Court Opinion

ID: 3620865
Source: CourtListenerOpinion
Date Created: 2016-07-06 00:02:40.639728+00
Date Added: 2024-06-11T13:53:14.973244
License: Public Domain

This action is brought to recover the balance of an account stated and settled between the parties on the 8th day of December, 1871, and the controversy arises upon a single item in the account as follows: "To add amount this day due on Fellows and McNab bond $39,432.73." The defendants' intestate had been for more than fifty years previously the agent and sub-agent for the plaintiff's intestate, a resident of England, in the management of a large real and personal estate in this and other States, commonly known as the Pulteney estate, and the bond in question was executed by the defendants' intestate, Mr. Fellows and one McNab, in 1817 for $6,763, with annual interest at six per cent in seven annual instalments, and was held by Mr. Fellows as a part of the property of his principal. There had been paid prior to the settlement of the account upon the said bond about $34,000, which was sufficient to discharge the bond at simple interest, and the question is whether the plaintiff is entitled to recover the sum above specified, it being the accumulation produced by compounding the interest. It is well settled in this State that compound interest is not allowable unless there is an agreement in writing to pay it after the interest has accrued, and that an agreement to pay interest upon interest not accrued will not be enforced. These principles are founded upon a wise public policy for the protection of the weak and ignorant debtor against extortion and oppression by the grasping creditor who, by an apparent indulgence, *Page 178 
is enabled to delude his victim into certain ruin. (1 J. Ch., 13, per KENT, Ch.) If, however, the debtor, after interest has accrued, voluntarily, without coercion or menace, agrees in writing that such interest shall be regarded as principal, which is equivalent, in legal effect, to an agreement that he will pay interest on such accrued interest, the agreement will be enforced. Whether such an agreement, which is retrospective in its terms, is valid has been a disputed point in this State. InVan Benschooten v. Lawson (13 J. Ch., 313) Chancellor KENT decided that such an agreement was invalid, while in Mowry v.Bishop (5 Paige, 98) Chancellor WALWORTH, although ostensibly distinguishing the two cases, substantially held and argued that such a contract was valid, and that the moral and equitable obligation to pay the interest when due furnished a sufficient consideration to support the promise. As an original question, after a careful examination of the grounds upon which the rule of public policy was founded, in connection with the authorities, I should hesitate in adopting the views of Chancellor WALWORTH, in 5 Paige (supra). Those of Chancellor KENT, in 6 Johnson's Chancery Reports (supra), seem more in consonance with the general principle involved. But the recent case in this court, ofStewart v. Petree (55 N.Y., 621), must be regarded as foreclosing the question, and establishing the validity of such a contract. Although the question presented was usury, yet as the note was wholly for compound interest, theretofore accrued, its validity upon the ground of public policy was necessarily involved, and must have been so regarded by the court, as the opinion is expressly adverse to the decision in 6 Johnson's Chancery (supra), and there are other cases cited tending in the same direction. Under these circumstances it is not desirable or proper to reopen the question, and the decision, it must be confessed, is in accordance with considerable judicial expression. The important question is, whether there was such an agreement as the law requires to render the defendant liable. The agreement is predicated upon the fact that Mr. Fellows was in the habit of compounding the interest every year upon this bond in his books, and in his statements *Page 179 
to his principal of including the amount with the compound interest in the gross amount of bonds, and upon the account stated and settled in 1871, at the close of his agency. Attached to this account is a writing signed by Mr. Fellows, the first paragraph of which is as follows: "The foregoing accounts and amounts have been liquidated and settled, and the balance due to Rev. Richard T.B. Pulteney is $70,463.52, subject to the correction of any errors and omissions which may hereafter be found therein."
The learned judge who tried the case found that Mr. Fellows caused the compound interest to be calculated and charged against himself, and included the same in the account of 1871, "with the intention and for the purpose of creating a legal obligation to pay the same." The question is whether he did create such legal obligation within the established rules of law. It is quite clear, I think, that the exception in the certificate of errors and omissions hereafter found cannot be held to include this item. Such errors and omissions were intended to apply to those arising from mistake or misapprehension as to some fact. The undisputed evidence and finding is, that there was no mistake of fact in this item, and that Mr. Fellows intended to pay compound interest upon the amount secured by this bond, and inserted the item in the account for that purpose. It was not, therefore, an error or omission within the meaning of the language of the exception. The respective counsel argued elaborately as to the character of the agreement required to create a liability to pay compound interest, on the part of the defendant, that it must be an express agreement, and on the part of the plaintiff that an implied agreement would suffice. We must not be misled by the use of particular words. As a result of the authorities, I apprehend that it is sufficient if the agreement is such that its legal effect is to pay interest upon interest, and this may not depend upon the use of those precise words. An agreement in terms that accrued interest might be regarded as principal would be, in legal effect, an agreement to pay interest upon interest, although that language was not expressed, because *Page 180 
when it becomes principal it draws interest as other principal money. It then becomes transformed from a debt for interest to a debt for principal, and has the same quality in respect to earning interest as other principal moneys. Such an agreement is in substance an express agreement to pay interest. On the other hand, an acknowledgment that a given sum of money is due as interest is not sufficient to change it into principal upon which interest might be calculated. Such an acknowledgment would not constitute an implied agreement even to that effect, for the reason that the acknowledgment would not be inconsistent with its remaining as interest simply.
In this case Mr. Fellows certified that upwards of $39,000 was due on this bond, and he arrived at this result by adopting the detailed account kept by himself or under his direction, in which interest upon interest was calculated. In substance, he agreed that there was that sum due which was impossible, except upon the theory of compound interest, and did not this agreement in legal effect necessarily embrace an agreement to pay compound interest. If so, it is immaterial what name is attached to it, whether express or implied. What is necessarily implied in an agreement is deemed in law expressed. By his own act he turned the yearly interest into principal, and he agreed that the result was correct. I feel constrained to hold that this, in legal import, constituted a special agreement that the yearly interest should be regarded as principal. To illustrate: A debtor owing an outstanding bond of $1,000, payable in one year with interest, presents to his creditor at the end of the year a statement showing that $1,000 is due for principal and seventy dollars for interest, and signs the statement agreeing that there is that amount due. Such an agreement would not change the interest to principal, because, as before stated, it is equally consistent with its remaining a debt for interest. If a clause was added that the interest due might be regarded as principal, the right to calculate interest upon it from that time would be clear. If the same debtor, at the end of two years, presented an account, *Page 181 
with the interest for one year added to the principal, making $1,070, and the interest calculated upon that sum the second year, making seventy-four dollars and ninety cents, and certified in writing to its correctness as the amount due, the proper and legal construction of such a transaction would be an agreement that, at the end of the first year, the interest should be turned into principal, and that is precisely this case. The detailed statement must be considered in connection with the settled account, as the result of the statement was adopted in the account, and the agreement to its correctness embraces, necessarily, an agreement to transform the interest annually into principal.
Regarding the case of Stewart v. Petree (supra), as definitely settling the rule that an agreement to pay compound interest may be retrospective, the conclusion follows from the foregoing views that the written agreement in this case was sufficient for that purpose. There is no claim in the case, that there was any attempted extortion, or any threat or menance, express or implied, on the part of the creditor. It is undisputed that what was done was done voluntarily and freely, and in pursuance of what the debtor regarded as a duty. It is found that he intended to create a legal obligation to pay compound interest, and I think he succeeded. The suggestion was made on the argument that interest should not be added to the amount admitted due, and that the agreement, if sufficient to cover compound interest previously accrued, would not justify interest upon such interest after that time. The answer to this is that the agreement, if effectual and valid, changed the debt from interest to principal (except the last year's interest), and when changed it became for all purposes a part of the principal.
The judgment of the general term must be affirmed.
For reversal of judgment of General Term, and affirmance of that of Special Term: ALLEN, RAPALLO, ANDREWS and MILLER, JJ.
CHURCH, Ch. J., FOLGER and EARL, JJ., dissent.
Judgment reversed. *Page 182