No. 91-070
IN THE SUPREME COURT OF THE STATE OF MONTANA
L. E. SCARR a/k/a
, ,
ROBERT SCARR,
Plaintiff and Appellant,
v. oc'; --ti ig91
JAMES W. BOYER
and JOANN BOYER, 22 -5ki-!A
.
CLERK OF S U P R E M ECOSRT
STATE OF MONTANA
Defendants and Respondents.
APPEAL FROM: District Court of the Thirteenth Judicial District,
In and for the County of Yellowstone,
The Honorable William J. Speare, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
J. Reuss, Wright, Tolliver & GuthaLs,
Billings, Montana
For Respondents:
James P. Healow, Sweeney & Healow,
Billings, Montana
Submitted on Briefs: June 13, 1991
Decided: October 8, 1991
Filed:
< . " % j
Clerk
Justice Terry N. Trieweiler delivered the opinion of the Court.
L.E. Scarr sued James and JoAnn Boyer to recover $70,000 due
under a promissory note. The Boyers filed a counterclaim alleging
usury. Both parties moved for summary judgment. The ~istrict
Court for the ~hirteenthJudicial ~istrictin Yellowstone County
granted summary judgment for Scarr on the note itself and granted
summary judgment for the Boyers on their counterclaim for usury.
Scarr appeals from the order of the District Court. We a f f i r m .
The issues are:
1. Did the District Court err in applying the usury penalty
to a contractual provision for post-default interest?
2. Did the District Court err in applying the usury penalty
to a contract in which the creditor did not intend to circumvent
the usury statute?
In August 1983, Scarr sold subdivided land in Billings to Rim
Creek Investors, a partnership that included defendant James Boyer.
Scarr was given a mortgage on the property in the amount of
$412,500. The partnership agreed to make annual interest payments.
The balance of all remaining principal and interest was due on
December 5, 1988. A dispute about foreclosure arose as the date
of the balloon payment approached. By that time $375,000 of
principal remained due. James Boyer and another partner went to
Scarrts residence in Washington and negotiated a compromise
agreement.
Under the terms of this compromise, Scarr forgave $175,000 of
principal in exchange for a $50,000 cash payment from the
partnership and promissory notes from the individual partners for
the remaining $150,000 of principal. The District Court treated
this compromise agreement as a novation that cancelled the earlier
mortgage, and neither party appeals from that determination.
The Boyers' individual share of the new principal debt was
$70,000. They executed a note for that amount and agreed to pay
interest at the rate of 10 percent prior to any default. The note
provided that in the event of default, the interest rate would
increase to 18 percent.
None of the partners made the first semi-annual interest
payment when it was due on April 25, 1989. Scarr told the
partnership he would accelerate the notes if he did not receive the
first semi-annual interest payment by May 15, 1989. On May 11,
1989, the partnership tendered a check drawn on the partnership
account for approximately one-half of the total amount of all the
semi-annual interest due from all of the partners. Scarr returned
this check and said he preferred to have payment from the partners
as individuals.
On May 19, 1989, Scarr accelerated the notes and filed suit
against the individual partners. His complaint against the Boyers
demanded all of the principal, plus 10 percent interest up to
April 25, 1989, and 18 percent interest from that date forward.
Specifically, Scarr demanded interest of $37.3687 for every day
that elapsed after April 25, 1989. In their counterclaim the
Boyers alleged that the post-default interest rate of 18 percent
was usurious.
Both parties moved for summary judgment. The District Court
granted summary judgment for Scarr on the note itself, but also
granted summary judgment for the Boyers on their counterclaim. The
penalty for usury is twice the amount of the usurious interest
charges. Section 31-1-108, MCA. Five hundred and fourteen days
elapsed between April 25, 1989, and the date during pre-trial
proceedings when Scarr finally abandoned his claim to 18 percent
interest. Pursuant to the statute, the District Court doubled the
usurious post-default interest sought by Scarr and subtracted it
from the $70,000 principal and $4,737.46 in non-usurious
pre-default interest. Thus, the court reduced Scarrls recovery by
$38,415.02. He appeals.
I
Did the District Court err in applying the usury penalty to
a contractual provision for post-default interest?
In Montana, interest is "the compensation allowed by law or
fixed by the parties for the use or forbearance or detention of
money." Section 31-1-104, MCA. Non-regulated lenders cannot
charge more than six percentage points above the New York prime
rate as reported in the Wall Street Journal three business days
before the transaction in question. Section 31-1-107, MCA.
Usury is "[t]he taking, receiving, resewing, or chargingw of
an interest rate greater than the limit set by § 31-1-107, MCA.
Section 31-1-108, MCA. The New York prime rate was 10.5 percent
three days before the Boyers signed their promissory note. Thus,
the maximum allowable interest rate applicable to the Boyer note
was 16.5 percent.
However, Scarr argues that we should not apply the usury
statute to the 18 percent post-default interest rate because it is
merely a late-payment penalty that the Boyers could have avoided
by paying on time. He cites the cases collected in 28 A. L.R. 3d 4 4 9
for the proposition that post-default interest is not subject to
usury statutes. In Metro Hauling,Inc. v. Daffem (1986), 44 Wash. App.
719, 722, 723 P.2d 32, 33, for example, the court said:
[A] provision in a note by which the debtor agrees to
pay, after maturity, interest at a rate higher than that
allowed by law, does not render the transaction usurious
provided the parties acted in good faith and did not
intend to evade the usury law. The debtor has it within
his power to avoid the additional interest charge by
prompt payment of his obligation, and therefore, the
contingency upon which the excessive interest comes into
existence is not solely within the lender's control.
[Citation omitted.]
Scarr assures us that this is by far the majority rule. But in
Washington, the usury statutes apply to "every loan or forbearance
of money. l1 Wash. Rev. Code 5 19.52.010. Montana, by contrast,
makes its usury statutes applicable to "detentiorzs" of money as weff
as loans and forbearances. Section 31-1-104, MCA. We find this
difference significant.
In Parksv. Lubbock (1899), 92 Tex. 635, 51 S.W. 322, the court
construed a statute that was virtually identical to Montana's
present statutory definition of interest. The court held 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. ... [Tlhe
conclusion is not to be resisted that there was a purpose
in adding the word 'Idetention1l the accepted definition
to
of and that this purpose was to meet the case
when the debtor should d e t a i n the money owed beyond the
stipulated period of forbearance, and so to provide that
a promise t pay an a d t o a sum fir such d t n i i ~Izouldbe deemed
o diinl eetoz
interest, and not merely damages by way of a p e n a l t y to
secure a prompt performance of the contract. [Emphasis
added. )
Parks, 51 S.W. at 323. The court concluded that the post-default
interest at issue in that case was subject to the usury statutes.
The Supreme Court of South Dakota reached the same conclusion
in Ulvildsz v, Sorken (193l), 58 S.D. 466, 237 N.W. 565. The statutory
definition of interest in South Dakota, like the statutes in Texas
and Montana, covered the "detention of money." The court cited
Parks with approval and added that:
~equiringthe maker of a note to pay a higher rate of
interest after maturity for the use of money is likely
to be as oppressive as when required to pay a higher rate
during the term of the loan. It may not be within the
power of the borrower promptly to meet his obligations
at maturity. If a borrower is to be protected from the
extortion of an excessive rate for the use of money,
there is no apparent reason why it should be limited to
the term of the loan.
We agree. Usury statutes protect borrowers who lack real
bargaining power against overreaching by creditors. Daffem, 723
P.2d at 34. The occurrence of a default in no way affects this
public policy in favor of protecting the debtor. Indeed, it is
after default that the debtor has the greatest need for protection;
a debtor who cannot retire a debt compounded by legal interest
certainly lacks the resources to pay usurious interest.
For these reasons we adopt the reasoning of the Texas and
South Dakota courts and hold that Montana's statutory definition
of interest includes post-default interest. Scarr charged the
Boyers post-default interest in excess of Montana's statutory
limit. This was usury. We conclude that the District Court was
correct in applying the usury penalty.
II
Did the District Court err in applying the usury penalty to
a contract in which the creditor did not intend to circumvent the
usury statute?
Scarr argues that it would be inequitable to penalize him for
usury because he did not intend to violate the usury statute. He
admits that it was his idea to charge 18 percent, but asserts that
he only wanted to charge as much interest as the law would allow.
He says he did not know what the usury limit was in Montana and
that not even the partnership or its attorney realized that the
post-default interest provision was usurious.
We disagree. The only intent required for usury is the intent
to charge a particular rate of interest that is usurious in fact.
Montana National Bank of Bozeman v Kolokotrones (1975 ) , 167 Mont
. . 92 , 53 5
P.2d 1017. The creditor need not know that the particular interest
rate is usurious and illegal. Thus, whether Scarr intended to
violate the law is irrelevant. It is enough that he intended to
charge 18 percent. We hold that the District Court was correct in
penalizing Scarr for usury despite his assertions that he did not
intend to violate the law.
Affirmed.
We concur:
October 8, 1991
I hereby certify that the following order was sent by United States mail, prepaid, to the
following named:
J. Reuss, Esq.
WRIGHT, TOLLIVER & GUTHALS
P.O. Box 1977
Billings, MT 59103
James P. Healow, Esq.
SWEENEY & HEALOW
1250-15th St. W., Suite 202
Billings, MT 59102
ED SMITH
CLERK OF THE SUPREME COURT
-
STATE 9 F MONTANA 1
BY:
Deputy