Giventer v. Arnow

• Citation: 372 N.Y.S.2d 63,333 N.E.2d 366,37 N.Y.2d 305
• Parties: , 333 N.E.2d 366 Michael GIVENTER, as Executor of Emanuel Choper, Deceased, Respondent, v. Samuel ARNOW et al., Appellants.
• Decision Date: 08 July 1975
• Court: New York Court of Appeals

Page 63

372 N.Y.S.2d 63

37 N.Y.2d 305, 333 N.E.2d 366

Michael GIVENTER, as Executor of Emanuel Choper, Deceased, Respondent, v. Samuel ARNOW et al., Appellants.

Court of Appeals of New York.

July 8, 1975.

Duncan S. MacAffer, Albany, for appellants.

Arthur J. Harvey, Albany, for respondent.

WACHTLER, Judge.

On July 1, 1970 the plaintiff's testator, Emanuel Choper, an attorney, loaned $13,410.67 to the defendants, Samuel and Pearl Arnow. On this same date the defendants executed a promissory note by which they agreed to pay back that sum 'one year after date * * * with interest at 7 1/2% Per annum, compunded (sic) quarterly.' When the note fell due, the defendants refused to pay either principal or interest and the plaintiff, Choper's executor, commenced this action. The question is whether the note is usurious.

At the time the note was executed, the maximum rate of interest was fixed at '7.50 per cent per annum' (see General Obligations Law, Consol.Laws, c. 24--A § 5--501, subds. 1, 2; 3 NYCRR 4.1). Thus if the note did not require that the interest be compounded quarterly, it would not violate the usury statute. However if the interest is compounded quarterly, as the note provides, the effective annual rate would be 7.72%. ¹ Because of this the defendants argue the note is usurious, and void, and the lender forfeits both interest and principal (see General Obligations Law, § 5--511, subd. 1). ² The plaintiff concedes that the provision for compounding the interest is illegal, but not usurious. He argues that only the compounding clause should be nullified and without it the remainder of the note is legal and enforceable.

Special Term found the note usurious and granted defendant motion for summary judgment. By a divided court, the Appellate Division reversed (44 A.D.2d 160, 354 N.Y.S.2d 162). There the majority was more impressed with the plaintiff's argument, which they felt was buttressed by (p. 161, 354 N.Y.S.2d p. 164) "the established principle that the presumption is against the taking of usury, which must be established by clear evidence as to all the elements essential thereto." Accordingly, they granted summary judgment to the plaintiff for the face amount of the note (p. 161, 354 N.Y.S.2d p. 164) 'together with interest at the rate of 7 1/2% Per annum'.

It is true that the compounding of interest is not, by itself, usurious (Stewart v. Petree, 55 N.Y. 621, 623; Young v. Hill, 67 N.Y. 162). The usury statute does not prohibit the payment of interest upon interest (General Obligations Law, § 5--501). Nevertheless agreements to pay compound interest have not found favor with the courts.

Generally the courts will enforce such an agreement when it is made after simple interest has accrued (Stewart v. Petree, supra; Newburger-Morris Co. v. Talcott, 219 N.Y. 505, 510, 114 N.E. 846, 847; compare Young v. Hill, supra) for then it 'only secures to the creditor a remuneration for that which he has lost' (Stewart v. Petree, supra, 55 N.Y. p. 623). But it is well-settled that 'a promise to pay interest upon interest is void if made at a time before simple interest has accrued' (Newburger-Morris Co. v. Talcott, supra, p. 510, 114 N.E. p. 847). Even in these cases, of course, the creditor has the same right to demand additional interest once the debtor fails to make timely payment. However it is considered against public policy to encourage creditors to silently permit debts to progressively mount at the expense of debtors who, often unaware of the consequences of the prior agreement, tend to confuse forbearance with indulgence (see Young v. Hill, supra, 67 N.Y. p. 167). Obviously this rule has nothing to do with the usury statute and does not require resort to the severe penalties provided for. The policy involved is adequately fostered by merely invalidating the compounding clause and limiting the creditor's recovery to principal and simple interest.

This rule however has no application to the facts of this case. Although this note provided that interest should be compounded quarterly, there was no provision that the loan be repaid or that interest be paid in quarterly installments. According to the terms of the instrument, no payment was due until 'one year from date' of execution. This, in other words, was not a case where the parties simply agreed in advance to compound interest upon default, which, in furtherance of public policy, calls for a limited sanction invalidating the compounding clause. Since no quarterly payments were ever due, the agreement to compound the interest was simply a computation device for increasing the interest due upon maturity. It was, as the defendants state, 'merely a way of expressing an interest rate of 7.72%.' As indicated, this is a 'greater sum * * * than is prescribed in section 5.501' and the note must be considered void and uncollectable (General Obligations...