Community Savings and Loan Association v. Fisher, A--11429

• Decision Date: 19 October 1966
• Docket Number: No. A--11429,A--11429
• Citation: 409 S.W.2d 546
• Parties: COMMUNITY SAVINGS AND LOAN ASSOCIATION, Petitioner, v. R. L. FISHER et ux., Respondents.
• Court: Texas Supreme Court

Page 546

409 S.W.2d 546

COMMUNITY SAVINGS AND LOAN ASSOCIATION, Petitioner, v. R. L. FISHER et ux., Respondents.

No. A--11429.

Supreme Court of Texas.

Oct. 19, 1966.

Rehearing Denied Dec. 31, 1966.

Raymond Kneese, Fredericksburg, Bryce A. Taylor, Burnet, Moursund & Ferguson, Johnson City, for petitioner.

Harold Kennedy, Austin, for respondents.

WALKER, Justice.

This is an action for a declaratory judgment to determine the balance unpaid on a promissory note. There is no dispute as to the dates and amounts of the payments that have been made, and the case turns upon the rate of interest and the manner in which the same accrues and is payable under the terms of the loan instruments.

On June 23, 1960, R. L. Fisher and wife, respondents, borrowed $7,200.00 from Fredericksburg Savings and Loan Association, now Community Savings and Loan Association, petitioner. As evidence of the indebtedness, they executed to petitioner their note in the face amount of $10,800.00 and secured the same by a deed of trust on real estate in Burnet County. The material provisions of the note are as follows:

'$10,800.00 Fredericksburg, Texas, June 23, 1960

'* * * pay to the order of Fredericksburg Savings and Loan Association * * * the sum of TEN THOUSAND EIGHT HUNDRED AND NO/100 ($10,800.00) DOLLARS, which includes interest for the stated period, in 120 monthly installments as follows:

'$90.00 on the 1st day of August, 1960, and the same amount on the same day of each succeeding month thereafter, except that the final payment shall be the unpaid balance then due on the note * * *. In event of prepayment of the entire balance before maturity, the holder agrees to credit to said note all unearned interest, however, there will be a prepayment expense charge not to exceed $75.00.

'* * * Interest included in the face amount of this note not earned at the date of acceleration shall be cancelled and credited upon this note. The holder hereof shall never be entitled to receive or collect interest at a rate in excess of ten per cent per annum on the principal indebtedness * * *

'The original net amount of this note is $7,200.00.'

The deed of trust provides that the monthly payments on the note shall be applied: first, to the liquidation of any incidental expenses representing a part of the loan; next, to insurance premiums, taxes and assessments against the property; and 'then regularly to the interest on the unpaid balance and the remainder to principal until said note is paid in full.' No rate of interest was specified in either the note or the deed of trust. As part of the transaction in which these instruments were executed and the proceeds of the loan disbursed, petitioner furnished respondents a loan closing statement which reads, in part, as follows:

'We submit herewith for your information the terms of the loan, and the expenses thereof, whether charged to you by the association, or paid for you by the association.

"Loan No.______ Amount $7,200.00 Rate of Interest

Disc - 5%

'Each monthly payment of $90.00 plus 1/12 annual taxes and 1/12 annual hazard insurance is due the 1st day of each month, beginning on August 1, 1960.'

The loan was made for petitioner by one of its officers, Reuben Eckhardt. He stated that the $3,600.00 interest added to the face of the note was computed by charging 5% Of the original $7,200.00 principal for each of the ten years the loan would have been outstanding if it ran to maturity. According to his testimony, the term 'Disc--5%' appearing on the loan closing statement means that interest calculated in this manner has been added to the face amount of the note. Respondent R. L. Fisher was told that he would be made a five per cent discount loan, but he did not know the difference between that type of loan and one in which the stated percentage represents the effective interest rate.

Respondents notified petitioner that they wished to pay the balance of the note on October 1, 1964. At that time the loan had run 51 months, and respondents had paid a total of $8,584.93 on the note. They concluded that the earned interest would be 5% Per annum on $7,200.00 for 51 months, or a total of $1,530.00. On this basis the unearned interest amounted to $2,070.00, and the balance unpaid on the note was $145.07. This amount plus the $75.00 prepayment charge was tendered to petitioner as constituting full payment of the note.

By the use of its tables prepared for that purpose, petitioner determined that the unpaid principal balance of the loan was $874.09. On the basis of this figure, with adjustments for the September interest, the prepayment fee, and the balance held in escrow to pay taxes and insurance, the amount required to retire the loan was $800.29. When petitioner insisted upon payment of that amount, respondents instituted the present suit. The trial court adopted respondents' theory as to the proper method of determining the unearned interest and entered judgment accordingly, and the Court of Civil Appeals at Austin affirmed. 400 S.W.2d 927.

The intermediate court held that the unearned interest should be computed on the same basis as the amount of interest included in the face of the note was calculated at the inception of the loan. We have jurisdiction under Subdivisions 2 and 3 of Article 1728. ¹ The construction of Article 5070 is necessary to a determination of the case, and the above mentioned holding of the Court of Civil Appeals is in conflict with the decision of the Court of Civil Appeals at Amarillo in American Nat. Ins. Co. v. Schenck, Tex.Civ.App., 85 S.W.2d 833 (no writ).

Respondents argue that the rights of the parties are governed by the 'rate of interest' set out in the loan settlement statement. They suggest that if this is not so, then no rate of interest has been specified and petitioner is entitled to charge six per cent per annum under the provisions of Article 5070. We do not agree. Respondents may well have been misled by the loan settlement statement, but there is no claim of fraud and no effort to obtain equitable relief. While the statement purports to set out the terms of the loan, it is not contractual in nature and not a part of the integrated loan contract represented by the note and deed of trust. Its recitals may be considered with the other surrounding circumstances in construing the agreement, but the rights and obligations of the parties must be determined from their contract. In this instance there is no ambiguity or doubt as to the legal effect of the note and deed of trust, and the same may not be added to or varied by expressions found in the contemporaneous but extrinsic writing. See McCormick and Ray, Texas Law of Evidence, 2nd ed. 1956, § 1601.

The note in Schenck contained no provision for rebating interest upon acceleration of maturity and no stipulation that the holder would never be entitled to interest in excess of ten per cent per annum, but was similar in all other material respects to the note involved in the present case. The plaintiff there contended on appeal that, independent of the acceleration of maturity provisions, the interest contracted for over the full term of the loan was more than ten per cent per annum. The Court of Civil Appeals first pointed out that this position had not been taken in the court below, and that on appeal the parties are restricted to the theory on which the case was tried. It then proceeded to discuss the contention, evidently for the guidance of the trial court upon remand and in connection with its holding that the exclusion of certain testimony was erroneous. The following portion of the opinion is relevant here:

'* * * In cases of this character, where interest is included in the face of the note and it is to be discharged by partial payments made at stated intervals, the rule for computing the interest and applying the payments is announced by the Supreme Court to be as follows: 'When partial payments are made, interest is to be computed to the time when a payment alone, or in conjunction with preceding payments, shall equal or exceed the interest due. Then deduct the payment and calculate the interest on the balance until the next payment or payments as before, and so on.' Odle v. Frost, 59 Tex. 684; Hampton v. Dean, 4 Tex. 455; Hearn v. Cutberth, 10 Tex. 216; Clark v. Brown, 48 Tex. 212.

'The rate of interest which the makers should pay in discharging the note is not stated either in the face of the note or in the mortgage securing same, but the amount of principal, together with the amount of interest and amount of payments necessary to discharge the indebtedness, being shown, a calculation discloses that interest was charged at the rate of eight and a fraction per cent. per annum. The testimony bearing upon this issue was excluded, and we think this action of the court is error.'

When the parties do not agree otherwise, partial payments on an interest-bearing obligation are ordinarily applied first to accrued interest and the balance to principal. Each succeeding payment is credited in a similar manner with the interest computed on the balance of the principal remaining unpaid. This is the so-called United States rule, which is recognized in Texas. See Tooke v. Bonds, 29 Tex. 419; J. I. Case Co. v. Laubhan, Tex.Civ.App., 64 S.W.2d 1079 (no writ); 30 Am.Jur. Interest § 49; 47 C.J.S. Interest § 66; and authorities cited above. The rule is...