Simpson v. Kentucky Citizens' Building & Loan Ass'n

• Decision Date: 19 June 1897
• Citation: 101 Ky. 496,41 S.W. 570
• Parties: SIMPSON v. KENTUCKY CITIZENS' BUILDING & LOAN ASS'N.
• Court: Kentucky Court of Appeals

41 S.W. 570

101 Ky. 496

SIMPSON v. KENTUCKY CITIZENS' BUILDING & LOAN ASS'N.

Court of Appeals of Kentucky.

June 19, 1897

Appeal from circuit court, Jefferson county.

"To be officially reported."

Action by Kentucky Citizens' Building & Loan Association against John Simpson to enforce a mortgage lien. Judgment for plaintiff, and defendant appeals. Reversed.

Clayton B. Blakey, Samuel S. Blitz, Beckner & Jouett, and Bennett H Young, for appellant.

John Young Brown, Holt & Holt, Phelps & Thum, and Strother &amp Gordon, for appellees.

HAZELRIGG J.

This case involves the validity of certain features of our building and loan law, and especially that feature which permits the association to exact from a borrowing member monthly or weekly premiums in addition to the legal interest on the money borrowed. The general corporation act of 1893 provides, under the heading of "Building & Loan Associations," that: "Any number of persons, not less than nine, may associate for the purpose of forming a corporation to accumulate the savings of its members, pay into such corporations in fixed periodical installments, and lending to its members the funds so accumulated." And further, that "the name assumed by such corporation shall not be so nearly alike that of any other similar corporation as to deceive the public, and the words 'Building Association' shall form a part of the name." Subsequent sections make provisions regulating total value of shares; date and amount; how much one person may hold; paid-up stock; limit of indebtedness; officers, and their compensation; and other formal matters usually found in the law governing such associations. Section 863, Ky. St., is as follows: "The moneys accumulated, after due allowance made for all necessary and proper expenses and for the withdrawal of shares, shall, at each monthly or weekly meeting, be offered to the members according to their priority of right to a loan as fixed by the by-laws. Each member whose bid is accepted shall be entitled, upon giving proper security and complying with the by-laws, to receive a loan equal to the par value of each share held by him, or such fractional part thereof as the by-laws allow. If a balance of money remains after the monthly loans, the directors may invest the same in good and safe bonds or real estate securities." Section 864: "A borrowing member for each share borrowed upon shall, in addition to his dues and monthly or weekly premiums, pay monthly or weekly interest on his loan at the rate of six per cent. per annum and the interest and premium shall not exceed twelve per cent. per annum, until his shares reach the value fixed by the by-laws, or the loan has been repaid; and when said ultimate value is reached said loan and shares shall be declared canceled and satisfied, and the balance, if any, due upon the shares shall be paid to the member." Section 865 provides: "For every loan made a note secured by first mortgage on real estate shall be given, accompanied by a transfer and pledge of the share of the borrower." Section 868 provides as follows: "If a borrowing member has been in default for six months, the amount to be credited to his shares under the preceding section shall be applied as a payment upon the loan, and the balance, with interest and premium thereon, from the time of first default, shall be enforced against the security. The shares, the value of which has been so applied in payment, shall revert to the corporation, and be held by it free from all interest, claim or demand on the part of the borrower or any person claiming under him." Other sections provide for the withdrawal and retirement of shares.

Appellant became a member of the appellee building and loan company in November, 1893, by purchasing 8 shares of its installment stock, of the par value of $100 per share, and thereby agreed and promised to pay on each of said shares of stock the sum of 60 cents per month, or $4.80 per month on the said 8 shares, until the maturity of his stock. In March, 1894, he made application for and obtained on his stock a loan of $800, and agreed to pay the sum of $4 per month, being 50 cents per share per month, as a premium, and also agreed to pay 6 per cent. interest per annum, or $4 per month, on the amount of the loan, until it was repaid to the association. To secure performance of his contract he executed to the appellee a mortgage on a house and lot in the city of Louisville, Ky. On this contract Simpson paid interest and premium to the amount of $48, and as dues the sum of $48; his last payment on any account being in March, 1896. In January 1897, the association instituted this suit, asking for judgment for foreclosure of the mortgage and sale of the property, and stated the account to be as follows: To advancement on stock, $800; interest for month of March, 1894, at 6 per cent., $4; premium month of March, 1894, $4; and so on to November, 1896, at the rate indicated, until the total debits, including $4.80 fines, and insurance paid for Simpson $8, amounted to $1,076.80. Simpson is then credited with his payments of interest and premium $48, and for dues and dividends $58.43, leaving a balance due as of December 1, 1896, $970.37.

The only defense made by appellant is that the contract is usurious. He concedes the appellee's right to a judgment for $836, and no more. The court below sustained a demurrer to the answer, and rendered judgment for the amount sued for, with interest from December 1, 1896, and directed a sale of the property to pay the debt.

The provisions of our organic and statutory law, supposed to affect the question involved, and invoked by appellant to show that the law is invalid which permits the association to charge any premium for this loan, are as follows "Section 59 (constitution): The general assembly shall not pass local or special acts concerning any of the following subjects, or for any of the following purposes, namely: *** 21: To regulate the rate of interest." Section 3 of our bill of rights provides as follows: "All men, when they form a social compact, are equal; and no grant of exclusive, separate public emoluments or privileges shall be made to any man or set of men, except in consideration of public services; but no property shall be exempt from taxation except as provided in this constitution; and every grant of a franchise, privilege or exemption, shall remain subject to revocation, alteration or amendment." Section 2218, Ky. St., reads as follows: "Legal interest shall be at the rate of $6.00 upon one hundred dollars for one year, and at the same rate for a greater or less sum, and for a longer or shorter time." A succeeding section says: "All contracts and assurances made, directly or indirectly, for the loan or forbearance of money, or other thing of value, at a greater rate than legal interest, shall be void for the excess over the legal interest." The general features of these associations are substantially the same throughout the country, and, as originally designed, were deserving of encouragement. A number of persons find they are able to save a small part of their earnings each week or month, and agree to put together their aggregate savings, to be loaned at interest to one of them, for the purpose of securing and owning his home. As all are actuated by a like desire to build, preference is given to the member who pays the most for the loan, and so on until all are supplied. It was the original design that each member should receive a loan and secure a home; indeed, in one of the first to be started, a share consisted in a dwelling house of a certain description and value. This primitive feature of such associations appropriately originated the term "partnership" in connection with their operation. It is manifest, however, that if this feature be made a subordinate one, or ignored, and, by sales of paid-up stock and other inducements offered to the capitalists, the association is made a mere agency, by means of which excessive interest is charged and large dividends declared on investments in stock, the term "partnership" is no longer applicable. The membership consist of two classes,-the borrower and the investor,-and if the transaction is to be treated as a borrowing and lending of money, a calculation will show that the investor will make about 15 per cent. per annum on his investment, and the borrower will pay from 10 to 12 per cent. for the use of the money borrowed. In this case, appellant, under the judgment, is made to pay 12 per cent. interest on the amount borrowed, or $122 more than the borrowed money would earn at the legal rate of 6 per cent. These calculations are in the rough, and are only intended to give an approximate outline of results. They show without a doubt, if the transaction is to be considered as one of borrowing and lending, that exorbitant interest is paid by the borrower, to the advantage of one who does not borrow. So the question is, what is the nature of the transaction, if not one of borrowing and lending? While the appellee company was organized prior to the general corporation act (April 5, 1893), embracing the law as to building and loan associations, the appellant made his contract with it since that time, and this is the first case we have had in which the new act is to be applied. We have, however, often had such transactions before us...