Opinion ID: 1794502
Heading Depth: 1
Heading Rank: 2

Heading: The Pioneer Period (1796-1835)

Text: Tennessee's first Constitutional Convention, composed of five members from each of the eleven counties of the Territory, met in Knoxville on January 11, 1796. [3] Twenty-six days after it convened, the Convention adopted our first constitution. It was largely adapted from the North Carolina Constitution of 1776, which basically was the organic law of the Territory of Tennessee, and had been in effect in Tennessee prior to our becoming a Territory. [4] The Constitution of 1796 does not even contain a passing reference to interest or usury. It is apparent that the delegates to our first constitutional convention believed that the matter of interest addressed itself to the law of the market place and could most effectively be regulated by the legislature, a body created to represent the people and designed to respond to the varying needs and demands of the state's economic, political, social and cultural affairs. [5] Under Condition 8 of the Cession Act, Chapter 3, North Carolina Acts of 1789, all the North Carolina acts that were in effect at the time of the cession became effective in the ceded territory. Article 10, Section 2, of the Constitution of 1796 provided: All laws and ordinances now in force and use in this territory, not inconsistent with this constitution, shall continue to be in force and use in this state, until they shall expire, be altered, or repealed by the legislature. Thus, by virtue of the Cession Act and this constitutional provision, [6] Chapter 11, of the North Carolina Acts of 1741, relating to interest, took effect in the State of Tennessee as of June 1, 1796, upon our admission to the federal union. Egnew v. Cochrane, 39 Tenn. 320 (1859). The North Carolina Act of 1741 provided in pertinent part: That no person ... shall, directly or indirectly take, for loan of any monies, wares, merchandizes, or commodities whatsoever, above the value of six pounds, by way of discount or interest, for the forebearance of one hundred pounds, for one year, and so after that rate for a greater or lesser sum, or for a longer or shorter time... . Violations were punishable by forfeiture of the double value of the monies, wares, merchandizes and other things so lent, bargained, exchanged, or shifted... . Thus, at the very outset the amount of interest was restricted and usury was punished severely. The 1741 Act remained in effect in Tennessee until the adoption on November 13, 1819, of Chapter 32 of the Acts of 1819. This act fixed the legal rate at 6%, provided for the recovery of excess interest, made usury an indictable offense, and specifically repealed the 1741 Act. It should be noted at the outset that the practice of discounting was recognized in the 1741 Act and, since the early days of our statehood, has been a practice in this state. In any given commercial transaction involving the practice of discounting, the result must be gauged against existing statutes and constitutional provisions. As the earlier cases are reviewed and analyzed it must be borne in mind that for the first three quarters of a century of our statehood we had no constitutional limitation on interest. Thus, the interest rate, including discount, was governed solely by statute until the Constitution of 1870. While the practice of discounting is discussed more fully infra, [7] for present purposes we merely note that discounting is the taking of interest in advance, Black's Law Dictionary (Rev. 4th Ed. 1968). It is characterized by a transaction wherein the lender deducts the interest from the principal at the time the loan is made. Our early cases recognize that a note may be sold at a discount, but if the seller agrees that he will be bound for the whole amount of the note, the transaction may be rendered usurious. Campbell v. Read and Gray, 8 Tenn. 392 (1828). Our early courts were quick to denounce usury, whether arising from discounting or otherwise. See e.g. Nashville Bank v. Hays, 9 Tenn. 243 (1829) and Lawrence v. Morrison, 9 Tenn. 444 (1830). An early case of particular note is Dews v. Eastham, 10 Tenn. 463 (1830), arising under the Act of 1819. There the borrower attempted to negotiate a cash loan and was told by the lender that he had none to lend but would buy cash notes at the usual discount. The borrower then arranged for his brother to execute notes totalling $112.50, payable to him and by him, endorsed to the lender. The parties agreed to a judgment in a justice of the peace court in the amount of $112.50 payable four months and twenty days later. As a part of this transaction the lender tendered the borrower the sum of $75.00, taking a discount of $37.50, plus 6% on the amount of the judgment, a total interest rate of over 140%. The court held that the notes were made to sell in the market at a discount and branded this as extremely gross usury and a highhanded oppression. 10 Tenn. at 464, 466. No other cases of any consequence were decided during this period.