Estate of Jackson, Matter of

• Decision Date: 26 November 1986
• Citation: 508 N.Y.S.2d 671,120 A.D.2d 309
• Parties: In the Matter of the ESTATE OF Floyd L. JACKSON, Deceased. Endicott Trust Company, Petitioner; Thomas Dean Jackson, Appellant; Angelos Peter Romas et al., Respondents.
• Court: New York Supreme Court — Appellate Division

Page 671

508 N.Y.S.2d 671

120 A.D.2d 309

In the Matter of the ESTATE OF Floyd L. JACKSON, Deceased Endicott Trust Company, Petitioner Thomas Dean Jackson, Appellant Angelos Peter Romas et al., Respondents.

Supreme Court, Appellate Division Third Department.

Nov. 26, 1986.

E. David Duncan, Albany, for appellant.

Angelos P. Romas, Endicott, respondent in person.

Salvatore A. Fauci, Endicott, for Clyde Barnes, respondent.

Ball & McDonough, P.C. (Thomas M. Christina, of counsel), Binghamton, for John P. Ayres and another, respondents.

Before MAHONEY, P.J., and MAIN, MIKOLL, YESAWICH and HARVEY, JJ.

MAHONEY, Presiding Justice.

The last will and testament of Floyd L. Jackson created a trust for the benefit of In December 1983, petitioner, Endicott Trust Company, as trustee of the Jackson trust, filed a voluntary accounting of the trust. Jackson filed objections. Subsequent to a trial of these objections, Surrogate's Court (1) entered a decree judicially settling the trust which included an award of $286,080.95 to respondent John P. Ayres, (2) made an order, inter alia, awarding respondent Angelos Peter Romas 200 shares of Jackson's IBM stock and $15,000, and (3) by order awarded $37,747 to respondent Clyde Barnes. Jackson has appealed from the decree as well as the two orders. Since the operable facts in each appeal are distinct, each case is considered separately.

Thomas Dean Jackson, a respondent in this proceeding seeking judicial settlement of accounts of the trustee of that trust. Under the terms of the trust Jackson was to receive income and such portions of the corpus as the trustee in its discretion deemed proper for his support, maintenance, education and general welfare. Upon Jackson's 25th birthday he was to receive one half of the corpus of the trust, with the balance to be paid when he reached age 35. Jackson was born on November 7, 1948. He reached his 25th birthday in 1973, at which time he received 1,484 shares of IBM stock, valued at $409,584. Upon reaching his 35th birthday Jackson became entitled to the balance of the trust fund consisting of 5,270 shares of IBM stock, ¹ valued at $643,598.75. Jackson's remainder interest was subject to several liens and assignments which are the subjects of this proceeding.

JOHN P. AYRES

In May 1978, Ayres and his wife loaned $100,000 to Jackson's business, T.D. Jackson Construction Company, Inc. Jackson and his wife personally guaranteed the corporate loan. Further, Jackson secured his guarantee by the issuance of a promissory note which, in part, stated:

In the event of the default of any payment of principal or interest * * * the unpaid accumulated interest shall be added to the outstanding principal balance establishing a new principal balance to be computed with interest at the rate of Twelve Percent (12%) per annum from the date said interest was otherwise due and payable. Obligees waive rights of collection action until November 7, 1983, by reason of default in payment of required interest (emphasis supplied).

The note was structured so that interest payments were due the first day of May each year and the balance of the principal and any accumulated interest were due on November 7, 1983, Jackson's 35th birthday. However, since Ayres had waived any right of collection action until November 7, 1983, Jackson had complete discretion either to make interest payments when they became due or to wait and, pursuant to the terms of the promissory note, have such interest added to the principal. Jackson chose not to make the interest payments as they became due. On June 22, 1979, a second note in the amount of $25,000 was executed between the same parties which was consolidated with the first note to constitute one note of $138,710. That total represents the principal of $125,000 together with the unpaid interest of $13,710 which remained unpaid at the time the consolidated note was signed. The disputed language of the first note was also present in the consolidated note. As with the first note, Jackson made no interest payments on the consolidated note.

In this proceeding, Jackson argues that since the language of the consolidated note mandates that unpaid accumulated interest be added to the outstanding principal creating a new principal balance which is subject to 12% interest, such a mechanism results in compound interest which, in the absence of an express agreement for either compound interest, or interest on interest, is violative of public policy (see, 32 NY Jur, Interest and Usury, § 9, at 21-23 ). Thus, Jackson insists that such interest is While it is true that the compounding of interest is not, by itself, usurious, it is also true that agreements to pay compound interest have not found favor with the courts (see, Giventer v. Arnow, 37 N.Y.2d 305, 308, 372 N.Y.S.2d 63, 333 N.E.2d 366). This general rule, however, has no application to the facts of this case. Here, there was no agreement between Ayres and Jackson that the latter should pay compound interest. To the contrary, since Ayres waived the right of collection until the note's date of maturity, Jackson was free to choose between making interest payments as they became due, thereby making compound interest impossible, or waiting until the date of maturity, in which case such unpaid interest would be added to principal and additional interest computed upon the new sum. Where, as here, a debtor has the option of not paying interest until the principal balance is due, a provision for "compounding" interest is actually just a legitimate method of computing lawful interest. Such a method " 'only secures to the creditor a remuneration for that which he has lost' " (Giventer v. Arnow, supra, quoting Stewart v. Petree, 55 N.Y. 621, 623).

not recoverable and Ayres is only entitled to simple interest. We disagree.

CLYDE BARNES

On January 23, 1980, Barnes loaned Jackson $10,000 secured by a note which provided for interest at the rate of 21.6% per annum. On or about April 14, 1980, Barnes loaned Jackson $3,000 evidenced by a note which also provided for a rate of interest at 21.6% per annum. Again, in May 1980, Barnes loaned Jackson $2,000 evidenced by a receipt which required a similar rate of interest. Also, from the record, it appears that there were additional loans for which there is no documentation.

In January 1981, Barnes and Jackson decided to consolidate all of Jackson's indebtedness to Barnes into a single promissory note. Such note was to be supported by Jackson's interest in the trust. Jackson signed a promissory note for $24,759, payable on Jackson's 35th birthday. Said note was calculated with an annual interest rate of 16%. Jackson's total indebtedness to Barnes was calculated to be $37,747. Jackson then executed an assignment of his interest in the trust to Barnes.

At the proceeding for the judicial settlement of the accounts of the trustee, Jackson attempted to show that the underlying loans were usurious and that, therefore, the consolidated promissory note and collateral assignment were null and void. Surrogate's Court found that the note and assignment were valid. We agree.

While it is true that the usurious nature of a contract or obligation is to be determined as of the time it is entered into, and an obligation void at its inception for usury continues void forever, it is also true that if the parties to a usurious contract or obligation agree to abandon the void agreement and execute a new obligation for the amount of the actual debt, free from usury, and bearing only legal interest, then the second agreement purges the first of its usurious taint and makes the second obligation valid and enforceable (see, Weaver Hardware v. Solomovitz, 235 N.Y. 321, 139 N.E. 353; 32 NY Jur, Interest and Usury, § 95, at 164 ).

Here, Jackson acknowledged that he owed Barnes $24,759 and signed a promissory note for that amount, which represented...