Small v. Ellis

• Decision Date: 13 December 1961
• Docket Number: No. 6634,6634
• Citation: 367 P.2d 234,90 Ariz. 194
• Parties: W. J. SMALL, husband of Hazel M. Small, dealing with his sole and separate property, Appellant, v. George L. ELLIS and Rachael M. Ellis, his wife, Appellees.
• Court: Arizona Supreme Court

Page 234

367 P.2d 234

90 Ariz. 194

W. J. SMALL, husband of Hazel M. Small, dealing with his sole and separate property, Appellant, v. George L. ELLIS and Rachael M. Ellis, his wife, Appellees.

No. 6634.

Supreme Court of Arizona, In Division.

Dec. 13, 1961.

Clark & Coker, Phoenix, for appellant.

Evans, Kitchel & Jenckes, Phoenix, for appellees.

PATTERSON, Judge.

This is an appeal by plaintiff from a judgment of the Superior Court of Maricopa County in an action upon a promissory note to which the defense of usury was sustained. The material facts of the case are not in dispute. The plaintiff loaned defendants $210,000 in consideration of which defendants executed a promissory note for $246,750. The promissory note containing an acceleration clause reads as follows:

'Promissory Note

'$246,750.00

Phoenix, Arizona,

May 28, 1952

'As Hereinafter Stated, for value received, we promise to pay to W. J. Small, or order, the sum of Two Hundred Forty-Six Thousand, Seven Hundred Fifty ($246,750.00) Dollars, with interest on the unpaid principal balance at the rate of two and one-half (2 1/2%) per cent per annum, principal and interest payable in lawful money of the United States of America at Kansas City, Missouri.

'This note is payable in six (6) annual principal installments of Forty-One Thousand, One Hundred Twenty-Five ($41,125.00) Dollars each, plus interest on the unpaid principal balance hereof at the rate of two and one-half (2 1/2%) per cent per annum, the first payment of principal and interest to be payable on June 1, 1953, and payments of like principal with interest on the lst day of June of each and every year thereafter until said principal sum with interest has been paid in full.

'Should the makers fail to pay the installments of principal hereon as above provided, plus interest, at the time the same become due, the holder may, at his election, declare the full amount then owing on this note, with interest, to be immediately due and payable.

'If this note be placed in the hands of an attorney for collection, then the makers agree to pay, in addition to the principal and interest due hereon, an amount as collection fees equal to ten (10%) per cent of the principal and interest then due on this note; in case suit or action is instituted to collect this note or any portion hereof, the makers promise to pay such additional sum as the court may adjudge reasonable as attorney's fees in said suit or action, together with all costs of suit.

'This note is secured by a Realty and Chattel Mortgage of even date herewith.

'George L. Ellis

George L. Ellis

Rachael M. Ellis

Rachael M. Ellis'

The amount appearing upon the face of the note was arrived at by adding to the amount actually loaned in the sum of $210,000 the additional amount of $36,750 which represented capitalized interest at 5% per annum. As a result the note being predicated upon a loan of $210,000 provided for repayment of this amount plus 5% capitalized interest plus 2 1/2% interest on the entire amount. So calculated the note would have produced a total of 7.94% interest per annum average upon the actual amount loaned had there been no default. Defendants defaulted with respect to the 1955 installment and as a consequence the plaintiff exercised his right to accelerate the note. He demanded only the balance due of the amount actually loaned plus interest thereon at 7 1/2%.

It is admitted that upon acceleration before maturity the note provides for payment of interest on the loan at a greater rate than 8% per annum. The trial court found and concluded that the note because of its acceleration clause was usurious and under A.R.S. § 44-1203 the court gave plaintiff judgment for only the principal amount loaned and credited all payments made by defendants to principal, thereby causing a forfeiture by plaintiff of all interest due under the note.

Plaintiff's Assignments of Error Are:

The trial court erred in making is findings of fact, conclusions of law and in rendering its judgment of foreclosure in favor of the plaintiff and against the defendants Ellis by holding that the promissory note secured by the mortgages in question was usurious, thereby holding that plaintiff was not entitled to any interest upon the note and that all payments previously made thereon were to be credited to principal, and in denying plaintiff's objections to the findings of fact and conclusions of law and his motion for new trial, for the reasons and upon the following grounds:

I. That there is no evidence to support the findings, conclusions and judgment that the note on its face was usurious.

II. That there is no evidence in the record before the trial court to show that plaintiff ever intended to, nor did he actually demand interest in excess of the legal rate, even as a penalty for default on the part of the defendants; nor is there any evidence to support the trial court's failure and refusal to find and conclude that there was no intent upon the part of either the plaintiff or defendants to violate the Usury Laws of Arizona.

III. That defendants, in asserting their claim of usury in defense, had not done all that equity requires in order to assert such defense.

IV. That there is no evidence to support the findings, conclusions and judgment of the trial court, that the note in question was usurious for the reason that according to the undisputed evidence if defendants had paid the note in accordance with its tenure and at the times stated therein at no time would the interest have exceeded 7.94%.

This appeal presents two primary problems to resolve: (1) Was the note at inception usurious on its face by reason of the contingency that the acceleration clause might be invoked by plaintiff on account of nonpayment of an installment due before maturity of the entire note and which contingency presents the probability of accruing an interest obligation in excess of 8%? (2) Did plaintiff by invoking the acceleration clause on account of defendants' nonpayment of an installment due before maturity of the entire note, and demanding and suing for the balance due on the money actually loaned plus interest at the rate of 7 1/2% per annum violate A.R.S. § 44-1202, although the terms of the note provided that plaintiff could have demanded payment of the principal of the note which included the capitalized interest and 2 1/2% interest thereon which demand would have exceeded 8%?

It is agreed by the parties that if the acceleration clause is not invoked before maturity and the note is paid according to its terms including the capitalized interest of 5%, the note would have borne interest at the rate of 7.94%.

A.R.S. § 44-1202 reads as follows:

'Usury prohibited; forfeiture of all interest upon obligation involving interest exceeding eight per cent

'No person shall directly or indirectly take or receive in money, goods, or things in action, or in any other way, any greater sum or any greater value for the loan or forbearance of any money, goods, or things in action, than eight dollars on one hundred dollars for one year. Any person, contracting for, reserving or receiving, directly or indirectly, any greater sum or value, shall forfeit all interest.'

Interest at the rate of 7.94% is not a violation of A.R.S. § 44-1201. Plaintiffs contend that the note is not usurious and defendants contend that it is usurious on its face by reason of the acceleration clause, which if invoked prior to maturity would impose interest at a rate in excess of 8%.

This Court has held that extrinsic evidence may be considered in determining whether a transaction is usurious. Seargeant v. Smith, 63 Ariz. 466, 163 P.2d 680; Fagerberg v. Denny, 57 Ariz. 179, 112 P.2d 578; Blaisdell v. Steinfeld, 15 Ariz. 155, 137 P. 555. This is an appropriate case to consider the extrinsic evidence adduced at the trial.

Plaintiff demanded of defendants and instituted suit to collect the unpaid balance on the $210,000 actually loaned and interest thereon at the rate of 7 1/2%. The capitalized 5% interest added to the $210,000 was waived.

Defendants cite the minority authorities which hold that if the interest due and payable by virtue of invoking the acceleration clause before maturity of the entire note exceeds the legal maximum the entire transaction is usurious. Also, if the face of the note contains an acceleration clause which could bring about such a contingency, the note is usurious. Atwood v. Deming Inv. Co., 55 F.2d 180 (5th Cir., 1932); Deming Inv. Co. v. Giddens, 120 Tex. 9, 30 S.W.2d 287; Shropshire v. Commerce Farm Credit Co., 120 Tex. 400, 30 S.W.2d 282, 84 A.L.R. 1269, cert. denied 284 U.s, 675, 52 S.Ct. 130, 76 L.Ed. 571; Parks v. Lubbock, 92 Tex. 635, 51 S.W. 322; Maxwell v. Jacksonville Loan & Improvement Co., 45 Fla. 425, 34 So. 255.

Defendants also rely upon § 526 of the Restatement of the Law of Contracts, which provides:

'A bargain under which a greater profit than is permitted by law is paid, or is agreed to be paid to a creditor by or on behalf of the debtor for a loan of money, or for extending the maturity of a pecuniary debt is usurious and illegal.'

The foregoing authorities support defendants' position. Defendants emphasize the ants' position. Defendants emphasize the Restatement as authority and refer to the case of Ingalls v. Neidlinger, 70 Ariz. 40, 216 P.2d 387, 390, wherein we stated:

'We have repeatedly stated that where not bound by previous decisions of this court or legislative enactment we will follow the Restatement of the Law. Waddell v. White, 56 Ariz. 525, 109 P.2d 843 and cases * * * cited.'

However, in the case of Reed v. Real Detective Pub. Co., 63 Ariz. 294, 162 P.2d 133, 138, this Court stated:

'* * * We think it would be unwise to follow this...