Shropshire v. Commerce Farm Credit Co.

• Decision Date: 10 February 1926
• Docket Number: (No. 732-4324.)
• Citation: 280 S.W. 181
• Parties: SHROPSHIRE et ux. v. COMMERCE FARM CREDIT CO. et al.<SMALL><SUP>*</SUP></SMALL>
• Court: Texas Supreme Court

280 S.W. 181

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

(No. 732-4324.)

Commission of Appeals of Texas, Section A.

February 10, 1926.

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

Suit by J. E. Shropshire and wife against the Commerce Farm Credit Company and others. Judgment for defendants was affirmed by the Court of Civil Appeals (266 S. W. 612), and plaintiffs bring error. Judgment of the Court of Civil Appeals and district court reversed, and judgment rendered for plaintiffs.

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

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

Statement of the Case.

NICKELS, J.

The defendants in error (who were defendants in the trial court), in their answer, thus describe the basic transaction now before the Supreme Court:

"These defendants further allege: That the plaintiffs made application for the loan of the money, and that the execution of all of the notes and of the deeds of trust were parts of the same transaction, and all were executed at the same time, said transaction being a contract between said plaintiff and the defendant Commerce Farm Credit Company, by which the said Commerce Farm Credit Company agreed to loan the plaintiffs the sum of $4,200 for a term of 10 years, at the interest rate of 9 per centum per annum from date until maturity, for the term of the loan; it being agreed as a part of the contract that the principal note should bear interest at 6 per centum per annum, and that the other 3 per centum should be evidenced by other notes, made payable in 5 years' instead of 10 years' time, and that the payment thereof should be secured by valid liens upon the property of said plaintiffs. That, in pursuance of such agreement, the notes herein involved were executed and acknowledged, and all were delivered by the plaintiffs to the Commerce Farm Credit Company, in exchange for which said company gave to plaintiffs the sum of $4,200."

The testimony fairly indicates that Shropshire and wife so understood the matter and acted upon that understanding at the time. As a part of the agreement, Shropshire and wife executed a "principal note" (or bond) of date August 2, 1921, for $4,200, due and payable August 2, 1931, and, also, executed ten notes (called coupons or bonds) of date August 2, 1921, each for the principal sum of $252, due and payable, serially, August 2, 1922, to August 2, 1931, inclusive, and five (other) notes (called coupons or bonds) of the same date, each for the principal sum of $252, due and payable serially, August 2, 1922, to August 2, 1926, inclusive. The "coupon notes" provided for interest at 10 per centum per annum from maturity, payable annually. Shropshire and wife also executed a deed of trust on certain lands owned by them in Hale county to secure payment of the "principal note," for $4,200 and another deed in trust on the same land to secure payment of the second series of "coupon notes." The deeds in trust declare the purpose of the liens to be to secure payment of the note (bond) for "the sum of $4,200, payable on the 1st day of August, 1931, with interest thereon from date until maturity as therein specifiled, payable annually, according to the interest coupons, * * * and both principal and interest bearing interest after maturity, whether matured from lapse of time or default," and provide that, "if default shall be made in the payment of the principal or any installment of interest upon said bonds, or any of them, and any one of the said sums remain unpaid, * * * then, at the option of the legal holders of said bonds, the same with interest," etc., "shall, without notice, become due and payable."

The first of each series of the "coupon" notes, aggregating $504, were paid by Shropshire and wife November 11, 1922, and the second of each series, aggregating $504, were paid by them on September 20, 1923. The "coupon" notes provided for interest from maturity at 10 per cent. per annum, payable annually, and on November 11, 1922, Shropshire and wife paid $16.10, and on September 20, 1923, they paid $7.15, representing such "interest." These payments were made in Hale county, upon demand of the other parties.

The form (i. e., the various notes or "bonds" and the deeds in trust) given the matter, was such as was required and dictated by the Commerce Farm Credit Company, and that, together with the company's subsequent demands, etc., is taken as indicative of its purpose and intent.

Shropshire and wife filed this suit, and therein sought recovery of $2,030.60, and sought also cancellation of said "interest contract," upon the ground that usurious interest had been provided for in the papers representing the transaction, of which alleged unlawful interest the other parties had "received and collected" $1,015.30. The trial court and the Court of Civil Appeals (266 S. W. 612) held that the transaction was free of usurious taint, and accordingly denied all relief prayed.

Opinion.

There is, as will more fully appear subsequently, a material difference between the interest contract evidenced by the instruments signed by Shropshire and wife and the contemporaneous understanding between the parties as described in the excerpt from the answer, quoted in the statement above. Shropshire and wife, according to the pleading and the proof, understood they were to get the use of $4,200 for 10 years, at an interest rate of 9 per centum per annum — such was the lender's promise. The notes, etc., were prepared by the lender, and they are in such form as it exacted, so that they must be taken as evidence of what the lender intended; if they exhibit usury, the lender must suffer the legal consequence.

The interest contract, embodied in the notes, etc., require a payment of $504 at the end of each of the first 5 years, a total of $2,520, which is the equivalent of 12 per centum per annum, and a payment of $252 at the end of each of the last 5 years, a total of $1,260, the equivalent of 6 per centum per annum. The maximum rate prescribed by the Constitution, § 11, art. 16, and the statute (article 5071, R. S. 1925), being 10 per centum per annum, the exactions thus provided for are usurious, at all events prima facie, and, we believe, absolutely. This is true for two reasons:

(1) The lawful maximum of 10 per centum per annum is exceeded when the contract requires payment of 12 per centum for any year of the term. Two elements enter into the standard of measurement, viz. a year (per annum) as the unit of time and 10 per centum of the principal borrowed as the amount for that period. The terms employed in the Constitution and statute are plain, and, while cases may be found to support a contention against the position here taken, we believe they are not subject to a meaning different from that above given.

(2) An interest exaction of 12 per centum for each of the first 5 years, and of 6 per centum for each of the last 5 years, is not the same thing as an exaction of 9 per centum per annum for the whole 10-year period; the interest, under such an arrangement, exceeds 10 per centum per annum for the 10-year period. This is so, because the exact amount of money ($3,780) paid by the borrower to the lender (called "interest") does not embrace all of the compensation to the lender for the use, forbearance or detention of the money loaned. The minimum value of the use of money, as agreed upon by the parties for the period in question, is 9 per centum per annum. It is plain that the lender here secured (rather, contracted to secure) the use of some money belonging to Shropshire and wife (i. e. the annual payments in excess of interest then earned) concurrently with the use by Shropshire and wife of a larger amount of the lender's money. The value of the use thus obtained by the lender must be charged to it, else the statutory definition of interest (article 5069 R. S. 1925; Parks v. Lubbock, 51 S. W. 322, 92 Tex. 635) will be ignored. The mere fact that the lender required this arrangement of the interest payments demonstrates the proposition that there was in it a substantial element of value, from its viewpoint, over and above the value to it of an ordinary plan whereby the borrowers, each year, would pay 9 per centum of the amount borrowed. Because of the agreement as to the minimum value of use of money, we may take 9 per centum per annum as the basis of calculating the charge which must be made against the lender in order to ascertain the true compensation exacted by it. Upon this basis, and taking into account all elements of compensation to the lender, the following calculation, based upon the facts, will disclose the inevitable effect upon the parties and the concomitant usury:

                The borrowers used $4,200 00 from 8/2/21 to 8/1/22
                                      378 00 interest at 9% earned
                                               same period
                                   _________
                                   $4,578 00
                                      504 00   paid by borrowers
                                               8/1/22
                                   _________
                The borrowers used $4,074 00 from 8/1/22 to 8/1/23
                                      366 66 interest at 9% earned
                                               same period.
                                   _________
                                   $4,440 66
                                      504 00   paid by borrowers
                                               8/1/23.
                                   _________
                The borrowers used $3,936 66 from 8/1/23 to 8/1/24.
                                      354 30 interest at 9% earned
                                               same period.
                                   _________
                                   $4,290 96
                                      504 00   paid by borrowers
                                               8/1/24.
                                   _________
                The borrowers used $3,786 96 from 8/1/24 to 8/1/25.
                                      340 83 interest earned at 9%
                                               same period.
                                   _________

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