Bothwell v. Farmers' & Merchants' State Bank & T. Co.

• Decision Date: 18 June 1930
• Docket Number: No. 5559.,5559.
• Citation: 30 S.W.2d 289
• Parties: BOTHWELL v. FARMERS' & MERCHANTS' STATE BANK & TRUST CO. OF RUSK, TEX.
• Court: Texas Supreme Court

30 S.W.2d 289

BOTHWELL v. FARMERS' & MERCHANTS' STATE BANK & TRUST CO. OF RUSK, TEX.

No. 5559.

Supreme Court of Texas.

June 18, 1930.

Error to Court of Civil Appeals of Sixth Supreme Judicial District.

Suit by Farmers' & Merchants' State Bank & Trust Company of Rusk, Tex., against J. W. Bothwell. Judgment for plaintiff was affirmed by the Court of Civil Appeals (19 S.W.[2d] 923), and defendant brings error.

Reversed and remanded.

Guinn & Guinn, of Rusk, for plaintiff in error.

W T. Norman, of Rusk, and Smithdeal, Shook, Spence & Bowyer, of Dallas, for defendant in error.

GREENWOOD, J.

The opinion of the Court of Civil Appeals shows that it affirmed a judgment of the district court, which embraced a recovery for a balance of $1,164.80 on four promissory notes in favor of defendant in error against plaintiff in error, with foreclosure of vendors lien on 10.1 acres of land. The four notes were dated October 22, 1914, and were payable on October 22, 1915, October 22, 1916, October 22, 1917, and October 22, 1918, respectively. The notes were given in part payment for the 10.1 acres of land conveyed to plaintiff in error, Bothwell, by J. P. Sears and wife, but were made payable to the First National Bank of Rusk or order, and were acquired by defendant in error from the First National Bank of Rusk. The first note due October 22, 1915, was for $240 "with interest thereon from date until maturity, at the rate of ten per centum per annum, the interest payable annually in advance as it accrues." This note provided: "This note and all past due interest thereon shall bear interest from the maturity thereof until paid, at the rate of ten per centum per annum. It is understood and agreed that failure to pay this note, or any installment of interest thereon, when due, shall at the election of the holder of them or any of them, mature all notes this day given by J. W. Bothwell to said The First National Bank of Rusk, Texas, in payment for said property."

The undisputed evidence disclosed that the interest "was figured in at ten per cent." for a year in making out the second, third, and fourth notes, so that the sum appearing as principal in each of these notes actually represented principal with a year's accrued interest. The second, third. and fourth notes, dated October 22, 1914, were each for $250, "with interest thereon from October 22, 1915, at the rate of ten per centum per annum, payable annually in advance as it accrues." Each of said notes contained a stipulation that failure to pay the principal or any installment of interest thereon when due should mature all the notes, at the holder's election.

The plaintiff in error pleaded usury as a defense to a recovery on the notes. Both the district court and Court of Civil Appeals concluded that the notes were free of usury. In its original opinion, the Court of Civil Appeals based its decision of the usury question on the holding that it was the settled rule in Texas that payment of the highest conventional rate of interest in advance was not usury. On rehearing, the Court of Civil Appeals quoted with approval the statement from Webb on Usury that "the test of usury in a contract * * * is whether it would if (fully) performed, result in securing a greater rate of profit on the subject-matter than is allowed by law." 19 S.W.(2d) 923, 925.

The writ of error was granted on assignments raising the question of usury. Our consideration of the case, at and since its submission, confirms the view entertained when the writ was allowed that all other questions were rightly determined in the opinion of the Court of Civil Appeals.

However, the court is unable to agree with the conclusion of the district court and of the Court of Civil Appeals that notes are free from usury which expressly provide for the payment of interest annually at the rate of 10 per cent. per annum in advance, and further stipulate that, on failure to pay the interest in advance, then interest shall be paid at 10 per cent. per annum, not only on the principal, but also on a year's interest. $24 is the maximum conventional interest for one year on a $240 note. Note one of the series before us undertakes to require not $24, but $26.40, to be paid as interest on a note in the principal sum of $240, on no other contingency than the debtor's default to pay $24 at the very time the note is taken. The same vice which inheres in the first note inheres in each of the others, despite the different dates for the payment of advance interest installments and for compounding interest.

Most text-writers and many judicial opinions have pointed out how devoid of logic is the rule which sanctions the collection in advance of interest at the highest conventional statutory rate, on even short-term loans, under statutes against usury.

Tyler states: "Where the lender receives the interest upon the sum, but before the end of the term for which the money is loaned, he clearly receives more than the legal rate; and yet cases have been referred to in preceding chapters where the practice was held not to be usurious. * * * The courts uniformly hold, at the present day, that the interest for ordinary paper having the usual time to run, such as is the practice by banks, may be taken in advance, by way of discount, and not subject the paper to the taint of usury." Tyler on Usury, Pawns & Loans, pp. 297-298.

Cyc. says: "Taking the highest rate of interest in advance, so that the borrower receives less than the principal sum he contracts to repay, is unquestionably usurious on principle, and seems at first to have been so considered in all cases. But an early concession was made to the usage among banks and other persons dealing in commercial paper whose customary short term loans made the violation of the law involved insignificant. The usage has widened, however, as is the custom of the law merchant, until at the present time it is the settled rule that upon any short term loan interest may be reserved in advance at the highest legal rate without rendering the loan usurious." 39 Cyc. pp. 948, 949.

It is likewise declared in Ruling Case Law: "As a general proposition there can be no doubt that interest at the highest legal rate may be received in advance, or that the lender may stipulate for its payment at certain periods in advance, without...