Title: CBS Real Estate of Cedar Rapids, Inc. v. Harper
Citation: 316 N.W.2d 170
Docket Number: 66191
State: Iowa
Issuer: Iowa Supreme Court
Date: February 17, 1982

316 N.W.2d 170 (1982) CBS REAL ESTATE OF CEDAR RAPIDS, INC., Appellant, v. Joann E. HARPER, Appellee. No. 66191. Supreme Court of Iowa. February 17, 1982. John M. Titler of Terpstra, Wilkinson &amp; Van Horne, Cedar Rapids, for appellant. *171 R. M. Fassler, Cedar Rapids, for appellee. Considered by UHLENHOPP, P. J., and McCORMICK, ALLBEE, LARSON, and SCHULTZ, JJ. UHLENHOPP, Justice. This appeal involves usury and foreclosure problems in a suit on a note and mortgage. On two occasions defendant Joann E. Harper borrowed money on her notes, each bearing 15% interest, from her employer, plaintiff CBS Real Estate of Cedar Rapids, Inc. Each time CBS itself borrowed the money from its bank at 15% interest. Harper was buying a home on contract, and she subsequently gave CBS a second mortgage on her equity in the home to secure the notes. Later she consolidated her indebtedness on the two notes into one note, likewise carrying 15% interest. At various times she made payments to CBS. At about the time she consolidated the two notes she also severed her employment with CBS. Harper ceased making payments, and owed $4231 of principal on the indebtedness. CBS commenced the present action asking judgment for the unpaid principal of the consolidated note together with interest and costs including attorney fees, and for foreclosure of the mortgage. Harper counterclaimed for other items. Neither party claimed that this was a consumer credit transaction. After trial, the court found that the note was usurious and gave CBS judgment against defendant for $4231 principal, without interest, costs, or attorney fees; denied foreclosure; and entered judgment against Harper for 8% interest on $4231 for the Linn County school fund. See § 535.5, The Code 1979; Miller v. Gardner, 49 Iowa 234, 239-40 (1878). The court denied the counterclaim. CBS appealed and in this court raises two issues. I. Usury. The maximum interest rate for this note is ostensibly governed by section 535.2(3)(a) of the Code of 1979. Under that section the maximum was 11% on the dates on which the notes were originally executed. III Iowa Admin.Bull. 17 (July 9, 1980); see Muchmore Equipment, Inc. v. Grover, 315 N.W.2d 92 (Iowa 1982). Facially, therefore, the rate of 15% in the consolidated note was usurious. CBS argues, however, that the consolidated note was not usurious for the reason that CBS is a corporation and under section 535.2(2) it could lawfully borrow at 15%; that it did so in order to raise the money to lend Harper; and that it made no profit by re-lending the money to her at the same rate it paid, citing Turner v. Younker Bros., Inc., 210 N.W.2d 550, 555 (Iowa 1973) (usury requires "the exaction of a greater profit than is allowed by law") (emphasis added). CBS misconceives the meaning of profit in the quotation from Younker Bros. The term is not used in the sense of charging the debtor more for the use of the money than the lender paid for the use of the money. It means the price that the lender exacts from the debtor, ordinarily expressed as a rate of interest, for the use of the money. CBS is right that "a lender in addition to the highest rate of interest could charge a reasonable fee for services rendered as for title examinations, recording fees, travel and commission expenses and credit reports provided such charges are for specific services and are in a reasonable amount." Younker Bros., 210 N.W.2d at 560. See also Iowa Savings &amp; Loan Assn. v. Heidt, 107 Iowa 297, 77 N.W. 1050 (1899); Comstock v. Wilder, 61 Iowa 274, 16 N.W. 108 (1883); Smith v. Wolf, 55 Iowa 555, 8 N.W. 429 (1881). Some courts have extended this rule to the lender's own interest expense in procuring the money. Annot., 91 A.L.R.2d 1389, 1406 (1963). Under the facts of this case, we need not determine whether we would so extend the rule because we think that when the lender is a corporation it cannot in effect pass through its own usury exemption to its loans to individuals who have no such exemption. Any other result would permit corporate lenders to undermine the usury statute applicable to individuals by applying to them the unregulated *172 rates that corporate borrowers may pay. Although the case is not precisely analogous on the facts, the principle is similar to that applied in Kroll v. Windsor, 259 Minn. 200, 107 N.W.2d 53 (1961). As demonstrated by Younker Bros., we do not hesitate to look through transactions to their substance to determine whether usury exists. An accommodation argument by CBS is likewise without merit. If a corporation as the primary debtor borrows money at a higher rate than individuals may be charged, an individual who guarantees the corporation's note is bound to the lender at the higher rate. Doggett v. Heritage Concepts, Inc., 298 N.W.2d 310, 312 (Iowa 1980). This is because the corporation is actually the debtor and must respond over to the guarantor if the latter is compelled to pay the lender. Here, however, Harper, an individual, is the primary debtor; she is ultimately liable and has no right over against plaintiff corporation. The bank could not lawfully lend to Harper as primary debtor at 15% interest, and CBS cannot negate that result by itself borrowing at 15% and then lending to Harper at 15%. CBS also argues that usury requires an intent to violate the law, again citing Younker Bros., 210 N.W.2d at 555. The required intent, however, is simply to charge a rate of interest which exceeds the maximum permitted. Id. at 563 ("The only intent necessary is one to exact payments on either the revolving charge account or the retail installment contract in excess of the amount of interest allowed by law."). The record leaves no doubt about the intention of CBS to charge a rate which did in fact exceed the maximum. The trial court was right in holding the interest rate in the note was usurious. II. Foreclosure. The precise reason for the trial court's denial of foreclosure is unclear. Apparently the court did so because the note was usurious. This raises the question of whether courts will foreclose mortgages, pledges, conditional sales, guarantees, and other securities which secure performance of contracts containing usurious rates of interest. The starting point on this question is that usury does not exist apart from statute, and that the penalties for usury are those prescribed by usury statutes. 45 Am.Jur.2d Interest and Usury § 4, at 18 (1969) ("In the absence of statute, any rate of interest agreed upon by the parties is legal."), Id. at § 307 ("Forfeitures and penalties for charging usurious interest generally are dependent upon, and are imposed by, statute."); 91 C.J.S. Usury § 2, at 558, § 56a, § 142 (1955). See also Younker Bros., 210 N.W.2d at 555 ("The common law has never forbidden the exactions of usury as a matter of general law."). Thus the consequences of usury in a transaction are to be ascertained by consulting the usury statute of the jurisdiction. If that statute declares usurious contracts void, obviously the contract and any security given for its performance cannot be enforced. On the other hand, if a usury statute prescribes some other penalty, such as loss of interest, then that is the penalty imposed, and the contract and its security are otherwise enforceable. As stated in 45 Am.Jur.2d Interest and Usury § 238, at 181-82 (1969): Many usury laws contain provisions, subsequently discussed, visiting penalties and forfeitures for usury which are similar to those imposed by the National Bank Act, but other statutes differ widely as to the effect of usury on a loan contract. Some laws expressly declare all contracts tainted with usury void, and in the absence of a showing that the usurious charge resulted from inadvertent error or a true mistake of fact, recovery may not be had thereon; the lender is prevented from recovering both principal and interest. Some of the other statutes do not invalidate contracts providing for usurious interest, but only accord to the borrower the personal privilege of setting up or waiving the defense of usury; some statutes declare usurious contracts void only so far as they relate to the illegal interest and permit the recovery of principal, but forbid the recovery of interest if the question is properly raised; and under other statutes, an obligation is unenforceable *173 if usury appears from the face of the instrument, but if it does not appear from the face of the instrument, the excess is to be deducted and the principal sum advanced is to be enforced. A number of statutes merely prohibit the taking of more than a stated rate of interest, and while the early decisions construing them uniformly held that the taking of a greater rate than lawful would avoid the contract, the growing tendency is to hold the contract valid as to the lawful interest and avoid only as to the excess, so that recovery could be had of the principal or the principal with legal interest. Although there is some authority to the contrary, a like result has been reached in a number of jurisdictions where, in addition, violations of the lawful rate of interest are penalized in some way, the courts being held powerless to add to the express penalty provided by law by declaring the contract void. Under a statute making the taking of usurious interest a criminal offense, the charging of excessive interest is illegal, but the contract is not void. The decisions are thus divided into two main groups, governed by the respective statutes involved. As stated in 45 Am. Jur.2d Interest and Usury § 241, at 184-85 (1969): The two rules are explained as follows in G. Osborne, Handbook on the Law of Mortgages § 111, at 175, 176 (2nd ed. 1970): When the mortgagor attempts to use the statute as a defense in an action of *174 foreclosure by the mortgagee, instead of it being a bar causing a dismissal of the action, it will merely result in cutting down the mortgagee's decree to the amount of the debt plus lawful interest, with any excess interest previously paid being deducted as a set-off. The authors state in 3 R. Powell, The Law of Real Property § 445, at 594, 595-96 (P. Rohan rev. 1981): Illustrative of decisions denying foreclosure under statutes declaring usurious transactions void is Jordan v. Humphrey, 31 Minn. 495, 18 N.W. 450 (1884) (under act usurious contracts are "absolutely void"; hence security given for them is unenforceable); illustrative decisions holding that security is enforceable to the extent the contract secured is enforceable include Burnhisel v. Firman, 89 U.S. 170, 177, 22 Wall. 170, 177, 22 L. Ed. 766, 768 (1875) ("In Pennsylvania, where there is a statute making usury penal, but not declaring the contract void, the usurious bond and mortgage may be enforced for the amount actually due."); Great Southern Land Co. v. Valley Securities Co., 162 Miss. 120, 137 So. 510 (1931) (interest forfeited under statute; mortgage held valid for principal); and Briggs v. Industrial Bank of Richmond, 197 N.C. 120, 147 S.E. 815 (1929) (mortgage valid for principal but statute forfeits the interest). Where a statute declared the interest forfeited, the court upheld foreclosure and stated in Grove v. Great Northern Loan Co., 17 N.D. 352, 358-59, 116 N.W. 345, 347 (1908): The Iowa statute on usury places us in the second category of decisions. It does not state that usurious contracts are void; *175 rather, it forfeits the interest to the creditor and obligates the debtor to pay 8% interest to the school fund. The penalty for usury is provided in section 535.5, The Code 1981: See Shuck v. Wight, 1 Greene 128 (Iowa 1848) (usury does not make contract void unless statute so providesjudgment on note and for foreclosure upheld under prior statute); Haggard v. Atlee, 1 Greene 44 (Iowa 1847). Three Iowa decisions look in the opposite direction from the general rule stated in American Jurisprudence and the cases: Tansil v. McCumber, 201 Iowa 20, 206 N.W. 680 (1925); Cox v. Douglas, 12 Iowa 185 (1861); and Kuhner v. Butler, 11 Iowa 419 (1861). Tansil, in which the court said that foreclosure is denied in usurious transactions, is distinguishable on its facts. It involved such unconscionable conduct on the creditor's part that relief was deniable in equity under the clean hands doctrinea doctrine that runs throughout equity jurisprudence. 27 Am.Jur. Equity § 136 (1966); 30 C.J.S. Equity § 93 (1965). In the course of the decision this court stated: 201 Iowa at 36-37, 206 N.W. at 687. The 1861 cases of Cox and Kuhner, however, simply hold that foreclosure is impermissible where usury appears. We now overrule those two cases and hold that security given under a usurious contract is ordinarily enforceable to the same extent as the contract itself. We confine Tansil to its facts and hold that a court may apply the clean hands doctrine and refuse to enforce security given under a usurious contract, if under all the circumstances unconscionable conduct on the part of the creditor appears. The present case does not involve unconscionable conduct by CBS. Indeed, Harper's note carried the same interest rate that CBS had to pay to get the money. The *176 trial court should not have denied foreclosure on the ground of usury. The record contains an intimation that the trial court may have denied foreclosure because Harper did not give the mortgage until after the loan came into existence. A precedent obligation, however, constitutes consideration for a mortgage. 55 Am.Jur.2d Mortgages § 100, at 257 (1971) ("a precedent debt or obligation is sufficient, as between the parties, of itself to support the mortgage"); 59 C.J.S. Mortgages § 91 (1949). CBS is not seeking priority over the titleholder to the property or over senior lienholders, and no junior lienholders are shown to exist; the action is solely between CBS as mortgagee and Harper as mortgagor. Nothing in chapter 654 of the Code, which governs foreclosures, provides that a mortgagee must join holders of senior interests in the property. A junior mortgagee may, as CBS did, obtain an adjudication solely between itself and the debtor. 55 Am.Jur.2d Mortgages § 571 (1971); 59 C.J.S. Mortgages § 627d(1) (1949). The court should have decreed foreclosure for the amount of the judgment on the note, without interest, costs, or attorney fees, except that the judgment for the unpaid principal on the note, for interest in favor of the school fund, and for foreclosure of the mortgage will itself bear interest from its date until paid at the legal rate for judgments. See Muchmore Equipment, 315 N.W.2d at 101. We return the case to district court for such a supplemental judgment. Costs are taxed to appellee. AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.