Beneficial Finance Co. (Me.) v. Fusco
| Decision Date | 29 September 1964 |
| Parties | , 10 A.L.R.3d 410 BENEFICIAL FINANCE CO. (MAINE) v. John C. FUSCO, Gerald Cope. |
| Court | Maine Supreme Court |
Berman, Berman, Wernick & Flaherty, by Sidney W. Wernick, Portland, for plaintiff.
Dana W. Childs, Gerald S. Cope, pro se, Portland, for defendants.
Before WILLIAMSON, C. J., and WEBBER, TAPLEY, SULLIVAN, SIDDALL and MARDEN, JJ.
On report. This action comes to us on report on an agreed statement of facts. Gerald S. Cope, upon motion addressed to the Court below, was allowed to intervene as a party defendant.
The plaintiff, Beneficial Finance Co. (Maine), (hereinafter referred to as Beneficial) is a corporation qualified to do business in the State of Maine. It is a licensee under the Maine Small Loan Law, R.S.1954, Chap. 59, Secs. 210-227, as amended. Beneficial, by this action, is seeking to collect the total sum of $408.66 from the defendant Fusco. This amount is alleged to be due as the result of the default by the defendant of payment of a note payable to Beneficial, the note bearing date of February 1, 1961. The defendant pleads, in defense, that the note which forms the basis of the action is in violation of Sec. 218, Chap. 59, R.S.1954, as amended, and therefore the note dated February 1, 1961 is void and uncollectible.
Section 218 is couched in the following language:
The facts of the case are supplied by agreed statement reading as follows:
'In addition to the allegations of fact admitted by the pleadings on file, the parties stipulate the following facts:
'1. When the defendant came to the office of the plaintiff on February 1, 1961, for the purpose of borrowing additional money, defendant was in default under the terms of the promissory note, described in the complaint, for the loan made on July 25, 1960, and there was then due and owing the entire unpaid balance of principal in the amount of $355.15 and accrued interest thereon in the amount of $8.17, a total of $363.32.
'2. On February 1, 1961 the defendant's request for an additional loan from the plaintiff was approved and the plaintiff and defendant entered into the following transaction: The defendant executed and delivered to the plaintiff a new promissory note in the face amount of $499.45, photographic copy of which is hereto annexed and incorporated as a part hereof, identified as 'Exhibit A.' Said note was secured by a chattel mortgage on various items of personal property. The face amount of the new note was computed as follows:
'(1) The unpaid principal balance due on the prior note, in the amount of $355.15;
'(2) Interest due on the prior note, in the amount of $8.17;
'(3) Recording fee of $1.00;
'(4) $135.13 new and additional money being borrowed by the defendant, and being slightly in excess of the amount defendant had requested to borrow in order to allow the new note to provide for 24 monthly installments in amounts of $28, plus a final installment covering unpaid principal and accrued interest thereon.
'The aforesaid borrowing transaction was completed by plaintiff's delivering to the defendant the sum of $136.13 in cash and taking back from the defendant $1 to cover recording fee for the chattel mortgage. The prior note was thereupon stamped 'Paid' and was delivered by plaintiff to defendant together with the chattel mortgage securing it, the mortgage being discharged.
'3. At the time of the filing of the complaint and of service of the complaint on the defendant, defendant was, and for a long time prior thereto had been, in default on the note executed by defendant, as described in the complaint, on February 1, 1961. Pursuant to the option provided to plaintiff as the holder of said note by the terms of said note, plaintiff has declared the entire unpaid balance of the principal on said note and the accrued interest thereon due and payable at once, said amount being the sum of $408.66.
The issue is whether the promissory note which includes $8.17, past interest due and unpaid under a previous note, is 'interest--compounded' in violation of Sec. 218, Chap. 59, R.S.1954, as amended. Determination of the issue requires construction of Sec. 218 in order to decide whether or not the interest bearing note executed under the factual circumstances as presented by the agreed statement represents in part the sum of $8.17 as 'interest--compounded' as the term has meaning within the concept of Sec. 218.
The positions of the respective parties are clear and well defined. Beneficial claims that when the parties executed the note of February 1, 1961 for the purposes of the defendant borrowing additional money and paying off the original note, the $8.17 as accrued interest and unpaid under the first note became transformed into principal in the note of February 1, 1961. In opposition to this contention defendant says that when the amount of interest of the first note ($8.17) became a part of the indebtedness evidenced by the second note it was 'interest compounded' within the intent of Sec. 218.
The Legislature in 1917 enacted a statute regulating the business of making small loans (Chap. 98, R.S.1917). Sec. 9 of Chap. 98, to all intent and purposes, is like that of Sec. 218. Since 1917 this court has had no occasion to consider the question presented here.
The lagislative enactment of 1917 took place against the background of some Maine case law concerning compound interest. In Doe v. Warren et al., 7 Me. 48 (1830), the Court had occasion to consider the question of the legality of compound interest. On page 49 the Court said:
In Otis v. Lindsey, 10 Me. 315 (1833) a note was given by the defendant to the plaintiff in payment of two smaller notes and for a sum of new or additional money loaned. The sum claimed due on the old notes included compound interest. The Court stated, on pages 316-317:
(emphasis supplied).
In light of these judicial pronouncements, where interest compounded by operation of law is illegal but when accrued and payable it becomes part of the principal of a new loan, the 1917 Statute was enacted. In these early case Maine recognized a distinction between interest upon interest occurring by operation of law, and when interest was transformed into principal by agreement under a new loan contract. At the time of the enactment of the Statute of 1917 the case law of Maine determined that interest cannot, by operation of law, be compounded, but when it accrues and becomes due, then, by agreement of parties, it may legally be made a part of a new principal and thereby lose its identity as interest.
Counsel for defendant urges that Madison Personal Loan v. Parker, 124 F.2d 143 (2nd Cir. 1941) is the leading authority on the question involved here and is decisive of this case. The case involves the construction of a section of the Small Loan Act of New York which is similar to the Maine Statute. On June 23, 1939 Parker executed a promissory note in the amount of $287.00, bearing interest at the maximum rate permitted under the Small Loan Act. The note was secured by chattel mortgage. $159.29 of the amount of $287.00 was paid to Madison Personal Loan in satisfaction of a prior loan representing $158.19 principal and $1.10 interest. The remaining $127.71 was paid to Parker. The court held that it was immaterial whether the $287.00 loan was a 'renewal' or a 'new' loan. It does not recognize the principle of transforming interest to principal as approved by Otis v. Lindsey, supra. The decision in Madison Personal Loan supports the contention of the defendant.
Counsel for Beneficial argues that Household Finance Corporation v. Goldring et al., 263 App.Div. 524, 33 N.Y.S.2d 514 (1942), affirmed in 289 N.Y. 574, 43 N.E.2d 715,...
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