Court Opinion

ID: 9645188
Source: CourtListenerOpinion
Date Created: 2023-08-22 21:15:46.799098+00
Date Added: 2024-06-11T13:09:15.403746
License: Public Domain

John I. Purtle, Justice, dissenting. I am compelled to dissent in this case. I agree with the concurring opinion the proper rule is that clear and convincing evidence is required before a contract will be voided upon the grounds of usury. I agree that this rule has had its ups and downs. Today it is down. I further agree that we have at least two lines of inconsistent cases in matters pertaining to usury. After this opinion, you can add another line. There is no question that both the majority and concurring opinion correctly state the rules and laws as they pertain to usury. However, from that point on, I am in considerable disagreement with the majority. “Usury” was the term originally applied to charges made for the use of money. Any amount repaid in excess of that borrowed was considered usury. This term goes back to at least Biblical times. After the Israelites were returned from captivity, they were allowed to charge Canaanites usury as a means of ruling them. However, Nehemiah, a prophet and governor of Jerusalem in 444 B.C., forbade the charging of usury (interest). Nehemiah 5:7-11. Historically, the various churches taught that charging of interest was sinful; nevertheless, successful merchants and commercial entrepreneurs continued the practice. An ordinance was passed in London in 1363 which outlawed usury (interest). In 1545 England passed a law repealing the 1363 ordinance and allowed usury at the rate of 10%. This 1545 law was repealed in 1551 by a statute that specifically declared usury to be prohibited by the word of God. W. Holdsworth, History of the English Law, vol. viii, at 100-112 (1926). Usury, as we know it, is opposed in Arkansas by strong public policy as declared by the constitution and the General Assembly. However, interest has not been considered against public policy. Usury or interest is controlled by law in practically every country in the world. In fact, it was controlled in Arkansas prior to the Constitution of 1874. Rev. Stats, of Ark., ch. 80, § 112, at 469 (1937). It is impossible for me to study our prior cases and ascertain a clear definition of what constitutes usury in Arkansas. For example, we have held a contract where a lender attempted to receive more than the amount allowed by law from the borrower is usurious. Home Building & Savings Association v. Shotwell, 183 Ark. 750, 38 S.W. 2d 552 (1931). We have also held if the lender, by mistake of fact or error in calculation, contracts to receive an illegal rate of interest, the contract is not void. Garvin v. Linton, 62 Ark. 370, 35 S.W. 430 (1896). In Garvin excessive interest was reserved through mistake of fact on the part of the lender only, and the excess was held not to be recoverable. Once again, we held that reservation of excessive interest through mistake of fact on the part of the lender did not render the contract usurious in Aldrich v. McClay, 75 Ark. 387, 87 S.W. 813 (1905). To the same effect, see: Temple v. Hamilton, 178 Ark. 355, 11 S.W. 2d 465 (1928). In Mitchell v. Duncan, 190 Ark. 598, 79 S.W. 2d 997 (1935), we held that the wrongful demand of excessive interest did not constitute usury because there was no agreement to pay the excessive demand. Compare this case with Redbarn Chemicals, Inc. v. Bradshaw, 254 Ark. 557, 494 S.W. 2d 720 (1973), where we held the attempt to collect 1% per month finance charge rendered the contract usurious. We have held a contract to pay interest greater than 10% per annum renders a contract absolutely void as to principal and interest. Smith v. Eason, 223 Ark. 747, 268 S.W. 2d 389 (1954). In one very early case, we held that a note bearing 10% interest given to cover supplies and money to be furnished did not render the contract usurious even though there was a failure to furnish a part of the supplies which was given as consideration for the contract. Lanier v. Union Mortgage, Banking & Trust Co., 64 Ark. 39, 40 S.W. 466 (1897). In the case of First National Bank of Memphis v. Thompson, 249 Ark. 972, 463 S.W. 2d 87 (1971), we held that an error in mathematical calculations resulting from a mistake of law could not be forgiven and could not remove the taint of usury. To the same effect, we have held an error in calculation was not one to be forgiven where the error involved the wrong interest rate. Ford Motor Credit Co. v. Catalani, 238 Ark. 561, 383 S.W. 2d 99 (1964). However, see Davidson v. Commercial Credit Equipment Corp., 255 Ark. 127, 499 S.W. 2d 68 (1973), where we held an error in calculating interest on a mortgage was forgiveable as an act done in good faith. We held in Davidson there was no usury. It seems to me that we are back to “square one”; and, we should make a new beginning as we attempted to do in Hare v. General Contract Purchase Corp., 220 Ark. 601, 249 S.W. 2d 973 (1952). I cannot agree with either the majority or the concurring opinion in matters relating to the Rule of 78ths. The majority seems to believe that the Rule of 78ths is limited to prepayment penalties. The opinion states the Rule of 78ths is an accounting method of accruing interest and of refunding unearned interest by prepayment. I do not understand the Rule of 78ths to be so simple. In fact, the majority clearly states a 10% note paid pursuant to Rule of 78ths would bear interest for the first month, on a one-year contract, at the rate of 15.38% per annum. Actually, the Rule of 78ths requires payment in excess of 10% about the first third of the life of the loan. Thus, the first 10 years of a 30-year loan would bear interest at a rate considerably greater than 10% per annum. What does the constitution have to say about usury? Although not set out verbatim in either the majority or concurring opinion, Art. 19, § 13, Constitution of Arkansas 1874, states: All contracts for a greater rate of interest than 10% shall be void, as to principal and interest and the General Assembly shall prohibit the same by law; but when no rate of interest is agreed upon, the rate shall be 6% per annum. There is no need to spend any time proving the Rule of 78ths violates the plain words of the constitution when the rule is applied to the first year of a 10-year loan such as we have in the case before us. In the past we have allowed the interest to be calculated over the life of the contract; and, if overall the interest did not exceed 10%, we held such contract did not violate the prohibition against usury. McDougall v. Hachmeister, 184 Ark. 28, 41 S.W. 2d 1088 (1931). On the other hand, we have held if interest on a contract charged up to the time of the filing of the suit to void the contract exceeded 10% per annum, it was violative of the prohibition against usury. Ryder Truck Rental v. Kramer, 263 Ark. 169, 563 S.W. 2d 451 (1978). The Rule of 78ths is designed for collection of the note over the life of the contract and not merely for early prepayment penalty as seems to have been suggested by the majority and concurring opinions. In the event of default, it is always the outstanding balance which is sued for, plus attorneys’ fees, abstracting costs, and so on. No credit is allowed for excess interest already paid. In the present case it is admitted that the lender charged about 15% interest on this $22,000 note during the calendar year 1976. The Rule of 78ths admittedly recognizes accumulation of interest at a rate greater than direct application of the simple interest rates. In a simple interest case, the annual percentage rate is calculated on the actual amount borrowed; whereas, under the Rule of 78ths, or “sum of digits’’ method, takes into consideration the cost of putting the loan on the books and assures the lender of collecting extra interest, above 10%, in the event of an early payment of the loan. Using the annual percentage rate of the Rule of 78ths, larger amounts of interest are collected in the earlier stages of the loan. The Rule of 78ths simply collects more than the annual rate during the first third of the contract and collects less during the last two-thirds of the contract. The net amount paid by the borrower, if paid on schedule, is exactly the same. An example of the two methods of collecting interest is illustrated in the present case. Interest charged on the $22,-000 note for the calendar year 1976, using the sum of digits method, was $2,717.97. Had the interest on the same note been figured at 10% per annum, simple interest would have amounted to $2,496.98, the exact amount found by the chancellor to have been collected by the lender. If there were no prepayment in this case, and certainly there was not, the appellants were required to pay a rate in excess of 10% per annum for the year 1976. Considering this fact, we should state clearly that we will consider the interest charged over the life of the contract to be the controlling factor. Failing to do this, we should issue a caveat that all contracts employing the Rule of 78ths will be declared void as usurious that are entered into after the date of this opinion. It is obvious the rate of interest has always been considered a matter of public concern. The wisdom of such a policy was never clearer than it is at this time. With interest running at the rate of 20% and still climbing, the present situation compels one to ponder whether our society can continue to exist as it has in the past. In past decisions we have made reference to Arkansas being a capital starved state. We have also made reference to interest rates driving industry from the state, depriving citizens of jobs, preventing consumers from purchasing necessary goods and supplies, and relating factors to be considered in matters of the rate of interest. All of these preceding factors are matters to be weighed by the people of Arkansas if and when a change in the rate of interest is authorized. Meanwhile, this Court should hold that all contracts in violation of the plain words of the constitution are usurious. Appellants argued the note should have been cancelled because of appellee’s fraudulent and material alterations to the instrument. In doing so, they rely upon Ark. Stat. Ann. § 85-3-407 (Add. 1961) which is accurately quoted at page 8 of the majority opinion. This contract was changed so many times by the appellee that it could hardly be recognized as the contract the parties signed. For example, the monthly installments were listed on the original note as $290.74 and were changed by the bank to read $329.97. This is only one of several changes which the appellants argue violated the above statute. One of the loans was for $22,000. The bank added $2969.74 as insurance premium and $14,626.61 as interest which brought the total note to $39,596.40. The bank received 35% of the insurance premium as a commission for selling the insurance. This commission was never paid to the insurance company. Ark. Stat. Ann. § 66-3806 (Repl. 1966) states that credit life insurance shall not exceed the original amount of the indebtedness. In my opinion, the original amount of the indebtedness was $22,000. Therefore, insurance covering the total amount, which would have been paid over the life of the contract ($39,596.40), does not represent the amount of the original indebtedness. At no time would the appellants have ever owed this amount. In fact, the most they could have owed at any one time was $22,000 plus the insurance premium and accrued interest. At any rate, the insurance policy, if issued at all, was not issued until sometime after the loan was made. The bank and the insurance company required Mrs. Winkle to obtain a physical examination before they would insure her. Obviously, if she had died prior to the furnishing of this information, there would have been no proceeds payable because no policy existed. The fact that the policy, if issued, was backdated is merely a contraption to claim the entire premium was earned. In Strickler v. State Auto Finance Co., 220 Ark. 565, 249 S.W. 2d 307 (1952), we held the imposition of charges for premiums on insurance policies in addition to the 10% by the lender on the borrower was usurious. See also Jones v. Jones, 227 Ark. 836, 301 S.W. 2d 737 (1957). For the above reasons I would not grant a rehearing in this case and would uphold the original opinion handed down on November 13, 1979.