Thrift Funds of Baton Rouge, Inc. v. Jones, 52065

• Decision Date: 19 February 1973
• Docket Number: No. 52065,52065
• Citation: 274 So.2d 150
• Parties: THRIFT FUNDS OF BATON ROUGE, INC., Plaintiff-Appellee-Respondent, v. Charlie JONES, Defendant-Appellant-Applicant.
• Court: Louisiana Supreme Court

Page 150

274 So.2d 150

THRIFT FUNDS OF BATON ROUGE, INC., Plaintiff-Appellee-Respondent, v. Charlie JONES, Defendant-Appellant-Applicant.

No. 52065.

Supreme Court of Louisiana.

Feb. 19, 1973.

Rehearing Denied March 26, 1973.

Laycock & Stewart, Ashton L. Stewart, Baton Rouge, for defendant-applicant.

Covert & Brantley, George R. Covert, Baton Rouge, for plaintiff-respondent.

Sanders, Miller, Downing & Kean, Robert A. Hawthorne, Jr., Baton Rouge, for amicus curiae.

TATE, Justice.

The principal issue concerns to what extent, if any, does the exaction of usurious interest by a lender forfeit not only the conventional interest expressed on the note but also the capitalized interest included within its face amount.

The plaintiff ('Thrift Funds') sues upon a promissory note. The maker Jones defends on the ground that the obligation is void as usurious and, in addition, he reconvenes to recover damages and attorney's fees. The court of appeal allowed Thrift Funds' recovery based on the face amount of the note. In so doing, it reversed the trial court, which had disallowed the capitalized interest included therein on the ground that the lender had exacted additional usurious interest. 259 So.2d 587 (La.App.1st Cir. 1971). Upon the defendant Jones' application, we granted certiorari. 261 La. 451, 259 So.2d 910 (1972).

The gravamen of the defendant Jones' complaint is this: The court of appeal sustained the plaintiff finance company's claim that he still owes it $1144.66, plus interest and 25% Attorney's fees, as of March 17, 1970, even though he has made payments of $815.10 since borrowing $650 on May 9, 1967, less than three years before, and $100 on October 22, 1969, five months before. The crux of his contention is that the bulk, if not all, of the present balance claimed due is composed of usurious interest sought to be collected from him in violation of Louisiana statutory law.

Facts

The factual context of this litigation is fully set forth by the court of appeal opinion. In summary, this shows:

Thrift Funds was licensed to do business under the former Louisiana Small Loan Law, La.R.S. 6:571--93 (1950). ¹ This enactment regulated loans made at an interest rate in excess of the normal maximum conventional rate ² and permitted licensees to make them at the greater rates prescribed by such small-loan law. ³

Jones, a black man aged 83 years, needed $650 to pay a plumbing bill when required by law to connect his house to the city sewerage system. He applied to the plaintiff lender for a loan, this being his first from a finance company. He received his loan, signing a note in 1967 in the face amount of $1152 payable in 48 installments of $24 each. In addition to the $650 loan and $50 closing costs to 'his' attorney, ⁴ the note also included $452 capitalized interest or discount. ⁵ The note also provided for 8% Per annum interest on each monthly installment from maturity until paid.

Between May 9, 1967 and October 18, 1969, Jones had made 28 payments of $24 each (i.e., $672), plus a $10.00 'extension fee' to secure an extension for a missed installment. He thus paid a total of $682.00. The total balance due by finance company records was still $522, since Thrift Funds had deducted a total of $49.20 late charges from the installment payments made. (See below.) Jones's note was fully current as of October 18, 1969.

On that date, Jones needed an additional $100 for a plumbing bill. He applied to Thrift Funds for this sum. Thrift Funds loaned him the $100, 'refinancing' the balance of $522 its records showed due on the prior $1152 note, which was then cancelled. Jones received his $100, in return for which he signed a new note dated October 22, 1969 in the amount of $1277.76 (payable in 48 installments of $26.62 each).

This face amount was arrived at as follows: $100 for the new loan; $7 recordation and cancellation charges; $522, balance of old note extinguished: total, $627 financed ($2.00 error in addition); Plus finance charges of $650.76, calculated at the rate of 41% Per annum. The note bore interest at the rate of 8% Per annum on any unpaid balance, commencing at maturity (November 20, 1973) of the note.

On this new note Jones paid five installments of $26.62 each prior to retaining an attorney and making no further payments. These installments were due on the 20th of the month. Since four of them were paid on the 3rd and 4th of the following month, 'default charges' of $2.66 (10% Of the installment due) were exacted for such payments delinquent by 15 days, i.e., at the rate of 240% Per annum upon each delinquent installment. These 'default' charges were exacted by virtue of a condition printed on the 'loan disclosure statement.' ⁶ Questioning the charges, Jones retained an attorney and paid no further installments.

The 'late charges' for the delinquent installments upon the first of 1967 note of $1152 also form a principal basis for the defendant Jones' charge of usury. We will therefore discuss them in detail.

The payments on the 1967 note were due on the 10th of each month. Presumably pursuant to a condition stamped on the face of the payment book, ⁷ the lender subtracted a 'late charge' ⁸ on 23 of the 28 installment payments, totalling $49.20, additionally charging a $10 'extension fee'. ⁹

It will be remembered that the note itself only authorized 8% Per annum on each installment overdue after its maturity, or 16 Cents per month, as contrasted with the $1.20 to $3.60 late charges thus exacted. This is without reference to the circumstance that each installment included capitalized interest and to the prohibition by Civil Code Article 1939 of charging interest upon interest.

The 'Late' or 'Default' Charges as Usurious Interest

Both the trial and intermediate courts correctly held that the exaction of the 'late' or 'default' charges constituted usury prohibited by Louisiana law. They disagreed, however, as to the consequences of such usury. In our view, in order to determine the consequences it is necessary to review once again the legal reasons why such delinquency charges constituted the exaction of usurious interest.

At least the 1967 note (and, Thrift Funds claims, also the 1969 note) was exempt from the Louisiana Small Loans Law, because this statute regulated only loans of $300 or less. La.R.S. 6:585 (1952). Because of this, the maximum interest on it chargeable is regulated by Civil Code Article 2924 (1870; amended in 1908) ¹⁰. (The 1970 and 1972 amendments do not affect the provisions applicable to the 1969 note. ¹¹)

Paragraph 4 of this code article (see footnote) provides that 'The amount of conventional interest cannot exceed eight per cent.' However, paragraphs 6 and 7 provide exceptions relevant to decision of the present issues.

These paragraphs permit recovery of the face amount of a note even if by reason of a discount the eight per cent maximum is exceeded (paragraph 6) or even if the capitalized interest included within the face amount is at a greater rate than eight per cent, 'provided such obligation shall not bear more than eight per cent per annum After maturity until paid' (paragraph 7). (Italics ours.)

In Mayfield v. Nunn, 239 La. 1021, 121 So.2d 65 (1960), we had occasion to review the statutory and jurisprudential history of these two provisions.

Paragraph 6 we declared limited to its legislative purpose of facilitating the sale of discounted notes to raise money, thus limiting it to protection of commercial discounting--the sale of already existing paper at a discount, see Note, 35 Tul.L.Rev. 276 (1960). 121 So.2d 69--70. We held paragraph 6 inapplicable to transactions such as the present, where the capitalized interest is included within the face amount of the note.

These latter transactions are governed instead by Paragraph 7, which permits recovery of capitalized interest (without limit as to amount) included within the face amount of such obligation, provided (Article 2924) 'such obligation shall not bear more than eight per cent per annum After maturity until paid' (Italics ours). See: General Securities Company v. Jumonville 216 La. 681, 44 So.2d 702 (1950); Huntington v. Westerfield, 119 La. 615, 44 So. 317 (1907); Chadwick v. Menard, 104 La. 38, 28 So. 933 (1900) (review of statutory history); Walker v. Villavaso, 18 La.Ann. 712 (1866); Tarver v. Winn, 18 La.Ann. 557 (1866). See also (summarizing jurisprudence critically): Meadow Brook National Bank v. Recile, 302 F.Supp. 62, 75--76 (D.C.1969) (excellent jurisprudential history), Noted, 44 Tul.L.Rev. 832 (1970); Cazales, Usury Law in Louisiana, 14 Loyola L.Rev. 301 (1969); Comment, 39 Tul.L.Rev. 328 (1965); Comment, 5 Tul.L.Rev. 211 (1931); Note, 29 La.L.Rev. 562 (1969).

In Mayfield, the $15,000 note included, in rounded figure, a $5,000 bonus capitalized within the face amount, as well as a stipulation for 8% Interest from the date on the face amount of the note. The creditor was attempting to recover Both the capitalized 'bonus' of $5,000 and the stipulated 8% Interest from date. This court rejected such claim, finding that the 'bonus' or 'discount' amounted to capitalized interest, so that the attempt of the creditor to collect such amounts was in violation of Paragraph 7 of Civil Code Articles 2924 (which permits recovery of conventional interest in excess of 8% When capitalized and included within the face amount of an obligation, providing such obligation does not bear more than 8% Interest 'after maturity') and 1939 (which prohibits recovery of interest on interest unless 'added to the principal, and by another contract made a new debt').

Under the Mayfield rationale, in the instant case the 'default' or 'late' charges of both the 1967 and the 1969 notes were illegally usurious exactions of interest charges for the delayed payment of money in violation of Civil Code Articles 2924 and 1939.

These charges are clearly 'interest' as defined by Civil Code Article 1935: 'The damages due for...