Madsen v. Whitman

• Decision Date: 24 December 1902
• Citation: 71 P. 152,8 Idaho 762
• Parties: MADSEN v. WHITMAN
• Court: Idaho Supreme Court

71 P. 152

8 Idaho 762

MADSEN v. WHITMAN

Supreme Court of Idaho

December 24, 1902

PREMIUMS FOR MAKING LOANS-USURY-PAYMENTS.-Premiums exacted for making loans and retained, or secured by mortgage, are unlawful interest, when, added to the rate provided by the contract of indebtedness, they make a rate greater than the statutes authorize, and payments upon such premiums, and all payments whether upon interest or principal, must be applied to reducing the principal of the debt.

USURIOUS CONTRACT-ATTEMPT TO PURGE SAME-THIRD PARTIES.-Two usurious loans were made, secured by trust deeds; the debtor made another loan from a third party and gave the latter a mortgage upon the property named in the trust deeds afterward the debtor and creditor came together and made an agreement for the purpose of removing the usurious character of the trust deeds and debts secured by them; payments were made by the debtor on interest and principal, added to the premiums retained in the first instance by the creditor reduced the principal of the two debts to a small amount, for which the trial court gave judgment of foreclosure. Held that the trust deeds only secured the principal of the debts, and that the subsequent agreement did not extend the liens of the trust deeds, especially as against the junior mortgagee, and that the judgment should be affirmed.

(Syllabus by the court.)

APPEAL from District Court, Bear Lake County.

Judgment affirmed. Costs awarded to respondents.

Alfred Budge and E. E. Chalmers, for Appellant.

The general question is: Was this suit brought upon a contract which was usurious at the commencement of the action? The old contract: The defendant Whitman testified that the total payments were twenty-seven dollars per month on the entire loan of $ 1,800. This would be just eighteen per cent per annum on the $ 1,800, a rate which was at that time (1894, or prior thereto) legal and authorized by the interest laws of Idaho. When the Whitmans paid this, they were simply paying the interest on the loan. They had the $ 1,800 all the time, less commission, which had a consideration of their own. What did it matter to the defendants whether the payments were applied on the principal or interest, or both. They expected and intended to pay the notes and interest. If they had gone on and paid at maturity, they would, in this respect, have paid the principal and a rate of interest which was lawful. If the red tape connected with the contracts of building and loan associations is to be eliminated, let it be done thoroughly and the transactions reduced to a business basis on behalf of both parties. The premium notes and mortgages were and constituted a separate transaction and were supported by a consideration of their own, viz., the speedy obtaining of the loans. But, in our view of the case, this is immaterial. The only thing remaining, then, to make the transaction between the parties to this action usurious is the fact that to the $ 800 note were originally attached certain coupon notes presumably for the payment of interest upon interest not due at the date of the execution of such coupon notes. There were no coupon notes with the $ 1,000 note, and therefore the trial court certainly erred in treating the two contracts as the same and in holding the $ 1,000 transaction usurious. The new agreement: Now, our usury laws have been repeatedly construed by this court, but nowhere do we observe that it has had under consideration the question of the parties themselves by subsequent agreement, removing from their original contract the taint of usury. As we have already seen, these parties met together at Montpelier, Idaho on November 25, 1899, with full knowledge of all the facts and for the purpose of correcting their mistakes. They virtually made a new contract, which was intended to relate back in point of time to the date of the original; their business relationships were changed. The Whitmans practically withdrew from the company, as stockholders; their stock was surrendered and canceled; they were no longer stockholders in or members of the company; they could receive no more credits or checks for the earnings of that stock. On the other hand, the company not only canceled and surrendered the premium notes and mortgages and the coupon notes and indorsed the credits of $ 150 on the $ 800 note, and of fifty dollars on the $ 1,000 note, but remitted all interest then due. The monthly payments were discontinued, and it was specifically agreed that the payment of $ 650 on the $ 800 note and of $ 950 on the $ 1,000 note, with a rate of interest which was then legal, should satisfy and discharge the entire indebtedness. The business connection of these parties was thus altered from an "entangling alliance" to the simple relation of debtor and creditor. Such was the status of these obligations at the time suit was commenced. Our proposition, accordingly, is that all this operated to purge these contracts of any usury which might have theretofore been attached to them. (Webb on Usury, secs. 311, 312, 481, 483, 484; Barnes v. Hedley, 2 Taunt. 184; Wright v. Wheeler, 1 Camp. 165; Gray v. Fowler, 1 H. Black. 462; Phillips v. Columbus City Bldg. Assn., 53 Iowa 719, 6 N.W. 121; De Wolf v. Johnson, 10 Wheat. 367, 6 L. ed. 343, 349; Vahlberg v. Keaton, 51 Ark. 534, 14 Am. St. Rep. 81, 11 S.W. 878; Morehouse v. Second Nat. Bank, 98 N.Y. 503.) Where a usurious obligation has been canceled and a new one given for the valid debt, an agreement that a security given for the former shall stand as security for the latter is valid and enforceable in equity. (Martin v. Hall, 9 Gratt. (Va.) 8; Warwick v. Dawes, 26 N. J. Eq. 548.) Estoppel: If, then, the contracts were purged of usury, the defendants were estopped to set it up as a defense. (Webb on Usury, sec. 44; 27 Am. & Eng. Ency. of Law, 957, and citations.) Where the defense of usury is interposed, the burden of proof is on the defendant. (Haughwout v. Garrison, 69 N.Y. 339; Holladay v. Holladay, 13 Or. 523, 11 P. 260, 12 P. 821; Thurston v. Cornell, 38 N.Y. 281.)

Glenn & Gough, for Respondents.

Interest at the rate of nine per cent per annum was paid monthly on face value of the notes, while the principal indebtedness was being reduced monthly by payments on stock. Such a transaction was usurious. (Stevens v. Home Sav. etc. Assn., 5 Idaho 741, 51 P. 779; Fidelity Sav. Assn. v. Shea, 6 Idaho 405, 55 P. 1022.) Counsel for appellants, impliedly conceding that the contracts sued on were originally usurious, seek to establish a contract on or about November 25, 1895, between appellant company and the Whitmans by the terms of which these contracts were purged of usury. There is no evidence proving that this agreement was made for the purpose of purging these contracts of usury. Conceding that the agreement was made for the purpose of purging the contracts of usury, was such a purpose thereby accomplished? The agreement was that the two premium trust deeds should be canceled and a credit of fifty dollars given on the $ 1,000 note, and a credit of $ 150 given on the $ 800 note. Were these sufficient credits to purge the contracts of usury? Forty-three monthly payments of twenty-nine dollars and seventy cents each, including payments on stock and interest, were made on this indebtedness. Giving these monthly credits and calculating interest at eighteen per cent per annum, the highest rate then allowed by law, on the face value of the notes, and there were not sufficient credits given on these notes at the time of this settlement to purge same of usury. Had the credits given in this settlement been sufficient to so purge the contracts of usury, still the agreement was of no binding force nor effect. 27 American and English Encyclopedia of Law, 964, states clearly what is necessary to purge contracts of usury. (Webb on Usury, secs. 481-485.) That the burden is on the defendant to prove an illegal intent where the defense of usury is interposed. (27 Am. & Eng. Ency. of Law, 925, 926; Levy v. Gadsby, 3 Cranch, 180; Maine Bank v. Butte, 9 Mass. 55; Bank of Salinas v. Alvord, 31 N.Y. 473; Drury v. Wolf, 134 Ill. 294, 25 N.E. 626.)

QUARLES C. J., STOCKSLAGER, J. Stockslager, J., Sullivan, C. J., concurring. Ailshie, J., took no part in this opinion on petition for rehearing.

OPINION

QUARLES, C. J.

This action was commenced by appellants to obtain judgments foreclosing two trust deeds executed by the respondents Martha J. Whitman and Marcus F. Whitman to secure two certain loans made by the Western Loan and Savings Company in the first instance. By novation the appellant became the owner, and new trust deeds were executed. The record is voluminous, and the findings of fact are quite lengthy. The trial court found the contracts usurious, and the findings favor the respondents in the main. The original transaction shows an utter disregard of the usury statutes of this state. Compound interest was provided for by way of coupon notes for monthly interest, each of which coupon notes for interest drew interest after its maturity. Large premiums were demanded and extorted by the lender in order that the debtors, the Whitmans, might obtain the loans. The transactions were unquestionably usurious. The assignments of error are many, but a careful consideration of the record shows us that they are without merit in the main. It is not necessary to review each action of the trial court excepted to in order to reach a determination of this case upon its real merits. The court found that the principal of the debts had been fully paid, except the sum of twenty-two dollars and sixty-five cents upon one loan, and the sum of forty dollars and sixty cents upon the other, and that respondents had broken their obligation in said trust...