Henrietta ALLEE, et al., Petitioners, v. Albert BENSER, Respondent, 779 S.W.2d 61

OPINION RAY, Justice. This is a usury case presenting the question whether a junior lienholder has standing to assert a usury claim of the borrower to defeat the senior lien. After both parties moved for

summary judgment, the trial court rendered judgment for the junior lienholder, holding that the senior transaction was usurious as a matter of law and the junior lienholder had standing to assert the usury claim. The court of appeals, divided as to the reason for its judgment, reversed and remanded. 735 S.W.2d 566. We affirm the judgment of the court of appeals. The borrower is Thomas E. Morris. Morris executed and delivered a note and deed of trust to Metropolitan National Bank, and Albert Benser guaranteed payment of the note to the bank.

When Morris defaulted the bank made demand on Benser under his guaranty, and Benser paid the balance due. Metropolitan Bank then assigned the note and deed of trust to Benser. Benser instituted foreclosure proceedings under the deed of trust, but ceased the proceedings on August 31, 1984, when he and Morris reached agreement on a renewal and extension of the loan. On September 24, 1984, Morris executed and delivered a note and deed of trust on the same property to Independence Bank. Henrietta Allee, Robert E. Myrin, Joseph E. Caperone, Jess S. Epps, Jr., and Donald E.

Davis (collectively the “Allee parties”) guaranteed payment of this second note. Morris defaulted and the Allee parties paid the note, after which Independence Bank assigned its note and deed of trust to the Allee parties. Subsequently, Morris was in default both on the renewal to Benser and the Independence Bank note. Both Benser and the Allee parties instituted foreclosure proceedings on the property. The Allee parties sued Benser for a declaration that his lien was extinguished. Tex.Civ.Prac. & Rem. Code Ann. § 37.004(a) (Vernon 1986).

The Allee parties alleged that a payment from Morris to Benser as part of the renewal and extension agreement was “interest,” which made the total interest under the renewal and extension agreement more than twice the amount allowed by law, requiring Benser to forfeit principal and interest as a usury penalty. Tex.Rev.Civ. Stat.Ann. art. 5069-1.06(2) (Vernon 1987). Benser defended on the grounds that the Allee parties lacked standing to assert the usury penalty because it was personal to the obligor, and that the renewal was not usurious.

We address the standing issue and, for the reasons given below, do not address whether

summary judgment was proper on the usury question. The Allee parties admit the general rule is that a usury cause of action is personal to the obligor. They argue that a junior lienholder is an exception to that general rule. They cite two cases decided in the 1890’s to support their argument. Both cases hold that a junior lienholder may assert the voidness of a usurious contract against the senior lienholder. The first case is Maloney v.

Eaheart, 81 Tex. 281, 16 S.W. 1030 (1891), which held that the purchaser under a junior mortgagee’s foreclosure sale, as one who has the right to pay off the debt that creates the prior encumbrance, has the right to discharge such incumbrance by paying only so much of the debt as was recognized to be valid. The second case is Johnson v. Lasker Real-Estate Ass’n, 2 Tex.Civ.App. 494, 21 S.W. 961 (Tex.Civ.App. — Galveston 1893, no writ), which held that a junior mortgagee may credit payments of usurious interest against the principal debt secured by the senior mortgage.

Benser relies on this court’s decision in Houston Sash & Door Co. v. Heaner, 577 S.W.2d 217 (Tex.1979), holding that the language of

article 5069-1.06 that the violator “shall forfeit to the obligor ” the usury penalties, meant the assertion of the remedy was “restricted to the immediate parties to the transaction.” Houston Sash, 577 S.W.2d at 222. The opinion cited with approval the holding that usury was a personal cause of action of Micrea, Inc. v. Eureka Life Ins. Co., 534 S.W.2d 348, 354 (Tex.Civ.App. — Fort Worth 1976, writ ref’d n.r. e.).

Because both the constitutional and statutory framework of the usury laws have changed since the Maloney decision, we hold that the type of “voidness” the Allee parties attempt to assert is not what this court held in Maloney they would have standing to assert. We thus reaffirm this court’s holding in Houston Sash that the penalties provided under

article 5069-1.06 are personal to the obligor and may not be asserted by the Allee parties. We begin with an examination of the constitutional provision prohibiting usury. During Reconstruction, one popular economic theory advocated that restrictions on interest rates produced a shortage of capital and consequently produced unnecessarily high costs for credit.

Texas’ Reconstruction government was so influenced by the theory that in the Constitution of 1869 (article XII, § 44), it abolished usury laws and prohibited the legislature from enacting laws limiting the amount of interest that could be charged for the use of money. Tex. Const, art. XVI, § 11, interp. commentary (Vernon 1955). The gross credit abuses that arose from the absence of usury laws prompted the people to adopt a specific usury prohibition in the Constitution of 1876. Id.

Article XVI,

section 11 of the Texas Constitution (1876) provided: The legal rate of interest shall not exceed eight per cent, per annum, in the absence of any contract as to the rate of interest; and by contract parties may agree upon any rate not to exceed twelve per cent, per annum. All interest charged above this last named rate, shall be deemed usurious, and the Legislature shall, at its first session, provide appropriate pains and penalties to prevent and punish usury.

This court held the constitutional provision as it then existed was self-executing and made illegal and void any contract for a higher rate than twelve percent. Hemphill v. Watson, 60 Tex. 679 (1884); Watson v. Aiken, 55 Tex. 536 (1881). The legislature enacted statutes in response to the constitutional mandate providing that all contracts for interest in excess of twelve percent were void as to interest, but that the principal debt was not void. Law of August 21, 1876, Ch. 137, § 3, 1876 Tex. Gen.Laws 228, 8 H. Gammel, Laws of Texas 1064 (1898).

It was in the context of this constitutional and statutory framework that this court held in Maloney that a second lienholder had standing to assert usury to determine the “true” amount of the debt underlying the first deed of trust. As discussed below, the cases held all interest paid on a usurious contract was “void,” and was applied to reduce the principal amount of the debt, without regard to the penalties provided by the usury statutes. In 1891 the voters adopted an amendment to

article XVI,

section 11 of the constitution. The amended

section then provided: All contracts for a greater rate of interest than ten per centum per annum, shall be deemed usurious, and the first Legislature after this amendment is adopted, shall provide appropriate pains and penalties to prevent the same; but when no rate of interest is agreed upon, the rate shall not exceed six per centum per an-num. Tex. Const, art. XVI, § 11 (1891). The amendment lowered the maximum interest rate to ten percent, but otherwise left the substance of the constitutional provision the same.

The provisions of the usury statutes remained substantially the same, ultimately being codified as articles 5071 and 5073 of the Revised Statutes of 1925. Tex.Rev.Civ.Stat.Ann. arts. 5071, 5073 (1925) (repealed 1967). It is instructive to review the ease law development under this constitutional and statutory framework to understand why the Allee parties may not assert the penalty right they seek of forfeiture of all the principal of the Benser note. The right to assert a credit against the principal debt for payment of the “void” interest rested on both constitutional and statutory grounds.

The legislature ultimately enacted a penalty provision for recovery by the debtor or his legal representative of twice the usurious interest actually paid in a suit brought within two years of the payment. The question then arose whether the remedy of cancellation of principal by application of the interest payments, had been repealed. This court approved a holding that the direct constitutional remedy was not repealed, but that the debtor (as to a particular payment of interest) had to elect whether to have it applied to principal or to collect the usury penalty for it. Sugg v.

Smith, 205 S.W. 363, 372-73 (Tex.Civ.App. — Austin 1918, writ ref’d). Several alternative remedies were available to the debtor. He could refuse to pay the interest (which was the “void” portion of the contract), but pay the principal debt in installments as provided. Palmetto Lumber Co. v. Gibbs, 124 Tex. 615, 620, 80 S.W.2d 742, 745 (1935). The two-year statute of limitations applied only to the penalty provisions of the statute, because the interest portion of the contract was void under the constitution.

Thus the debtor could elect to apply all payments made more than two years before the filing of suit to the principal debt, and to recover penalties (then double the amount of interest paid) for the interest payments made within the two-year period. Adleson v. B.F. Dittmar Co., 124 Tex. 564, 568, 80 S.W.2d 939, 941 (1935). Alternatively, the debtor could have the interest paid applied to principal for payments made before the two-year period, and the penalty of twice the interest paid applied to principal for payments made within the two-year period. Id.

As to interest payments made within the two-year period for which the penalty was not barred, the debtor had the choice of the two remedies. He could require the reduction of the amount of usurious interest paid from the principal, or by pleading the penalty statute he could sue to recover double the amount of interest paid, but he could not pursue both remedies or blend the two. Gerard v. National Bond & Mortgage Corp., 86 S.W.2d 74, 76 (Tex.Civ. App. — Galveston 1935, writ ref d).

It was the penalty statute, being of a penal nature and thus strictly construed, that the courts held provided a remedy that was personal to the debtor or to his legal representatives, according to the specific language of the statute then in force. Sugg v. Smith, 205 S.W. at 370. This court has never held that a junior lienholder, or anyone else not directly authorized by the usury statute in force at the time of the decision, had standing to assert the penalty portion of the usury statute. Both the constitution and the usury statutes read differently now.

In 1960 the voters adopted the constitutional amendment to

article XVI,

section 11 presently in force. It now provides: The Legislature shall have authority to classify loans and lenders, license and regulate lenders, define interest and fix maximum rates of interest; provided, however, in the absence of legislation fixing maximum rates of interest all contracts for a greater rate of interest than ten per centum (10%) per annum shall be deemed usurious; provided, further, that in contracts where no rate of interest is agreed upon, the rate shall not exceed six per centum (6%) per annum.

Should any regulatory agency, acting under the provisions of this Section, cancel or refuse to grant any permit under any law passed by the Legislature; then such applicant or holder shall have the right of appeal to the courts and granted a trial de novo as that term is used in appealing from the justice of peace court to the county court. Tex. Const, art. XVI, § 11. In 1967 the legislature enacted the current scheme of usury statutes, represented by the various chapters under current

article 5069. Although the 1960 constitutional amendment eliminated the term “pains and penalties,” the legislature’s statutory language and the holdings of this court make it clear that the forfeiture of all principal for so-called “double usury” is a “penalty” as that term was used under the former constitutional and statutory provisions. The statutory heading for

article 5069-1.06 is “Penalties,” and the double usury provision itself,

article 5069-1.06(2), states the lender “shall forfeit as an additional penalty, all principal as well as interest” (emphasis supplied). This court’s decisions recognized the provision as a particularly severe penalty. Houston Sash, 577 S.W.2d at 220. The pleadings of the Allee parties seek to enforce the penalty forfeiture provision. Under the holding of Maloney it is only the constitutional voidness that may be asserted by the junior lienholder.

Under this court’s Houston Sash opinion, and under the holdings construing the constitutional and statutory scheme in effect when Maloney was decided, the Allee parties lack standing to enforce the penalty forfeiture provision. The changes in the constitutional and statutory provisions have altered the distinctions for pleading and election of alternative substantive remedies of the prior usury laws. Wall v.

East Texas Teachers Credit Union, 526 S.W.2d 148, 150-51 (Tex.Civ.App. — Texarkana 1975), affd in part and rev’d in part, 533 S.W.2d 918, 921-22 (Tex.1976) (expressly approving reasons and holding on the point). Thus the rationale of an older case for why a transaction was not tainted by usury may no longer apply. Nevertheless, during the same term in which this court decided Ma-loney, we held that a subsequent usurious renewal and extension did not taint the original loan and deed of trust with usury, when the original loan was not usurious. Krause v. Pope, 78 Tex. 478, 14 S.W. 616, 619 (1890).

A literal application of Malo-ney and Krause would require that neither the junior lienholder nor the debtor could defeat the senior lien in the present case. We do not expressly overrule either Malo- ney and Krause. They correctly applied the constitution and statutes then in force. They simply do not apply to the present constitutional and statutory scheme. Our holding should not be misconstrued. We do not hold that a junior lien-holder has no standing to assert the constitutional voidness of usurious interest.

Since a constitutional provision still expressly condemns usury, if the renewal contract were to collect usurious interest, that portion of the contract would be illegal and void. Tri-County Farmer’s Co-op v. Bendele, 641 S.W.2d 208, 209 n. 2 (Tex.1982). We do not decide and expressly do not preclude the Allee parties from asserting on remand that constitutionally void usurious interest was collected that must be applied against the principal indebtedness of the note. Some courts have called variations of this theory “common law usury.” See Coppedge v.

Colonial Savings & Loan Ass’n, 721 S.W.2d 933, 938 (Tex.App. —Dallas 1986, writ ref d n.r.e.); Commercial Credit Equipment Corp. v. West, 677 S.W.2d 669, 679 (Tex.App. — Amarillo 1984, writ ref d n.r.e.). The present state of the Allee parties’ pleadings would not allow such a remedy, so we do not decide either whether such a “common law” usury doctrine is viable, or whether the

summary judgment evidence established that as a matter of law the payment by Morris to Benser constituted usurious interest because it was a device to evade the usury laws. We hold that a junior lienholder lacks standing to assert the penalty provisions of the usury statutes against the senior lien-holder. We affirm the judgment of the court of appeals which remanded this cause to the trial court for further proceedings. SPEARS, J., dissents joined by MAUZY, J. CULVER, J., dissents joined by KILGARLIN, J.