American Sav. Life Ins. Co. v. Financial Affairs Management Co., Inc., 1

CourtCourt of Appeals of Arizona
Citation20 Ariz.App. 479,513 P.2d 1362
Docket NumberCA-CIV,No. 1,1
PartiesAMERICAN SAVINGS LIFE INSURANCE COMPANY, an Arizona corporation, Appellant, v. FINANCIAL AFFAIRS MANAGEMENT CO., INC., an Arizona corporation; George E. Gaylord and Jane Doe Gaylord, husband and wife; Harold G. Brown and Jane Doe Brown, husband and wife; William J. Lowes and Cecile C. Lowes, husband and wife; Kenneth Biaett, Trustee; Thayer C. Lindauer, Trustee; Carl K. Schmidt, Jr. and Elizabeth R. Schmidt, husband and wife; Thayer C. Lindauer; Thayer Crane Lindauer; George A. Engelthaler; James A. Loar and Phyllis J. Loar, husband and wife; Carl K. Schmidt III; Carolyn Val Schmidt; Cleo Lorraine Lindauer; Victoria Elizabeth Schmidt; Frederick Hall Schmidt, Appellees. 1785.
Decision Date20 September 1973

HAIRE, Judge.

On this appeal the appellant lender (American Savings Life Insurance Company) raises several issues as possible grounds for reversal of the trial court's judgment finding the subject loan transaction usurious. A primary issue is whether a loan agreement, usurious when made, can be enforced according to its original terms when a subsequent statutory amendment authorizes the originally contracted-for interest rate. We hold that on the facts here presented, it can. In reaching this decision we find that even if the subject loan could have been considered usurious under the prior statute, it was not usurious under the subsequent amendment.

The facts pertinent to this question, and a subsidiary question pertaining to the actual rate of return involved, are set forth below. A more complete statement of the facts and the parties in this litigation can be found in a prior opinion rendered by this Court on the first appeal of this matter, American Savings Life Insurance Co. v. Financial Affairs Management Co., Inc., 13 Ariz.App. 44, 474 P.2d 51 (1970).

In the trial court the plaintiff lender filed an action to collect the principal and interest due on a $220,000 promissory note, and also sought to foreclose a real property mortgage and a stock pledge held as security for the obligation. The defendant borrower, Financial Affairs Management Company, Inc. pleaded usury as an affirmative defense, and pursuant to A.R.S. § 44--1203 sought to have all payments paid by it, whether of principal or interest, applied to reduce the principal balance due the lender.

At the time of the original transaction, A.R.S. § 44--1202 (discussed hereinafter in more detail) allowed a maximum rate of interest of 8% Per annum. Since the $220,000 promissory note provided for interest at the rate of 3% Per annum until the first $110,000 of principal was paid, and interest at the rate of 6% Thereafter, the claimed usury was not apparent from the face of the note. The borrower based its claim of usury upon a contemporaneous collateral transaction whereby the borrower was required to buy from the lender 48,888 shares of the lender's stock at $2.25 per share, as a condition to receiving a loan of $110,000. In essence, in exchange for its $220,000 promissory note, the borrower received $110,000 in cash, and stock valued by the parties at $110,000. The alleged inflated sales price of the stock that the borrower was required to buy gave rise to the subsequent claim of usury.

Evidence relating to the actual value of the stock at the time of sale was introduced at trial, and the jury found the actual value to be $1.35 per share. As a result of this finding, the trial judge determined that the difference between the actual value of the stock at the time of the loan transaction ($65,998.80) and the sales price ($110,000) was $44,001.20). This sum, when added to the interest provided for on the face of the promissory note, created an effective rate of return in excess of 8%. He therefore concluded that the loan was usurious. In determining the proper judgment to be entered, the trial judge adjusted the stated principal balance of $220,000 by deducting the difference between the sales price of the stock and its actual value as determined by the jury, to produce a new beginning principal balance of $175,998.80. From this new balance the trial court deducted all loan payments made by the borrower, whether of principal or interest, which, combined with certain other adjustments not here relevant, resulted in a final principal balance due to lender of $113,265.82. Judgment was then entered in favor of the lender in that amount, coupled with a requirement that the lender bid the sum of $95,000 on the foreclosure sale of the 48,888 shares of pledged stock pursuant to a separate agreement entered into between the lender and certain grantees of the borrower.

In December of 1963, when the loan agreement was executed, A.R.S. § 44--1202 called for the penalty of forfeiture of all interest if the loan agreement contemplated interest in excess of 8%. However, prior to the time of the second trial of this matter, this statute had been amended so as to allow a maximum interest rate of 10%. 1 As we have previously indicated, one of the principal issues raised on appeal is the lender's contention that this amended statute allowing 10% Interest is applicable here, rather than the prior 8% Statute With this in mind, the lender contends that, accepting the jury's valuation of $1.35 per share, the effective rate of return was less than 10%. On the other hand, the borrower contends that, again accepting the jury's valuation, the rate was in excess of 10%, and therefore in violation of the 10% Statute, even if it could be considered applicable. In view of these conflicting contentions, it is necessary for the Court to determine the rate of return involved, assuming for this purpose the correctness of the stock valuation made by the jury, and further assuming that the alleged over-valuation by the lender was with the intent of securing a greater return for the loan than allowed by law.

While the trial court did not expressly determine the exact rate of return involved, there are sufficient facts in the record from which it can be computed. Assuming the correctness of the jury's findings that the stock had an actual value of $1.35 per share at the date of sale, the parties agree that the principal amount of the loan as adjusted would be $175,998.80. The total 'interest' would then be $80,890.17. By the terms of the promissory note the loan was to be paid off in 103 monthly payments of $2,475 plus one month's payment of a lesser amount to cover the then remaining balance. The lender's Exhibit No. 35 is a detailed pay-out schedule which conclusively establishes that the application of a 9.31% Interest rate will completely amortize $175,998.80 of principal and $80,890.17 of interest by means of 103 monthly payments of $2,475 plus one additional month's payment of $2,008.70. This result is reached by applying the monthly payment first against accrued interest and the remainder against principal, as is required by the terms of the promissory note. See Community Savings and Loan Association v. Fisher, 409 S.W.2d 546 (Tex.1966). Since the rate of return or 'interest' rate was 9.31%, the loan could not be considered usurious under the statute in force at the time of the second trial of this matter.

We now proceed to the issue of whether the loan agreement, assuming that it was in fact usurious when made, could be enforced according to its original terms in view of the subsequent statutory amendment allowing an increased interest rate. As an initial matter, the borrower contends that our opinion in the first appeal, American Savings Life Insurance Co. v. Financial Affairs Management Co., Inc., Supra, precludes the consideration of this issue at the second trial. A careful reading of our prior opinion shows that this contention cannot be sustained. In the previous appeal, the issue before us was the propriety of the trial court's order granting a new trial in view of an obvious jury failure to apply the law as instructed by the court. The issue of the applicability of the amended statute was not involved. In fact this Court had serious doubts that the evidence was sufficient to justify the submission of the usury defense to the jury even under the old statute, and for this reason stated:

'Without going into further evidentiary details of the circumstances of the transaction, suffice it to say that On this appeal there is no contention that the trial court was not justified in submitting the usury defense to the jury for its determination.' 13 Ariz.App. 44 at 46, 474 P.2d at 53 (Footnote omitted; emphasis added).

We hold that our prior opinion did not limit the trial court's power to consider the effect of the amended statute at the retrial of this matter.

Turning now to the question of the applicability of the new statute, since there are no Arizona decisions which deal with this precise question, we have carefully reviewed the decisions from other jurisdictions which have considered analogous questions. The landmark decision in this area is Ewell v. Daggs, 108 U.S. 143, 2 S.Ct. 408, 27 L.Ed. 682 (1883). There, the agreement between the parties called for the payment of interest at the rate of 20% Per annum. The statute in force at the time of the making of the contract voided all contracts calling for interest in excess of 12%. Prior to suit an amendment to the Texas Constitution repealed all usury laws. This amendment was not specifically made retrospective. However, the U.S. Supreme Court held that it would be applicable to the contract made before its enactment, reasoning:

'The effect of the usury statute of Texas was to enable the party sued to resist a recovery against him of...

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