Gillivan v. Austin, Civ. No. 85/136.

Decision Date21 August 1986
Docket NumberCiv. No. 85/136.
CourtU.S. District Court — Virgin Islands
PartiesMichael and Norma GILLIVAN, Plaintiffs, v. Cuther H. & Hilda J. AUSTIN, Defendants.

John R. Coon, Christiansted, St. Croix, Virgin Islands, for plaintiffs.

Kenneth R. Lindquist, Christiansted, St. Croix, Virgin Islands, for defendants.

MEMORANDUM OPINION AND ORDER

DAVID V. O'BRIEN, District Judge.

This case mandates a most inequitable result: is an individual lender who innocently asks for more interest than the maximum legal rate fully subject to the quasi-criminal penalties for usury? With reluctance, we must answer affirmatively.

I. FACTS

Michael S. Gillivan, ("Gillivan"), is a self-employed builder and repairer of boats and motors, who also makes native crafts for sale in a small store in downtown Christiansted, managed by his wife Norma Gillivan. He has a high school education. He met defendant Cuther H. Austin, ("Austin"), in 1977 and arranged to lease Austin's property at Plot No. 39 Estate La Grande Princesse for a year, starting in 1978. The property is a quarter-acre lot with a small residence on it. The monthly rent was $300. A short written lease was prepared and signed by the parties, although it is unclear who prepared the document.

The Gillivans, as early as 1978, had expressed an interest in owning the property. Austin had owned it since 1965 and had relocated to the mainland. He agreed to sell it for $30,000, but wanted cash. The Gillivans could not raise the cash.

They talked again about a sale in March, 1980. Gillivan and his wife had remained as tenants beyond the lease term at the same monthly rent. The Austins agreed to sell at a price of $32,500 with $15,000 down. The balance of $17,500 was to be financed at an interest rate of 16% on the basis of a monthly payment of $300 until all interest and principal was paid. Austin had arrived at the 16% interest rate because he thought it was the "going rate" for money loaned, having heard people talking at the place where he worked.

Austin, at the time of trial, was 65 years old. He is a plumber by trade and has a ninth grade education. He testified that until he was actually sued by the Gillivans he had never heard of "usury", and he did not retain an attorney until November, 1982.1

Gillivan also testified that he had no idea what the maximum legal rate was when he agreed to the 16% rate. He testified that his attorney, who drafted all the documents, never told him that 16% was a usurious rate. He only learned that he was paying usurious interest some time after the documents had been signed.

There was a delay from August, 1980, when the Gillivans began making the $300 per month payments toward the purchase of the property, until November 12, 1982, when the actual land contract was signed. In the meantime, the Austins corresponded frequently with the Gillivans and their attorney regarding the 16% interest rate and other matters, but kept rejecting the documents sent to them on the mainland for signature.

The Austins did not want to pass title until they received all of their money. The Gillivans' attorney, believing the agreement to involve a warranty deed with a mortgage for the $17,500, kept sending such documents to Austin. Meanwhile, the Gillivans continued to make the $300 payments.

Finally, a land contract was sent to the Austins for their approval, on the threat of a lawsuit for specific performance if they did not take steps to finalize the oral agreement struck in August, 1980 and confirmed by both parties through correspondence. When the Austins did not promptly sign and return the land contract, the Gillivans sued them in territorial court for specific performance. The Gillivans alleged in that lawsuit that the agreement was made in August, 1980, effective with their payment on August 15, 1980 of $300.

Austin came to St. Croix in November, 1982 with the land contract signed, both by his wife and himself, and duly notarized by a Maryland notary public. He attended the closing at the office of the Gillivans' attorney. There is some confusion as to whether he was represented by counsel at that closing. He did retain an attorney on St. Croix, but indicated that it was only for purposes of seeing to it that his daughter would receive the payments if he and his wife died.

In any event, a land contract was executed and provided for a $15,000 down payment, interest on the down payment from August, 1980 to 1982 in the amount of $3,000 calculated at 10%, and the financing of the $17,500 balance at 16% dating back to the August 15, 1980 payment. The Gillivans' attorney testified that the contract entered into on November 12, 1982 was considered to be retroactive to August 15, 1980.

In May 1985, the Gillivans discovered that the 16% interest rate was usurious. They stopped making payments to Austin, and brought this action under the Virgin Islands usury statute, 11 V.I.C. § 951 et seq. They continued making the $300 payments to an escrow account controlled by their attorney.

There is presently $4,200 in escrow, representing 14 monthly payments of $300 since May 20, 1985.

At the trial, Gillivan established that he had made $300 payments every month from August 15, 1980 until May, 1985. Of the total of those payments, $12,050.53 was for interest. Under the provisions of 11 V.I.C. §§ 953-54, the Gillivans seek a recovery of double the interest already paid, or $24,197.06, plus a forfeiture of all future interest.

The Austins counterclaimed, alleging that the Gillivans were in material default of a wholly valid land contract, thus entitling the Austins to the balance of the contract price or immediate possession of the property. Alternatively, the Austins contended that the Gillivans substituted a usurious interest rate into the contract after the closing and a punitive award of $50,000 is demanded.

The Austins abandoned their latter claim at trial and conceded through counsel that the 16% rate exceeded the maximum legal interest rate. The parties stipulated that the maximum legal rate was 14%.

II. DISCUSSION

Usury is "the extraction of a greater sum for the use of money than the highest rate of interest allowed by law." Zugelter v. Bank of America, 19 V.I. 561, 565 (D.V. I.1983) (citing Evans v. Nat'l Bank, 251 U.S. 108, 40 S.Ct. 58, 64 L.Ed. 171 (1919)) aff'd 728 F.2d 218 (3d Cir.1984). Virtually all American jurisdictions have enacted usury statutes "to prevent the personal financial ruin of individuals from the unconscionable tactics of unscrupulous lenders who seek to derive monetary gain from the financial distress of others." Zugelter, supra at 565. (citation omitted).2 See also Beneficial Finance Co. v. Administrator of Loan Laws, 260 Md. 430, 272 A.2d 649, 651 (1971). It is prohibited in the Virgin Islands by 11 V.I.C. § 952, which provides:

Usury
No person shall, directly or indirectly, receive in money, goods, or things in action, or in any other manner, any greater sum or value for the loan or use of money, or upon contract founded upon any bargain, sale or loan of wares, merchandise, goods, chattels, lands and tenements, than prescribed in this chapter.3

The public policy underlying § 952 is given bite by the sanctions for usury: the borrower receives twice the amount of the interest already paid and all future interest is forfeited. 11 V.I.C. §§ 953-54. These penalties make clear that the goal of the usury law is to punish the lender. Consequently, usury has historically been viewed as a quasi-criminal offense. Therefore, the statutes prohibiting it must be strictly construed in favor of the creditor. E.g., Allied Chemical Corp. v. Mackay, 695 F.2d 854, 857 (5th Cir.1983).

Having established these black letter points, we now determine whether the Austins committed usury.

Usury is comprised of three universal elements. There must be: 1) a loan of money 2) that must be repaid 3) at an interest rate exceeding the statutory maximum. E.g., Jaeger, 14 Williston on Contracts, (3d ed.) § 1684 (1972); Lloyd supra 29 U.S. (4 Pet.) at 222, 7 L.Ed. at 839. These requirements are clearly met here because the land contract obligates the Gillivans to pay the Austins interest that exceeds the allowable rate by two percent.

The burden of proving the additional element of intent is frequently imposed on the borrower by statute, e.g., Freitas v. Geddes Savings and Loan Association, 63 N.Y.2d 254, 481 N.Y.S.2d 665, 471 N.E.2d 437, 443 (1984), or caselaw, e.g., Scott, supra 29 U.S. (4 Pet.) at 222. No such requirement, however, exists in the Virgin Islands. Barclays Bank v. Creque, 13 V.I. 163, 167 (D.V.I.1976).

In Barclays Bank, Chief Judge Christian reluctantly held that the Virgin Islands Code defines usury as a strict liability offense. Thus, even the most innocent of lenders is guilty of usury if the loan agreement calls for excessive interest.4

We are constrained to agree with this result because the territory's usury statutes are devoid of an intent requirement. These laws, moreover, are consistent with substantial authority.

The prevailing view holds that a lender who demands excessive interest commits usury regardless of whether he or she knows the rate is illegal. The rationale in some jurisdictions is that intent is irrelevant because usury is a strict liability offense. E.g., In re Schwartz, 37 B.R. 776, 778-79 (Bkrtcy.D.R.I.1984); Pease v. Taylor, 88 Nev. 287, 496 P.2d 757, 763 (1972); Beneficial Finance, supra 272 A.2d at 651.

Other states purportedly include intent as an element of usury but hold that this requirement is satisfied upon a showing that the lender merely intended to charge the interest rate that proved to be usurious. E.g., Kissell Co. v. Gressley, 591 F.2d 47, 53 (9th Cir.1979) (applying Arizona law); Dennis v. Bradbury, 236 F.Supp. 683, 687 (D.Colo.1964); Liebergesell v. Evan, 93 Wash.2d 881, 613 P.2d 1170, 1174 (1980) (en banc); Dang v. F and S Land Development Corp., 62 Hawaii 583, 618...

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2 cases
  • Mangold v. Wilson
    • United States
    • United States District Courts. 3th Circuit. District of the Virgin Islands
    • September 16, 1988
    ...act and expand the exception to a transaction entirely distinct from first priority mortgages. C. Estoppel In Gillivan v. Austin, 640 F.Supp. 1325 (D.V.I.1986), we noted that an estoppel defense is often available to a usury claim. Id. at 1329 n. 5. We pointed out, however, that representat......
  • Mangold v. Wilson
    • United States
    • United States District Courts. 3th Circuit. District of the Virgin Islands
    • September 16, 1988
    ...act and expand the exception to a transaction entirely distinct from first priority mortgages.C. Estoppel In Gillivan v. Austin, 640 F. Supp. 1325 (D.V.I. 1986), we noted that an estoppel defense is often available to a usury claim. Id. at 1329 n.5. We pointed out, however, that representat......

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