J. E. Shropshire et ux. v. Commerce Farm Credit Company et al., 120 Tex. 400

Mr. Justice GREENWOOD delivered the opinion of the court. As appears from the opinion of the Court of Civil Appeals, 266 S.

W., 613, the pleadings and evidence disclosed the following facts: “The plaintiffs (Shropshire and wife) borrowed the sum of $4,200 from one of the defendants, The Commerce Farm Credit Company, and executed their note (or bond) to the said company for the sum of $4,200, payable ten years after date. * * *” To secure payment of the interest, “the plaintiffs executed 10 interest coupons, each for the sum of $252, payable annually, which, it will be seen, represented interest on the loan at 6 per cent; the additional interest was ‘squeezed into five equal payments,’ ” secured “by 5 separate notes, each for $252, payable one each year during the first five years of the loan period. * * * The principal note and the six per cent interest coupons were secured by a first lien deed of trust on land in Hale County.” By the terms of the $4,200 note and the coupons and the deed of trust securing same, it was stipulated that both the principal and interest of the note should bear interest “after maturity, whether matured from lapse of time or by default, at the rate of ten per cent per annum.” Both note and deed of trust provided that if default was made in the payment of any installment of interest, when due, then at the option of the legal holders of the note, “the same with interest and all other indebtedness and charges secured hereby shall, without notice, become due and payable”, and the deed of trust empowered the trustee to advertise and sell the land and make conveyance thereof to the purchaser.

The five separate notes for $252 each were secured by a second lien deed of trust on the land in Hale county, containing the following provision: “This conveyance is in trust, however, to secure the payment of grantor’s promissory notes of even date herewith aggregating the sum of $1,260 and due as therein specified and provided, payable to the order of the Commerce Farm Credit Company. * * * If the notes secured hereby and each of them are not paid promptly, when due, or in case of the breach of any of the covenants, terms, or agreements in said first deed of trust, then all of said notes hereby secured shall become due and payable, at the election of the holder; and the trustee, his successor, or substitute may sell said premises, after notice as prescribed in first deed of trust, and execute and deliver a good and sufficient deed therefor and receive the proceeds of sale.” Shropshire and wife paid $1,015 in discharge of the two installments for $252 each first maturing on the note secured by the second lien deed of trust and in discharge of the first two coupons on the $4,200 note.

Afterwards, Shropshire and wife instituted this suit to have the loan adjudged usurious and to recover double the amount paid by them as interest. The district court rendered judgment that Shropshire and wife take nothing by their suit. The Court of Civil Appeals at Amarillo affirmed this judgment. 266 S. W., 612. On writ of error, the Supreme Court, on an opinion by

Section A of the Commission of Appeals to the effect that the loan was usurious, reversed the judgments of the district court and Court of Civil Appeals, and awarded Shropshire and wife double the amount they had paid as interest on the loan. 280 S. W., 181. On motion for rehearing, the case was withdrawn from the Commission of Appeals and was argued before the Supreme Court.

From the above statement of the case it appears that the single question for our determination is whether a contract is usurious under the Constitution and statutes in Texas, which provides for the payment of a higher rate of interest than ten per cent per annum, at the creditor’s option, on no other condition than the default of the debtor in discharging annual installments of interest.

Regardless of results in the event the debtor should discharge every promised annual installment of interest at or before maturity, it is too plain for dispute that this contract, on the face of the writings, entitles the creditor, at its option, on failure of the debtor to discharge certain annual installments of interest, to enforce collection from the debtor of a sum amounting to more than the $4,200 loaned with interest thereon for the term of the loan at the rate of ten per cent per annum.

This results from the stipulations of the writings whereby such failure, at the creditor’s election, shortens the term of the loan and increases the amount of the debtor’s obligation. The argument for defendants in error proceeds on the misleading hypothesis that the borrower had the right to retain the $4,200 for a term of ten years.

Thus, it is argued: “In this case the borrower was entitled to use the money for ten years, and not merely for one year or five years, and the interest he agreed to pay was to be paid, not for the use of the money for one year or for each of the ten years considered separately, but for its use during the whole term of the loan”. But, the contract, by means of the acceleration clauses, deprives the borrower of the right to retain the money beyond the date of default in discharging an annual installment of interest, if the creditor so elects.

A borrower is no longer entitled to use money after he is obligated to no longer withhold it, and after his creditor can Compel collection through sale of his mortgaged property. The only way this contract can be upheld is by applying the doctrine invoked by defendants in error, announced by most text writers and supported by abundant authority, which Mr.

Williston formulates as follows: “The provision in a pecuniary obligation that on default of the debtor in payment of either principal or interest the entire indebtedness including interest for the full terms, or a greater sum than legal interest to the time of default, shall thereupon become immediately payable, is not usurious, though recovery of any excess over legal interest is generally disallowed as penal.

Similarly, a provision that on default by the maker an obligation shall thereafter bear a rate of interest higher than the legal rate, though it may be objectionable as penal if the rate is excessive, is not usurious. The principle applicable to these cases has been thus stated: ‘Wherever the debtor by the terms of the contract can avoid the payment of the larger by the payment of the smaller sum at an earlier date, the contract is not usurious but additional, and the larger sum becomes a mere penalty.’” 3 Williston on Contracts, sec. 1696; Webb on Usury, sec. 119, p. 134; Long v. Storie, 9 Hare, 546, 41 Eng.

Ch., 545; Lloyd v. Scott, 4 Pet., 226, 7 L. Ed., 840; Ward v. Cornett, 91 Va., 681, 22 S. E., 494, 49 L. R. A., 550. ■ This doctrine, while quite generally followed, has riot escaped criticism. Mr.

Sutherland said of the theory that the contract should be upheld - because the debtor had it within his power to prevent the increase of his- debt by promptly discharging his installment payments: 1 “This reasoning overlooks the possibility that for want of money the debtor will be unable to avail himself of this relief; this is the very inability, with its distressing consequences, from which it is deemed humane and politic by statutes against usury to shield him. * * * If the creditor’s power over the necessities to extort oppressive terms at the lending is deserving of legal check, why limit that restriction to the period of credit?

High rates of interest to commence at the end of that period are as likely to be oppressive as when applied before, and more likely to-be assented to.” 1 Sutherland on Damages (th Ed.), sec. 318, pp. 997-1000. There is an expression in the opinion of the Court of Civil Appeals, in the case of Seymour Opera House Company v. Thurston, 18 Texas Civ. App., 417, 45 S.

W., 815-817, to the effect that an acceleration clause does not render a contract usurious though it would “result in requiring the maker to pay more for the use of the money than the rate fixed and limited by law would permit”, for the reason that “the holder of the note ought not to be held responsible” for “the subsequent default of the maker.” A writ of error was refused in that case. The Supreme Court had previously stated in Dugan v. Lewis, 79 Texas, 249-254, 14 S. W., 1024-1026, 12 L. R. A., 93, 23 Am. St.

Rep., 322, that the court agreed with the conclusion of the trial judge that a. stipulation in a deed of trust to the effect that the whole sum of money thereby secured might be declared at once due and payable, at the lender’s-option, on failure to pay a note or its interest coupons, “is to be construed as a penalty which will not be enforced except upon canceling the-unearned interest notes and that it does not make the contract usurious.” The argument is pressed upon the court with great earnestness that the decisions in these two cases have made the rule formulated by Mr.

Williston a rule of property in Texas for such a length of time that it cannot now be properly departed from. There is no possibility of usury in the contract involved in Dugan v. Lewis. While the deed of trust contained a clause that the whole sum of money secured by the lien of the deed of trust might be declared at once due, at the option of the lender, yet the note, which the deed of trust secured, specifically provided that the debtor’s failure to pay the note or any installment of interest was to result in “making the principal of the note become due at the option of the holder”.

The court completely disposed of the case when it held: “We do not think a correct construction of the contract will make a greater amount of interest due- and collectible upon it than shall have accrued on the principal calculated-up to the date of collection at the rate named in the note; or in other words, that any unaccrued interest comes within the proper meaning of the stipulation.” 79 Texas, 254, 14 S. W., 1024-1026, 12 L. R. A., 93, 23 Am. St. Rep., 322.

Having correctly so construed the words of the writings before the court, it was wholly unnecessary for the court to declare what would have been the legal effect of writings containing words having a different signification. No greater weight should be given to the language relied on by defendants in error from the opinion in Dugan v. Lewis than should be given to any expression of opinion by the great judges then composing the court upon any question not necessary to be decided.

It would subserve no useful purpose to discuss the effect which should be given to this court’s refusal of a writ of error in the Seymour Opera House case for the reason that it is too plain for argument that no action by this court on mere application for writ of error can ever override a subsequent express decision of the same question in an opinion of the Supreme Court. Within a year from the date of refusal by the Supreme Court of a writ of error in the Seymour Opera House case, Parks v. Lubbock, 50 S.

W., 464, was determined by the Galveston Court of Civil Appeals, in an opinion by the eminent Justice Williams. The record now in this court shows that the case of Parks v. Lubbock was tried on a written agreement of counsel containing the following stipulation: “It is agreed in this case that the sum of $693.12 was the consideration and true amount of money advanced by the Jarvis-Conklin Mortgage Trust Co. to Henry Fields on November 1, 1889, and for which note of that date of $825 was given by Henry Fields and Mary Fields to said company and which is now sued on- in this case”.

By the note, its makers promised to pay “eight hundred and twenty-five dollars, lawful money of the United States, with interest thereon at the rate of six per cent, per annum, payable semi-annually on the first days of May and November in each year, according to the tenor and effect of the interest notes of even date herewith and hereto attached. This note is to draw interest from date at the rate of twelve per cent per annum if either principal or interest remain unpaid ten days after due.

At the option of the legal holder, after any of said interest notes remain due and unpaid ten days, the whole of the principal and interest may be declared immediately due and payable”. The question squarely presented for decision in Parks v. Lubbock was whether the clause increasing the amount payable on conditions of default by the debtor to pay lawful interest installments rendered the above recited note usurious.

The Galveston Court of Civil Appeals in decreeing the note free of usury declared: “If 12 per cent interest for five years is calculated on the amount received by Fields, the sum of such amount and interest will exceednthe sum of the principal of the note and the coupons. This proves that there is no absolute agreement to pay more than 12 per cent, which rate was allowable at the time this contract was made. The note, however, stipulates for the payment of 12 per cent, upon the $825 in case of default in payment of principal or interest in accordance with the contract.

This left it in the debtor’s power to comply with his contract by paying less-than the sum received and lawful interest upon it. The obligation to pay any additional amount could only arise from his default. Such stipulations are almost universally construed as imposing a penalty to enforce prompt payment only, and as not being usurious. Crider v. Association, 89 Texas, 597, 35 S. W., 1047; Dugan v. Lewis, 79 Texas, 254, 14 S. W., 1024, 12 L. R. A., 93, 23 Am. St. Rep., 322; 27 Am. & Eng. Enc. Law, p. 994, and cases cited.” Parks v. Lubbock, 50 S. W., 466-467. The Supreme Court granted a writ of error in Parks v.

Lubbock and reversed the judgment of the Court of Civil Appeals and rendered judgment decreeing the note to be usurious. Explicitly recognizing that the authorities which were in line with the rule at common law “seem to be practically unanimous in upholding the legality of such a stipulation” as that contained in this note, the Supreme Court decided that the Texas statute had changed the common law rule.

After quoting the statutory definition of interest as “the compensation allowed by law or fixed by the parties to a contract for the use of forbearance or detention of money”, the court in the opinion of Chief Justice Gaines, who had participated in Dugan v. Lewis and Seymour Opera House Company v. Thurston, declared that “the detention of money arises in a case when a debt has become due and the debtor withholds its payment without a new contract giving him a right to do so.

It follows, therefore, that what would have been deemed a penalty under the rule of the common law is made interest under our statute; and if the rate agreed upon for the detention of the money after the maturity of the debt exceed 10 per cent, per annum the contract is usurious and void as to interest. * * * The conclusion is not to be resisted that there was a purpose in adding the words detention to the accepted definition of interest, and that this purpose was to meet the case where the debtor should detain the money owed beyond the stipulated period of forbearance, and so to provide that a promise to pay an additional sum for such detention should be deemed interest, and not merely damages by way of penalty to secure a prompt performance of the contract.” 92 Texas, 637, 638, 51 S.

W., 322-333. The principle controlling the decision of the question of usury in Parks v. Lubbock was again announced in Investment Company v. Grymes, 94 Texas, 613-615, 63 S. W., 860-861, 64 S. W., 778, where the court said: “The present question is this: Did the parties embrace in the 120 notes for the use of the principal debt a sum greater than the original debt would produce at 10 per cent per annum for the time the payor of the note had the use of the money?” Holding the 120 notes usurious, the court differentiated the Grymes case from the Crider case in 89 Texas, 597, 35 S.

W., 1047, as follows: ' “In the one now before the court the manner of payment imposes upon the payor a charge for more time than he had the money. By the contract in the other case, he paid only for the time it was used”. So, the vice in the contract now under consideration is that the acceleration clauses impose on the debtors a charge, enforceable at the creditor’s option, in excess of the maximum permitted in this state. Chief Justice Gaines dissented not on the correctness of this principle but with respect to the construction in the majority opinion of Grymes’ contract as regards application of payments.

After stating the rule under most authorities that a rate beyond statutory limits to be paid on a loan only after maturity was to be regarded as a penalty, Mr. Sutherland adds in a footnote: “A statute defining interest as ‘the compensation allowed by law or fixed by the parties to a contract for the use or forbearance or detention of money’ changes the rule”, citing Parks v. Lubbock, 92 Texas, 635, 57 S. W., 322. 1 Sutherland on Damages (4th Ed.) p. 999.

Likewise it is stated in 27 Ruling Case Law, sec. 33, p. 232: “Where a borrower has agreed to pay a rate of interest not forbidden by law, but has stipulated that, in the event of his not making payment at the time specified, the obligation shall bear a higher rate of interest, either from default or from the date of its execution, or that some specific sum shall be paid in addition to the principal and interest contracted for, the increased rate is generally regarded as a penalty and not within the usury laws. * * * But under a statute defining interest as the compensation allowed by law or fixed by the parties to a contract for the use or forbearance or detention of money, that which would have been deemed a penalty at common law is made interest, and a stipulation for interest after maturity at a rate in excess of' the legal rate is usurious.” Mr.

Page, after giving the general rule treating acceleration clauses like those before us as having no other effect than to provide penalties for non-payment, adds: “Under some statutes a contract for a rate of interest after maturity, exceeding the legal rate, is usury. This result is reached in Texas under the statutory definition of interest as a sum allowed for the detention of money. In some states which under former statutes allowed interest after maturity in excess of the legal rate, statutes have since been passed specifically forbidding such contracts and making them usurious.” Page on Contracts,

section 465. A clear statement of the law which governs our decision1 is made in 27 Ruling Case Law, at

section 24, on pages 223 and 224, in these words: “To constitute usury, it is of course essential that an excess of the ■legal maximum be exacted in consideration of' the loan or forbearance. By this is meant an excess of the maximum prescribed by statute. Though there is authority to the contrary, it does not seem requisite that an excess be payable in any event.

On the contrary a contract is usurious when' there is any contingency by which the lender may get more than the lawful rate of interest, whether it is so apparent that it becomes the duty of the court to so declare, or whether it is a case in which it is necessary, that the jury should find the facts.

Usury, it is considered, does not depend on the question whether the lender actually gets more than the legal rate of interest or not; but on whether there was a purpose in his mind to make more than legal interest for the use of money, and whether, by the terms of the transaction, and the means used to effect the loan, he may, by its enforcement be enabled to get more than the legal rate.” The Supreme Court of Florida vigorously assaield the soundness of the prevailing American rule, and held a stipulation usurious because it provided a greater rate than permitted by statute for “forbearance to enforce the collection of any debt”, after the debt’s maturity.

Maxwell v. Jacksonville Loan and Improvement Company, 45 Fla., 425, 468, 34 So., 267, 268. In Richardson v. Brown, 9 Baxt. 255, 267, 268, 68 Tenn., 249, the Supreme Court of Tennessee asked and answered questions as follows: “What difference can it make in the essence of the transaction that the excessive rate shall be agreed to be paid for one period rather than another? Is it not equally the compensation demanded by the lender or the creditor for the use of his money? We think it is, most certainly.

The fact that the party might relieve himself from this payment by payment of the bill at the day agreed upon for its falling due, only prevents other contracts from being enforced against him; but if he for any cause failed to pay, then the interest at the rate contracted becomes due by virtue of the agreement, is paid as interest for the continued use of the money, and is contrary to the requirements of the law.” The Supreme Court of North Carolina refuted the contention that a contract cannot be pronounced usurious until excessive interest had been collected, when it said: “But the question of usury does not depend upon the question whether the lender actually gets more than the legal rate of interest or not.

If this were so it could never be determined whether there was usury or not until the money was paid back. This would be locking the stable after the horse was stolen. But it depends upon whether there was a purpose in the mind of the lender to make more than legal interest for the use of money, and whether, by the terms of the transaction and the means used to effect the loan he may by its enforcement be enabled to get more than the legal rate. If so, the transaction is usurious.” Miller v. Life Insurance Co., 118 N. C., 618, 623, 24 S. E., 484-487, 54 Am. St. Rep., 741.

Within about three years after the doctrine suggested in Dugan v: Lewis and Seymour Opera House v. Thurston had been definitely rejected by the Supreme Court in its decision in the case of Parks v. Lubbock, the statutory definition of interest was re-enacted in

article 3097 of the Revised Statutes of 1895. This definition was continued in the Revised Statutes of 1911 and of 1925, in articles 4973 and 5069 respectively. The Legislature must have intended the statute to have the effect previously declared by the Supreme Court in leaving its wording unchanged. So, the rule we follow, instead of disturbing a fixed rule of property, follows the law established in Texas for over thirty years and three times declared as the public policy of the state with respect to usury in revisions of the statutes. Pearson v. West, 97 Texas, 239, 77 S. W., 944; Cargill v.

Kountze, 86 Texas, 400, 22 S. W., 1015, 25 S. W., 13, 24 L. R. A., 183.

In view of the contrary holding of the Commission, we deem it proper to say that though logically it is usury to deduct in advance the highest legal rate of interest on the principal of a loan for any part of the term for which the principal is borrowed, or to collect interest on the entire principal at the highest rate monthly or quarterly or semi-annually, or at other intervals less than a year, in advance of the year’s expiration, yet these practices have been validated by the decisions in Texas, as elsewhere in the United States, too long for this court to now adjudge them to be usurious. Miner v.

Paris Exchange Bank, 53 Texas, 560; Martin v. Land Mortgage Bank, 5 Texas Civ. App., 167, 23 S. W., 1035; Webb v. Pahde (Texas Civ. App.), 43 S. W., 19; Geisberg v. Mutual Building and Loan Assn. (Texas Civ. App.), 60 S. W., 478, par. 4 of syllabus, wherein writ of error was refused February 14, 1901, Complete Writs of Error Table, page 27; Investment Company v. Grymes, 94 Texas, 615, 65 S. W., 860, 64 S. W., 778; Vela v. Shacklett (Texas Com. App.), 12 S. W. (2d) 1007, 1008; Tyler on Usury, Pawns & Loans, pp. 155, 156; 27 R. C. L., sec. 326, pp. 225, 227; Page on Contracts, sec. 471.

This opinion will supersede that heretofore delivered by the Commission. Having vacated the judgment heretofore entered on the Commission’s recommendation, the motion for rehearing is overruled and judgment will be entered reversing the judgments of the district court and Court of Civil Appeals and adjudging that plaintiffs in error recover of defendant in error, Commerce Farm Credit Company, the sum of $2,030.60 with interest from this date at the rate of six per cent per annum.