The opinion of the majority appears to be a departure from our previous interpretation of our usury laws and our previous attitude toward the admissibility of evidence to show usury. As I view the effect of the decision, it makes it remarkably easy for a usurer to avoid the penalties provided by statute and to exploit the necessitous borrower. The reasons advanced to support the conclusion are, to me, not persuasive. As I view the matter, usury statutes are on the books to prevent oppression of necessitous borrowers whether or not the loans be made by contracts fair and legal on their face. The question should not be whether the usurious contract is enforceable in the courts were there no usury law. There can be no binding reservation of interest at a rate other than six *Page 101 per cent unless it is in writing, and no usurer is likely to put his usurious contract in writing. Usually he adopts some written device to conceal it. It is the actual arrangement to pay illegal interest that the law should penalize. Hitherto the courts have looked through the camouflage of legality thrown up by ingenious usurers and have viewed the actual, not the ostensible, arrangement made by the parties. That the actual arrangement was in fact nugatory in the sense that it was illegal and hence unenforceable has not, except in a minority of states, been a defense.
The Mosaic law prohibited the Jews from exacting interest on loans to their brethern but permitted interest to be taken from Gentiles. 66 C. J. p. 142; Exodus XXII, 25; Leviticus XXV, 35-47; Deuteronomy XXIII, 19, 20; Psalms XV, 5. Sir Edward Coke regarded the taking of interest as directly against the law of God, but the necessities of commerce ultimately required the lending of money at moderate rates, and, in the sixteenth century, Parliament legalized contracts for interest not exceeding ten per cent. In 1714 it was reduced to five per cent, where it remained until 1854, when apparently the necessities of commerce succeeded in removing all restrictions on interest charges.
As early as 1717 the colony of New York enacted a law against usury with a penalty of treble the value of the money lent. Curtiss v. Teller, 157 A.D. 804, 810, 143 N.Y. S. 188. The opinion in that case gives a very enlightening history of the law of usury in New York until it took final form in substantially that enacted in this state in the provisions which now appear in 2 Mason Minn. St. 1927, c. 51, relating to interest and negotiable instruments. Section 7036 fixes the legal rate of interest and the maximum rate which may be lawfully charged by lenders of money. Section 7037 authorizes the recovery of the entire interest paid by the borrower where he has paid in excess of the permitted rate. It provides that one-half of the recovery shall go into the county treasury for the common schools. Section 7038 makes void all contracts which reserve a greater rate than that permitted by § 7036. The word "reserved" as used in that section obviously means "contracted for." Section 7040 provides for the cancellation, by the courts, of usurious *Page 102 contracts. Section 7039, requiring alleged offenders against the usury law to answer complaint under oath, obviously came in to overcome some of the difficulties arising under the old equity practice described in Curtiss v. Teller, 157 A.D. 804,143 N.Y. S. 188.
Our usury statutes are undoubtedly patterned after the provisions of the New York code. They are the result of legislative efforts to curb the practice of extorting from necessitous borrowers excessive rates of interest. In a majority of our states the statutes carry some penalty, ranging from forfeiture of the interest only, up to forfeiture of principal and interest and fine and imprisonment. It was unquestionably the intent of our legislature, in making the usurious agreements void, that there could be no action to enforce such an agreement and that as a result, where the contract was still executory, the lender would forfeit both interest and principal. It must have been thought that the forfeiture would be sufficient penalty to discourage the taking of usury. It is significant that the statutes provide two distinct remedies for a borrower: First, a suit for cancellation and surrender of any instruments given pursuant to an usurious agreement and the return of any security, while the contract is still executory; and, second, an action to recover interest paid after the usurious contract has been executed, one-half of the recovery to go to the schools.
This court is committed to the liberal doctrine that the law will look behind any device or shift on the part of the lender to evade the usury statute in order to ascertain the real nature of the transaction. In Elwell v. Lund, 102 Minn. 166,112 N.W. 1009, 1067, this court had before it a case where a usurious loan was disguised by a written contract as a sale with the privilege of repurchasing. Elwell and his partner were endeavoring to purchase a stock of merchandise. They sought a loan from Lund, offering a highly usurious rate. Lund took title to the stock and agreed to resell it to Elwell at $10,000 advance in price, that being the amount Elwell had offered for the use of the money. It was there contended, as it is here, that whatever the original proposals or arrangements had been, the transaction was finally integrated and consummated as a *Page 103 sale with the privilege to the plaintiff of purchasing the property at a stated price. There, as here, the oral contract to pay a usurious rate claimed by plaintiff was unenforceable and nugatory because for a rate higher than six per cent and not in writing. There, as here, the written contract of sale and option to purchase was fair and legal on its face and so held to be by this court, but the court said [102 Minn. 169]:
"If the writing, Exhibit B, represented the actual agreement between the parties, made in good faith with no purpose to evade the usury laws, it must be conceded that the transaction was a sale, or at least a joint venture, and not subject to attack; but we cannot agree with the learned counsel that this question must be determined from a consideration of the writings alone. If this were true, the usury laws might as well be repealed, as it would be a very simple matter for counsel to draw contracts and arrange papers which in form would be regular, and thus render the transaction impervious to attack, although as a matter of fact the writings represented the ostensible, and not the actual, transaction between the parties. In order to determine whether these writings represent the actual arrangement, it is necessary to consider the surrounding circumstances and the conditions under which the writing was drawn and executed as well as the conduct of the parties prior to, at the time of, and subsequent to its execution."
See also Lewis v. Willoughby, 43 Minn. 307, 311, 45 N.W. 439; Stein v. Swensen, 46 Minn. 360, 49 N.W. 55, 56,24 A.S.R. 234; 27 R.C.L. 212; Seekel v. Norman, 71 Iowa, 264,32 N.W. 334. In the Stein case Mr. Chief Justice Gilfillan said [46 Minn. 363]:
"On the examination of Vaughn, a witness for defendants, they asked him if there was an oral agreement, in addition to said instrument, for an extension or extensions of the notes upon payment of a commission, at the time of the original loan. As there is no device or shift on the part of the lender to evade the statute under or behind which the law will not look, in order to ascertain the real nature of the transaction; as no act, however formal, no instrument, *Page 104 however solemnly executed, will stand in the way of the court getting at the truth, in order to determine whether there has been an attempt to evade the law, it was competent to prove the oral agreement indicated by the question."
Hitherto it has not been suggested that the consideration was the only element of the contract that could be gone into by parol to show usury.
The ostensible agreement here, as evidenced by the written contract, was to pay $5,000 four months after date. Interest had been deducted in advance. The real agreement between the parties, as well found by the trial court, was that in consideration of a loan of $4,866.67 the plaintiffs agreed to repay $5,000 in four equal monthly instalments of $1,250, the first instalment being due one month after the loan was made. An expert accountant figured the rate of interest to be 14.68 per cent. In any way it may be figured the rate exceeded the legal rate then in force. As said in substance in Elwell v. Lund, 102 Minn. 166, 112 N.W. 1009, 1007, to hold that the real agreement cannot be shown by parol would nullify our usury laws.
The contrary rule which forbids the introduction of oral evidence to prove usury in a note, legal on its face, seems to have been adopted by Massachusetts and a few other courts but does not appear to have found favor in the eyes of this court until now.
If the rule be, as laid down by the majority, that parol evidence may not be introduced to show the real bargain and that the paper executed by the borrower is only the ostensible one, then it will be a simple matter for usurers to protect themselves against the statutory penalties by taking an instrument fair on its face and, in case of trouble, resorting to it under the claim that it is the integrated contract. That is just what this court in the Elwell case said the usurer could not do. No usurer will be naive enough to write out the usurious bargain, and in effect there will now never be a case for the application of § 7038 except where the note or obligation is given for a larger principal than that actually received. After the cases penalizing the usurer in such circumstances it will be a very ignorant usurer who will resort to that device, and usurers are not *Page 105 ignorant. It is the necessitous borrower who usually suffers from that affliction or from the equally handicapping necessity of keeping his precarious credit good with the usurer. If it becomes known that he takes advantage of the usury laws he never can borrow again. How effective is this influence is demonstrated by the fact that usury is notoriously prevalent and usury cases are amazingly rare. As said by this court, speaking through Mr. Justice Olsen in Adjustment Service Bureau, Inc. v. Buelow, 196 Minn. 563, 567, 265 N.W. 659, 661:
"The object of the usury laws is to protect the weak and necessitous from oppression. 6 Dunnell, Minn. Dig. (2 ed.) § 9962. Courts look to the substance and effect of transactions. There is no shift or device on the part of the lender to evade the law under or behind which the law will not look to ascertain the real nature and object of the transaction. 6 Dunnell, Minn. Dig. (2 ed. Supps. 1932, 1934) § 9965, and cases cited in note 36."
The borrower and the usurious lender are not on an equal footing, and it is the purpose of the law and the duty of the courts to protect the borrower. In order to do this the courts, as in all cases of fraud or illegality, allow parol evidence to show the real transaction. 3 Jones, Evidence (2 ed.) § 1522. The borrowers are probably not more prone to perjury than the lenders. Under our previous decisions it became a question to be disposed of as other issues of that character. In the case at bar there was documentary corroboration of the alleged oral contract. As well said by the Supreme court of Iowa in France v. Munro, 138 Iowa, 1, 7, 115 N.W. 577, 579,19 L.R.A.(N.S.) 391:
"The game of hide and seek between the usurer and the law is not the product of recent evolution, and the rule has long been settled that, as in case of fraud in general, the rule referred to will not be allowed to exclude proof of the true nature of a contract into which the usurer is alleged to have entered. Seekel v. Norman, 71 Iowa, 264, 32 N.W. 334; Train v. Collins, 2 Pick. 145; Scott v. Lloyd, 9 Pet. (U.S.) 418 (9 L. Ed. 178). Says the Minnesota court: 'All that is required to establish a case of usury is a fair preponderance *Page 106 of the evidence, and there is no shift or device on part of the lender to evade the statute under or behind which the law will not look to ascertain the real nature of the transaction.' Phelps v. Montgomery, 60 Minn. 303 (62 N.W. 260)."
The courts should look through every device used by the usurer to evade the law as well as the simple and now unusual one that relates to the consideration. It may be that the penalty for usury is too harsh. I am inclined to think it is and that loss of a minor percentage of the principal would be a sufficient penalty. But the harshness of the penalty should not lead us to establish rules which in effect nullify the usury laws and protect the usurer. After this decision we may expect him in his "game of hide and seek" to adopt a new and very effective technique to protect his principal and legal interest. He will have only the excess at stake.
UPON APPLICATION FOR REARGUMENT. On May 8, 1936, the following opinion was filed: