Indian Springs State Bank v. Kelley's Auto Supply, Inc.
| Decision Date | 26 January 1984 |
| Docket Number | No. 55328,55328 |
| Citation | 9 Kan.App.2d 211,675 P.2d 379 |
| Parties | INDIAN SPRINGS STATE BANK, Plaintiff-Appellee, and Westgate State Bank, Plaintiff, v. KELLEY'S AUTO SUPPLY, INC., et al., Defendants, and Donna Jo Rives f/k/a Donna Jo Goin, Defendant-Appellant. |
| Court | Kansas Court of Appeals |
Syllabus by the Court
1. Two of the elements essential to prove a claim of usury are (1) an unlawful intent to violate the usury law, and (2) an exaction of something in excess of what is permitted by law.
2. In an action on a variable interest rate promissory note, the rules governing usury are applied and it is held that the trial court did not err in holding that the borrower had failed to prove that there was an unlawful intent on the part of the lender to violate the usury law, or that the lender had exacted interest in excess of that permitted by law where the interest charged was not in excess of the maximum statutory rate in effect on the date of the rate adjustment.
Richard L. Reid, Kansas City, for defendant-appellant.
Laurence M. Jarvis, of Laurence M. Jarvis, Chartered, Kansas City, for plaintiff-appellee.
Before ABBOTT, P.J., PARKS, J., and HARRY G. MILLER, District Judge, Retired, assigned.
The only parties involved in this appeal are Indian Springs State Bank, appellee, and Donna Jo Rives, appellant. The appellant has appealed from a ruling of the trial court that her claim of usury was neither a successful defense nor counterclaim in a mortgage foreclosure action brought by the appellee bank.
On February 2, 1977, the appellant and her former husband, Phillip Goin, borrowed $110,000 from the appellee for the purpose of acquiring land and constructing a building for Mr. Goin's auto supply business. The note was secured by a real estate mortgage, and provided for the payment of interest as follows:
On the date when appellant signed the note, the Kansas usury statute provided for a ceiling on interest rates of "10% per annum unless otherwise specifically authorized by law," K.S.A.1977 Supp. 16-207, and the published New York prime rate was 6 1/4%. On December 5, 1978, appellant divorced her husband.
The interest paid on the note in subsequent years exceeded the maximum allowable rate of 10% in effect when the note was executed since the published New York prime rate went up. In March of 1982, the appellee commenced foreclosure proceedings. Phillip Goin filed for bankruptcy, but the appellant answered and counterclaimed that the interest charged by plaintiff exceeded 10% and was therefore usurious.
Although appellant proposed a set of interrogatories to appellee which asked the date of each payment on the note and the rate of interest charged, this information was never offered or admitted as evidence in the trial. Based upon the evidence presented to it, the trial court found that no usury existed because the appellant proved neither an unlawful intent nor an exaction for use of the loan of something in excess of what was permitted by law.
The appellant's sole contention is that the contract is governed by the law fixing maximum interest rates in existence when it was made, and that later statutes raising the interest ceilings are not applicable.
The Kansas usury law has undergone substantial changes since 1977. At that time, the ceiling on interest rates was 10% and the penalty provision, which has not changed substantially throughout the years, provided that "[a]ny person so contracting for a greater rate of interest" shall forfeit the amount of the excess interest paid and deduct an equal amount due on principal and lawful interest charges. K.S.A.1977 Supp. 16-207. (Emphasis supplied.)
The ceiling on interest rates was raised to 11% effective July 1, 1978, for loans secured by a first real estate mortgage. This rate remained in effect until the 1980 legislature substantially changed the interest rate by this amendment:
This amendment, providing for the so-called "Freddie Mac" rates, became effective May 17, 1980.
In 1981, the section was again amended to specifically authorize variable interest rate notes:
K.S.A. 16-207. (Emphasis supplied.)
The legislature also added a provision exempting business or agricultural loans from such interest ceilings.
The 1982 legislature provided:
"(h ) The interest rates prescribed in subsections (a ) and (b ) of this section shall not apply to a note secured by a real estate mortgage or a contract for deed to real estate where the note or contract for deed permits adjustment of the interest rate, the term of the loan or the amortization schedule." K.S.A.1982 Supp. 16-207.
There is nothing to indicate that the legislature intended the usury statute to convey any meaning with respect to variable rate loans when it enacted the usury statute in effect at the time appellant signed the note. At that time variable rate loans were neither commonly used by lenders nor generally understood by legislators. The statute, in fixing a single rate limitation for any loan, does not appear to have been written to accommodate or to prohibit an adjustable rate note.
Certain principles have been clearly established in this state regarding usury in the context of fixed interest rates. The burden of proof rests upon the party asserting usury. In re Estate of Johnston, 180 Kan. 329, 304 P.2d 461 (1956); Atlas Acceptance Corp. v. Spurgeon, 154 Kan. 290, 118 P.2d 535 (1941). The existence of usury will not be presumed. Rather "where an agreement to pay interest is subject to two constructions, one of which will make it usurious, and the other not, the court will adopt the latter." In re Estate of Johnston, 180 Kan. at 332, 304 P.2d 461; Investment Co. v. Brown, 89 Kan. 66, 130 P. 665 (1913); Lusk v. Smith, 71 Kan. 550, 81 P. 173 (1905). Usury statutes are penal in nature and are to be strictly construed in favor of the lender. Young v. Barker, 185 Kan. 246, 342 P.2d 150 (1959). However, where the defense of usury is interposed the courts will look to the substance of the transaction to determine whether it is usurious and will render such judgment as will do justice and vindicate the law. In re Estate of Johnston, 180 Kan. at 331, 304 P.2d 461; Loan Co. v. Solomon, 71 Kan. 185, 79 Pac. 1077 (1905).
State, ex rel., v. Miller, 177 Kan. 324, Syl. p 3, 279 P.2d 223 (1955), established that four separate elements must be proved in order to establish usury: (1) a loan or forbearance of money or its equivalent; (2) an unlawful intent; (3) an understanding that the loan be paid; and (4) an exaction for the use of the loan of something in excess of what is permitted by law. These essential requisites of a usurious contract were approved in In re Estate of...
To continue reading
Request your trial
-
George v. Capital South Mortg. Investments, Inc.
..."Usury statutes are penal in nature and are to be strictly construed in favor of the lender." Indian Springs State Bank v. Kelley's Auto Supply, Inc., 9 Kan.App.2d 211, 213-14, 675 P.2d 379 (1984), citing Young v. Barker, 185 Kan. 246, 342 P.2d 150. "Usury laws in general were designed to p......
-
Gillivan v. Austin, Civ. No. 85/136.
...786, 788 (Minn.Ct.App.1985); Lockhart Co. v. Naef, 107 Idaho 888, 693 P.2d 1090, 1091 (1984); Indian Springs State Bank v. Kelley's Auto Supply, Inc., 9 Kan.App.2d 211, 675 P.2d 379, 382 (1984); Saskill v. 4-B Acceptance, 117 Ill.App.3d 336, 72 Ill.Dec. 886, 890, 453 N.E.2d 761, 765 In the ......
-
Gillivan v. Austin
...374 N.W.2d 786, 788 (Minn. Ct. App. 1985); Lockhart Co. v. Naef, 693 P.2d 1090, 1091 (Idaho 1984); Indian Springs State Bank v. Kelley's Auto Supply, Inc., 675 P.2d 379, 382 (Kan. 1984); Saskill v. 4-B Acceptance, 453 N.E.2d 761, 765 (Ill. Ct. App. 1983). [10, 11] In the face of the unambig......
-
Other People's Money: the Ethics of Litigation Funding - Douglas R. Richmond
...See George v. Capital S. Mortgage Inv., Inc., 961 P.2d 32, 49 (Kan. 1998)(quoting Indian Springs State Bank v. Kelley'sAuto Supply, Inc., 675 P.2d 379,382 (Kan. Ct.App. 1984)). 100. Killion v. Bank Midwest, 886 S.W.2d 29, 33 (Mo. Ct. App. 1994). 101. Martin, supra note 3, at 90 (noting cate......