Court Opinion

ID: 9471538
Source: CourtListenerOpinion
Date Created: 2023-08-05 03:35:05.985535+00
Date Added: 2024-06-11T17:42:27.486279
License: Public Domain

SHAW, District Judge,
dissenting:
I respectfully dissent.
I have no quarrel with the majority’s conclusion that the phrase “rate of interest” contained in 46 U.S.C. § 926(d) includes within its meaning the charging of interest on interest. However, I do take issue with the majority’s conclusion that section 926(d) provides a valid defense to a claim under 12 U.S.C. §§ 85 and 86 only when the lender and borrower have agreed upon the rate of interest to be charged. In my view, sections 85 and 86 have no application to a loan made pursuant to the Preferred Ship Mortgage Act, 46 U.S.C. § 911, et seq.
12 U.S.C. § 85 was enacted as part of the National Bank Act to place national banks on an equal competitive basis with state banks. Tiffany v. Bank of Missouri, 18 Wall. 409, 85 U.S. 409, 21 L.Ed. 862 (1874). It provides in pertinent part:
“Any association may take, receive, reserve, and charge on any loan or discount made, or upon any notes, bills of exchange, or other evidences of debt, interest at the rate allowed by the laws of the State, Territory, or District where the bank is located, or at a rate of 1 per centum in excess of the discount rate on ninety-day commercial paper in effect at the Federal reserve bank in the Federal reserve district where the bank is located, whichever may be the greater, and no more, except that where by the laws of any State a different rate is limited for banks organized under State laws, the rate so limited shall be allowed for associations organized or existing in any such State under this chapter...”
12 U.S.C. § 86 is the counterpart to section 85. It provides:
“The taking, receiving, reserving, or charging a rate of interest greater than is allowed by the preceding section, when knowingly done, shall be deemed a forfeiture of the entire interest which the note, bills, or other evidence of debt carries with it, or which has been agreed to be paid thereon. In case the greater rate of interest has been paid, the person by whom it has been paid, or his legal representatives, may recover back, in an action in .the nature of an action of debt, twice the amount of the interest thus paid from the association taking or receiving the same: Provided, That such action is. commenced within two years from the time the usurious transaction occurred.”
*387The provisions of the Preferred Ship Mortgage Act were enacted to foster growth of the nation’s merchant marine by encouraging investment in the shipping industry. Section 926(d) provides one of the primary incentives to potential investors. It provides:
“A preferred mortgage may bear such rate of interest as is agreed by the parties thereto.”
I understand the majority opinion to hold that section 926(d) presents a valid defense to a claim under sections 85 and 86 only when the lender and borrower agreed to the rate of interest that was charged. If the lender and borrower did not agree to the rate of interest that was charged, and if the rate of interest so charged exceeded the rate of interest that could be charged under state law, then a viable claim may be asserted under sections 85 and 86.
Implicit in this holding is the assumption that if, for whatever reason, a lender and borrower have failed to reach an agreement on the rate of interest to be charged on a loan secured by a preferred ship mortgage, then the rate of interest which may accrue on the loan is automatically governed by state usury laws; for under the facts of this case, it is only when the applicable state interest rate has been exceeded that section 86 comes into play. In my view, such an assumption is erroneous. State usury laws have no application to a loan secured by a preferred ship mortgage regardless of the existence of an agreement between the lender and borrower as to the rate of interest to be charged.
The Preferred Ship Mortgage Act was designed to avoid parochial limitations on the ready availability of credit to the shipping industry by wholly and completely superseding state law and practice in every respect. J. Ray McDermott & Co., Inc. v. Vessel Morning Star, 457 F.2d 815, 818 (5th Cir.1972) (en banc). One of the primary parochial limitations on the ready availability of credit was the ceiling on interest rates that varied from state to state. Section 926(d) was included in the Preferred Ship Mortgage Act to avoid these varying interest ceilings and afford a lender the right to contract an appropriate interest rate without reference to state law. In this way lenders could offset the risks inherent in the investment of vast sums of money in the shipping industry by demanding whatever rate of interest the market would bear. The intent was to completely eliminate the application of state usury laws.
The majority opinion contravenes this intent by holding, in effect, that if the parties to a loan secured by a preferred ship mortgage have a misunderstanding as to the rate of interest to be charged, then state usury law determines the ceiling on the interest rate that may be charged. I cannot agree with such a holding.
I am of the firm opinion that section 926(d) completely supersedes state usury laws regardless of the existence of an agreement between the parties. This view is consistent with the Congressional intent underlying the enactment of the statute which was to completely eliminate parochial limitations on the rate of interest that could be charged. When Congress wrote section 926(d) to provide that a preferred mortgage could bear such rate of interest “as is agreed by .the parties thereto” it did not mean to imply that state usury laws governed whenever the parties had a misunderstanding as to the interest rate to be charged. By including the language “as is agreed by the parties thereto” in section 926(d), Congress was simply recognizing the fact that a meeting of the minds is an essential element of any conventional contract.
Since in my view Congress completely eliminated the application of state usury laws through enactment of section 926(d), I see no room for the application of' section 86. Section 86 would permit relief only if applicable state usury laws have been exceeded. Inasmuch as state usury laws have been superseded and have no application to loans secured by preferred ship mortgages, section 86 can never come into play. I believe to rule otherwise is to undermine the congressional intent underlying the enactment of section 926(d).
There is another reason why I believe the majority opinion to be incorrect. The ma*388jority holds that section 926(d) presents a valid defense to a claim under sections 85 and 86 only when the lender and borrower have agreed upon the rate of interest that has been charged. If, for whatever reason, the lender and borrower fail to reach an agreement on the rate of interest, then section 926(d) cannot be asserted as a defense and recovery can be had under section 86. I believe such a rule of law is inherently unfair to an innocent lender who makes a loan erroneously and in good faith believing that the borrower has agreed to the terms of the loan.
For instance, in this case appellant has asserted that it never agreed to pay interest on the $8,400 amount. Appellees, of course, have taken the opposite view. It is quite possible that appellees charged the interest based upon an erroneous, but good faith, belief that appellant had agreed to pay such interest. If this is so, then under the broad rule pronounced by the majority, the appellees, who in good faith had attempted to do only that which section 926(d) allows, are now subject to the punitive provisions of section 86. Such a result is unduly harsh and disserves the policies underlying the Preferred Ship Mortgage Act. Potential investors receive little encouragement from a rule of law that results in a forfeiture of interest and the imposition of penalties whenever there is an innocent but good faith error as to the existence of an agreement on the interest rate to be charged.
In my view, this case presents nothing more than a contractual dispute. Either appellant agreed to pay interest or it did not. If there was an agreement, then appellant-has no claim. If there was not an agreement, then appellant may resort to recognized principles of contract law for an appropriate remedy. In any event, sections 85 and 86 have no application.
For the foregoing reasons, I would affirm the ruling of the district court.