No. 12694
IN THE SUPREME COURT OF THE STATE OF MONTANA
1975
MONTANA NATIONAL BANK OF BOZEMAN,
Plaintiff and Appellant,
WILLIAM J. KOLOKOTRONES et al, ,
Defendants and Respondents.
Appeal from: District Court of the Eighteenth Judicial District,
Honorable W. W. Lessley, Judge presiding.
Counsel of Record:
For Appellant :
Towe, Neely and Ball, Billings, Montana
Gerald J, Neely argued, Billings, Montana
For Respondents:
Patrick F. Hooks argued, Townsend, Montana
Submitted: January 16, 1975
Decided :
UY23trn
Filed : MAY 2 3 19%
Mr. J u s t i c e Gene B. Daly d e l i v e r e d t h e O p i n i o n of t h e C o u r t .
T h i s i s a n a p p e a l from a p a r t i a l summary judgment e n t e r e d
i n t h e d i s t r i c t c o u r t , G a l l a t i n County, a g a i n s t p l a i n t i f f Montana
N a t i o n a l Bank of Bozeman and i n f a v o r o f d e f e n d a n t s W i l l i a m and
C l a r e K o l o k o t r o n e s , a w a r d i n g t h e amount o f $12,870 i n damages,
t h a t b e i n g d o u b l e t h e v a l u e o f t h e add-on i n t e r e s t on t h e p r o m i s -
sory note i n dispute. P l a i n t i f f Bank a p p e a l s from t h e judgment
and c o n t e n d s t h a t a s a m a t t e r o f l a w t h e r e was no u s u r y .
The f a c t s are n o t i n d i s p u t e . I n e a r l y 1 9 7 0 , t h e Kolo-
k o t r o n e s went t o t h e Bank f o r a l o a n t o buy a s e l f - p r o p e l l e d auger
and t r u c k . They s i g n e d a n i n t e r i m i n s t a l l m e n t p r o m i s s o r y n o t e
o n A p r i l 4 , 1970.
On A p r i l 2 7 , 1 9 7 0 , K o l o k o t r o n e s s i g n e d t h e f i n a l i n s t a l l -
ment p r o m i s s o r y n o t e . Under t h e t e r m s o f t h a t n o t e t h e y borrowed
$33,000 a t a 6.5% add-on i n t e r e s t r a t e . Thus, t h e add-on i n t e r e s t
was $6,435. T h e r e f o r e , t h e n o t e r e f l e c t e d $39,435 a t m a t u r i t y .
T h i s would r e f l e c t a r e a l i n t e r e s t r a t e o f 11.75% b u t i s a n ex-
ception t o t h e s t a t u t e i f properly applied.
The n o t e c a l l e d f o r 36 i n s t a l l m e n t s , t h e f i r s t t o b e $500
d u e J u n e 2 5 , 1 9 7 0 , and 35 monthly i n s t a l l m e n t s t h e r e a f t e r a t
$1,112.42, t h e f i n a l m a t u r i t y b e i n g on o r b e f o r e J u n e 2 5 , 1 9 7 3 , a
t e r m of t h r e e y e a r s . The n o t e c o n t a i n e d a p r o v i s i o n t h a t p a s t
d u e p r i n c i p a l and i n t e r e s t would b e a r i n t e r e s t a t t h e r a t e o f 1 0 %
p e r annum u n t i l f u l l y p a i d .
K o l o k o t r o n e s had t r o u b l e making payments o n t h e n o t e and
it became d e l i n q u e n t t o t h e p o i n t o f s e r i o u s n e s s . They made t h e
i n i t i a l $500 payment o n o r a b o u t J u l y 2 2 , 1970 and t h e r e a f t e r were
c r e d i t e d w i t h f o u r payments a t p e r i o d i c t i m e s . Because o f t h e
i r r e g u l a r payment r e c o r d , t h e p a r t i e s a g r e e d on a v o l u n t a r y r e p o s -
s e s s i o n o f t h e t r u c k a n d a u g e r by t h e Bank. The Bank k e p t t h e
e q u i p m e n t f o r s e v e r a l months and t h e n s o l d it u n d e r t h e p r o v i s i o n s
of the security agreement in May 1972, for a total of $25,800.
Immediately after the sale the Bank's Assistant Vice President
and loan officer, who dealt with the Kolokotrones during the
entire proceeding, wrote the Kolokotrones a letter on May 12,
1972, demanding payment of the sum of $11,487.92, plus the Bank's
costs of sale in the amount of $113.56. Attached to the Bank's
letter was the schedule of payments and interest. This schedule
reflected the Bank's allocation of payments received, including
the proceeds of sale, to principal and interest, and supported
the demand for the balance. This was the schedule:
"William J. Kolokotrones
Box 952, Three Forks, Montana 59752
Account No. 1-2958-25 Date of Note - April 27, 1970, APR 11.75%
Schedule of payments and interest
Date Amou nt Interest Paid on Current Bal Paid on Princ.
Paid Paid Accrued Interest of Interest Principal Balance
.................................................................. $33,000.00
$ 500.00 $ 913.55 500.00 413.55 00 33,000.00
420.00 764.83 420.00 758.38 00 33,000.00
1,129.35 573.63 1,129.35 202.66 00 33,000.00
1,800.00 2,623.81 1,800.00 1,026.47 00 33,000.00
424.84 393.04 424.84 994,87 00 33,000.00
15,000.00 (sale)2,252.01 3,246.88 00 $ 1,753.12
1 21,246.88
9,800.00 (sale) 41.04 41.04 00 9,858.96 11,487.92"
The .total interest to be paid was $7,561.91 or $1,126.91 more
than the amount of interest stated on the face of the April 27
note.
The Bnk, in explaining the difference between the terms
of the April 27 note and the terms of the schedule under which
the Bank was attempting to collect, stated that the loan officer
approached a senior officer of the Bank desiring his opinion on
the fairest way of collecting the note. The senior bank officer
agreed the fairest and simplest manner would be to charge a
straight 11.75% interest on the note and abandon the 10% interest
rate on the past due amounts.
Both p a r t i e s moved f o r summary judgment. The Bank moved
f o r summary judgment o n t h e e n t i r e c a s e a f t e r f i l i n g a second
amended r e p l y t o d e f e n d a n t s ' c o u n t e r c l a i m . K o l o k o t r o n e s moved
f o r p a r t i a l summary judgment on t h e i r c o u n t e r c l a i m . The d i s t r i c t
c o u r t g r a n t e d K o l o k o t r o n e s ' motion and d e n i e d t h e B a n k ' s m o t i o n .
Judgment was e n t e r e d i n f a v o r of d e f e n d a n t s i n t h e amount o f
$12,870. From t h i s judgment p l a i n t i f f Bank a p p e a l s .
The Bank a r g u e s i t was n o t g u i l t y of u s u r y and t h e d i s t r i c t
court erred i n so finding. More s p e c i f i c a l l y , it a r g u e s t h a t t h e
n o t e , i f performed a c c o r d i n g t o i t s t e r m s , would n o t r e s u l t i n
p r o d u c i n g t o t h e Bank a g r e a t e r r a t e of i n t e r e s t t h a n i s a l l o w e d
by law; t h a t i n f a c t t h e r e was n o t a n e x a c t i o n of a g r e a t e r amount
t h a n a l l o w e d by law; t h a t t h e r e was no m u t u a l i t y o f i n t e n t t o g i v e
and t o t a k e u s u r y ; a n d , t h a t t h e demand made upon K o l o k o t r o n e s i n
a c c o r d w i t h t h e c o m p u t a t i o n s c h e d u l e a t t a c h e d t h e r e t o d i d n o t can-
s t i t u t e usury.
T h i s C o u r t c a n n o t a g r e e w i t h t h e B a n k ' s argument. Montana's
u s u r y s t a t u t e , s e c t i o n 47-125, R.C.M. 1947, p r o v i d e s t h a t p a r t i e s
may a g r e e f o r t h e payment of any r a t e of i n t e r e s t n o t e x c e e d i n g
t h e r a t e o f 1 0 % p e r annum. The n o t e i t s e l f s t a t e s t h a t t h e a n n u a l
p e r c e n t a g e r a t e of t h e n o t e i s 1 1 . 7 5 % .
The o n l y e x c e p t i o n t o t h i s u s u r y s t a t u t e a f f e c t i n g banks
i s s e c t i o n 5-527, R.C.M. 1947, which p r o v i d e s t h a t a bank c a n c o l -
l e c t i t s i n t e r e s t i n advance. That s t a t u t e s t a t e s :
"5-527. (6014.52) I n t e r e s t n o t t o exceed l a w f u l
r a t e - - p e r m i s s i b l e c h a r g e on i n s t a l l m e n t l o a n s .
N bank s h a l l demand o r r e c e i v e f o r l o a n s o r d i s -
o
c o u n t s , a r a t e of i n t e r e s t e x c e e d i n g t h a t a l l o w e d
by l a w , e x c e p t i n g t h a t it s h a l l be l a w f u l f o r any
bank t o r e c e i v e i n t e r e s t i n a d v a n c e a c c o r d i n g t o
t h e o r d i n a r y u s a g e s o f banking i n s t i t u t i o n s . On
l o a n s t o be r e p a i d i n o n e o r more d e f e r r e d i n s t a l l -
ments a bank may c h a r g e n o t t o e x c e e d t h e f o l l o w -
i n g s c h e d u l e : On s o much o f t h e p r i n c i p a l b a l a n c e
a s d o e s n o t exceed t h r e e hundred d o l l a r s ( $ 3 0 0 ) ,
e l e v e n d o l l a r s ( $ 1 1 ) p e r o n e hundred d o l l a r s ($100)
p e r year; i f t h e p r i n c i p a l balance exceeds t h r e e
hundred d o l l a r s ( $ 3 0 0 ) , b u t i s l e s s t h a n one
thousand d o l l a r s ($1,000) , n i n e d o l l a r s ( $ 9 )
p e r one hundred d o l l a r s ($100) p e r y e a r on t h a t
p o r t i o n o v e r t h r e e hundred d o l l a r s ( $ 3 0 0 ) ; i f
t h e p r i n c i p a l b a l a n c e e x c e e d s o n e thousand
d o l l a r s ($1,000) , s e v e n d o l l a r s ( $ 7 ) p e r one
hundred d o l l a r s ($100) p e r y e a r on t h a t p o r t i o n
o v e r o n e thousand d o l l a r s ( $ 1 , 0 0 0 ) . Such
c h a r g e s s h a l l be computed on t h e p r i n c i p a l b a l -
a n c e on c o n t r a c t s p a y a b l e i n s u c c e s s i v e monthly
payments s u b s t a n t i a l l y e q u a l i n amount from t h e
d a t e of t h e c o n t r a c t u n t i l t h e m a t u r i t y of t h e
f i n a l installment, notwithstanding t h a t t h e
t o t a l b a l a n c e t h e r e o f i s r e q u i r e d t o be p a i d i n
i n s t a l l m e n t s . A minimum c h a r g e of twenty d o l l a r s
( $ 2 0 ) may be made w i t h r e s p e c t t o any i n s t a l l -
ment l o a n made by a bank. When a n i n s t a l l m e n t
l o a n c o n t r a c t p r o v i d e s f o r payment o t h e r t h a n i n
e q u a l s u c c e s s i v e monthly i n s t a l l m e n t s t h e c h a r g e
may be a t a r a t e which w i l l p r o v i d e t h e same
y i e l d a s i s p e r m i t t e d monthly payment c o n t r a c t s
having due r e g a r d f o r t h e s c h e d u l e o f payments
i n the contract."
Thus, t h e maximum i n t e r e s t i n t e r n s of add-on o r d i s c o u n t
i n t e r e s t t h a t can be l e g a l l y t a k e n under Montana l a w on $33,000
i s $ 7 , 0 0 8 , computed t h i s way:
$11.00 p e r $100.00 p e r y e a r on t h e 1st
$300.00 f o r 3 y e a r s ($33.00 x 3 ) ..........$ 99.00
$9.00 p e r $100.00 p e r y e a r on t h e n e x t
$700.00 f o r 3 y e a r s ($63.00 x 3) .......... 189.00
$7.00 p e r $100 p e r y e a r on t h e n e x t
$32,000.00 f o r 3 y e a r s (2,240.00 x 3 ) ..... 6,720.00
T o t a l Allowance Discount I n t e r e s t ............$ 7 m 8 . 0 0
The Bank, however, demanded $7,561.91, a d i f f e r e n c e of $553.91.
The Bank's demand on t h e K o l o k o t r o n e s was t h e r e f o r e u s u r i o u s .
Here we have a n o t e which o r i g i n a l l y s t a r t e d o u t u s i n g
t h e p r i n c i p l e of add-on i n t e r e s t , which would have been l e g a l
under s e c t i o n 5-527, R.C.M. 1947, b u t t h e Bank t h e n s w i t c h e d t o
u s i n g a s t r a i g h t a p p l i c a t i o n of t h e 11.75% p e r annum i n t e r e s t
rate. T h a t made t h e n o t e u s u r i o u s .
The Bank c o n t e n d s t h a t one o f t h e t e r m s of t h e n o t e was
a 1 0 % p e n a l t y on t h e p a s t due p r i n c i p a l and i n t e r e s t , and s u c h
p e n a l t y c o u l d n o t be c o n s i d e r e d i n t e r m s of u s u r y a s t h e Kolo-
k o t r o n e s had i t w i t h i n t h e i r power t o p r e v e n t t h e p e n a l t y , t h e r e -
f o r e i t was n o t p a r t o f t h e i n t e r e s t r a t e o f t h e n o t e . Fur-
t h e r , t h a t t h e B a n k ' s demand r e p r e s e n t s a l e s s e r amount t h a n
t h e Bank would h a v e been e n t i t l e d t o had i t u s e d t h e 1 0 % p e n a l t y .
Kolokotrones a r g u e t h a t t h e Bank's argument i s i r r e l e v a n t
t o t h e i n s t a n t c a s e , f o r t h e Bank abandoned t h e 1 0 % p e n a l t y , and
s o s t a t e d i n a letter t o Kolokotrones' a t t o r n e y , d a t e d October
7 , 1972.
T h i s C o u r t f i n d s t h e abandonment o f t h e p e n a l t y c h a r g e
by t h e Bank d i s p o s i t i v e o f t h a t i s s u e .
The Bank a l s o c o n t e n d s t h e r e was n o t t h e n e c e s s a r y i n t e n t
f o r t h e Bank t o be g u i l t y o f u s u r y . T h i s C o u r t i n Bowden v . G a b e l ,
1 0 5 Mont. 477, 487, 76 P.2d 334, s t a t e d :
" D e f e n d a n t c o n t e n d s t h a t t h e r e q u i s i t e i n t e n t was
n o t shown h e r e t o e s t a b l i s h u s u r y . This contention
c a n n o t be s u s t a i n e d , f o r i t i s w e l l s e t t l e d t h a t t h e
v o l u n t a r y t a k i n g o f more t h a n t h e l e g a l r a t e o f
i n t e r e s t c o n s t i t u t e s u s u r y . The o n l y i n t e n t n e c e s -
s a r y i s t h e i n t e n t t o t a k e more i n t e r e s t t h a n t h e l a w
permits, Usurious i n t e n t i s implied i f excessive
i n t e r e s t is i n t e n t i o n a l l y taken. I t i s o f no c o n s e -
a u e n c e t h a t t h e r e w a s no s p e c i f i c i n t e n t knowingly
t o v i o l a t e t h e law." ( ~ r n ~ h a so u r s . )
is
I t f o l l o w s t h a t t h e Bank had t h e n e c e s s a r y i n t e n t , by i n t e n d i n g
t o t a k e from K o l o k o t r o n e s more t h a n t h e l e g a l amount o f i n t e r e s t .
The Bank a l s o a r g u e s t h e demand f o r $ 7 , 5 6 1 . 9 1 was n o t a
b i n d i n g c o n t r a c t between it a n d K o l o k o t r o n e s ; t h a t t h e C o u r t must
l o o k t o t h e o r i g i n a l n o t e t o d e t e r m i n e i f t h e n o t e was u s u r i o u s .
F u r t h e r , b e c a u s e t h e i n s t a l l m e n t n o t e o f A p r i l 27, 1 9 7 0 , o n i t s
f a c e was w i t h i n t h e p r o v i s i o n s o f t h e b a n k e r s ' e x c e p t i o n t o t h e
u s u r y l a w , s e c t i o n 5-527, R.C.M. 1 9 4 7 , t h e judgment i n t h e d i s -
t r i c t c o u r t was e n t e r e d e r r o n e o u s l y .
However, t h e n o t e o n which t h e Bank b r o u g h t t h i s a c t i o n
i s a n anomaly i n i t s e l f . I t i s n o t a n i n s t a l l m e n t n o t e , b u t was
t h e o n l y n o t e form t h e Bank had a t t h e t i m e . It did not explain
t h e i n s t a l l m e n t payments. The Bank c o n s t r u e d t h e t e r m s o f t h e
n o t e , i n making i t s demand on t h e K o l o k o t r o n e s , a s a s t r a i g h t
l o a n of $33,000 a t 11.75% i n t e r e s t p e r annum, and t h a t i s t h e
c o n t r a c t it now s e e k s t o e n f o r c e . The t e r m s of t h e n o t e a r e
n o t c l e a r on i t s f a c e , b u t , when r e a d i n l i g h t of t h e Bank's
l e t t e r s t o K o l o k o t r o n e s , t h e i n t e n t of t h e p a r t i e s becomes
clear. The t e r m s of t h e n o t e a r e u s u r i o u s .
The Bank n e x t c o n t e n d s t h e K o l o k o t r o n e s were awarded
a n i n c o r r e c t amount of money; t h a t t h e y s h o u l d have been award-
ed t w i c e t h e amount of t h e d i f f e r e n c e between t h e i n t e r e s t
c h a r g e d and t h e maximum a l l o w e d by s e c t i o n 5-527, R.C.M. 1947.
W e f i n d t h a t s t a t u t e speaks f o r i t s e l f . S e c t i o n 47-126, R.C.M.
1947, s p e c i f i c a l l y s t a t e s t h a t t h e r e s h a l l be a " f o r f e i t u r e o f
a sum d o u b l e t h e amount of i n t e r e s t which t h e n o t e , b i l l , o r
o t h e r e v i d e n c e of d e b t c a r r i e s , o r which h a s been a g r e e d t o be
paid thereon." The amount of i n t e r e s t a p p e a r i n g on t h e f a c e o f
t h e n o t e was $6,435. Twice t h a t amount i s $12,870. That i s t h e
amount t o which t h e Kolokotrones a r e e n t i t l e d , and t h a t i s t h e
award of t h e d i s t r i c t c o u r t .
F i n a l l y , t h e Bank a r g u e s t h e r e was no w r i t t e n demand
made by t h e Kolokotrones f o r t h e r e t u r n o f t h e u s u r i o u s i n t e r e s t
a s r e q u i r e d by s e c t i o n 47-126, R.C.M. 1947, which p r o v i d e s :
"The t a k i n g , r e c e i v i n g , r e s e r v i n g , o r c h a r g i n g
a r a t e of i n t e r e s t g r e a t e r t h a n i s a l l o w e d by
t h e p r e c e d i n g s e c t i o n s h a l l be deemed a f o r -
f e i t u r e of a sum d o u b l e t h e amount of i n t e r e s t
which t h e n o t e , b i l l , o r o t h e r e v i d e n c e o f d e b t
c a r r i e s , o r which h a s been a g r e e d t o be p a i d
thereon.
"When a g r e a t e r r a t e o f i n t e r e s t h a s been p a i d ,
t h e p e r s o n by whom i t h a s been p a i d , h i s h e i r s ,
a s s i g n s , e x e c u t o r s , o r a d m i n i s t r a t o r s , may r e -
c o v e r from t h e p e r s o n , f i r m o r c o r p o r a t i o n
t a k i n g , r e c e i v i n g , r e s e r v i n g , o r c h a r g i n g same
a sum d o u b l e t h e amount of i n t e r e s t s o p a i d ;
p r o v i d e d , t h a t s u c h a c t i o n s h a l l be b r o u g h t
w i t h i n two y e a r s a f t e r t h e payment of s a i d i n t e r e s t ;
and p r o v i d e d , t h a t b e f o r e any s u i t may be b r o u g h t
t o recover such usurious i n t e r e s t , t h e p a r t y bring-
i n q s u i t must make w r i t t e n demand f o r r e t u r n of
s a i d i n t e r e s t s o p a i d . " (Emphasis added. )
Both p a r t i e s r e l y on t h e l a n g u a g e o f Bowden v . Gabel,
105 Mont. 477, 76 P.2d 334, t o s u s t a i n t h e i r p o s i t i o n c o n c e r n -
i n g t h e n o t i c e r e q u i r e m e n t c o n t a i n e d i n t h e second p a r a g r a p h
of s e c t i o n 47-126. Bowden d o e s r e c i t e t h a t t h e r e a r e two
d i f f e r e n t s i t u a t i o n s c o n t e m p l a t e d by t h e s t a t u t e and c i t e s
Miller v. Oklahoma S t a t e Bank, 53 Okl. 616, 157 P. 767, f o r t h e
p r o p o s i t i o n t h a t demand i s n o t r e q u i r e d t o o b t a i n r e l i e f under
t h e f i r s t p a r a g r a p h o f s e c t i o n 7727 [now s e c t i o n 47-1261. Miller
d o e s r e l y on a North Dakota c a s e which i n d i c a t e s t h a t t h e f i r s t
p a r a g r a p h rests i n c o n t r a c t when t h e i n t e r e s t h a s been c h a r g e d ,
and t h e second p a r a g r a p h d e a l s w i t h a c i r c u m s t a n c e where t h e
i n t e r e s t h a s been p a i d . I n Bowden t h e r e p r e s e n t a t i v e o f a machine
company b r o u g h t s u i t a g a i n s t t h e u s u r e r and t h e f a c t s t h e r e do
n o t harmonize w i t h t h e i n s t a n t c a s e , n o r was o u r problem h e r e d e -
cided there. A l l t h e s e c i t a t i o n s d e a l f o r t h e most p a r t w i t h
s u i t s against the usurer. The s t a t u t e i s c l e a r on t h i s p o i n t and
r e q u i r e s a p a r t y b r i n g i n g s u i t t o make a demand f o r r e t u r n o f t h e
interest. Case law s a y s i t a p p l i e s t o t h e second p a r a g r a p h of
s e c t i o n 47-126, R.C.M. 1947,only.
Here, Kolokotrones d i d n o t b r i n g t h e s u i t f o r r e c o v e r y .
The Bank sued them, and t h e y responded w i t h kh-'r ?aFonses. If
be w i t h i n
t h e i r c o u n t e r c l a i m c o u l d i n any way be c o n s t r u e d t o / t h e contem-
p l a t i o n of t h e second p a r a g r a p h of s e c t i o n 47-126, a s h a s been
a r g u e d , t h e n i t would have t o be s a i d t h a t demand would i n any
c a s e be a n i d l e a c t a s a c o n d i t i o n t o f i l i n g a n answer and de-
fenses. T h i s would n o t be r e q u i r e d under s e c t i o n 49-124, R.C.M.
1947.
The p a r t i a l summary judgment g r a n t e d by t h e d i s t r i c t c o u r t
i s a f f i r m e d and t h e c a u s e remanded t o t h e d i s t r i c t c o u r t f o r
f u r t h e r proceedings.
Justice
We concur:
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----------------------------- - -
&ief Justice
r
Ju tices