the parties, and as to whether risk, expense, and cost of constructing a house were honest and fair elements in the contract, or were inserted with usurious intent. Henry v. Sampson, 2 Texas Civ. App., 156; Call v. Palmer, 116 U. S., 98; Thurston v. Connell, 38 N. Y., 281; Mitchell v. Napier, 22 Texas, 128; Wolsley v. Jones, 84 Ala., 88; Pass v. Patterson, 68 Miss., 310; collation of authorities in 27 Am. and Eng. Enc. of Law, 47, at bottom, and p. 1048, notes 1 and 2 in cases cited; Railway v. Gaither, 35 S. W. Rep., 179; Moore v. Moore, 3 S. W. Rep., 285.
The Court of Civil Appeals likewise erred in not sustaining the fourth and fifth assignments of error, set out on pages 15 and 16 of appellant’s brief, reflecting the error of the court in not charging that the transaction between the parties was a sale of property and not forbearance of a debt or the loan of money, and not within the contemplation of usury. Mills v. Crocker, 9 La. Ann., 334; Culver v. Bigelow, 43 Vt., 249; Burfield v. Jefferson, 78 Ga., 220; Matlock v. Cobb., 62 Miss., 43.
B. L. Whitehead, for defendants in error.
The construction given by the court to the contract was the proper and only construction that could be given to it when read in connection with the parol testimony introduced to show its illegality.
The contract shows that the money was to be returned in 120 monthly installments. The undisputed testimony shows that the rate agreed upon was 10 per cent; that of the amount set forth in the notes a sum equal to the 120th part of the principal was to be applied to the reduction of the principal every time a payment was made; that the interest was to be calculated for the full period of ten years upon the idea "that every note would be paid when it matured, that is, monthly, and this interest added to the principal, the amount thus obtained to be divided to be divided by 120 to get the face of each note. That the appellant, in order to ascertain the face of the notes sued on, assumed that the defendant would pay on the principal 1-10 annually and the accrued interest, in one payment at the end of each year, and calculated interest on the full principal for 12 months, then deducted a payment equal to the accrued interest and 1-10 of the principal, used the remainder as a new principal, and repeated the process. By this method it is true that the total amount of interest for ten years would just equal 55 per cent of the principal, but the contract shows that the payments are to be made monthly, consequently the principal would be . reduced twelve times in one year, instead of only once. There is no doubt that appellant is not entitled to interest on the payments after they are made, and by this method it collects interest on the full amount of principal for the first year, and for a full "year’s time, although the principal has been reduced by twelve monthly payments, and this process is continued each year, so that at the end of ten years appellant has collected $193.21 more than 10 per cent, and its contract is usurious.

Opinion:
BROWN, Associate Justice.
From the opinion of the Court of Civil Appeals in this case (50 Southwestern Reporter, 467) we copy the following conclusions of fact:
"Appellant entered into a written contract with the appellee on the 5th day of May, 1898, by which it agreed to sell to him a lot in Houston for $2160, and to erect on it a residence, as per plans and specifications • presented by appellee through his architect, the contract for such building to be let to a contractor who should be required to enter into ' bond for its erection. It was further stipulated that when the bid of such contractor should be accepted, and the cost of the building thereby ascertained, appellant would sell and convey to appellee the lot, with the house thereon, for a sum equal to the price of the lot and the contract price of the house, including architects' fees, and that thereupon the appellee should pay 10 per cent of such" sum, and that a sum equal to 30 per cent of the balance should be added thereto and appellee should give to appellant seventy-two notes for equal parts of the sum thus ascertained, each note being a monthly installment, or that 55 per cent of the sum unpaid should be added thereto and 120 notes of equal monthly installments thereof should be executed, the notes in either case to bear 10 per cent interest after maturity. The contract also stated: 'The said thirty or fifty-five per cent so added into the notes represents the interest on said deferred payments and all costs, trouble, and expense incurred by the company in the erection of said house and the risk during the same. And the said party of the second part (appellee) shall insure said house from the date of its completion in the interest of the party of the first part, as their interest may appear, during the time that the deferred payments are unpaid. Failure to do this, as well as failure to pay any two notes, 'shall entitle the first party to declare said contract forfeited, and said notes mature, and entitle the said first party to sell said property under the provisions of this instrument/ The contract also made provisions for sale of property in case of default in payment, and gave the appellant the option to exact from appellee a deed of trust with power of sale when the conveyance should be executed. The house was built and delivered to Grymes, the cost of the house and price of the lot aggregating $4215.45, to which was added 55 per cent thereof, and for the sum of the two, 120 notes were executed by appellee, the first for $55.49 and the others for" $55.44, payable monthly in succession, the first payable in one month and the last in 120 months or ten years from date, and bearing 10 per cent interest after maturity. Appellee paid the nineteen notes first falling due as they matured and sold the property to P. C. Byrne, who assumed those remaining unpaid, and thereafter paid nineteen of them; the total payments amounting to $2124.31. Default having been made in payment of others, appellant caused the property to be sold by trustee and bought it in for $1600, crediting the notes with that sum, and then brought this suit against appellee and Byrne to recover the balance of the notes unpaid, alleged to amount, with some expenses, to $2344.06. Byrne pleaded general denial and Grymes set up the defense of usury. The court instructed the jury that the contract was usurious and directed a verdict for plaintiff against Grymes for $640.14, which was returned, and plaintiff appeals."
The provisions of the Revised Statutes which relate to interest and usury are embodied in the following articles:
"Art. 3097. 'Interest' is the compensation allowed by law or fixed by the parties to a contract for the use or forbearance or detention of money."
"Art. 3103. The parties to any written contract may agree to and stipulate for any rate of interest not exceeding ten per cent per annum on the amount of the contract.
"Art. 3104. All written contracts whatsoever which may in any way, directly or indirectly, violate the preceding article by stipulating for a greater rate of interest than ten per cent per annum shall be void and of no effect for the amount or value of the interest only; hut the principal sum of money or value of the contract may be received and recovered."
To determine the question of usury in a contract, it must be tried by the statutory limitation of 10 per cent per annum for the use, forbearance or detention of the money for one year; if the interest contracted for exceeds that rate, it constitutes usury, no matter in what form the contract may be expressed-. The court must give to the terms of the contract, if fairly susceptible of it, a construction that will make it legal, but has no right to depart from the terms in which it is expressed to make legal what the parties have made unlawful. Webb on Usury, p. 482; Archibald v. Thomas, 3 Cow., 284.
The question presented is, did the parties embrace in the 120 notes, for the use of the principal debt, a sum greater than the original debt would produce at 10 per cent per annum for the time the payer of the note had the use of the money? The original debt was $4215.45, to which $2318.45, interest, was added, aggregating the sum of $6533.39, which being divided into 120 equal parts, each note represented the principal and interest in the ratio that the principal and interest each bore to the whole amount; that is, each note represented l/120th part -of the principal, $35.12, and l/120th part of the interest, $19.32. The payer of the notes agreed to pay $35.12 of the principal each month. By this method of payment, the sum of money for which the interest was allowed was gradually reduced, and to ascertain what amount of interest would be earned by the notes, we must calculate interest upon each note from its date to maturity, and all of the interest added will give the legitimate earnings of the sum loaned; or the average of time the different notes run will give five years and fifteen days, the time that the entire sum would be used. It is a simple calculation to ascertain the interest on each note at 10 per cent for the number of months that it is made to run, thus ascertaining the interest upon 120 notes, which, added, would give the total interest; or to calculate interest on $4215.45 for five years and fifteen days at 10 per cent per annum; the result in either case would be the sum of $2125.38, which is $193.17 less than the sum reserved for interest by the parties. This shows the transaction to be usurious.
Counsel for plaintiff in error have not suggested any method by which the interest can be calculated under the terms expressed by the 120 notes which would sustain them as lawful, but they have suggested several forms in which the parties could have made a legal contract embracing-the same debtj of which the following two are the most plausible: (1) Consider the debt of $4215.45 as existing as a whole and treat each note as a partial payment upon the debt to be credited at maturity of the note, calculating the interest with a rest at each payment; (2) it is contended that the parties might have agreed—and that the contract should be so construed—that each note should represent the interest upon the whole sum up to the time that the note was payable,—that is, the parties, after adding the principal and interest together and dividing the sum into 120 parts, might have agreed that the sum of each note should contain what would be the interest upon the whole sum for one month, the remainder to be credited upon the principal. These methods produce the same result. To test the two plans suggested, the interest must be calculated upon $4215.45 for each month, added to the principal, and the note maturing at the time be deducted, the balance constituting a new principal, until the $120 notes shall be thus applied as credits. The result would be a larger sum as interest than the amount reserved in this transaction, but after exhausting the notes as credits, there would remain unsatisfied about $250 of the original principal.
If the transaction was such as to render the intention of the parties doubtful, the court would adopt that construction which would attribute to them a legal intention, but we can not adopt any method for the solution of this question by which we must arrive at a different result from that shown by the contract, because it is impossible, to conceive of the parties having an intention to use certain forms of contract that would produce a result different from that which they embodied in the contract actually made.
If, however, the court had the authority—in the absence of evidence —by construction to reform the contract of the parties, such construction is excluded in this case by the evidence offered on behalf of the plaintiff in error, that the parties arrived at the amount of interest which is embraced in the notes by considering the principal debt, $4215.45, payable in ten equal annual installments with 10 per cent interest from date, calculating the interest at 10 per cent per annum with rests at each annual payment; or to reach the same result, take the average of time that the payer would use the money, being five years and six months, and calculate the interest at 10 per cent upon the whole amount for that time. Either of the methods suggested would produce the amount of interest contracted for in this case, and, if the contract had been consummated upon that basis, it would not have been illegal, but when the parties came to express it in writing, the payments were so changed as to be monthty instead of annual, whereby the time that, the money would be used by the defendant in error was reduced five months and a half; that is, the average of time upon the notes is five years and fifteen days. By this change in the time of payment, the basis of calculation was abandoned so that the contract itself as it was finally made is usurious.
This case differs from Crider v. Building and Loan Association, 89 Texas, 597, in this: In that case, the interest was not calculated and added into the notes, but the principal was divided into 72 parts and a note taken for each part, payable, the first in one month, and one at the end of the succeeding month for seventy-two months. The first note embraced 1/72 part of the principal and the interest upon the whole debt for one month, the second note embraced a like part of the principal and the interest for one month upon the balance of the debt, after deducting the first payment, and so on, reducing the principal upon which interest was calculated by each monthly payment. In this way, the interest was paid monthly upon the amount of money that the maker of the notes had used during that month and for no more. This produced 10 per cent per annum, the same as if it had been calculated by the year. This court held that the contract was not void because the parties might contract to pay the interest by the month; but, to restate the difference between the two cases, in the one now before the court, the manner of payment imposes upon the payer a charge for more time than he had the money; by the contract in the other case, he paid only for the time it was used.
The judgments of the District Court and of the Court of Civil Appeals are affirmed.
Affirmed.