Opinion ID: 1627996
Heading Depth: 1
Heading Rank: 3

Heading: Conflicting Authorities on Spreading

Text: While the note in question is not usurious under the spreading doctrine of Nevels, Ferguson argues that it is, in any event, usurious under Commerce Trust Co. v. Ramp, 135 Tex. 84, 138 S.W.2d 531 (1940), which the lower courts declined to follow. Ramp stands for the proposition that payment of more than ten percent interest in any one year of the effective term of an extended loan is usurious, even though the total interest payments for the whole period did not exceed the rate and amount of yield authorized by law. Thus, it conflicts with Nevels. It must be conceded that during the decade of 1930 to 1940 this Court was not entirely consistent in its writings on this phase of the usury law. These decisions predated the modern practice of charging points in addition to the constant long-term interest rate, [6] and the recently popular tax sheltered investment in real estate on long-term notes which defer principal payments and require only interest to be paid during the early years of the note. [7] More importantly, our conflicting cases were written before usury penalties were extended to the entire amount of interest contracted for, whether or not it was received by the payee. [8] Yet, in this first case since 1940 in which our Court has been called upon to resolve the point at issue, we find principles enunciated in the earlier cases which are helpful in the present task. To begin with, it was held in 1930 that usury does not result from the long practice of charging not to exceed one year's interest at the highest lawful rate one year in advance of maturity. Bothwell v. Farmers' & Merchants' State Bank & Trust Co., 120 Tex. 1, 30 S.W.2d 289 (1930). See also Shropshire v. Commerce Farm Credit Co., 120 Tex. 400, 30 S.W.2d 282 (1930), which was decided on the same day. This rule would govern the present case if only prepayment of the first year's interest were involved. It does not sanction, however, the additional overlapping of advance quarterly interest payments made for the second year during the first twelve months of the note. The question remains as to whether these advance quarterly payments of interest during 1974 may be spread over the subsequent years of the five-year note. In 1935, the forerunner of the Nevels concept was written in a Commission of Appeals opinion adopted by this Court in Adleson v. B. F. Dittmar Co., 124 Tex. 564, 80 S.W.2d 939 (1935). In that case a $6000 note was payable in 60 monthly installments, including interest at 9.48% per annum, plus a $240.00 commission charged by the lender when the note was executed. The commission was regarded as additional interest, which meant that interest in the first year (including the front-end commission) had been collected at a usurious rate of 13.48% per annum. A usury suit was filed against the lender after the third year. Upon the theory that any usurious interest was received only in the first year, the lender contended that the statute of limitations (then two years) barred recovery, since no usurious interest was charged or received within the two years prior to the suit. The Commission disagreed. It averaged the full amount of interest charged over the entire term of the note and concluded that a usurious rate of 11.268% per annum was charged throughout the term, including the two years immediately preceding the suit. The same procedure was followed as to a $70 commission deducted from a $1500 loan in Eubanks v. Simpson, 90 S.W.2d 291 (Tex.Civ.App.1936, writ ref'd). The $70 was held to be interest and the loan would have been usurious if the interest paid during the first year had been considered separately. The court, however, averaged the interest charges over the full term of the note and found that the contract was not usurious. See also Southern States Mortgage Co. v. Lykes, 85 S.W.2d 780 (Tex.Civ. App.1935, writ ref'd), for a similar holding. In 1937 the Dittmar and Eubanks approach was embraced in Nevels v. Harris, supra , which is often cited as the leading authority on spreading. Its basic facts have been discussed above. The judicially declared interest (a $320 front-end fee) added to the contracted 8% per annum on a five-year $6400 stated principal (or $6080 true principal) would have rendered the first year's interest payments usurious. However, the Court looked to the full term of the note, spread the interest over the five-year term of the contract and found that the note was not usurious. What has since been referred to as the Nevels doctrine was stated by this Court as follows: If the contract for the use and detention of the principal debt is not a sum greater than such debt would produce at 10 percent per annum from the time the borrower had the use of the money until it is repaid, it is not usurious. [9] Nevels was followed on this point more recently in Imperial Corp. of America v. Frenchman's Creek Corp., 453 F.2d 1338 (5th Cir. 1972), and Commerce Savings Ass'n of Brazoria County v. GGE Management Co., 539 S.W.2d 71 (Tex.Civ.App.1976), which was modified on another point and affirmed by this Court in 543 S.W.2d 862 (1976). There is also authority for spreading interest paid in advance over the entire term of the loan in other jurisdictions. [10] On the other hand, the Ramp approach, which would prohibit spreading and apply a year-by-year testing even of long-term contracts, was derived from a 1933 opinion of the Commission of Appeals in Dallas Trust & Savings Bank v. Brashear, 65 S.W.2d 288 (Tex.Com.App.1933, jdgmt adopted). In that case Brashear borrowed $3000 from the bank at 9% interest per annum for a term of ten years. He executed a series of notes which resulted in an effective rate of interest of 11% during each of the first five years and 7% during the last five years. Spread and averaged over the ten-year term, the loan bore interest at the rate of 9% per annum. However, amounts equal to 2% interest for the ten-year period were squeezed into the first five years, so that the actual amount of interest collected during each of the first five years exceeded 10% per annum. This was held to be usurious. In Commerce Trust Co. v. Ramp, 135 Tex. 84, 138 S.W.2d 531 (1940), this Court, in a similar fact situation followed the rule announced in Brashear. Ramp involved a ten-year loan with multiple notes which squeezed an additional 2½% interest into four annual payments instead of being spread over the ten year period of the loan, and this made the first four years in excess of 10 percent per annum. This was held to be usurious. The Brashear and Ramp cases have not been followed on this point as often as the contrary result reached in the Nevels line of cases. One of the most recent cases to follow Ramp in testing a loan for usury was Southwestern Investment Co. v. Hockley County Seed & Delinting, Inc., 511 S.W.2d 724 (Tex.Civ.App.1974, writ ref'd n. r. e. with per curiam, 516 S.W.2d 136 (Tex. 1974)). The Court of Civil Appeals held the note in that case to be usurious because it provided for more than 10% per annum interest during the first year and part of the second year of the note. Just as easily the court could have found the note to be usurious under the spreading concept of Nevels, because it was undisputed that the annual interest rate over the entire term of the loan was 10.798% per annum. In electing to follow Ramp, the Court observed that a loan contract is considered usurious if for the first year or first few years it requires the payment of more than the lawful rate, even though the interest calculated over the entire loan period does not exceed the statutory limit. In a per curiam opinion, 516 S.W.2d 136 (1974), we cited Ramp on a completely different holding and agreed with that point. However, on the rather obvious dictum contrary to the Nevels concept of spreading, we reserved judgment in the following words: In the course of its opinion, the court of civil appeals held that a loan contract is regarded as usurious if during the first year, or first few years, it requires the payment of interest at greater than the legal rate, even though the interest calculated over the entire period of the loan does not exceed the statutory limit. The effect of such a holding is to label as usurious any loan in which the stated interest rate plus any discount, fees, points, or other front-end charges that are judicially determined to be interest exceed the lawful rate for the first year even though spreading the front-end charges over the term of the loan results in an overall interest rate below the legal limit. No question as to the spreading of front-end charges over the life of a loan is presented by the facts in this case, and our action on the application for writ of error is not to be interpreted as an expression of opinion on that question. We have purposely refrained from making any distinctions in this opinion between interest stipulated by the parties and judicially declared interest, or between interest in advance and front-end interest. Technical and economic differences exist. However, all forms of compensation for the use, forbearance or detention of the principal debt have been treated alike in applying the usury laws for such a long period of time that it would only create more confusion if they were now treated in any different manner. The confusion in the cases and their treatment of interest in advance and front-end interest is discussed in detail by several law review writers. [11] See also the discussion in Riverdrive Mall, Inc. v. Larwin Mortgage Inv., 515 S.W.2d 5 (Tex.Civ.App. 1974, writ ref'd n. r. e.). Existence of the problem was apparently recognized by the Sixty-Fourth Legislature when, on June 2, 1975, it enacted House Bill 351, the relevant portion of which is now codified as Article 5069-1.07(a) and reads as follows: (a) On any loan or agreement to loan secured or to be secured, in whole or in part, by a lien, mortgage, security interest, or other interest in or with respect to any interest in real property, determination of the rate of interest for the purpose of determining whether the loan is usurious under all applicable Texas laws shall be made by amortizing, prorating, allocating, and spreading, in equal parts during the period of the full stated term of the loan, all interest at any time contracted for, charged, or received from the borrower in connection with the loan. However, in the event the loan is paid in full by the borrower prior to the end of the full stated term of the loan and the interest received for the actual period of the existence of the loan exceeds the maximum lawful rate, the lender contracting for, charging, or receiving all such interest shall refund to the borrower the amount of the excess or shall credit the amount of the excess against amounts owing under the loan and shall not be subject to any of the penalties provided by law for contracting for, charging, or receiving interest in excess of the maximum lawful rate. [12] While Tanner does not contend that this statute should be applied retroactively, it does argue that as to loans secured by real estate the Legislature merely codified the existing law as applied in the Nevels line of cases. There is some legislative history in support of this view. [13] On the other hand, Ferguson argues that if the Nevels doctrine was already applicable to all forms of interest paid in advance, then there was no need for the new statute. In any event, under the points as presented in this appeal we are not required to determine whether Article 5069-1.07(a) should be considered, and we decide the case without regard to Article 5069-1.07(a). We simply observe in passing that the statute did in fact adopt the Nevels doctrine of spreading all interest over the whole term of loans secured by real property, whether it be interest in advance, front-end interest, or a mixture of both. As heretofore indicated, long before the Ferguson-Tanner contract was executed in 1973, this Court had adopted the Nevels doctrine of testing for usury by spreading judicially determined interest over the entire term of the contract. We hold that the same rule should be applied to stipulated interest in the present case. When, in 1967, the Legislature extended the usury penalties to interest contracted for during the entire term of a note (Article 5069-1.06), it seems only reasonable that it intended for the contract to be tested for usury on the basis of the compensation charged for the entire term during which the borrower had use, detention or forbearance of the principal debt. Since the contract in question provided Ferguson, the payor, with the full use of the consideration represented by the actual face amount of the note (the ten acres of land) for the entire term of the contract, and since usury penalties are now applied to the entire contract, we are compelled to hold that the advance interest payable under the present note should be spread over the entire term of the contract. To do otherwise would be manifestly unfair and unjust under the law as it existed when the Ferguson-Tanner contract was executed. In our opinion, it would be beyond the obvious intent of the Legislature in the enactment of Article 5069-1.06 to impose its severe penalties solely upon proof that one year's interest payments exceeded the statutory limit, where over the effective period of the contract, interest payments were not, in the aggregate, in excess of the amount authorized by law. We hold, therefore, that the note in question was not usurious. This opinion is limited to contracts covered by Article 5069-1.06(1), wherein the stated rate of interest on the principal debt does not exceed 10% per annum and wherein all consideration (contracted for and judicially determined) for use, detention or forbearance of the principal debt is a sum no greater than such principal debt would produce at 10% per annum during the full time that the payor has use of the principal debt or the consideration (such as land) which is represented by the principal debt. Insofar as the opinion in Commerce Trust Co. v. Ramp, supra , is in conflict with this opinion, it is overruled. Likewise, the conflicting holding of the Court of Civil Appeals in Southwestern Investment Co. v. Hockley County Seed & Delinting, Inc., supra , is disapproved. Accordingly, the judgment of the Court of Civil Appeals is reversed and the judgment of the trial court is affirmed. McGEE, J., notes his dissent. JOHNSON, J., concurs in the result.