Shropshire v. Commerce Farm Credit Co.

• Decision Date: 18 June 1930
• Docket Number: Motion No. 7013; No. 4324.
• Citation: Shropshire v. Commerce Farm Credit Co., 30 S.W.2d 282, 120 Tex. 400 (Tex. 1930)
• Parties: SHROPSHIRE et ux. v. COMMERCE FARM CREDIT CO. et al.
• Court: Texas Supreme Court

Page 282

30 S.W.2d 282

SHROPSHIRE et ux. v. COMMERCE FARM CREDIT CO. et al.

Motion No. 7013; No. 4324.

Supreme Court of Texas.

June 18, 1930.

Error to Court of Civil Appeals of Seventh Supreme Judicial District.

Suit by J. E. Shropshire and wife against Commerce Farm Credit Company and others. Judgment for defendants was affirmed by the Court of Civil Appeals (266 S. W. 612), but reversed by the Supreme Court on opinion of the Commission of Appeals (280 S. W. 181), and defendants moved for rehearing.

Opinion of the Commission of Appeals superseded, motion for rehearing overruled, judgments of district court and Court of Civil Appeals reversed and judgment rendered.

M. J. Baird and Oxford & Oxford, all of Plainview, for plaintiffs in error.

Martin & Williams, of Plainview, Terrell, Davis, Huff & McMillan, of San Antonio, and Charles L. Black, of Austin, for defendants in error.

Phillips, Townsend & Phillips and Cockrell, McBride, O'Donnell & Hamilton, all of Dallas, amici curiæ.

GREENWOOD, J.

As appears from the opinion of the Court of Civil Appeals, 266 S. W. 612, 613, the pleadings and evidence disclosed the following facts:

"The plaintiffs [Shropshire and wife] borrowed the sum of $4,200 from one of the defendants, the Commerce Farm Credit Company, and executed their note [or bond] to the said company for the sum of $4,200, payable 10 years after date. * * *" To secure payment of the interest, "the plaintiffs executed 10 interest coupons, each for the sum of $252, payable annually, which, it will be seen, represented interest on the loan at 6 per cent.; the additional interest `was squeezed into five equal annual payments,'" secured "by 5 separate notes, each for $252 payable one each year during the first 5 years of the loan period. The principal note and the 6 per cent. interest coupons were secured by a first lien deed of trust on land in Hale county."

By the terms of the $4,200 note and the coupons and the deed of trust securing same, it was stipulated that both the principal and interest of the note should bear interest "after maturity, whether matured from lapse of time or by default, at the rate of ten per centum per annum." Both note and deed of trust provided that, if default was made in the payment of any installment of interest, when due, then, at the option of the legal holders of the note, "the same with interest and all other indebtedness and charges secured hereby shall, without notice, become due and payable," and the deed of trust empowered the trustee to advertise and sell the land and make conveyance thereof to the purchaser.

The five separate notes for $252 each were secured by a second lien deed of trust on the land in Hale county, containing the following provision: "This conveyance is in trust, however, to secure the payment of grantor's promissory notes of even date herewith aggregating the sum of $1200 and due as therein specified and provided, payable to the order of the Commerce Farm Credit Company. * * * If the notes secured hereby and each of them are not paid promptly, when due, or in case of the breach of any of the covenants, terms, or agreements in said first deed of trust, then all of said notes hereby secured shall become due and payable, at the election of the holder; and the trustee, his successor, or substitute may sell said premises, after notice as prescribed in first deed of trust, and execute and deliver a good and sufficient deed therefor and receive the proceeds of sale."

Shropshire and wife paid $1,015.30 in discharge of the two installments for $252 each first maturing on the note secured by the second lien deed of trust and in discharge of the first two coupons on the $4,200 note. Afterwards, Shropshire and wife instituted this suit to have the loan adjudged usurious and to recover double the amount paid by them as interest.

The district court rendered judgment that Shropshire and wife take nothing by their suit. The Court of Civil Appeals at Amarillo affirmed this judgment. 266 S. W. 612. On writ of error, the Supreme Court, on an opinion by Section A of the Commission of Appeals, to the effect that the loan was usurious, reversed the judgments of the district court and Court of Civil Appeals, and awarded Shropshire and wife double the amount they had paid as interest on the loan. 280 S. W. 181. On motion for rehearing, the case was withdrawn from the Commission of Appeals and was argued before the Supreme Court.

From the above statement of the case it appears that the single question for our determination is whether a contract is usurious under the Constitution and statutes in Texas, which provides for the payment of a higher rate of interest than 10 per cent. per annum, at the creditor's option, on no other condition than the default of the debtor in discharging annual installments of interest. Regardless of results in the event the debtor should discharge every promised annual installment of interest at or before maturity, it is too plain for dispute that this contract, on the face of the writings, entitles the creditor, at its option, on failure of the debtor to discharge certain annual installments of interest, to enforce collection from the debtor of a sum amounting to more than the $4,200 loaned with interest thereon for the term of the loan at the rate of 10 per cent. per annum. This results from the stipulations of the writings whereby such failure, at the creditor's election, shortens the term of the loan and increases the amount of the debtor's obligation.

The argument for defendants in error proceeds on the misleading hypothesis that the borrower had the right to retain the $4,200 for a term of ten years. Thus, it is argued: "In this case the borrower was entitled to use the money for ten years, and not merely for one year or five years, and the interest he agreed to pay was to be paid, not for the use of the money for one year or for each of the ten years considered separately, but for its use during the whole term of the loan." But the contract, by means of the acceleration clauses, deprives the borrower of the right to retain the money beyond the date of default in discharging an annual installment of interest, if the creditor so elects. A borrower is no longer entitled to use money after he is obligated to no longer withhold it, and after his creditor can compel collection through sale of his mortgaged property.

The only way this contract can be upheld is by applying the doctrine invoked by defendants in error, announced by most text-writers and supported by abundant authority, which Mr. Williston formulates as follows: "The provision in a pecuniary obligation that on default of the debtor in payment of either principal or interest the entire indebtedness including interest for the full term, or a greater sum than legal interest to the time of default, shall thereupon become immediately payable, is not usurious, though recovery of any excess over legal interest is generally disallowed as penal. Similarly, a provision that on default by the maker an obligation shall thereafter bear a rate of interest higher than the legal rate, though it may be objectionable as penal if the rate is excessive, is not usurious. The principle applicable to these cases has been thus stated: `Wherever the debtor by the terms of the contract can avoid the payment of the larger by the payment of the smaller sum at an earlier date, the contract is not usurious but additional, and the larger sum becomes a mere penalty.'" 3 Williston on Contracts, section 1696; Webb on Usury, section 119, p. 134; Long v. Storie, 9 Hare 546, 41 Eng. Ch. 545; Lloyd v. Scott, 4 Pet. 226, 7 L. Ed. 840; Ward v. Cornett, 91 Va. 681, 22 S. E. 494, 49 L. R. A. 550.

This doctrine, while quite generally followed, has not escaped criticism. Mr. Sutherland said of the theory that the contract should be upheld because the debtor had it within his power to prevent the increase of his debt by promptly discharging his installment payments: "This reasoning overlooks the possibility that for want of money the debtor will be unable to avail himself of this relief; this is the very inability, with its distressing consequences, from which it is deemed humane and politic by statutes against usury to shield him. * * * If the creditor's power over the necessitous to extort oppressive terms at the lending is deserving of legal check, why limit that restriction to the period of credit? High rates of interest to commence at the end of that period are as likely to be oppressive as when applied before, and more likely to be assented to." 1 Sutherland on Damages (4th Ed.) § 318, pp. 997-1000.

There is an expression in the opinion of the Court of Civil Appeals in the case of Seymour Opera House Company v. Thurston, 18 Tex. Civ. App. 417, 45 S. W. 815, 817, to the effect that an acceleration clause does not render a contract usurious though it would "result in requiring the maker to pay more for the use of money than the rate fixed and limited by law would permit," for the reason that "the holder of the note ought not to be held responsible" for "the subsequent default of the maker." A writ of error was refused in that case.

The Supreme Court had previously stated, in Dugan v. Lewis, 79 Tex. 249-254, 14 S. W. 1024, 1026, 12 L. R. A. 93, 23 Am. St. Rep. 332, that the court agreed with the conclusion of the trial judge that a stipulation in a deed of trust, to the effect that the whole sum of money thereby secured might be declared at once due and payable, at the lender's option, on failure to pay a note or its interest coupons, "is to be construed as a penalty, which will not be enforced except upon canceling the unearned interest notes, and that it does not make the contract usurious."

The argument is pressed upon the court with great earnestness that the decisions in these two cases have made the rule formulated by Mr. Williston a rule of property in Texas for such a length of time that it...