Opinion ID: 1685818
Heading Depth: 1
Heading Rank: 1

Heading: Enforcement of the contract

Text: Appellants' first argument is that the circuit court erred in enforcing the contract because it contained an illegal rate of interest. In support of their argument, Appellants rely on numerous cases where Arkansas courts have prohibited the enforcement of illegal contracts, but the cited cases are inapposite. The contractual infirmity at issue in those cases was not, as it is here, a usurious rate of interest. Article 19, § 13 of the Arkansas Constitution deals with the maximum lawful rates of interest. It states in part: (a) General Loans: (i) The maximum lawful rate of interest on any contract entered into after the effective date hereof shall not exceed five percent (5%) per annum above the Federal Reserve Discount Rate at the time of the contract. (ii) All such contracts having a rate of interest in excess of the maximum lawful rate shall be void as to the unpaid interest. A person who has paid interest in excess of the maximum lawful rate may recover, within the time provided by law, twice the amount of interest paid. It is unlawful for any person to knowingly charge a rate of interest in excess of the maximum lawful rate in effect at the time of the contract, and any person who does so shall be subject to such punishment as may be provided by law. Ark. Const. art. 19, § 13. The contract at issue in this case provided for an interest rate of 7% for the first sixty months of the contract. Based upon the 1.25% FDR at the time of the contract, the maximum lawful rate of interest would have been 6.25%, thereby making the rate of 7% usurious. Additionally, the interest rate of 6% above the FDR for the next fifteen years of the contract would also be unlawful. The question, then, is whether the remaining provisions of a contract with a usurious interest rate can be enforced. Notably, the constitution provides that contracts having a usurious rate of interest shall be void as to the unpaid interest; but, the constitution does not provide that the entire contract shall be void. Although former law voided an entire contract if it exceeded the maximum rate of lawful interest, the express intent of Amendment 60 is that the taint of usury voids the agreement only to the extent of unpaid interest. Perryman v. Hackler, 323 Ark. 500, 916 S.W.2d 105 (1996) (citing Henslee v. Madison Guar. Sav. and Loan Ass'n, 297 Ark. 183, 760 S.W.2d 842 (1988)). Consequently, in the instant case, the contract between Appellants and Appellees was only void as to the usurious rate of interest, and the circuit court did not err in ordering specific performance of the remaining provisions of the contract. Appellants next argue that Appellees should be estopped from asserting that the interest rate was usurious. A debtor may be estopped from asserting the defense of usury when the debtor created the infirmity in the contract in order to take advantage of the creditor. Ford Motor Credit Co. v. Hutcherson, 277 Ark. 102, 640 S.W.2d 96 (1982). In Ford Motor Credit , Ford Motor argued that Hutcherson should be estopped from asserting a defense of usury. Our court recited the following facts: For eight years, Hutcherson, a college graduate, had served as an assistant bank examiner. Only two months before he purchased the car he had attended a seminar on the subject of checking the accuracy of the annual percentage rates on consumer loans. He was aware of the Arkansas usury laws. A clerk for Union Lincoln Mercury testified that on July 17, she first prepared a non-usurious contract which was never executed. In it, she had a first payment period of 45 days. She then prepared a second contract, the one before us, at the direction of the Union Lincoln Mercury salesman. She did not know the reason for the change. The salesman had a stroke before the trial and was unable to testify. Hutcherson testified that he knew of only one contract. He testified that he did not see the automobile until July 16 and he purchased it on July 17, and signed the only contract he saw on that date. He said he wanted the contract to be payable on the 10th, but he had nothing to do with the interest rate or computing the amounts of the payments. Those items were computed by Union Lincoln Mercury's title clerk who never talked to Hutcherson. Id. at 107, 640 S.W.2d at 99. The court then held, However, here the trial court did not find that estoppel should be applied. While the circumstances here are suspicious, we must consider the evidence in the light most favorable to the appellee and affirm unless the trial court's decision is clearly erroneous. We cannot say the Chancellor was clearly in error. Id. at 108, 640 S.W.2d at 99. In this case, Appellants assert that Mr. Moore, Appellees' principal, drafted the contract and knew or should have known the maximum lawful rate of interest. Appellants also maintain that they questioned Mr. Moore about the interest rate and were advised that the rate was not usurious. However, Appellees state that Mr. Moore merely transcribed the agreement, according to the terms agreed upon by both parties. Furthermore, Mr. Moore testified that he and Carr did not have any discussions about the Arkansas usury rate during their negotiations, and that he did not know if the contract was usurious. We have long held that the determination of the credibility of witnesses is best left to the trial court before whom they are testifying. Nat'l Lumber Co. v. Advance Dev. Corp., 293 Ark. 1, 732 S.W.2d 840 (1987). As in Ford Motor Credit v. Hutcherson, supra , the circuit court's decision not to apply estoppel to these facts is not clearly erroneous. In a similar vein, Appellants suggest that the Appellees waived the issue of usury by seeking specific performance of the contract. In support of this proposition, Appellants cite the cases of Utterberg v. Cameron, 282 N.W.2d 536 (Minn.1979), Hall v. Montaleone, 38 Ill.App.3d 591, 348 N.E.2d 196 (Ill.App.Ct.1976), and Sosin v. Richardson, 210 Cal.App.2d 258, 26 Cal. Rptr. 610 (1962), arguing other states that have been faced with such cases have held that a buyer seeking specific performance of a usurious contract waives the usurious term. However, in each of these cases, the party attempting to assert a usury defense was the lender and not the borrower, and the issue before the appellate court was whether the defense of usury was available to a lender/creditor. In each case, the appellate court concluded that it was not. In fact, only one of the three cases even discusses the possibility of waiver by the borrower. The Illinois Court of Appeals stated The defense of usury in this case is founded on the contention that the contract, since it provided a usurious rate of interest is illegal and void and cannot be sued upon. However, it is clear from the authorities cited above that even as to the borrower, for whose benefit the statute was enacted, a usurious contract is not void but only voidable. Moreover, the borrower cannot use the statute to take advantage of his own wrong. If the borrower, for whose benefit the statute was enacted, cannot use it to take advantage of his own wrong, it is hardly logical to allow the lender against whom the statute is aimed, to do so. In our opinion the usury statute does not render a usurious contract void and the borrower may enforce the contract, waiving the question of usury. It would seem to be a necessary consequence of this holding that as a practical matter the defense of usury is never available to the lender since it would only be raised by the lender where the borrower affirmed the contract and in that case the point is waived. Hall v. Montaleone, 38 Ill.App.3d at 593, 348 N.E.2d at 198-99 (emphasis added). Our statute, however, differs markedly from the Illinois statute, which provides, In all written contracts it shall be lawful for the parties to stipulate or agree that 8% per annum, or any less sum of interest, shall be taken and paid upon every $100 of money loaned or in any manner due and owing from any person to any other person . . . in this state. Id. at 592, 348 N.E.2d at 197 (citing Ill.Rev.Stat.1971, ch. 74, par.4). Specifically, the Illinois statute does not provide that the contracts are only void as to the unpaid interest. Thus, though in Illinois a usurious contract is only, voidable, in Arkansas, the contract is void as to unpaid interest. This distinction mandates the conclusion that under Arkansas law a borrower cannot waive a usury defense by simply requesting specific performance of the remaining clauses of the contract.