Opinion ID: 409484
Heading Depth: 2
Heading Rank: 3

Heading: Usurious Intent

Text: 28 12 U.S.C. § 86 provides for double recovery of all interest paid when the usurious interest is knowingly received. In American Timber I, we held that this standard of intent was shown by two facts: the act of charging the excess interest was intentional, and the bank knew its policy would result in payment of more than the legal rate. 511 F.2d at 983. 29 It is undisputed that the compensating balance policy was intentional. Further, First National stipulated that, if called, its witness Paul Cook would testify that at all times relevant to this action, he was aware, as a matter of mathematical computation, that requiring a non-interest bearing compensating balance would increase the effective interest rate on a loan. 8 30 First National argues that intent was lacking because it did not know that the benefits it received from compensating balances would be considered as part of the effective interest rate. We held in American Timber I that knowledge of the usury violation is unnecessary. Id. at 983. Knowledge that the benefits received were in excess of the legal rate is sufficient. 9 III COMPUTATION OF INTEREST: WILLAMETTE 31 Summary judgment was granted against Willamette, a member of subclass IV, on the ground that the interest charged was not usurious when two loans to it were considered together and the total interest paid was spread over the period of the longer loan. Willamette appeals the aggregation of the allegedly separate loans and the spreading of the interest. A. Aggregation 32 The district court properly granted summary judgment on the issue of aggregation. The district judge looked to the substance, not the form, of the loan transactions to determine whether they should be aggregated and treated as a single loan. The focus on substance was consistent with both Oregon law and the general rule. See, Mohr, Inc. v. Bank of California, 443 F.Supp. 370, 373 (D.Or.1978), aff'd mem., 622 F.2d 594 (9th Cir. 1980); see also Bebee v. Grettenberger, 82 Mich.App. 416, 266 N.W.2d 829 (1978); Irving Trust Co. v. Smith, 349 F.Supp. 146 (S.D.N.Y.1972). 33 Although Willamette pointed out numerous formal differences between its two loans, it did not raise a material issue of fact as to whether the loans were independent in substance. A single term business loan agreement covered both loans. The differences in duration, payment schedules, record keeping and interest rates were adequately explained by the fact that the loans were funded from two separate sources. Most importantly, Willamette alleged no facts controverting First National's showing that the usurious Eurodollar loan would not have been made in the absence of the accompanying term business loan. The purpose of aggregation analysis is not only to prevent the lender from arranging to receive usury, but also to prevent a borrower from using the usury law as a sword against the lender when in substance he has received only one loan. See Mohr, 443 F.Supp. at 374. In light of this purpose, the failure to allege facts showing that the Eurodollar loan, the only one which was allegedly usurious, would have been made independently of the related term business loan was sufficient reason to aggregate the two for purposes of the usury laws. 10 B. Spreading 34 The district court spread the interest paid by Willamette over the period of the longer loan. Because the two loans were not independent in substance, spreading the interest across the two loans was appropriate. 11 See Tanner Development Co. v. Ferguson, 561 S.W.2d 777, 785 (Tex.1977); Smart v. Tower Land and Investment Co., 582 S.W.2d 543, 545 (Tex.Civ.App.1979). Willamette has further argued that the interest must be evaluated for usury at the time of each payment, not averaged over the whole loan period. 12 Willamette is correct that spreading the interest over the full term of the loan means that the existence of usury may not be determinable until the end of the loan period; however, this may simply be the nature of a variable rate loan. See O'Brien v. Shearson Hayden Stone, Inc., 90 Wash.2d 680, 586 P.2d 830, 836 (1978), on reconsideration 93 Wash.2d 51, 605 P.2d 779 (1980). A contrary rule, unless accompanied by a good faith defense such as California has grafted on its no-spreading rule, could undermine the practicality of the variable-rate device. Id., 586 P.2d at 836; see also McConnell, 146 Cal.Rptr. at 378, 578 P.2d at 1382. Spreading the interest over the whole period of the loan rather than computing the effective rate separately for each installment payment also avoids employing the harsh penalties of the Bank Act in a marginal case. In light of the penal nature of the Act and the general rule that a finding of usury is not favored, we decline to disturb the district court's use of spreading in calculating the effective interest rate on Willamette's loan. See Tiffany v. National Bank of Missouri, 18 Wall. 409, 410, 85 U.S. 409, 410, 21 L.Ed. 862 (1873) (The defendant is not to be subjected to (the Bank Act) penalty unless the words of the statute plainly impose it). Cf. Coast Finance Corp. v. IRA F. Powers Furniture Co., 105 Or. 339, 209 P. 614, 615 (1922) (clear and cogent proof of usury required); Crisman v. Corbin, 169 Or. 332, 128 P.2d 959, 962 (1942) (Oregon usury statute should be strictly construed). IV COMPUTATION OF INTEREST: LENRICH AND COLUMBIA 35 There were a number of separate loans to Lenrich and Columbia, and First National sought to have the district court compute the effective interest rate by spreading the total interest paid on all the loans across the various separate loans. The district court refused to spread the interest across the separate loans to Columbia and Lenrich. It carefully examined cases from other states and concluded that each loan should be considered independently because there was neither an agreement covering all the notes, nor any promise for future loans at the time of the first loan. Also, each loan to Columbia and to Lenrich had a separate interest charge, principal, and compensating balance requirement. The Bank had made a single credit report on Columbia to cover future commitments of $987,000, but a separate credit report preceded each actual advance of funds. The affidavits on the motion for summary judgment as to Lenrich did not show an overall advance commitment of funds, although they did show that the various loans were recorded by the bank on a single account card. 36 Interest spreading has been approved where there is a series of transactions based on a single loan agreement. Mayfield v. Oklahoma State Bank, 460 P.2d 414 (Okl.1969) (oral agreement). In Mohr, 443 F.Supp. 370, the amounts of loans made pursuant to a single line of credit were aggregated. First National argues that Mohr means that a non-binding, oral agreement for future loans is a sufficient reason to spread interest payments over the period of all the loans in a series. Even if this were the law, however, the district court found that there was no agreement for future loans, and the affidavits on summary judgment do not allege facts showing an agreement of any type. They only indicate that a series of loans and renewals were in fact made. 37 Thus, we decline to disturb the district court's refusal to spread interest over the series of separate loans to Columbia and Lenrich. There was no agreement governing all the loans, and the fact of the multiple transactions alone did not show a sufficient agreement or understanding to require spreading.