McElroy v. Grisham

Decision Date10 June 1991
Docket NumberNo. 91-21,91-21
Citation306 Ark. 4,810 S.W.2d 933
PartiesErnest McELROY, Appellant, v. C.C. GRISHAM, Bill Doshier & H.D. McCaleb, Individually and as Partners d/b/a BBS Company, a Partnership, Appellees.
CourtArkansas Supreme Court

Stephen E. Adams, Fayetteville, for appellant.

Donald J. Adams, Harrison, for appellees.

HOLT, Chief Justice.

The appellant/cross-appellee, Ernest McElroy, initially filed suit in the Boone County Chancery Court requesting equitable relief in the cancellation of a warranty deed, option contract, and deed for sale, as well as the quieting of title to the real estate in question. These requests were predicated, in part, on Mr. McElroy's allegations that the deed and contracts between him and the appellees/cross-appellants, C.C. Grisham, Bill Doshier, and H.K. McCaleb, individually and doing business as BBS Company, constituted a usurious scheme to loan money.

The chancellor found that the transaction was a usurious loan and that the deed from the appellant to the appellees "was in fact a mortgage" and issued his orders accordingly.

While appellant McElroy agrees with chancellor's finding that the transactions amounted to a usurious loan, he contends, on appeal, that the chancellor erred: 1) in determining the amount of interest he paid; 2) in refusing to award twice the amount of interest paid; 3) in refusing to award him attorney's fees and 4) in awarding post judgment interest on the balance found due to the appellees.

On cross-appeal, the appellees contend that the chancellor erred in finding the transaction was a usurious loan and in denying their motion for summary judgment, in which they argued that a release signed by Mr. McElroy constituted a release and termination of the contract at issue.

We agree with the chancellor's findings that the transaction was usurious but reverse and remand as to his calculation of interest paid and the award of a penalty. We affirm the trial court as to the appellees' cross-appeal.

Mr. McElroy is engaged in the residential home construction business. In 1984 and 1985, he acquired a total of 104 acres of property for which he paid $238,357. In addition, Mr. McElroy claims to have invested approximately $19,200 preparing the land for residential development.

By early 1987, Mr. McElroy was experiencing financial difficulties and contacted Mr. C.C. Grisham for help. He claims to have requested an initial loan of $100,000 from Mr. Grisham. This proposal was rejected, but, after lengthy negotiations, the parties agreed that Mr. McElroy would deed the property to Mr. Grisham and his partner, Mr. H.D. McCaleb, in exchange for $80,000. In addition, Mr. McElroy was to receive a contract for deed allowing him to repurchase the property for $120,000, of which $40,000 was to be paid in one year and the balance of $80,000 at the end of two years.

Mr. Grisham referred Mr. McElroy to Mr. Bill Doshier, an attorney, to complete the necessary legal work. Mr. Doshier was subsequently brought into the transaction as an equal partner with Mr. Grisham and Mr. McCaleb, which partnership was named BBS Company. At Mr. Doshier's suggestion, the contract for deed was changed to an option contract and, on February 13, 1987, the parties executed a warranty deed, in which Mr. McElroy conveyed the property to the appellees, and an option contract, wherein Mr. McElroy was given one year to exercise his option to repurchase the property; $40,000 to be paid at the time of purchase and $80,000 to be paid within a total of two years, interest free. The appellees disbursed $80,000 to Mr. McElroy through an abstract and title company and required Mr. McElroy to obtain release of over $120,000 in liens against the property.

Mr. McElroy claims that in February, 1988, before the expiration of the option contract, he approached the partnership about exercising his option. This is disputed by the appellees who claim that Mr. McElroy allowed the option contract to expire. In either event, the parties disregarded the option contract and executed a contract for deed on March 1, 1988, in which Mr. McElroy agreed to pay $125,000 for repurchase of the property (less three lots to be retained by the "sellers"). This price was $5,000 more than the "option price". Mr. McElroy was to pay $16,000 at closing and the balance of $109,000 in installments, at an annual rate of 10%, which was evidenced by a promissory note. The parties have stipulated that during the term of this agreement, Mr. McElroy made payments to the appellees totalling $45,195.

In April, 1989, Mr. McElroy was informed by the appellees that he still owed over $86,000 on the debt. He filed suit in the Boone County Chancery Court shortly thereafter.

Following trial, the chancellor entered two opinion letters in which he held that "the underlying and real purpose of this transaction was a loan to plaintiff in the amount of $80,000, and that since it was a loan, under its terms, it exceeded the lawful rate of interest." The court found that Mr. McElroy had repaid $45,195, of which $10,866 was interest, leaving $34,329 paid on the principal and $45,671 owing. This amount was offset by a penalty of $16,300, assessed against the appellees, which resulted in a final judgment of $29,371 in favor of the appellees. Mr. McElroy was ordered to pay the debt within 30 days of judgment or face foreclosure.

Since all of the issues before us hinge on the central question of whether there was, in fact, a usurious loan, we address the appellees' arguments on cross-appeal, first.


Initially, we note that while we review chancery cases de novo, we recognize the superior position of the chancellor to weigh issues of credibility and therefore we do not reverse unless the chancellor's findings are clearly erroneous. Taylor's Marine, Inc. v. Waco Mfg., 302 Ark. 521, 792 S.W.2d 286 (1990).

In denying that the transactions amounted to a usurious loan, the appellees first contend that the documents were not usurious on their face. While it is true that, taken alone, the original warranty deed and option contract appear to be documents concerning only the sale of land, and no mention of a loan or obligation on the part of Mr. McElroy to repay the appellees is recited, these transactions call to mind an oft quoted maxim: "The law shells the covering and extracts the kernel. Names amount to nothing when they fail to designate the facts." Sparks v. Robinson, 66 Ark. 460, 51 S.W. 460 (1899). In Sparks, we upheld the trial court's conclusion that an absolute bill of sale of a sewing machine, coupled with an absolute right of redemption, amounted to nothing more than a mortgage with a usurious rate of interest.

Here, the chancellor found that the purported sale and option to repurchase were nothing more than a cloaking device to hide the true transaction--a loan in the amount of $80,000 to be repaid in two years, with interest totalling $40,000. Such a transaction has been historically recognized as one of several simple devices to evade Arkansas usury laws. See G. Collins and V. Ham, The Usury Law of Arkansas: A Study in Evasion, 8 Ark.L.Rev. 399 (1954).

The burden is upon the one asserting usury to show the transaction is usurious, and usury will not be presumed, imputed, or inferred where an opposite result can be fairly reached. Winkle v. Grand Nat'l Bank, 267 Ark. 123, 601 S.W.2d 559 (1980). The test, however, is not whether the "lender" intended to violate the usury laws, but whether the lender knowingly entered into a usurious contract intending to profit by the methods employed. See Id.; Davidson v. Commercial Credit Equip. Corp., 255 Ark. 127, 499 S.W.2d 68 (1973). Furthermore, it is unnecessary that both parties intend that an unlawful rate of interest be charged; if the lender alone charges or receives more than is lawful the contract is void. Superior Improvement Co. v. Mastic Corp., 270 Ark. 471, 604 S.W.2d 950 (1980) (decision under prior law).

The chancellor was faced with conflicting testimony throughout the trial in this case. He obviously found Mr. McElroy's version of the events to be the more credible and, deferring to his advantage in observing the witnesses' demeanor and in considering the evidence presented in the record, we cannot conclude that his decision was clearly erroneous.

Mr. McElroy testified that prior to contacting the appellees, he had approached a number of banks and individuals for a loan and had been rejected. He testified that he was in dire financial trouble and that the appellees were aware of his situation.

Mr. McElroy contacted Mr. Grisham and initially requested a loan of $100,000. This request was rejected but, after further discussions, Mr. Grisham agreed to a loan of $80,000, of which $40,000 was to be repaid in one year and another $80,000 within the following year. This agreement later developed into a warranty deed combined with an option to purchase. Mr. McElroy admitted it was he who proposed the terms finally agreed upon, and we have said that a debtor may be estopped from asserting the defense of usury when the debtor created the infirmity in the contract in order to take advantage of the creditor. Ford Motor Credit Co. v. Hutcherson, 277 Ark. 102, 640 S.W.2d 96 (1982). Such was not the case here. Mr. McElroy stated that he was in financial straits and testified repeatedly that it was never his intention to relinquish his land, but simply to arrange a loan for temporary financial relief. Clearly, it was the appellees, not Mr. McElroy, who received an unfair advantage.

Furthermore, there was testimony from Mr. McElroy's expert witness that the land was valued at $227,200, and, in fact, Mr. McElroy stated that he paid approximately $238,357 for it. This evidence reflects a gross disparity between what Mr. McElroy paid for it, and the appellees' purchase price of $80,000.

There was also disagreement in the record as to the execution of the contract for sale. The...

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