Opinion ID: 1794502
Heading Depth: 1
Heading Rank: 3

Heading: Constitution of 1834; statutes, decisional law and other developments leading up to the Constitution of 1870.

Text: The Constitution of 1834 came as a result of the growth and development of Tennessee over a forty year period that saw our state evolve from a primitive society into the early stages of agriculture, manufacturing and cultural pursuits. We outgrew the old Constitution and a new one was demanded especially to improve the method of levying taxes, electing state officers, avoiding conflicts between the different courts and to promote a good system of internal improvements ... [8] The population of Tennessee in 1796 was less than one hundred thousand; by 1830 it had risen to 681,902. [9] The Convention's sixty delegates met in Nashville on May 19, 1834, and remained in session for 104 days, adjourning on August 30, 1834. The finished product was ratified by the people on March 5 and 6, 1835, and became effective with the Governor's proclamation issued on March 27, 1835. The adoption of this Constitution terminated what has been called the pioneer period of Tennessee. [10] The Journal of the 1834 Constitutional Convention is distressingly meager. It reflects that the matter of interest was referred to the Committee on local and private legislation. In submitting its report on July 24, 1834, the Committee recommended a constitutional provision to read as follows: The Legislature shall fix the rate of interest, and the rate so established shall be equal and uniform throughout the State, so that every person and corporation may be allowed the same. But this provision shall not affect existing corporations. The Committee report reads, in pertinent part, as follows: There is nothing by which the best interests of the community may be so soon, and so severely, and so imperceptibly destroyed, as by the mode of regulating the interest on money loaned. The committee believes its great importance deserves a notice in the fundamental law. This clause requires that the Legislature shall fix a rate. (Emphasis in original). This is to prevent the matter from being open to contract, whereby the necessitous may be devoured by the more astute. (Emphasis supplied). [11] The Convention rejected two formal motions to write in a provision that interest should not exceed six per centum per annum. See Journal, Constitutional Convention of 1834, 301, 353. As adopted, Article 11, Section 6 of the Constitution of 1834 reads as follows: The Legislature shall fix the rate of interest, and the rate so established shall be equal and uniform throughout the State. [12] Again, the Convention left the rate of interest to the judgment and discretion of the legislature. It made it the mandatory duty of the legislature to fix a rate of interest, and required that such rate be equal and uniform throughout the state. In Perkins v. Watson, 61 Tenn. 173 (1872), the Court stated the purpose of this constitutional provision as follows: Notwithstanding the Act of 1819, the Legislature had granted to banks and other moneyed corporations the privilege of taking more than six per cent. for the use of money, and these special charters, or rather this privilege granted to them gave rise to sec. 6, Article XI, of the Constitution of 1834, whereby it is provided that the Legislature shall fix the rate of interest and the rate so established shall be equal and uniform throughout the State. That the object of this provision was to inhibit the legislature from granting the banking corporations the privilege of taking a greater rate of interest than was allowed to individuals, is manifest from the journals of the Convention. (Emphasis supplied). 61 Tenn. at 177.
This Chapter, captioned An Act to fix the rate of interest in this State, was adopted February 20, 1836, approximately eleven months after the effective date of the Constitution of 1835. [13] This act made no significant change in the Act of 1819. The rate of interest was fixed at six per centum per annum, provision was made for the recovery of usury, and usury was made an indictable offense.
A significant portion of our jurisprudence relating to discounting, interest and usury developed in cases arising under this act. In Ramsey v. Clark, 23 Tenn. 244 (1843), the Court, speaking through Justice Nathan Green, for the first time, drew a distinction between a business transaction of purchasing a note and a negotiation for a loan of money. 23 Tenn. at 245. The sale of a note at a greater discount than six per cent was treated as lawful as opposed to a note made for a loan, which was unlawful and usurious if the discount was greater than six per cent. See also Gooch v. Massey, 23 Tenn. 374 (1843). In May v. Campbell, 26 Tenn. 450 (1846), the Court, without citing Ramsey, changed the terminology somewhat by holding that a real transaction note discounted at 25 per cent was not usurious, but a note made to raise money and discounted at the rate of 25% was usurious and unlawful. In the one instance there was a real transaction, i.e., the purchase of commercial paper; in the latter a loan. The holding of May is clarified in Holeman v. Hobson, 27 Tenn. 127 (1847). Involved were several notes, all purchased before maturity and at a discount in excess of the legal rate of interest. In holding the purchases not to be usurious, the Court said: [There is a distinction] between a note or bill, in its inception, a real transaction, and a note or bill for the purpose of raising money by sale in market. A transfer by endorsement of the former, though beyond the legal rate of interest, will be regarded as a sale of the note, and a valid and legal transaction; but the endorsement of the latter, being only a nominal negotiation, will be held a usurious contract, if transferred at more than the lawful rate of interest. 27 Tenn. at 129-130. Hazen v. Union Bank of Tennessee, 33 Tenn. 115 (1853), arose under a charter provision allowing the bank to discount short term paper at the rate of 7 per cent. The Court recognized that the legal rate of interest was 6 per cent; that the reformed Constitution of 1834 declared that interest would be uniform, and noted that no law or grant of a franchise can have legal existence which stands in opposition to it. 33 Tenn. at 121. However, the Court, noting the constitutional provision (Art. 11, Sec. 7) against impairing the validity of existing contracts, held that, because the bank's charter pre-dated the constitution, and was granted at the time when, under the Constitution of 1796, we had no constitutional interest requirements, its charter provisions could stand. The most interesting and informative case of Wetmore v. Brien, 40 Tenn. 723 (1859), arose under the Free Banking Act of 1851-1852, as amended. Involved was a note discounted at the bank at the rate of 15 per cent. The Free Banking Act provided inter alia that banks operating under the act shall not be authorized to discount or shave notes, directly or indirectly, at a greater discount than the other banks are allowed, under existing laws... . 40 Tenn. at 724. The concluding portion of the opinion is significant: The regular business of discounting notes, by deducting from their face the interest for the entire time they have to run, though in itself usurious  as the borrower pays interest on the amount thus deducted  has been long sanctioned by the courts, rather from necessity than upon principle ; and thus far the act is plain enough. But the prohibition upon the Free Banks, not to shave notes at a greater rate of discount than the other banks are allowed under existing laws, is not quite so clear. The term shave has not, perhaps, heretofore been regarded as a technical term; but in our local jurisprudence, at least, it can no longer be regarded as untechnical, inasmuch as its use is sanctioned by the authors of the Code of Tennessee. The popular signification of the phrase shaving notes, as contra-distinguished from the legitimate business of discounting negotiable paper by the banks, is well understood. The business of purchasing notes, in the market, at less than the amount called for on their face, or par value, is common amongst individuals in the community; and by the act under consideration, the right to do so would seem to be impliedly conceded to corporations whose business it is to lend money, and exercise other functions of banking  under certain restrictions. And this business of purchasing negotiable paper is, to a certain extent, sanctioned by law, although the purchaser may thereby get greatly more than legal interest for the use of his money. The distinction is between real transaction paper and paper made for the purpose of raising money by a sale in the market. See [ May v. Campbell, ] 7 Humph. 450; [ Ramsey v. Clark, ] 4 Humph. 244. This distinction is important, between a loan, in the form of a sale, and an actual sale and purchase. The purchase must be actual, and made in good faith, and not merely colorable, to cover a usurious transaction. A note made in the course of a real business transaction, for which the original party has given a valuable consideration, is regarded as property ; and, like other property, the owner may sell it for the most he can get, and whatever the profit the purchaser may make on his purchase, there is certainly nothing usurious in it. The owner may be induced, by doubts as to the solvency of the maker, or the pressure of his necessities, to sell the note for less than its face, or less than its market value, and, in the absence of all fraud, this will not affect the validity of the transaction, or impart to it the character of usury. But if the note were made for the purpose of being sold, to raise money, or as an artifice to evade the usury laws, under the color of a sale and purchase of the paper, this will not avail and the purchaser, under such circumstances, with knowledge of the facts, either actual or inferable from the facts of the case, will be held guilty of usury, if the discount shall have been greater than the legal rate of interest. In this sense, the word shave is to be understood in the act of 1855-56. And in this sense, and to this effect only, is the business of shaving notes, or other negotiable paper, either by individuals or banking corporations, tolerated by law. 2 Pars. on Con. 421. (Emphasis supplied). 40 Tenn. at 726-728.
It is readily apparent that discounting, shaving and kindred usurious practices became matters of vital public concern. The Legislature, at the 1859-1860 session, appointed a Joint Select Committee to investigate the present effect of the Usury Laws of Tennessee; to ascertain the amount of money used in shaving; the amount of domestic capital taken from the State to be used elsewhere, and the average per cent. paid by borrowers for the use of money... . The Committee Report appears as an appendix to the Senate and House Journals of the 1859-1860 Legislative Sessions beginning at page 457. This Committee reported: 1. that comparatively but little money is now loaned out in Tennessee, at legal rates (Id. page 457); 2. that the rate of interest in Tennessee is largely over that which is established by law (Id. page 458); 3. that the law fixing that rate for borrowed money, is no longer operative in keeping down the price of money (Id.); 4. [that law abiding men have no inducement to make loans and] prefer to place their money on special deposit  to hoard it up, or loan it in other States, whose laws permit something like a fair remuneration for capital (Id. page 459); 5. that a large amount has been banished from the state because of our unfortunate legislation, that has arbitrarily fixed the price for the use of money at a standard below its actual value (Id.); and 6. that the rate of discount in Tennessee ranges between fifteen and twenty-five percent (Id. at 461). In comparing Tennessee's interest rates at the time with other states, the Committee rather graphically reported: The facts, however, show a marked contrast between the rates of interest in those States as compared with ours. The tendency and effect of their laws has been to keep capital at home  that of ours to drive it from the State. Their laws invite capital from a distance  ours, on the contrary, repels it from our borders. Their laws protect the borrower, and give him some chance to obtain money at fair rates  ours, on the contrary, create exorbitant rates of interest, and places the borrower at the mercy of the money dealer. (Emphasis in original). Id. at 462.
Appended to the report was A Bill to Amend the Usury Laws of the State, and to establish a Conventional rate of Interest. (Emphasis supplied). This proposal passed the legislature as Chapter 41, Acts of 1859-1860, and, thus, we had our first conventional interest law. Section 1, omitting the enacting clause, provided: That whenever any person or persons shall contract for the loan of money, it shall and may be lawful for the lender ... to receive a rate of interest on the same up to the time when payment is made, not to exceed ten per cent. per annum: Provided, That the parties to the [contract] (sic) shall have so agreed, and such agreement be expressed in the face of the contract, whether the same be evidenced by bond, bill, note or other written instrument. (Emphasis supplied). It should be noted that this section, in essence, defines conventional interest. It is an agreed rate, and is frequently referred to as contractual interest. It seems to be universally recognized that conventional interest is the rate agreed upon and fixed by the parties themselves as distinguished from that which the law would prescribe in the absence of an explicit agreement. Black's Law Dictionary (Rev. 4th ed. 1968). See also Hunt Tool Company v. Southern Towing & Salvage Co., 275 F. Supp. 139 (E.D.La. 1967); Farnworth v. Jensen, 117 Utah 494, 217 P.2d 571 (1950); Saulsberry v. Wood, 180 Wash. 340, 39 P.2d 592 (1935); Elston, Prince & McDade v. First State Bank of Plain Dealing, 19 La. App. 385, 140 So. 510 (1932); Fowler v. Smith, 2 Cal. 568 (1852); 45 Am.Jur.2d, Interest and Usury, Section 1. The same authorities make it clear that legal interest, sometimes called judicial interest, is the rate imposed by law in the absence of an agreement. These rates may, or may not, be the same. The distinction between a conventional and a legal rate of interest is crucial to a proper resolution of the question of the constitutionality of Sec. 45-2007(f). It is beyond question that as early as 1859 our legislative leaders fully knew and understood the differences between legal and conventional rates of interest. Section 2, of Chapter 41, Acts of 1859-1860 reads, in part: That the rate of interest now established by law, shall continue equal and uniform throughout the State as heretofore; and no greater amount than six per cent. shall be paid on any contract or obligation, unless agreed on by the parties, according to the provisions of the first section of this Act; ... . Section 3 specifically authorized the purchase of notes, etc., made for the purpose of sale, at a rate of discount not to exceed ten per cent. per annum, upon the payment of a privilege tax. Section 8 required that reports be made by February 1, 1861 and each February thereafter of the aggregate amount of all loans made. In Jackson v. Collins, 49 Tenn. 491 (1870), the purpose of the conventional interest law of 1860 is stated as follows: The object of said statute was to relieve the people, by making it the interest of creditors not to sue, and also to induce capitalists to loan their money, or bring in money from other States and loan it, by increasing the rate of interest; and, under the first section, it was not required that any other part of the agreement should be stated upon the note tha[n] the contract to pay interest at the rate of ten per centum. 49 Tenn. at 498. This act was passed February 21, 1860, and became effective September 1, 1860. It was in effect for 153 days, being repealed by Chapter 4, Acts of 1861, passed January 31, 1861, one day before the first reports were due. It was, however, construed in several reported cases. The first, and most significant of these cases, is the controversial case of Caruthers v. Andrews, 42 Tenn. 378 (1865). The note involved provided for interest at the rate of 10 per cent. The trial judge held Chapter 41, Acts of 1859-1860, to be unconstitutional. The Supreme Court reversed, pointing out that the constitution imposes no restraint or limit upon the legislature, upon the subject of interest except that the rate shall be equal and uniform throughout the state. 42 Tenn. at 386. The Court treated the Act of 1860 as being an amendment to the Act of 1835, [14] and held that the 1835 act as amended was equal and uniform throughout the state. The basis for this holding was that all lenders could bring themselves within its provisions. The Court pointed out that [a]fter the passage of the Act of 1860, as before its passage, there was but one equal and uniform rate of interest ... which was six per cent. per annum. But, said the Court, under the 1860 act it was made lawful for any person ... to take more or less than the legal rate of interest... . 42 Tenn. at 389. This opinion had serious repercussions and contributed to the action of the 1870 Convention. [15]
The Constitution of 1834 left the rate of interest to the judgment and discretion of the legislature. The object of Article 11, section 6 of that constitution requiring that the rate of interest be uniform throughout the state was to inhibit the Legislature from granting the banking corporations the privilege of taking a greater rate of interest than was allowed to individuals. Perkins v. Watson, 61 Tenn. at 172, 177 (1872). Real transaction paper might be discounted at a rate in excess of the legal rate but notes made for the purpose of raising money might not. May v. Campbell, supra. There could be no valid law authorizing banks to discount at a rate in excess of the legal rate, except where the charter predated the Constitution of 1834. Hazen v. Union Bank of Tennessee, supra . The practice of discounting notes was prevalent during the period; however, we find no case approving the practice where the note or other indicia of debt were executed for the purpose of raising money. The discounting of notes became a matter of public concern and this led to the appointment of a Joint Legislative Committee. The Committee reported that the going rate of interest was in excess of the legal rate, ranging between fifteen and twenty-five per cent, and that our interest rates were driving capital from the state to the detriment of our economy. The Committee recommended a conventional interest law that was adopted by the legislature, stayed in effect five months and then was repealed. In the meantime, its constitutionality was upheld in Caruthers v. Andrews, supra. The case law decided under the Constitution of 1834 must be given great weight in construing the provisions of Article 11, Section 7 of our present constitution.