Green v. Mid-State Homes, Inc.

• Decision Date: 23 December 1968
• Docket Number: MID-STATE,No. 5--4763,5--4763
• Citation: 245 Ark. 866,435 S.W.2d 436
• Parties: Rheuben F. GREEN et ux., Appellants, v.HOMES, INC., Appellee.
• Court: Arkansas Supreme Court

Page 436

435 S.W.2d 436

245 Ark. 866

Rheuben F. GREEN et ux., Appellants, v. MID-STATE HOMES, INC., Appellee.

No. 5--4763.

Supreme Court of Arkansas.

Dec. 23, 1968.

Rehearing Denied Jan. 27, 1969.

Lightle & Tedder, Searcy, for appellants.

Spencer & Spencer, El Dorado, for appellee.

GEORGE ROSE SMITH, Justice.

The issue here is that of usury in a contract for the construction of a shell home. The chancellor upheld the contract and ordered a foreclosure of Mid-State's mortgage.

The material facts are not similar to those in any of the many usury cases that we have considered in the past fifteen years or so. Here Mid-State's assignor, Jim Walter Corporation, agreed on April 7, 1966, to build a house for the Greens for a contract price of.$6,355, with the transaction being financed by the builder. The Greens agreed to pay the taxes and insurance premiums; so the only elements involved were principal and interest. According to the note and mortgage, the debt was payable in 144 monthly installments of $75.80 each, beginning June 15, 1966, and totaling $10,915.20. It is undisputed that the installment payments could have been at least $75.95 each without exceeding the maximum interest rate of 10% per annum. See Lake's Monthly Installment and Interest Tables, p. 152 (5th ed., 1959).

Green had retired from the military service shortly before the contract was negotiated and had not yet found civilian employment. Having saved some money, he wanted to make ten monthly payments in advance, to give him time to find a job. The Walter Corporation salesman, Carl Allen, did not have a form of contract that could be used to put such a prepayment arrangement into effect. Allen suggested that the money be used as a down payment, but Green rejected that suggestion--presumably because he would still have been required to begin making payments sooner than he wanted to.

The note and mortgage were actually executed for the full amount of the contract price; that is, as we have said, for $10,915.20 payable in 144 installments of $75.80 each, beginning June 15, 1966. By oral agreement, however, Green obtained the desired ten-month moratorium by agreeing to pay the full amount of the first ten payments ($758) in advance--$500 on the day the contract was signed and $258 five days later. Pursuant to that oral understanding Green was not required to make any monthly payment until April 15, 1967, ten months after the first payment was ostensibly due on June 15, 1966. Upon the debtors' default Mid-State, to whom the note and mortgage were assigned on June 17, 1966, brought this foreclosure suit on November 2, 1967. The defendants pleaded usury.

The contentions of the parties are clear-cut. The Greens insist that they were overcharged, because even though they paid $758 in cash at the inception of the contract, that amount was nonetheless included in the principal indebtedness, upon which interest was exacted at substantially the maximum rate for the full term of twelve years. Hence, say the Greens, the lender was charging interest as if the $758 cash payment had actually been advanced to the borrowers, although in reality the lender had the money from the outset in its own possession and available for its own benefit.

Mid-State counters by insisting that the Greens merely made a voluntary prepayment upon their indebtedness. They rely upon the rule that if an installment contract would not be usurious if paid according to its terms, the transaction is not rendered usurious by the debtor's voluntary payment in full before maturity, although as a result the creditor receives a sum amounting to more than the principal plus the maximum legal rate of interest. Eldred v. Hart, 87 Ark. 534, 113 S.W. 213 (1908).

We do not wholly agree with either side--at least not to the full extent to which they would carry their contentions. We consider first the Greens' argument. At the trial they introduced the testimony of a banker, Wayne Hartsfield. He testified that if the prepayment of $758 had been credited at once upon the principal debt, the balance of $5,597 could have been made payable in 144 monthly payments of $66,89 each. Under that schedule the Greens' total payments would have been $1,283.04 less than the face amount of the actual note. By deducting from that difference the amount of the $758 initial payment, Hartsfield concluded that the Greens had been charged $525.04 in excessive interest.

Hartsfield's computations manifestly do not jibe with the undisputed facts. No party to the contract ever intended, as Hartsfield's theory assumes, that the Greens would begin making monthly payments within thirty days. To the contrary, everyone agrees that the Greens' prepayment was for the specific purpose of affording them a respite of ten months, at the end of which they would be in exactly the same position as if the ten payments had been made when due. Thus Hartsfield's testimony presupposes a hypothetical situation so different from the actual facts that we have found his calculations to be of no assistance to us.

Nor can we go all the way with Mid-State's insistence that the doctrine of Eldred v. Hart is controlling. That case had to do with a loan that was not usurious in the beginning. Of course a debtor cannot, by making a payment in advance of its due date, convert a valid loan into a usurious one. If that were the law no one lending money at the maximum legal rate of ten per cent per annum could afford to accept an installment payment even a few days before it was due.

On the other hand, the lender cannot be allowed to hold back part of the loan under the guise of an acceptance of voluntary prepayments by the borrower. We cannot lay down a rule that would open the door to the exaction of outwardly 'voluntary' prepayment agreements from borrowers actually acting under the pressure of financial necessity.

In the study of the case we have explored a number of tentative theoretical and mathematical approaches to the problem, with a variety of results. We are now firmly convinced that no solution should be adopted that does not take into account two of the undisputed realities in the case:

First, the parties unquestionably intended for the Greens, at the expiration of ten months, to occupy precisely the same position they would have occupied if the payments had been made every month instead of all at once. That is, at the end of the ten months the Greens would have paid all the interest accruing up to that time and also...