Paul v. U.S. Mut. Financial Corp.

Decision Date08 July 1986
Docket NumberDocket No. 85024
Citation389 N.W.2d 487,150 Mich.App. 773
PartiesRobert E. PAUL and Karen B. Paul, Plaintiffs-Appellants, v. U.S. MUTUAL FINANCIAL CORPORATION, a Michigan corporation, Defendant-Appellee. 150 Mich.App. 773, 389 N.W.2d 487
CourtCourt of Appeal of Michigan — District of US

[150 MICHAPP 776] Hendley & Datsko, P.C. by James R. Datsko, Manchester, for plaintiffs-appellants.

Bodman, Longley & Dahling by David W. Hipp, Detroit, for defendant-appellee.

[150 MICHAPP 777] Before HOLBROOK, P.J., and T.M. BURNS and HOOD, JJ.

PER CURIAM.

Plaintiffs appeal as of right from an order of the trial court granting summary judgment in favor of defendant on the basis that plaintiffs were not entitled to assert the defense of usury on a promissory note. We reverse.

This case had its genesis on April 1, 1979, when plaintiffs purchased a business known as "Doug's Party Store" from Douglas and Arlene Sindlinger. This business was located in Manchester, Michigan, and consisted of a party store and gasoline filling station. The sale was evidenced by: (1) a land contract secured by the real estate on which the business was located and carrying an interest rate of 10% per annum; (2) a promissory note with a 10% per annum interest rate given in exchange for the good will of the business as a going concern, the liquor license, furniture, fixtures, equipment and other property; and (3) a security agreement contained in the promissory note covering all equipment, fixtures and inventory of the business. The documents provided that default on either the land contract or promissory note would be deemed a default on the other document. The 10% interest rates were subject to readjustment after October 6, 1982.

On April 22, 1981, the Sindlingers sold and assigned the three documents to United States Mutual Real Estate Investment Trust. The Sindlingers were required to sign a guaranty agreement in April, 1981. This assignee and plaintiffs amended the promissory note in June, 1983, and specified that the interest rates should not be readjusted for any reason. United States Mutual Real Estate Investment Trust assigned its interest [150 MICHAPP 778] in the three documents to defendant, U.S. Mutual Financial Corporation on July 29, 1983.

On December 12, 1983, plaintiffs filed a complaint for declaratory relief against defendant alleging that defendant was barred from recovering interest and costs on the promissory note pursuant to M.C.L. Sec. 438.32; M.S.A. Sec. 19.15(2), because the note's 10% per annum interest rate on the unpaid balance exceeded the lawful rate of 7% per annum. The complaint also asserted that defendant refused to accept tender of plaintiffs' monthly payment on December 1, 1983, at the 7% interest rate, and refused to accept the monthly payment made on the related land contract. A motion for a preliminary injunction was filed the same day, requesting that the court order defendant to accept plaintiffs' payment, that all interest on the promissory note be paid into escrow pending resolution of these proceedings, and that defendant be barred from forfeiting or foreclosing on the land contract. The preliminary injunction was granted on May 30, 1984.

On May 14, 1984, plaintiffs filed a motion for summary judgment, asserting that there was no genuine issue of material fact and that they were entitled to relief as a matter of law pursuant to GCR 1963, 117.2(3), presently MCR 2.116(C)(10). On May 22, 1984, defendant moved for summary judgment in its favor asserting that the rate on the promissory note was not usurious because the "business entity" and real estate exceptions applied to the note and that plaintiffs failed to do equity by tendering payment of all principal plus 5% interest.

On April 30, 1985, the trial court granted summary judgment in favor of defendant based upon a lack of usurious intent in the original transaction and upon defendant's holder in due course status [150 MICHAPP 779] (hereafter "HIDC"). Neither of these issues were specifically raised by the parties.

I

The first issue we address is whether the plaintiffs are entitled to a judgment as a matter of law because the promissory note was usurious when entered into in 1979.

The trial court granted summary judgment under GCR 1963, 117.2(3) on the basis that no genuine issue of material fact exists. Motions under this court rule test whether there is factual support for a claim and should not be granted when there is an issue of material fact. Soderberg v. Detroit Bank & Trust Co., 126 Mich.App. 474, 479, 337 N.W.2d 364 (1983), lv. den. 419 Mich. 867 (1984).

The trial court must consider the affidavits, pleadings, depositions, admissions and documentary evidence. GCR 1963, 117.3, now MCR 2.116(G)(5). Unlike the moving party, the opposing party is not obligated to make a showing by affidavits. However, there must be some showing by opposing affidavits, testimony, depositions, admissions or documentary evidence that a genuine issue of fact exists. Rizzo v. Kretschmer, 389 Mich. 363, 373-374, 207 N.W.2d 316 (1973). The test is whether the kind of record which may be developed, giving the benefit of any reasonable doubt to the opposing party, will leave an issue upon which reasonable minds may differ. The courts are liberal in finding that a genuine issue of fact exists. Rizzo, supra, p. 372, 207 N.W.2d 316. However, the trial court must avoid substituting a trial by affidavit and deposition for a trial by jury. A court is not allowed to make findings of fact or to weigh the credibility of affiants or deponents. Durant v. Stahlin, 375 Mich. 628, 135 N.W.2d 392 (1965).

[150 MICHAPP 780] The plaintiffs herein contend that the promissory note is in violation of M.C.L. Sec. 438.31; M.S.A. Sec. 19.15(1), which sets forth a 7% per annum ceiling on interest rates. Exceptions to this rule are set forth in the act. See e.g., M.C.L. Sec. 438.31c; M.S.A. Sec. 19.15(1c); M.C.L. Sec. 438.61; M.S.A. Sec. 19.15(71). M.C.L. Sec. 438.32; M.S.A. Sec. 19.15(2) provides that the lender or seller shall forfeit any interest, costs or fees if the act is violated and that the borrower or buyer is entitled to recover attorney fees and court costs from the seller, lender or assigns.

The instant trial court relied in part on Wilcox v. Moore, 354 Mich. 499, 93 N.W.2d 288 (1958), and Domboorajian v. Woodruff, 239 Mich. 1, 214 N.W. 113 (1927), in concluding that the promissory note was not usurious because the facts did not reveal that the original transaction between the plaintiffs and the Sindlingers was unfair and overreaching or that the Sindlingers had a usurious intent. The trial court's reliance on these decisions was misplaced.

First, the facts and circumstances surrounding the original transaction were not disclosed in the pleadings or documentary evidence. Therefore, the trial court's determination had no basis in the record.

Second, Wilcox does not stand for the proposition that a court must ascertain whether the agreed-upon interest was fair because there was no overreaching by the lender. Rather, the actual holding of Wilcox was that the court must look beyond form to characterize the real nature of the transaction in order to determine whether the transaction falls within the usury statute. M.C.L. Sec. 438.31; M.S.A. Sec. 19.15(1). See Farley v. Fischer, 137 Mich.App. 668, 358 N.W.2d 34 (1984); Heberling v. Palmer's Mobile Feed Service, Inc., 119 Mich.App. [150 MICHAPP 781] 150, 326 N.W.2d 404 (1982), lv. den. 417 Mich. 995 (1983).

Similary, usurious intent need only be ascertained when it is not clear from the face of the instrument whether the usury statute is applicable. See Domboorajian v. Woodruff, supra; Ferguson v. Grand Rapids Land Contract Co., 242 Mich. 314, 218 N.W. 685 (1928). Where, as here, the instrument is patently in violation of the usury statute, there is no need to determine a usurious intent. Indeed, it appears that the intent of the parties is totally irrelevant where the instrument is usurious on its face. Union Trust Co. v. Radford, 176 Mich. 50, 141 N.W. 1091 (1913); Houghteling v. Gogebic Lumber Co., 165 Mich. 498, 131 N.W. 109 (1911).

In the case at bar, it is undisputed that a promissory note with a 10% interest rate per annum was signed in conjunction with the sale of a business. Aside from the fairness of the original transaction between the plaintiffs and the Sindlingers, the interest rate is patently usurious under M.C.L. Sec. 438.31; M.S.A. Sec. 19.15(1) unless an exception applies. Whether an exception applies is determined by looking beyond form to characterize the real nature of the original transaction. Wilcox, supra. Defendant asserts the applicability of two statutory exceptions and one equitable defense.

A Is the "Business Entity" Exception Applicable?

Defendant argues that the "business entity" exception of M.C.L. Sec. 438.61; M.S.A. Sec. 19.15(71) should apply. The statute provides in pertinent part:

"(1) As used in this act 'business entity' means: (a) A corporation, trust, estate, partnership, cooperative, or association; or (b) A natural person who furnishes to [150 MICHAPP 782] the extender of the credit a sworn statement in writing specifying the type of business and business purpose for which the proceeds of the loan or other extension of credit will be used, but the exemption provided by this act does not apply if the extender of credit has notice that the person signing the sworn statement was not engaged in the business indicated."

"(3) Notwithstanding the provisions of Act No. 326 of the Public Acts of 1966, it is lawful in connection with an extension of credit to a business entity by any person other than a state or nationally chartered bank, insurance carrier, or finance subsidiary of a manufacturing corporation for the parties to agree in writing to any rate of interest not exceeding 15% per year."

Defendant's first basis for contending that...

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