Valley Mortg. Co. v. Patterson

• Decision Date: 07 April 1942
• Docket Number: 8 Div. 181.
• Citation: 8 So.2d 213,30 Ala.App. 492
• Parties: VALLEY MORTG. CO. v. PATTERSON.
• Court: Alabama Court of Appeals

8 So.2d 213

30 Ala.App. 492

VALLEY MORTG. CO. v. PATTERSON.

8 Div. 181.

Alabama Court of Appeals

April 7, 1942

Rehearing Denied May 12, 1942.

Appeal from Morgan County Court; J. H. Crow, Jr., Judge.

S. A. Lynne, of Decatur, for appellant.

Harris & Harris, of Decatur, for appellee.

SIMPSON Judge.

Basis of this suit is a promissory note made by appellee Patterson, payable to the Tennessee Valley Bank. Appellant became the lawful holder of the note after maturity and brought the present action to recover the sum due thereon.

The defense is usury, the contention being that the principal of the suit note represents, in part, usurious interest previously charged in a transaction whereby appellee, Patterson, obtained a certain sum of money from the Tennessee Valley Bank.

Appellant mortgage company, which is the transferee of the note acquired it after maturity.

The transaction between Patterson and the Tennessee Valley Bank originated as follows: Patterson held the note of one Chunn dated November 1, 1919, and due one year after date, in the sum of $1,566. Patterson offered this note to the bank for a ten percent discount of its face value, which the bank accepted upon the indorsement and guarantee of payment thereof by Patterson. Patterson received the amount above, less the ten percent discount agreed upon, and the bank took the note, duly indorsed by him. There were other subsequent transactions, but we deal first with the contention of usury as to this one. It is our opinion that there was no usury in this sale and assignment of the note.

There is a divergence of opinion elsewhere, but our courts have consistently ruled that such a transaction is a valid sale of a chattel, with warranty of its soundness, and the purchaser may enforce the obligation to its full extent against his indorser. 66 C.J., p. 188, § 85cc.

The rule was first given expression in Saltmarsh v. Planters' & Merchants' Bank, 17 Ala. 761, to-wit: "A note or bill, which in the hands of the holder is a valid debt, may be bought or sold as any other chattel at its real or supposed value, and the transfer of such a note or bill at a discount beyond the legal rate of interest is not usurious, although the holder may endorse it, unless the transaction was a mere device to evade the statute against usury."

There have been many decisions since, among which are Capital City Ins. Co. v. Quinn, 73 Ala. 558; King v. People's Bank, 127 Ala. 266, 28 So. 658; Hart v. Adler, 109 Ala. 467, 19 So. 894; Scott v. Taul, 115 Ala. 529, 22 So. 447; Woodall & Sons v. People's Nat. Bank, 153 Ala. 576, 45 So. 194; Orr v. Sparkman, 120 Ala. 9, 23 So. 829; Holmes v. Bank of Ft. Gaines, 120 Ala. 493, 24 So. 959; Commercial Credit Co. v. Tarwater, 215 Ala. 123, 110 So. 39, 40, 48 A.L.R. 1437.

The precise statement, by the now Mr. Chief Justice Gardner of our Supreme Court, in the Tarwater case is quite applicable: "The mere fact that plaintiff purchased the note at a discount beyond the legal rate of interest does not constitute the transaction an usurious one."

The contention is untenable that Code 1940, Title 9, Sec. 66, Code 1907, Sec. 4624, forbidding the discounting by a banker of notes, etc., at a higher rate of interest than eight percent per annum, renders this transaction usurious.

The term discount, as used in the statute, does not comprehend or affect the sale of commercial paper at its market value. Saltmarsh, Tarwater, and other cases, supra.

Discount, as there employed, presupposes a loan or advance. As defined in Corpus Juris Secundum (vol. 9, Banks and Banking, § 383): "A discount is a transaction by which a bank, in making a loan on a promissory note or other paper, deducts the interest in advance, so that the borrower receives only the face value of the obligation less the interest on such face value from the time when the loan is negotiated, until its maturity."

The distinction is very well illustrated in our own case of Hudson v. Repton State Bank, 16 Ala.App. 101, 75 So. 695, 696: "The manifest purpose of section 4624, Code 1907 [now Sec. 66, Title 9, Code 1940], is to prevent banks from using the character of their business as a cloak to evade the usury laws; and where money is advanced by a bank and the transaction is in substance a loan, though in form a discount of securities, and the amount taken out for the use of the money is in excess of the legal rate of interest, the transaction is usurious. * * * Where, however, the transaction is not in substance a loan, but is a bargain and sale of securities, and the obligation of the person liable on such securities is not made more burdensome, the transaction is not usurious, though the amount of the discount is in excess of the legal rate of interest."

We construe the transaction, above, to have been, not one of a loan or advance of money, but a bargain and sale of a negotiable security.

The finding below was opposed to this conclusion, that court having concluded that usury prevailed in the procurement of the money. A reversal of the judgment must therefore be ordered as a result of this erroneous ruling.

But, other transactions proceeded from the original one, hereinabove described, and it is clear to us that these subsequent transactions were infected with usury, which precluded the allowance and collection of interest on the obligation represented thereby.

Briefly stated, these later transactions, which finally resulted in the note now sued on, were: There was default in payment of the original Chunn-Patterson note, above, when it matured. The bank forbore collection and allowed a renewal of this obligation by the execution of a new note, between the same parties, for an extended time, but on this new note there was added to the $1,566 principal interest at the rate of ten percent per annum. This was clearly an inclusion in a new obligation or contract of usurious interest for the bank's consent to forbear collection of the original one. This is denounced by our usury statute, to-wit: "All contracts for the payment of interest upon the loan or forbearance of goods, money, things in action, or upon any contract whatever, at a higher rate than is prescribed in this chapter, are usurious." (Emphasis supplied.) Title 9, Sec. 65, Code 1940.

This second, renewal note was similarly renewed...