Opinion ID: 1794502
Heading Depth: 1
Heading Rank: 6

Heading: Decisional law since 1870

Text: Cases decided under the Constitution of 1870 add no dimension to earlier cases decided under the Constitution of 1834 and/or statutes governing conventional interest. Some, however, are relevant, and because able counsel urge differing construction, we note those we consider to be most significant. Counsel for Cumberland Capital relies upon Chafin v. Lincoln Savings Bank, 54 Tenn. 499 (1872), opinion by Chief Justice Nicholson, aptly described in brief as one of the chief architects and builders of the constitution of 1870 (quoting 113 Tenn. at 736). Counsel relies upon this opinion as approving discounting at the legally permissible rate. We cannot accept the implications of this construction. In Chafin the facts were that the bank had discounted, at a rate of 15 per cent, a note that was made for the purpose of raising money. The Court held that the fact that the note was made to be sold for the purpose of raising money, and that the bank knew this, made the transaction illegal and usurious. The Court said, in pertinent part: Although in strictness the term discount of notes, originally meant the purchase of real transaction notes, as contradistinguished from mere accommodation notes, yet in practice the distinction has been too long disregarded, and has been too often ignored in our legislation, to be now made the ground of a judicial decision. The lending of money is one of the legitimate franchises of a bank, and it exercises this privilege when it discounts a note which it knows was made for the purpose of raising money. The bank lends its money and takes the note of the borrower as security for its repayment. If the loan is made at a rate of interest or discount not exceeding 6 per cent., the transaction is legitimate. If the note was discounted, or the loan made at a greater rate than 6 per cent., the transaction is illegal and usurious. ... (Emphasis supplied). 54 Tenn. at 501-502. We read nothing in this opinion that would validate any discounting that would result in a rate of interest in excess of the constitutional or statutory limit. The construction contended for by Cumberland, would not only be at variance with the constitutional limitation, it would nullify its own meaning. It is true, as contended by Cumberland, that the Court held in Crowley v. Kolsky, 57 S.W. 386 (Tenn.Ch.App. 1900) that a lender has a right to deduct legal interest until the maturity of the note,  that is to exact prepayment of legal interest.... We do not regard this as a precisely correct statement of the law. It is correct if, but only if, two criteria are met. First the repayment must be on an annual basis and secondly, the rate must be less than 10%. This follows from the fact that a note in the sum of $100.00, payable at the end of the year, when discounted at the rate of ten per cent, gives the borrower a net of $90.00. For the use of that for one year he pays approximately 11.1% interest and this rate, therefore is constitutionally impermissible. For further computations see Appendix. Cumberland contends that Caldwell & Co. v. Lea, 152 Tenn. 48, 272 S.W. 715 (1924) must be considered as the single most authoritative pronouncement on the meaning and scope of Article XI, section 7. While we agree that the opinion is authoritative, we are not impressed that it is supportive of Cumberland's position. Caldwell arose under Chapter 69 of the Acts of 1925 authorizing corporations, firms and individuals to issue bonds or notes aggregating $50,000.00 or more at a rate not to exceed seven and one half (7 1/2%) per cent. The Court held the act to be constitutional. The opinion points out that Section 7 of Article 11 of the Constitution except requiring the legislature to fix an interest rate adds nothing to section 8 of article 1 [law of the land], and section 8 of article 11 [class legislation], of the present constitution. 152 Tenn. at 52, 272 S.W. at 716. Then, the Court said: We may lay aside so much of section 7 of article 11 as authorizes the legislature to provide for a conventional rate of interest. 152 Tenn. at 52, 272 S.W. at 716. Next, the Court notes the provisions of Article 11, section 6 of the Constitution of 1834, and cites Caruthers, supra, and McGhee v. Trotter, 48 Tenn. 453, as being two cases wherein the Court held that the legislature was empowered to fix a contract rate ... not exceeding ten per cent. was valid. Id. These two cases were decided under our first conventional interest law (Ch. 41, Acts of 1859-60). Thus, the Court reaches the only question in the lawsuit, viz whether the classification made in the Act of 1925 was reasonable. The Court responded in the affirmative. In so doing the language of the opinion by Justice Green is most significant. The object of the provision of section 6 of article 11 of the Constitution of 1834, carried into section 7 of article 11 of the Constitution of 1870 that the interest rate should be equal and uniform was to cut off the grant of charter powers to banks and moneyed institutions to exact a greater rate than individual lenders were permitted to obtain. (Emphasis supplied). 152 Tenn. at 53, 272 S.W. at 716. The derivation and the background of the first clause of Sec. 7, Art. 11 is explained as follows: Under section 7 of article 11 of the Constitution of 1834 the legislature was authorized to grant such charters of corporation as they might deem expedient for the public good. The legislature had been empowering banks by their charters to contract for a special rate of interest, and section 7, just quoted apparently authorized a continuance of this practice. Section 6 of the Constitution of 1834 [now sec. 7, art. 11] was adopted to prevent the grant of any special power of this sort. (Emphasis supplied). Id. at 54, 272 S.W. at 716. In the meantime, in 1921 the legislature adopted our third conventional interest law. See Chapter 28, Acts of 1921. It was repealed by Chapter 5, Acts of 1923. Again, the Act of 1835, as codified in the Code of 1858, became operative. The record suggests that Tennesseans cannot live with a conventional interest law and cannot live without one. The constitutionality of the 1925 Small Loan Act (Ch. 69, Acts of 1925) was upheld in Koen v. State, 162 Tenn. 573, 39 S.W.2d 283 (1931). This act fixed the interest charge at six per cent. This case was primarily concerned with service fees and is discussed infra. In Dowler v. Ga. Enterprises, Inc., 162 Tenn. 59, 34 S.W.2d 445 (1931), the Court held (1) that partial payments on interest bearing obligations must be applied first to interest and second to principal; (2) that this rule may be varied by contract if it does not savor of usury, 162 Tenn. at 63, 34 S.W.2d at 446; (3) that in interest computation a year is 365 days; and (4) that shortening the year to 360 days results in usury. Rush v. Dupont Emp. Cr. Union, 210 Tenn. 344, 358 S.W.2d 333 (1962), arose under the credit union statutes, Sec. 45-1801 et seq. T.C.A. Section 45-1820 authorizes a credit union to lend to its members at a rate of interest not in excess of the legal rate, and the total interest and all other charges for a loan shall not exceed one per cent (1%) per month on the unpaid balance... . Citing Sec. 47-1604 (now XX-XX-XXX) T.C.A. fixing the rate of interest at 6%, the Court held a note payable with interest on unpaid balance at the rate of one per cent per month was usurious on its face and unenforceable. The Court declined to permit the introduction of parol evidence to show that the word interest as used in the note included all other charges.