Court Opinion

ID: 4145687
Source: CourtListenerOpinion
Date Created: 2017-02-18 03:59:39.774405+00
Date Added: 2024-06-11T14:24:14.880849
License: Public Domain

:
                           NO.   3050
       (Affirmedby,Letter to Hon. Callan Graham, Ch. Comm$tte.e
                        Rouse of,Representatlves,Jan. 31, 1951)
       on State.Affair.4,
       .HOU
          SE BILL NO. 420~IS'BECONSTITUTIONA
                                          L'
       Opinion holding House Bill~Ro..&       .(&all 'A   Bill3
       unconstitutionalbecause:,.                        .
                                                      .~
                                                       .
   '(.(1;. "It violates  ~&tic&    ‘XVI, Section 11, by -attempting
   .; to authorize   interest' of -dre.thah-ten,pef,,,cent.per .an$um.
                                         ,.
      (2) It is a special'law.88flxing      the +aii'$e
                                                     of interest+in
      violation of .Constitution,    Artlcle~
                                    .~        III;~?$@tlon 56i
      Q)*.~ It.is dlscrimlnatory~lnviolation of .*%qual"Protec-'       .'.:
      tlon? Clause of Federal~Const@ut$onand-'TexasConstitution,:
      Article'I Section 3, Article I;.~S~otlon'1~,~~~~~~ticle
      III, SectIon 56;'       ;.~
                                                                   _’

                   OFFICE'OE.:
                            THE AfiOREEY GENERAL '-' ':~':
                                                         .'

                                               May 13, 1939
 Honorable R. Emmett'Morse           .OpinionEo; 9-726,
 Speaker of the House of             Ret.Constltutionalityof Commlt-
  Representatives     ..         .:: tee amendment to Iiouse.Bill No.
 ,Austin,.
         Tees                        420, ,whlch&'a bill to regulate
                                      the business of making loans of
                                    -~$5C@.OOor less-and provides.‘,
                                      that such lenders may make cer-
                                      tain &are;@ in additlon,to lO$
 Dear Sir:                            Interest.
           4ie beg ‘to ~ackno#edge receipt of your request .ofMay
 1st  for an opinion of.th$s department on 210 S.W. 262,
          Thus in Joy v. Provident Loan Society 37 S.W.(2) 2%
(writ of error diSIdSS8d)  the Texarkana Court :f Civil Appeals
held that a pawn broker'dght not collect."s.torage charges'!
from the borrower in addition to ten percentinterest. 'The
court said:

     than the regular.zra~of&$erest :.woXi&dgiv8.*!'.
                                       ....,.
                                            - ,,_
                                               -:.  (Empha-
     sis ours)
         -,.
         .~-~Forres~o~~S~~~~~~~~o~~~~~~e~to~'~v..:~ooks~~(Waco
Courtof~ Civil ;Appeals:,1932)zq,51
                              ‘&W;'(2); &5 ,:the':court:~declared
theloan:usurious.~becapsethe-barik:&arged &e.%rrower'a ten
yer 'center
         "servlce~~charge"-:~~'-ddit~on.~to::'a,,:ten
                                              'R&:cent:interest.
   that:.
        opinion tht$
                   -icourt
                         said?,,-.,
                                 .:'

                    such e v c s. The evidence wholly
    .failed.to~,sh~~.~t--~~~i,~~,,tra~  service wasrendered
     as would authorize a charge therefor,~'.~~:.~means
                                                      em-...
     ployed in this case cannot be used to avoid the effect
     of the usury:statutei~~r
                            To;allowextra;c&rgas:~forsuch
     service~s;,.would:de.stroy::.the~
                                pqrp0se.I
                                        o$-.,thel
                                               usury flaws.
     Independent:::L~ber,~~Company,-~..'.Gulf,,Sta.te;Bank,..
                                                    299 :ZLW.
     939;:~':Slaughter:Com$any,~v.~~,,Rller,-
                                      196~.-S.W.~~,704.",...
                                                       (Empha-
     sis.o*.,).,
               ..- ~.

         .:$&.ce :RcCl&d~on sp&king,f'&j~jjh,~
                                            'Austin.
                                                   Court of Civil
Appeals In Reltimore.Trus~t6ompan.y
                                  ;r;.:-.~nders.,~~~,:S.fdo,(2)
                                                         710,
(writ-of error ~diq&ssed)l
                         said:, ~~
.     .

    Hon. R. Emmett Morse, page 5   (o-726)

          "Under this state of facts it is clear that the ex-
          penses, testified to by Viner as going to make up
          note 2, were expenses incurred by the bond company
          in the conduct of its business; that is for printing,
          negotiating,etc., its own bonds and guaranteeingthe
          collateral securing them. They were not in any proper
          sense expenses incurred or services rendered to appel-
          lees by the bond company in the ca city of broker or
          agent for appellees (the borrowersp"or otherwise. The
          bona company might as properly charge to appellees
          its office rent salaries of its officers,~agentsand
          employees and o-&er expenses of operating its busi-
          ness."
              In the case of IndependentLumber Company v. Gulf State
    Bank 299 S.W. 939,'(writof error refused), the Galveston Court
    of Civil Appaals held to be usurious a series of loans on which
    a bank charged the borrower eight per cent "inspectionfee" for
    inspecting the property by which the.loans~wereSecured. The
    evidence showed that the "inspectionfee? was charged in all in-.
    stances regardless of whether or.not an:inspection.actually was
    made. The court said:
          %idln&tte~~    it 'was&v8% ~eken.contemplatedthat appel-
          lant(the borrower) was to..nordid it in fact ever get
          anything except the use of'the money. No quid pro quo
          could     thereforehave gone to it,for anything else.....
          Th8 mere takingoutin advance, by the, discountingmeth-
          od, of the full conv8ntionalrate in Texas of 10 per
          cent per annum didnot constituteusury but that malum
          prohibitumlay in tacking on still another six per cent
          per annum charge,for,noadditional or different service
          to the borroweri,,but    for 'th8 amount of trouble to the
          bank in carrying that type of loan.' Fowler v. Equitable
          Trust Company, 141 U.S. 384, 3.2 S.Ct. 1, 35 $.Ed. 786;
          F8d8ral Mortgage Company V. Bank, 254 S.W.,1002."
              In the case of Texas Farm~MortgageCompany v. Rowley
    98 &W.(2) 8%    the~FortWorth Courtof Civil Appeals held that
    certain notes earing 7&% interest secured by deed of.$&&t were
                  i
    usurious because the deed of trust stipulatedthat the borrower
    should pay all taxes which might be assessed against the notes,
    which contingent taxes When added to the 7+$interest of the
    notes tip&&&total more than 10% which would amount to usury. It
    is to be noted that th8Se taxes were clearly *expenses incurred
    in connectionwith the loan* as contemplatedby Section 13-A of
    House Bill 420. Yet the Court of,Civil Appeals considered them
    to be within the meaning of "interest"if chargeableto the bor-
    rower. We quote from.that opinion:
                                                                          .     .

Hon. R. Emmett Morse, page 6                       (O-726)

     "And th8 provisionin the mortgage, to‘the effect
     that the borrower would gy~any taxes that might
     be assessed against the note while the holder is
     a resident of another~county manifestlywas in-
     tended.to prwide for ~paymen   4 of taxes~on the
     n ote in the event it shouId have"a taxable situs
     in that county by reason'of establishinganof-
     fice or agency in that county for transactionof
     any.of~its buciness. The stipulation could not.
     have been employed,'with any other contingencyfin
     view; and therefore.itmanifests an intention
     to charge more than 10 Der cent interest forkthe
     use of the monev borroved;'in the event of the
    happening ,of that.contingencya.@ if the ..taxes
     ofi$f&!
           ':cote
                ;.i
                  !$,+$f
                       ~f&$&j't;. ff44ereo$.;   'shotid:&- ;
     +&ea!;q:$.F ;dnt pr '&iilfm'  "~‘~miiphasis:     oys.).: '. .:
          .A~.cwT&'-
                 &I:.&iT'@&c.g*?         yg.: t,j& i&a:&r qjy;j@ Texas
~&,~~~&&;:~~~i':
               !~fi&;~;,;.&&,j&~&~  w. ,~~i&&s~i,~~@a     GeT'&&,;~
                                                                 o;$'.ae
&j~&g~~fix~~~~pfi&ql ~db~~ajibJi"t~:~~eine~,.~Co~t           a*:~+~ '10,
1939.;7*~~7+ig1ygg&.*a) o~~y~~a,+&g&+~            ;.tibajssw  cd**        et
.a1v. Elizabeth Rowley ec al,  the   ab&:.Q~o~~jC@&~f           &:::bpmon
of 'theFort,Worth.Courtwas expresslyaaprovdd. though the case ,,
,,,&.:
    keve'r&a f&.$$@'!,+@j-~d-i
                            *hat:68 Tex. 593, 5 S.W. &Ol. I?or.dothe courts consider com-
missions pald'to agents of the lender to be in the nature of addi-
tional interest,where the'agent is ~the "special"as distinguished
from the ng8neralnagent of the lender. This rule is well stated
by Judge Smith of the San Antonio Court of Civil Appeals in Hughes
v. Security F!ullding.andLoan Association, 62 S.W.(2) 219:
     Ylhe act of an agent, having only special and limited
     authority; in charging the borrower a fee by way of a
     commission for making a loan or for examining title
     to property to be mortgaged $0 s8cure th8 amount of
                                                            .    .

 Hon. R. Emmett Morse, page 8 : (O-726)

      the loan is not the act of his principal,and the
      fee so charged does not render the loan usurious.
      Jones on Mortgages,642...
        '*Therule would be different, so as to charge the
        lender, if the agent were a general agent, with
        authority to make loans for the lender in such sums
        or at such.timesas he pleases. Jones, 642-a. In
        this case the agent had no such authority. His au-
        thority extended no further than that of receivingand
        forwardingapplicationsfor loans, deliveringmoneys
        actually lent, and collectingand remitting install-
        ment payments from the borrower. He had no authority
        whatever to make loans, to :pass:upon~.risks,,or ap-
        praise se'curities for ..apuelleei.S.
                                          ~i.~
  t388 also: N ‘oelv.'Paahandle.~Building   and-LoanAssoclatlon, 85
  S.W.@. 733 hrit of error~refus8d);::.Sales     v. .Wrcantile:lVa-
 .tional.Dank,  89 S.W.(2!3.2+?7:.+rit of error~diSmiSS8d).'.-Pla.
                                                                 same
 rule with respectto .ganeraLagents;~would     apply:to Servants or     .'
 ~employeesof the lender::..Baltimore:Trust    CompanyV:Sanders, 105
  S.W.(2) 710&rritof .8rrordh~missad)~.~     Cost of..-preparation:
                                                                 ana
::examination'of.abstracts   mayLbech+rged to~the borrowers::e.
                                               :
             In all OS sh8se::caSes  where'the cou&~sanction8d'pap-
  ments by the borrower for.8xpenS8.6   &r.connection:withthelloan it
‘196 S.W. 704; the court held that the
lender might receive compensationfor his labor in supervisingthe
conduct of the borrower'sbusiness. The.court said:
     (IThecontract in this case provided the means by which
     Slaughter might keep informed of the condition of
     Eller's business and prevent a use of funds other than
     in the business which Slaughter,wasfinancing. The
                                                        .     .

Hon. FL Emmett Morse, page 10   (C-726)

     attention to the details by which this was to be ac-
     complishednecessarily imposed some labor. !lkebor-
     rower might legitimatelyagree'to compensate the
     lender for servicersof.such char& ter, although per-
     formed in the interest of the lender, providedal-
     ways that such charges are not made a mask behind
     which to conceal the true purpose of the parties."
     The court said further:
     "It is also stated generally that any advantage or
     benefit exacted which, added to the interest reserved,
     increases the compensationreceived for the loan to
     an amount in excess g&the lawful interest constitutes
     us@f.i;;)' ".      ',' ,;,

           Inthe~same~category may be placed the.casesrelating to
buildingaud ~ldan~associati'ons !whereinthencourtShave recognized
,theam    capacity,ofa&an as borrower atia StOCkhOld8r. Conti-
n8ntal 'Savingsa.ria l3ui1ding~~~Association
                                         v. w00a @astlana~~Courtof
civil' AppeCI~~).~3.'S.W;:,~~2).:770i'affimaed
,641;: ,-       .,: ;:;       ,: ,'~:. by com+pp. 56 S.w.(2)
           T&&g'n~'from     :the'qUestion~,of
                                            what is and what is
 not YnteresV' as d8fiXIed.by thecoUrts.of this state;let us con-
 Sid8r the more general question:. to what extent a-s  the Usury
  revision of the T8xaSCOnStitUtiOn circumscribethe authority of
%l 8 Legislatura~to.ex8rCise ,its'.discretion
                                            with'referenceto
 regulatingthe busiriess;of making loans?.~May the tigislatureig-
 nore'the constitutionalmandate to.npr'ovide'appropriate pains ma
 penalties to prevent" us,Uryas to a,specific cla~ssof lenders in
 the furtherance of what it .deems'tobe the public welfare?
          This question was squarely'beforethe Supreme Court of
Texas in Watson v. Alken,.   Tex.'536, wherein it consideredan
usurious loan made~after the adoption of the Constitutionof 1876
but prior to the enactment by the Legislatureof any statute pro-
viding "pains and penalties*'for usury. 'Chief Justice Gould in
that opinion said:      :~'

     “on I&y 27, 1876,~Watson~%&r$@Iedof Aiken $3,000 agree-
     ing to pay interestat the ranted
                                    of eighteen per cent
     Der annum. The constitutionwhich took effect in April
     of that year provided that in the absence of contract
     the rate of interest should not exceed eight per cent
     per annum, and authorised'partiesto contra.& to "agree
     upon any rate not~to exceed twelve per cent per annum.'
     It then proceeds thus: 'All interest'chargedabove
     this last named rate'shall be deemed u.su%=ious,
                                                    and the
     Legislature shall at its first session provide appro-,
     priate pains and penalties'toprevent and punish usury.'
-     .

    Hon. R. Emmett Morse, page 11   (O-726)

          Article 16, Section 11. . . .
          "In our opinion Aiken occupiesno more favorable
          position than if his loan had been made after the
          act of the Legislaturetook effect. When his loan
                                            tue of the cpn-
          bush
          sti t 0                               it was left
          to the Legislatureto 'nrescribe' rains and uenalties
          fl                         'I a contr ct for usur-
          ious interest was a contract in violation of law."
          @mphas,i~ours)
              Equally persuasive of the proper constructionof such
    a constitutionalprohibitionisthe, more recent case by the Texas
    .SupremeCourt, City of Wink v. Griffith.AmusementCompany 100
    S.W. (2) 695, wherein the court was required to construe&ticle
     III, Section 47, of the Stat8 Constitutionwhich prOVid86 that
    "the Iegislatureshall pass laws prohibitingthe establishment
    of lotteries and gift enterprisesin this state, as we1.las the
    sale of~ticketsin lotteries,giftenterprises or other evasions
    involving the,lottery~principle,  astablished~orexisting in other
    states." Chief Justice'Cureton.found   that "lotteries&have
    b88n prohibitedby the.,RenalCode inaccordance withthe consti-
    tutional mandate. 'Gift enterpriss# ana~,%therevasions involv-
    ing the lottery principleI neverthel' 's;remainand stand con-
                                        ~~.
    demned by the constitutionof'the sta as being against public
    policy....rfjefendant in Error's 'Rank.Night'plan was obviously
    an evasion "o?"thelottery laws~ by the-~avoidance.ofa direct charge
    for prize chances.... but neverth81ess.~r..manif8stlyan attempted
     'avoidance'o,fthe'lotterystatute ~:'by artifice' in accordance
    with the generally accepted definition of ~'.evasion'.Tnerefore
    defendant in error's 'Rank Night' plan stands condemned bv the
     Constitutionof Texas. Being condemn@ by the Constitution,it
     is against the 'publicpolicy of the'Statelt'. (Emphasisours)
              Chief Justice Cureton wasthere speaking of a constitu-
    tional provision which directea~the legislature to pass remedial
    legislation as does the usury provision;,theLegislaturehad
    there failed to provide a remedy for a part of the evil recited-
    by the Constitution,and ye,tthe Chief Justice declared that the
    defendant'sact "stands condemned by.the Constitutionof Texas."
    Applying this reasoning to our question, it follows that the
    usury provision of the Constitutionpermits of no discretion by
    the Legislatureto withhold as to any class the "pains and penal-
    ties" for usurywhich the Con,s.titution~prescribes.
              In view of the above,two clear pronouncementsby the
    Supreme Court ~ofTexas, we feel it unnecessary to burden this
    opinion with additional citation of authorities. Our conclusions
    as to the limitationsplaced upon the Legislaturewith reference
Hon. R. Emmett Morse, page.12 (O-726)

to loans which, under the d8fiXXitiOn of ~'inter8st1~
                                                    announced by
the tourts, are in fact usurious could not be better expressed
than in the language of Judge Laitimore,speaking for the Texas
Court of Criminal Appeals in Juhan v..:&ate, 216 S.W. 873:
    'We are not permitted to concern ourselves
                                           '. with the
    question as to whether the loan broker is necessary
    and useful in a community, to meet the wants of
    those~wholack ability to measure up to the financial
    standing required by the bankers, nor as to whether
    the loan shark is an evil that should be effectively
    banished from our midst. Evils must be met and
    abolish8d or minimized according to the wisdom of
    our ~&hl'8,       u within he limits fixed bv our
    $%mstitution.w &m$Lasis 0-A)
          We therefore,respectfullyadViS8 you that it is the
opinion of t&is department that th8 Committee amendment to House
Bill 420 exceeds the limitations of.ArticleXVI, Section 11, of
th8 Constitutionof -Texas in that Section 13-A thereof purports
to put the cloak of legis~tive sanction about a special class
of loans which may be usurious as a matter of law.
          We also believe that this bill is unconstitutionalfor
several additional reasons. We shall mention th8Se briefly with-
out attempting to discuss each one exhaustively.
          Section l3-C.of th8 bill seeks to give to,all charges
permitted by Section 13-A a presumptionof validity. This we
believe is contrary to the spirit.ofth8 constitutionali&bition
against usury. As said by the Texas Supreme Court in Hemphill v.
Watson, 60 Tex. 679:
     Vhe section of the Constitutionabove alluded to
     (Article16, Section 11, of Constitutionof 1876) made
     usury a quasi offense which the Legislaturewas
     charged with suppressLlg and punishing. It even de-
    fined what should amount to the offense of usury, ae-
     claring such offense to consist in charging interest
     at a greater rat8 than twelve per cent per annum.
     This provision is prohibitoryin its nature and self-
     executing so far as to render all contracts of the
    kind denounced immediatelyillegal; and it left to the
    .Legislaturethe only remaining duty of saying what
     penalties should be impo.seaupon offenders against
     this clause of the Constitution. Cooley on Constitu-
     tidnal Limitations,100 nOtej  Law v. People, 87 111.
     385.
     "'A3
     power to uass laws of a certain character is urohibitory
a    ,.,

    Hon. R. Emmett Worse, page l3    (O-726)

           of such acts as those laws would authorize.13t
              We believe.Section 13-C of,this bill is discriminatory
    as to certain features thereof and thereforeviolates the "equal
    protection"clause of the United States Constitutionand the
    following provisionsof the Constitutionof Texas:
           Article III, Section 56. "The Legislatureshall
           not, except as otherwise provided in th&Constitu-
           tion, pass any local or'special law authorizing.....
           fixing the rate of interest."
           Article I, Section 3. "All free men, when they form
           a social compact,have equal rights,.and.no man, or
           set of men, is entitled to exclusivesseparate public
           emoluments,or privil8ges,~~but in considerationof
           public services." :        ,.
           Article.I Saction~19: oivo.'kti&i of. this state
           shall.be'JrpriV8d:'of'~,lif8.;~
                                     liber.ty,..
                                              property, privi-
           leges or immunities;.orinanymanner disfranchised:,
           ~8XC8ptby Ch8 dUeCoUrS8,Of the +3W~Of th8.tind.w -1
              Section.l3C prOvid8S.that~if:a;loan.made~by a licensed
    lender in accorpance'withthe rate provisions-ofSection 13-A be
    found by a.court to.,beusurious, suchlender will be ~penalizea~
    only to the extent of lC$.Of the principalamount of the   lOan;

    whereas if.a'non-licensedlender (a!idhe;274 U.S. 352, 47 Sup.Ct. 632, 71 L.&I.
1091, wherein the Massachusettsstatute providingfor substituted
service on non-residentmotorists was upheld because "it is re-
quired that he shall actually receive and receipt for notice of
the service and a copy of the process." We, therefore,believe.
this provision of Section 3 of the bill is a denial of due process.
         'Ihecommitteeamendment to House Bill No. 420 being un-
constitutionalfor the various reasons above enumerated,we shall
pretermitany more detailed considerationof its specificprovi-
sions.
                                    Yours very truly
                                    AT!CORNEYGENERAL OF TEXAS
                                    By/& Walter R. Koch
                                    Walter R. Koch~Assistant
                                    (s&Victor W. Bouldin
                                    Victor
                                       :   W.. Bouldin,Assistant

WFtK:FL/wb
          This opinionhas been consideredin conference,approved,
and ordered recorded.
                                    g;wCld&Mann
                                           ..
                                    Al!TORNEYGENERALGF!l!FXAS
APPROVED: tX'&NI;~CQJC.TEE
BY:          ,

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