Smith Machinery Co., Inc. v. Jenkins

Citation654 F.2d 693
Decision Date17 July 1981
Docket NumberNo. 79-1270,79-1270
PartiesSMITH MACHINERY COMPANY, INC., Plaintiff-Appellee, v. Bob JENKINS, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)

Steven L. Tucker of Jones, Gallegos, Snead & Wertheim, Santa Fe, N. M., for defendant-appellant.

Charles H. Coll of Sanders, Bruin & Baldock, Roswell, N. M., for plaintiff-appellee.

Before McWILLIAMS and LOGAN, Circuit Judges, and PALMIERI, District Judge *.

LOGAN, Circuit Judge.

Bob Jenkins appeals from a directed verdict finding him in default on a promissory note and awarding Smith Machinery Company, Inc. $29,100.00 in principal and $3,762.79 in interest plus attorneys' fees as provided in the note. 1 The issues on appeal are whether the district court erred in refusing to disallow all interest on the note as usurious and whether it erred in directing a verdict for Smith Machinery on the evidence and offers of proof presented.

In 1976, Jenkins, a farmer, purchased a combine from Smith Machinery, making a cash downpayment and giving a promissory note to the company for $29,100.00, the balance of the purchase price. At the same time he entered a security agreement, granting Smith Machinery a security interest in the combine purchased. Payment was promised in two equal installments scheduled for June 15, 1977, and June 15, 1978. The note bore interest rates of 10% until maturity and of 12% after maturity. It also provided for attorneys' fees in the amount of 15% of the principal and interest in the event an attorney was employed for collection.

Jenkins failed to make the first payment. On January 5, 1978, Smith Machinery sued Jenkins, seeking judgment on the note, a court order authorizing the company to take possession of the combine securing the note in order to sell it to satisfy the judgment, and a judgment for money owed by Jenkins on an open account with Smith Machinery. 2 Offers of judgment tendering all of Jenkins' right to the combine to Smith Machinery made during and between pretrial hearings were either rejected or not responded to by Smith Machinery. Shortly before the trial Jenkins placed the combine on a common carrier in Athens, Texas, consigned to the order of Smith Machinery in Roswell, New Mexico; while en route, the night before the trial was to begin, Jenkins delivered a bill of lading for the combine to the home of a Smith Machinery salesman who had sold him the combine. The salesman testified he did not see the document until the morning of the trial. At trial the judge accepted testimony relating to the combine only for the purpose of showing consideration for the note. He reduced the postmaturity rate of interest on the note to 10% and, at the conclusion of the presentation of evidence relating to Smith Machinery's claims, directed a verdict in favor of Smith Machinery.

Jenkins appeals the district court's allowance of interest on the loan on the ground that the postmaturity interest rate is usurious and that N.M.Stat.Ann. § 50-6-18 (1953) requires a forfeiture of the entire amount of interest charged on the note. He appeals the court's directed verdict, arguing that sufficient evidence had been presented to require submission of the defense of payment to the jury. We affirm the decision on the appealed issues, although our reasoning differs from that of the district court.

I

Jenkins argues that under New Mexico law all interest provided for in the promissory note to Smith Machinery must be forfeited because the interest on the note is usurious. We must look to the wording of the usury law to determine whether postmaturity interest rates are governed by the limits set by the statute.

N.M.Stat.Ann. § 50-6-16 (1953), in effect at the time the promissory note was executed, provided in pertinent part as follows:

"Rates of Interest Allowed Minimum Charge. The interest rate shall be the rate agreed to by the parties, except that (it) ... shall not exceed ten percent (10%) per annum computed upon unpaid balances for the actual elapsed time during which such balances ... are unpaid where the evidence of indebtedness is secured by collateral security ...."

The penalty statute for usury at that time, N.M.Stat.Ann. § 50-6-18, provided:

"Penalties and Forfeitures. The taking, receiving, reserving or charging a rate of interest greater than that allowed by this act (50-6-15 to 50-6-19), when knowingly done, shall be deemed a forfeiture of the entire amount of such interest which the note, bill, or other evidence of debt carries with it or which has been agreed to be paid thereon...."

(Emphasis added.)

Jenkins' position is that the interest rate of 12% on this secured note made the note usurious on its face and, thus, the penalty provision requires a forfeiture of the entire interest on the note. Jenkins relies upon the reference in N.M.Stat.Ann. § 50-6-16 to "unpaid balances for the actual elapsed time during which such balances ... are unpaid" as requiring inclusion of the postmaturity period. Smith Machinery contends, inter alia, that postmaturity interest rates are not covered by the New Mexico usury statutes and, thus, cannot be usurious. We agree with Jenkins' contention that if postmaturity rates are covered by the usury laws of New Mexico, N.M.Stat.Ann. § 50-6-18 requires forfeiture of all interest on the note, and does not simply require reduction of the postmaturity interest to 10%. 3

In the absence of language in the usury statutes that compels a different conclusion, the courts have generally held the limitations on interest rates charged do not apply to postmaturity charges. See generally, Annot., 28 A.L.R.3d 449, 452 (1969); 91 C.J.S. Usury § 31, at 608-611 (1955). The rationale is that because postmaturity charges are within the debtor's control they are penalties for nonpayment rather than charges for the use of money and, therefore, they are not affected by usury laws. See In re Tastyeast, Inc., 126 F.2d 879, 882 (3d Cir.), cert. denied, 316 U.S. 696, 62 S.Ct. 1291, 86 L.Ed. 1766 (1942); Scientific Products v. Cyto Medical Lab., Inc., 457 F.Supp. 1373, 1379 (D.Conn.1978); see also Abbot v. Stevens, 133 Cal.App.2d 242, 284 P.2d 159 (1955) (prepayment penalty not usurious because contingency creating excessive rate is under the control of the debtor). Such charges may be deemed usurious, however, when state laws limit interest rates which can be applied on the "detention" as well as the use of money. See Ulviden v. Sorhen, 58 S.D. 444, 237 N.W. 565 (1931).

N.M.Stat.Ann. § 56-8-9 A (1978) indicates the scope of coverage of the usury limits of the New Mexico provisions cited above.

"(N)o person, corporation or association, directly or indirectly, shall take, reserve, receive or charge any interest, discount or other advantage for the loan of money or credit or the forbearance or postponement of the right to receive money or credit except at the rates permitted in Sections 56-8-1 through 56-8-21 NMSA 1978." 4

All the terms of the statute denote consensual agreements between the parties, indicating that a withholding or detention by the borrower not consented to by the lender is not within the statute's purview. The mere fact that the parties have agreed to the rate to be paid after the debt is due does not make an arrangement a forbearance. In the instant case there was no agreement that Jenkins could defer payment after maturity; the situation was a "detention" of money rather than a "forbearance" and, as such, we do not think the New Mexico courts would hold it is covered by the statute. See Ferguson v. Electric Power Bd., 378 F.Supp. 787 (E.D.Tenn.1974), aff'd 511 F.2d 1403 (6th Cir. 1975) (charge imposed because of late payment is within meaning of statute only when it is consideration for creditor's forbearance). Thus, the contract was not usurious under the New...

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