Summary
In Schlosburg v. Bluestein, 150 S.C. 311, 148 S.E., 60, this Court affirmed the judgment of the Circuit Court, and from the result which obtained it would appear that the trial Judge in this case correctly construed the first part of Section 6740 to apply only to unpaid interest, but such was not the case because in the Schlosburg case there was no issue relating to the first part of the section.
Summary of this case from Frick Co. v. Tuten et alOpinion
12654
May 7, 1929.
Before WILSON, J., Lancaster, September, 1927. Affirmed.
Action by Anna Schlosburg against Kate Bluestein and another. From an adverse judgment, plaintiff appeals.
The report of the Special Referee and the decree of the Circuit Judge are as follows:
"REPORT OF REFEREE"This cause was referred to me by consent. The action is for the foreclosure of a mortgage given by the defendant, Kate Bluestein, to the plaintiff. The note secured by said mortgage reads as follows:
"`Gastonia, N. Car., May 30, 1923. $2,500.00. One year after date I promise to pay to the order of Anna Schlosburg twenty-five hundred dollars, value received, payable at Camden, S.C. with discount before and interest at the rate of eight (8) per cent. per annum, after maturity, payable annually. I also agree to pay ten per cent. of the original principal hereof additional for attorney's fee in case this note is placed in the hands of an attorney-at-law for collection after maturity, or in the event of bankruptcy proceedings. "`Kate Bluestein.'
"This note was discounted on the day of its execution at 8 per cent. per annum; the sum of $200 being retained by the mortgagee, and the cost of the loan paid by the mortgagor. It will be seen that the note is due one year after date, with discount before and interest at the rate of 8 per cent. per annum, after maturity, payable annually. Upon the note becoming due one year from date, Mrs. Bluestein's husband, who seems to have been her agent in the transaction, testified that the plaintiff, through her agent, demanded that the interest again be paid in advance for one year, and threatening that, if it was not so paid, the mortgage would be foreclosed, and that, to avoid such event, the sum of $200 was paid. The same threat, followed by the payment of $200 interest in advance, occurred on the due date of the note for the next two years. To be exact, the note was discounted at 8 per cent. on May 30, 1923; when it became due on May 30, 1924, $200 was again paid, at the due date in 1925; and also in 1926 $200 was again paid as interest in advance on the principal sum. On the due date in 1927 the defendant failed to again pay interest in advance, and this action was immediately brought for the foreclosure of the mortgage. The defendant Kate Bluestein answered, admitting the execution of the note and mortgage, but also set up as a counterclaim a demand for $1,200 on the ground that the plaintiff had been guilty of usury in demanding and receiving in advance annually the sum of $200 as interest for three years; the contract between the parties only stipulating for discount of one year's interest and after maturity for the payment of 8 per cent. per annum, payable annually. In other words, the defendant admits plaintiff's right to discount one year's interest, but contends that, after maturity under the contract, that interest could not be demanded in advance, and that, by receiving it in advance on the threats of foreclosure, the plaintiff is guilty of usury. So the question here is, Can the plaintiff not only discount her note and thus receive one year's interest in advance, but can she demand and receive her annual interest in advance thereafter, or is she only entitled to collect her interest after maturity after it has been earned?
"The statute (Civ. Code 1922) Section 3638, regulating interest charges in the State, reads as follows: `No greater interest than seven (7) per cent. per annum shall be charged, taken, agreed upon or allowed upon any contract arising in this State for the hiring, lending or use of money or other commodity, either by way of straight interest, discount or otherwise, except upon written contracts wherein, by express agreement, a rate of interest not exceeding eight per cent. may be charged.'
"From the language used, it is clear that the Legislature intended to prohibit the charging of a greater rate of interest than that fixed by it in this statute. The words, `either by way of straight interest, discount or otherwise,' certainly mean that not more than 7 per cent. interest may be taken, except that by express agreement in writing not more than 8 per cent. may be charged. Notwithstanding the statute, the Courts have held that a note may be discounted at not more than 8 per cent. interest by special written contract, and also that 8 per cent. interest may be paid in advance if a special contract so agreeing was entered into between the parties at the time the loan was made. These decisions seem to be founded upon that provision of the statute allowing 8 per cent. by written agreement; in other words, that, if a man contracts in writing to pay 8 per cent. interest in advance, it may be collected notwithstanding the strict language of the statute. I have not been cited to any case where interest was allowed in advance except by written agreement.
"The crucial question here is, under the terms of this contract, Can the plaintiff not only demand discount at the time of the execution of the note, but also that interest thereafter be paid in advance annually? The contract here is that the note is subject to discount at 8 per cent. per annum; therefore the plaintiff is clearly entitled to deduct the first year's interest in advance, but there is nothing said in the note about the payment of interest in advance after maturity if the note should not then be paid. On the contrary, the note provided for the payment of interest at 8 per cent. per annum after maturity, payable annually; there is no stipulation that interest after maturity shall be payable in advance annually or otherwise. Unquestionably the plaintiff was entitled to foreclose her mortgage if the note was not paid at maturity, and charge interest thereafter at the rate of 8 per cent. per annum for such time as her money was used after the maturity of the note, such interest to be paid on an annual basis. But could she, by threats of foreclosure, force the defendant to pay her annual interest in advance after the maturity of her note; there being no contract so to do by the defendant, no written contract? Certainly the statute ought to be so construed as to prevent the charging and receiving of more interest than it allows.
"Because the Courts have permitted the charging of 8 per cent. interest in advance by special written contract, ought it to be allowed where the contract is that the note bears interest at 8 per cent. after maturity, payable annually? If such be the case, then if by contract allowing discount before maturity at 8 per cent. and providing that, after maturity, the interest shall be paid at the same rate per annum, payable annually, interest may be collected in advance, then there need be no contract agreeing to the payment of 8 per cent. interest in advance, but such rate may be collected under any note drawing interest after maturity at the rate of 8 per cent. per annum. As remarked, the statute was certainly intended to fix the legal rate of interest at 7 per cent. except by written contract when it might be made 8. Although the statute says that interest shall not be greater than the rate fixed by way of discount or otherwise, the Courts have held that discount may be taken and that even 8 per cent. interest may be taken in advance if there is a special contract in writing to that effect. It is held that paying 8 per cent. interest in advance on any sum of money is paying more than straight interest because it is paying to the lender of the money his interest before it is earned. But, in the absence of a contract, to pay 8 per cent. interest in advance, under the terms of such a contract as that here, where the contract specifies discount but fixed the interest after maturity at 8 per cent. per annum, payable annually, can the holder of the note by any device whatsoever, especially such as that in evidence here, demand and collect interest a year in advance after his note has matured? If he does, is he guilty of receiving a greater rate of interest than the law allows?
"The case of Newton v. Woodley, 55 S.C. 132, 32 S.E., 531, 33 S.E., 1, by a divided Court, held that interest might be made payable in advance where the note provided for it, and that such payment could not constitute usury. The reason the Court permits interest to be paid in advance by written contract seems to be because the statute does not directly say when the interest shall be paid. It is true the statute does not directly say when the interest must be paid, but it does say that no greater rate of interest than that prescribed by it shall be taken by discount or otherwise. That is a declaration that it is not to be paid in advance because to discount a note is to pay interest in advance. There is no other way to discount it. But it most certainly seems that, even if interest may be discounted or paid in advance by written agreement that it could not be in the absence thereof or in the face of an agreement to pay interest after maturity annually. The syllabus in the case of Bank v. Sarratt, 77 S.C. 141, 57 S.E., 621, 122 Am. St. Rep., 562, holds: `It is usury to discount a note before maturity at eight per cent. which provides for interest at that rate only after maturity.' That is the same principle as in the case at bar. If it is usury to discount a note before maturity at a per cent. which provides for interest at that rate only after maturity, then why is it not usury to demand and receive the payment of 8 per cent. interest in advance on a note which provides for interest at that rate only after maturity after the payment of the discount? It is the same principle. The cases of Cooke v. Young, 89 S.C. 175, 71 S.E., 837, Heyward v. Williams, 63 S.C. 474, 41 S.E., 550, and Bank v. English, 133 S.C. 129, 129 S.E., 156, are all cases in which the contract was in writing and was to pay the interest in advance, not one of them adjudicates a contract such as that here.
"It seems to me that, when the plaintiff here demanded and received discount of a year's interest and then on her contract which provided for the payment of 8 per cent. interest per annum, payable annually, after maturity, again demanded and received her annual interest in advance, that she was charging and receiving a greater rate of interest than that allowed by law, and that she is liable for usury. That being true, what is the defendant entitled to recover? That is settled by Section 3639, which is as follows: `Any person or corporation who shall receive, or contract to receive, as interest any greater amount than is provided for in the preceding Section shall forfeit all interest, and the costs of the action and such portion of the original debt as shall be due shall be recovered without interest or costs, and where any amount so charged or contracted for has been actually received by such person or corporation, he or she, or they shall also forfeit double the total amount received in respect of interest, to be collected by separate action or allowed as a counterclaim in any action brought to recover the principal sum,' so it seems clear the defendant is entitled to recover double the amount the plaintiff received in respect of interest. Before the amendment of this Section in 1889, the defendant was only entitled to recover double the excess interest paid, but the amendment practically rewrote the statute and provided where the usurious interest `has been actually received by such person, * * * he or she, or they shall also forfeit double the total amount received in respect of interest.' The old section was constructed in the case of Hardin v. Trimmier, 30 S.C. 391, 9 S.E., 343. The amendment in 1889 was doubtless in consequence of this decision In addition to the payment of the borrower of double the amount so received as interest, the lender also forfeits all costs and is restricted to the recovery only of the principal sum. Here the principal sum was $2,500; the plaintiff is entitled to judgment for that amount less the sum of $1,200, double the amount actually received by her in respect of interest.
"I find, therefore, as issues of fact:
"(1) The execution by the defendant Kate Bluestein to the plaintiff of the note and mortgage described in the complaint.
"(2) That the note was discounted in the sum of $200 on the day of its execution.
"(3) That on the due date of the note one year from its date the plaintiff demanded and received of the defendant one year's interest in advance under threat of immediate foreclosure.
"(4) That each year thereafter, in all three years, to wit, May 30, 1924, 1925, 1926, the defendant, by the same threat, demanded and received one year's interest in advance.
"(5) That the annual interest so received was $200, aggregating $600.
"I find, as conclusions of law:
"(1) That the plaintiff was entitled to discount the note on the day of its execution for one year's interest, to wit, $200.
"(2) That by the terms of the note it bore interest after maturity at 8 per cent. per annum, payable annually, and that, the note already having been discounted at its execution, interest could not again be demanded in advance, but could only be collected after it had been earned at the rate of 8 per cent. per annum, payable annually.
"(3) That the plaintiff, by demanding and receiving 8 per cent. interest in advance, pretensively under the terms of the note, was demanding and receiving a greater rate of interest than the law allows, and therefore received usurious interest.
"(4) That the amount received by plaintiff in respect of interest was $600.
"(5) That the defendant Kate Bluestein is entitled to recover of the plaintiff double that amount, to wit, $1,200, to be allowed as a counterclaim against the principal sum of $2,500.
"(6) That the plaintiff is entitled to the foreclosure of the mortgage, a sale of the premises, and the payment to her out of the proceeds of the sale of the sum of $1,300; this being the remainder due on her mortgage after the allowance of the counterclaim.
"(7) That the plaintiff is liable for the costs of this action.
"(8) That, if the proceeds of said sale should not be sufficient to pay the sum of $1,300 so found to be due plaintiff, and the counterclaim of $1,200 allowed the defendant Kate Bluestein, then that said counterclaim be allowed and paid out of the total of such proceeds, and the remainder paid to the plaintiff.
"(9) That if the total proceeds of said sale exceed the amount of $1,300 herein found to be due plaintiff, and $1,200 found to be due defendant as a counterclaim, that such excess be paid to the defendant Kate Bluestein.
"I therefore recommend that the plaintiff's mortgage be foreclosed, the premises therein described sold, and the proceeds of such sale distributed as directed herein."
DECREE OF CIRCUIT COURT"This case came before me on exceptions by the plaintiff to the report of R.E. Wylie, Esq., Special Referee. His report fully states the issues, and is a very clear discussion of the law involved, so it will not be necessary for me to do more than as briefly as I can refer to the questions raised. The action is for the foreclosure of a mortgage for $2,500. The defendant Kate Bluestein admits its execution, but alleged that the plaintiff had charged and received usurious interest in the sum of $600, and set up a counterclaim of $1,200, double the amount received in respect of interest. There is no denial of the receipt of the sum of $600 but of course the plaintiff contends that there was no usury. The note was for $2,500, dated May 30, 1923, due one year after date, `with discount before and interest at the rate of 8 per cent. per annum after maturity, payable annually.' The sum of $200 was deducted from the loan of $2,500, as interest discounted for one year. The defendant admits the plaintiff's right to do so because the note stated it was subject to discount at 8 per cent. But at the maturity of the note the plaintiff threatened the defendant that, if she did not then pay another $200 interest in advance on the note, the mortgage would be foreclosed, and for two years thereafter on each due date of the note the sum of $200 as interest in advance was paid the plaintiff under the same threats; the sum of $600 being paid in all. At the next due date of the note, or the next annual rest, to be more exact, the defendant was unable to pay another year's interest in advance, and this action was brought for foreclosure for the full sum of $2,500, and interest from the annual date to which the interest was last paid in advance. None of the money paid by the defendant was credited on the principal of the note, although each of the three years it was paid before any interest was due — that is, before it had been earned. The defendant Kate Bluestein makes the issue that, when the plaintiff enforced the collection of the annual interest in advance after the note became due for three years, she was charging and receiving a greater rate of interest than the law permits, and therefore is guilty of usury. The Referee agreed with the defendant. Was he in error in so doing?
"It is not denied that the note was subject to discount at 8 per cent. and therefore that the plaintiff was entitled to take in advance the sum of $200, one year's interest. Nor does the defendant deny that 8 per cent. interest may be charged and collected in advance, notwithstanding the usury statute, if there is a written contract that it may be done. Defendant does deny, however, that 8 per cent. interest may be charged in any event except by a written contract, and that, inasmuch as 8 per cent. may not be charged or a note discounted at that or any other rate, except by written contract, 8 per cent. may certainly not be collected in advance unless the borrower contracted in writing so to pay; in other words, 8 per cent. may not be charged except by written contract; a note may not be discounted at any rate except it be so stated therein; therefore, if you cannot charge 8 per cent. without a written contract, and you cannot discount at 8 per cent. without a written contract, and you cannot continue to collect 8 per cent. interest annually after maturity, in advance, without a written contract, and that you certainly cannot collect 8 per cent. interest annually in advance after maturity, where your written contract is that the sum borrowed is subject to `discount before and interest at the rate of 8 per cent. per annum after maturity, payable annually,' as is the stipulation in the contract here. For instance, a note due one year from date with interest after maturity at 8 per cent. per annum, with no stipulation as to discount, could not be discounted; nor could a person be required to pay 8 per cent. interest in advance on a note due one year from date with interest from date at 8 per cent. per annum, payable annually. The law only allows 8 per cent. by special written contract; it necessarily follows that it will not allow 8 per cent. discount, nor 8 per cent. interest in advance, payable annually, unless it also be contracted for in writing. Why should it require a written contract for the payment of 8 per cent. interest and not require a written contract for its payment in advance?
"It appears to me that is the fundamental of the decisions of the Supreme Court in all of the cases cited by the Referee, and that the Court has made it clear that it reluctantly permits the collection of 8 per cent. interest in advance and will not do so unless the borrower contracted in writing to pay it. The case of Bank v. Sarratt, 77 S.C. 141, 57 S.E., 621, 122 Am. St. Rep., 562, is convincingly in point. The Court held in that case that `it is usury to discount a note before maturity at eight per cent. which provides for interest at that rate only after maturity.' It is true that the Court permitted the charging of 8 per cent. interest in advance, but only because the borrower gave his check marked `int. on sundry notes' simultaneously with the execution of his notes, and the Court held the check a written contract to pay interest in advance at 8 per cent. The other cases cited, except Bank v. Parrott, 30 S.C. 61, 8 S.E., 199, which was not cited by him, have, it seems to me, been correctly construed by the Referee. The case of Bank v. Parrott, supra, was urged before me by the plaintiff as sustaining his contention. I do not think it applies here. The issue there was different; that of charging 10 per cent. on deferred payments of interest. But I think that case supports the conclusions I have reached. The Court says it is true that in discounting a note in a bank they may arrange that the interest shall be paid in advance which, as we believe, is usually done by the borrower receiving that much less money. This is the very meaning of the word `discount' which is defined to be to lend money, deducting the interest at the time of the loan.' In such case, however, as we understand it, the note is made to conform to the fact and to bear no interest until its maturity (the interest to that time being embraced in it). The language, `the note is made to conform to the fact and to bear no interest until after its maturity (the interest to that time being embraced in it), can only mean that the note having been discounted, the interest can be charged until after its maturity, and then only after it has been earned, and that, the note being made to conform to the fact, the contract must be in writing.
"The note here was subject to discount at 8 per cent., and it was discounted; it bore interest after maturity at the same rate, and only after maturity can the plaintiff collect her interest, and only after it was earned; it did not stipulate for the payment of 8 per cent. interest in advance payable annually. I agree with the Referee that the collection of this interest in advance was charging and receiving a greater rate of interest than the law allows, and was therefore usury.
"I do not think that the plaintiff changed her position in any way because of the written acknowledgment of the defendant Kate Bluestein on the mortgage on June 1, 1926; therefore the doctrine of estoppel cannot apply. The acknowledgement was that so much was due on the mortgage, and was made to aid the plaintiff to borrow money. Nothing was said or intimated that it was intended to be a written contract to pay 8 per cent. interest in advance.
"The usury statute was enacted to prevent the charging of more interest than that fixed therein. It should be construed to suppress the evil it sought to prevent. The Courts have permitted discount by written contract in deference to the law merchant and recognized business usages, but have uniformly held that no subterfuge or evasion will be permitted to defeat the purpose of the law. It matters not that there is no intent to do an unlawful act. Here it is the spirit of the law that must be enforced. The plaintiff here has her discount when the money was loaned; that was her contract and the law does not deny her rights under it. But her contract also was to collect 8 per cent. interest per annum, after maturity on an annual basis; she had no right under it to continue to demand interest in advance.
"It is therefore ordered that all of the exceptions of the plaintiff be overruled.
"It appears that no ruling was made by the Referee as to the judgment of the defendant H.L. Schlosburg against Kate Bluestein; it being a mere oversight, not having been called to the Referee's attention in argument. The exceptions of this defendant are sustained to the extent of holding that the judgment is a lien against Kate Bluestein junior to that of the plaintiff's mortgage, but I do not hold as to how the judgment shall be paid. It stands for itself, and can be collected out of any properties belonging to Kate Bluestein, unless her homestead right should void its lien. The defendant H.L. Schlosburg may apply at the foot of this order for any further order adjudicating his rights after the sale of the mortgaged property.
"It is therefore ordered that the report of the Referee is confirmed and made the judgment of this Court, except as modified.
"It is further ordered that the mortgage of the plaintiff be foreclosed the equity of redemption barred, the lands described in the complaint be sold by Paul Moore, Esq., Clerk of Court, at public outcry for cash during the legal hours of sale at the courthouse in Lancaster, S.C. on the first Monday in February, 1928, he having first given notice of the time, place, and terms of said sale for three consecutive weeks, as required by law, in the Lancaster News, a paper published at Lancaster, S.C.; that out of the proceeds of said sale he do pay any taxes due, and that he distribute the remainder as follows:
"To the defendant Kate Bluestein or her attorney, the sum of $1,200, the amount of her counterclaim, with interest from this date at 7 per cent. per annum.
"To the plaintiff, Anna Schlosburg, or her attorney, the sum of $1,300, less the sum deducted therefrom sufficient to pay the costs of this action.
"To the defendant Kate Bluestein, or her attorney, any surplus proceeds of said sale after the payment of the sum named above.
"In the event the proceeds of said sale should not be sufficient to pay both of said sums, then let the $1,200 be paid the defendant Kate Bluestein, and the remainder be paid to the plaintiff.
"It appearing that the defendant Kate Bluestein is a married woman, she is entitled to her homestead exemption as against the judgment of H.L. Schlosburg. There is no evidence of what property Mrs. Bluestein owns other than the sum herein found for her; therefore the payment of the H.L. Schlosburg judgment out of that sum is left open for the further judgment of this Court on motion herein."
Messrs. L.A. Wittkowsky, and Mendel L. Smith, for appellant, cite: Cases distinguished: 30 S.C. 61; 77 S.C. 141. As to usurious interest: 63 S.C. 470; 89 S.C. 173; 55 S.C. 132.
Mr. Harry Hines, for respondent, cites: Case at bar controlled by 77 S.C. 146.
May 7, 1929. The opinion of the Court was delivered by
The facts and issues involved in this case are fully stated in the report of the Special Referee, Hon. R.E. Wylie, and the decree of the Circuit Judge, Hon. John S. Wilson, and, for the reasons set forth therein, the appellants' exceptions are overruled, and it is the judgment of this Court that the judgment of the Circuit Court be, and the same is hereby, affirmed.
MR. CHIEF JUSTICE WATTS and MESSRS. JUSTICES BLEASE and STABLER concur.
This is an action for the foreclosure of a mortgage upon real estate given by the defendant to the plaintiff as security for the payment of a note for $2,500, dated May 30, 1923, and due May 30, 1924, with "discount before and interest at the rate of eight per cent. per annum after maturity, payable annually." The sole question for decision is whether or not the plaintiff has subjected herself to the statutory penalty for usury which is set up by the defendant mortgagor as a defense and counterclaim.
It appears that, when the loan was consummated, the mortgagee paid to the mortgagor $2,300, which was the face of the note $2,500, less $200, discount retained for one year upon $2,500 at 8 per cent. When the note fell due on May 30, 1924, the mortgagee demanded that the interest again be paid in advance for one year under threat of foreclosure. The advance payment was made, and the same demand, threat, and payment was made May 30, 1925, and May 30, 1926. It does not appear that the mortgagor made any objection to these advance payments, and it must be assumed that she agreed thereto upon the consideration of an extension of credit upon the note for another year.
The defendant now claims that the exaction of the advance payments of interest for the three years, 1924, 1925, and 1926, constituted usury, and subjected the mortgagee to the penalty prescribed in Section 3639 of the Code, the forfeiture of "double the total amount received in respect of interest," $300, $600, which should be allowed as a counterclaim against the mortgage debt.
I do not think that there can be a doubt but that the terms of the note permitted the deduction of the discount only for the first year, and that, after the maturity of the note, it bore interest, not discount, at the rate of 8 per cent. per annum, payable annually; the real question is whether or not the parties had the right, without violating the usury statute, in consideration of the extension of credit upon the note, to agree orally to pay and receive the advance payments of interest.
A large number of decisions, collated in 3 A.L.R., 877, I think a majority, hold that, where the original transaction was valid, free from the taint of usury, but subsequently, by a usurious agreement, the payment of the obligation was extended, the taint of the subsequent illegal contract does not affect the original contract. The decisions of this Court, however, take a contrary view; notably the case of Harp v. Chandler, 1 Strob., 461, followed the case of Lewis v. Dunlap, 112 S.C. 544, 100 S.E., 170. This appears to be the settled law of this jurisdiction; there is no disposition on my part to recede from it.
The crucial question then is, taking one as an example, Was the agreement of March 30, 1923, by which the mortgagor paid the discount in advance, of $200, for an extension of the debt to March 30, 1923, a usurious transaction?
It will be observed that the note as it originally stood was free from any possible suggestion of usury; it provided for discount before maturity at 8 per cent.; the deduction of $200 at the inception of the loan was authorized by the statute.
It is held in the cases of Harp v. Chandler, 1 Strob., 461, and Caughman v. Drafts, 1 Rich. Eq., 414, that the forbearance of a pre-existing debt, or what is the same thing, an agreement for an extension, is a new loan, the same as if a new paper had then been drawn up; an extension of the original note was necessarily an extension upon the same terms as were expressed in it, which permitted the deduction of a year's discount. In the place of executing a new paper with the precise terms of the old, the parties manifestly adopted it as the basis of the agreement for the extension. As the original note was free from usury when it was taken, it should be held similarly immune when adopted as the evidence of the new loan.