Arkansas Sav. and Loan Ass'n v. Mack Trucks of Arkansas, Inc.

• Decision Date: 17 April 1978
• Docket Number: No. 77-91,77-91
• Citation: 566 S.W.2d 128,263 Ark. 264
• Parties: ARKANSAS SAVINGS AND LOAN ASSOCIATION, Appellant, v. MACK TRUCKS OF ARKANSAS, INC., Armond L. Smith and Shirley G. Smith, his wife, Harris Cattle Company, Frank E. McGehee, Trustee for First Pyramid Life Insurance Company of America, and Truman O'Neil, Appellees.
• Court: Arkansas Supreme Court

Page 128

566 S.W.2d 128

263 Ark. 264

ARKANSAS SAVINGS AND LOAN ASSOCIATION, Appellant, v. MACK TRUCKS OF ARKANSAS, INC., Armond L. Smith and Shirley G. Smith, his wife, Harris Cattle Company, Frank E. McGehee Trustee for First Pyramid Life Insurance Company of America and Truman O'Neil, Appellees.

No. 77-91.

Supreme Court of Arkansas,In Banc.

April 17, 1978.

Rehearing Denied June 19, 1978.

House, Holmes & Jewell by Robert L. Robinson, Jr., H. B. Stubblefield, Little Rock, for appellant.

Hardin, Jesson & Dawson, Fort Smith, amicus curiae brief for Arkansas Savings & Loan League.

Wright, Lindsey & Jennings, Little Rock, amicus curiae brief for Central Arkansas Bank Clearing House Assoc.

Southern, Stewart, Gunter, Matthews & Alexander by Byron S. Southern,Laser, Sharp, Haley, Young & Boswell by John H. Haley,Catlett & Henderson by E. DeMatt Henderson, O. H. Storey, III, Little Rock, for appellees.

BILL PENIX, Special Justice.

On March 1, 1974, Mack Trucks of Arkansas, Inc., Armond Smith and Shirley G. Smith executed a note secured by a mortgage to Arkansas Savings and Loan Association of North Little Rock, Arkansas. The note was for $340,000.00, plus interest at the rate of nine percent per annum, and was for the purpose of a construction loan for one year.

Arkansas Savings was to and did make periodic disbursements out of the loan proceeds. On March 6, 1974, Arkansas Savings disbursed to itself $3,400.00. The $3,400.00 was noted by Arkansas Savings as a "service charge", but there was testimony that the charge was a "commitment fee". Arkansas Savings defined this as a charge for the lender binding itself ". . . absolutely and unconditionally to make said loan and advances as the construction of the improvement progresses". Further, the testimony was that while the loan required Arkansas Savings to tie up the funds committed to Mack Trucks and the Smiths for one year, the borrowers could obtain credit elsewhere and never draw the funds down.

The agreement required Mack Trucks and the Smiths to pay taxes and hazard insurance. Arkansas Savings paid these charges totalling $3,429.65. The mortgage provided that these expenditures should be added to the principal sum of the debt.

Mack Trucks and the Smiths defaulted on the note. Arkansas Savings ultimately sued and the primary defense raised was usury. The Chancellor held that the $3,400.00 "service charge" or "commitment fee" was interest and that when added to the stipulated interest charged, the total was greater than the Arkansas constitutional limitation of ten percent during the one year term of the note. The Chancellor sustained the usury defense and dismissed the complaint except to the extent of the $3,429.65 paid by Arkansas Savings for taxes and hazard insurance which the Chancellor found to have been paid for all parties. Arkansas Savings was declared to have an equitable lien on the collateral of the mortgage to the extent of the $3,429.65. A second lien was awarded Harris Cattle Company in the principal amount of $39,911.54 on a mortgage which had been subordinated to the mortgage of Arkansas Savings. A third lien was found on the property in favor of First Pyramid Life Insurance Company in the principal amount of.$23,416.66 for a later mortgage. A fourth lien was found on the property in favor of Truman O'Neil in the principal amount of $130,500.00 for a still later mortgage.

Arkansas Savings appealed the Chancellor's decree. Mack Trucks and the Smiths and Truman O'Neil cross appealed with regard to the Chancellor awarding the $3,429.65 first lien in favor of Arkansas Savings for taxes and insurance. Able briefs have been filed on behalf of Arkansas Savings, Mack Trucks and the Smiths, Harris Cattle Company and Truman O'Neil, as parties, and by Central Arkansas Bank Clearing House Association and Arkansas Savings and Loan League, as amicus curiae.

I

The primary issue in this case is whether the $3,400.00 "service charge" or "commitment fee" is interest. Interest at the legal maximum of ten percent for the year, March 1, 1974 to March 1, 1975, would have been $15,024.82, according to Arkansas Savings' computations. The contract called for interest at the rate of nine percent per annum and the parties stipulated that Arkansas Savings charged interest in the amount of $13,653.74, not counting the $3,400.00 fee. If the $3,400.00 were interest, then the total interest charged for the year was $17,053.94-$2,028.92 above ten percent.

This court previously has set forth two principles to determine when additional charges are interest. Sosebee v. Boswell, 242 Ark. 396, 414 S.W.2d 380 (1967). First, "any profit exacted by the lender must be treated as interest if it depends upon a contingency not within the control of the debtor". Second, "the moneylender cannot impose upon the borrower charges that in fact constitute the lender's overhead expenses or costs of doing business". The first principle does not apply in this case since the one percent charge was made without regard to any contingency.

The second principle indicates the $3,400.00 charge is interest. The evidence is that a "commitment fee" is a common practice of savings and loan associations in the Little Rock area, purportedly for the association's willingness to set aside funds for the borrower. Arkansas Savings apparently charges one percent on all of its loans, construction, long-term, commercial and residential. This is no more than the collection from the borrower of a part of the lender's overhead or expense of doing business. If it is not payment of overhead expense, then the charge has no basis. Without any basis, the fee would be an unjustified service charge which should be included as interest under the note.

Although it is not in issue here, Arkansas Savings charged Mack Trucks and the Smiths a second one percent fee of $3,400.00 which was paid in cash on August 23, 1974. This apparently was for permanent financing which never was carried out. This court is not ruling on whether the second $3,400.00 is interest.

The $3,400.00 Arkansas Savings disbursed itself March 6, 1974, whether it was a "service charge", "commitment fee", "points" or whatever, was no more than a discount the taking of interest in advance. The Chancellor correctly held that the total of the interest charged to Mack Trucks and the Smiths made the loan usurious.

The collecting of interest by discounting and withholding money at the beginning of the term of a loan is a very old practice. In 1896 this court upheld a statute which allowed a ten percent initial discount for not more than one year. Bank of Newport v. Cook, 60 Ark. 288, 30 S.W. 35 (1895). The statute, as amended, now purports to allow discounting of a note to extend up to 36 months under certain circumstances. Ark.Stat.Ann. § 68-604 (Repl.1957). The statute apparently has not been tested in recent times, but has been analyzed in articles. Note, Discounting of Commercial Paper, 7 Ark.L.Rev. 341 (1953); Mitchell, Usury in Arkansas, 26 Ark.L.Rev. 263 (1972).

The appellant questioned the ruling of the Chancellor as to the admissibility of evidence of custom. Any error in this regard was harmless. The evidence, if admitted, would not have changed the outcome of this case. Just because a practice is a matter of custom does not make it any less usurious.

II

Arkansas Savings urges that the Chancellor erred in refusing to hold that...