Opinion ID: 2409465
Heading Depth: 1
Heading Rank: 2

Heading: smart's counterclaim for usury

Text: Smart's promissory note to Tower contained the following provision for interest payments prior to maturity: [W]ith interest thereon from date until three years from date at the rate of six percent (6%) per annum (such portion of the interest being paid for the first three years in advance on the date hereof) and thereafter at the rate of seven percent (7%) per annum .... Only interest was payable until 1974, when payments of the principal amount of $517,549.80 were to begin. Pursuant to these terms, Smart prepaid the first three years' interest at 6%, an amount of $93,159.00, at the inception of the note in 1968. The note also gave Tower the option upon default to accelerate and mature the note: Default in the payment of any part of the principal or interest when due, or failure to comply with any of the agreements and conditions in the instrument given to secure this note shall, at the option of the holder hereof, mature this note and it shall at once become due and payable ... however, holder shall give maker or endorsers thirty (30) days' notice of default before this note can be matured. Another provision ensured that Tower was not required to refund payments: The maker hereof is not now nor shall he ever be personally liable on this note, but the payees or other holders of this note shall never be obligated to refund any payment of interest or principal after such payment has been made. The note was extended in 1974 and Smart defaulted in 1975. Tower foreclosed on the property and purchased the property at foreclosure. Smart does not contend that Tower received usurious interest; Smart's usury claim is based on his contention that the note is usurious on its face because under hypothetical circumstances it allows the holder to receive more than the lawful rate of interest. The statute providing penalties for usury applies in the disjunctive to either a contract for, a charge of, or receipt of usurious interest, and any one of these triggers the penalty provisions. Tanner Development Co. v. Ferguson, 561 S.W.2d 777, 788 (Tex.1977) (on motion for rehearing). According to Smart, the interest in advance terms, in conjunction with the acceleration clause and no refund provision, results in a potentially usurious contract. Smart argues that if he had defaulted during the first twenty-two months of the loan, Tower could have accelerated maturity of the entire principal and would not have been required to refund the three years' prepaid interest. If Tower did not credit part of this prepaid interest to principal, the rate of interest received by Tower would exceed 10% per annum. Upon acceleration of maturity, the failure to properly refund or credit excess unearned interest may result in usury. Tanner Development Co. v. Ferguson, supra at 788-89 (on motion for rehearing). See St. Clair, The Spreading of Interest Under the Actuarial Method, 10 St. Mary's 753, 757 (1979). Whether the inclusion of an acceleration clause, and the attendant contingency that excess unearned interest may be collected or retained, makes a contract usurious is a question of construction. The contention that the lender's right to exercise an acceleration clause resulted in a usurious contract was discussed in Shropshire v. Commerce Farm Credit Co., 120 Tex. 400, 30 S.W.2d 282 (1930), on motion for rehearing, 39 S.W.2d 11 (1931), cert. denied, 284 U.S. 675, 52 S.Ct. 130, 76 L.Ed. 571 (1931). Holding that the particular contract under construction gave the lender the right to recover usurious interest, the court stated: In obedience to the behest of the Constitution to provide appropriate penalties to prevent contracts for a greater rate of interest than 10 percent per annum, the Legislature has declared that all written contracts whatsoever which may in any way, directly or indirectly, provide for a greater rate of interest than 10 percent per annum, shall be usurious.... [T]he illegality is the same whether the contract for usury takes the form of a stipulation for lawful interest, becoming a stipulation for usurious interest through reduction of the original term of the loan and increase in that which may be exacted of the debtor, at the creditor's option, on no other contingency than the debtor's default; or whether the contract is in the form of a stipulation for interest in excess of 10 percent per annum for a specific term. Both contracts provide for usury. Id. at 14 (on motion for rehearing). Significantly, the court had recognized a duty to give a legal construction to the contract, but because the clear and positive language of the contract provided for the collection of unearned interest in addition to the principal balance due, the contract was usurious. Several cases decided after Shropshire have given nonusurious constructions to contracts alleged to be usurious because of acceleration clauses. In Walker v. Temple Trust Co., 124 Tex. 575, 80 S.W.2d 935 (1935), this court stated: While of course courts have no right to depart from the terms in which the contract is expressed to make legal what the parties have made unlawful, nevertheless when the contract by its terms, construed as a whole, is doubtful, or even susceptible of more than one reasonable construction, the court will adopt the construction which comports with legality. It is presumed that in contracting parties intend to observe and obey the law. For this reason the court will not hold a contract to be in violation of the usury laws unless, upon a fair and reasonable interpretation of all its terms, it is manifest that the intention was to exact more interest than allowed by law. . . . . . [T]he rule should be, as clearly recognized in motion for rehearing in the Shropshire Case [ Shropshire v. Commerce Farm Credit Co., 120 Tex. 400, 30 S.W.2d 282, 39 S.W.2d 11, 84 A.L.R. 1269], that unless the contract by its express and positive terms evidences an intention which requires a construction that unearned interest was to be collected in all events, the court will give it the construction that the parties intended that the unearned interest should not be collected. Id. at 936-37; see Marble Sav. Bank v. Davis, 124 Tex. 560, 80 S.W.2d 298, 299 (1935); Sinclair v. Mack Trucks, Inc., 355 S.W.2d 563, 564 (Tex.Civ.App.Fort Worth 1962, writ ref'd n.r.e.). These cases indicate that it will be presumed that the parties intended a nonusurious contract. The contract under construction will not be found usurious on its face unless it expressly entitles the lender, upon the happening of a contingency or otherwise, to exact interest at a rate greater than that allowed by law. W. E. Grace Manufacturing Co. v. Levin, 506 S.W.2d 580, 584 (Tex.1974). Nevertheless, under the rule in Shropshire applied to facts of this case, we are unable to presume Tower intended a nonusurious contract. This is not a situation in which the contract is silent on whether the lender will collect unearned interest upon default and acceleration of maturity. To the contrary, three years' interest was prepaid and the note expresses an intent to retain it in the event of acceleration as excess unearned interest. The note is not merely silent whether prepaid interest will be credited or refunded upon acceleration. It provides that interest will not be refunded. If acceleration had occurred early in the loan period, the transaction would be usurious. Acceleration upon the first anniversary of the note with the retention of the $93,159.00 prepaid interest for the use of $517,549.80 principal would have resulted in a rate of approximately 18% per annum, an amount in excess of the legal rate. Tower argues that the transaction would be saved from usury if some of the retained interest were credited to principal. Although we recognize that this course of action may prevent usury, there is nothing in the note to indicate that Tower would pursue any course of action other than to keep unearned interest. The note attempts to give Tower the right to keep unearned interest in addition to the right to recover the balance on the note by foreclosure. Having affirmatively provided for the retention of unearned interest, Tower was obliged to make further provisions ensuring that the retention of this interest would not result in a usurious transaction. Neither the note nor the deed of trust, nor any of the other documents contains any kind of usury savings clause whatever. Cf. Nevels v. Harris, 129 Tex. 190, 102 S.W.2d 1046, 1049-50 (1937). In the absence of a savings clause, we find that Tower's expressed authorization to retain excess unearned interest overcomes the presumption of legality accorded to allegedly usurious contracts. [2] Because the installment note is usurious on its face, we remand this case to the trial court for determination of the proper remedy to be imposed.