Bethke v. Idaho Sav. & Loan Association , 93 Idaho 410 ( 1969 )

McQUADE, Justice.

•Leonard Bethke and Deon Bethke, plaintiffs-appellants, commenced this action on December 27, 1965, charging that the respondent Idaho Savings and Loan Association charged interest in excess of the then legal rate of 8% per annum¹ on a note which appellants executed in favor of respondent on February 12, 1962. The note was for a face amount of $12,000, payable over a period of 240 months by monthly installments of $92.31, the first payment to be made on or before June 15, 1962. It carried a stated interest rate of 6.9%, and the total interest charged over the twenty year term of the note was to be $10,154.40 (which, curiously enough, was $3.44 less than the amount called for by the respondent’s amortization statement). In addition to this nominal interest, respondent charged the appellants $51.73 additional interest on a “construction loan account,” and the respondent withheld $1,200 from the $12,000 of the loan as a “service” fee. This 10% service charge was withheld prior to the performance of any services (although a number of services of a supervisory sort were, in fact, later rendered), and it was the respondent’s policy to deduct such amount automatically without regard to whether services actually would be performed or not.

The trial court found, as a factual matter, that the $1,200 service fee was not actually a legitimate service fee, but was prepaid interest, because “the same was deducted prior to and regardless of whether any services were, in fact, performed.” ² The lower court also concluded, however, that, under the law of Idaho as announced in Eagle Rock Corp. v. Idamont Hotel Company³ the total interest charged over the entire term of the loan was not usurious. The appellants attack this determination urging that the Eagle Rock Corp. case is distinguishable from this one, or that the formula used therein to determine the “margin” over the nominal interest on the loan within which “hidden” interest ■charges might be incurred without running .afoul of the usury laws is incorrect.

On its pertinent facts, Eagle Rock Corp. v. Idamont Hotel Company is practically 'indistinguishable from this case. It involved a note and mortgage which provided for 120 equal payments of $653.42 per -month over a ten year period. The face amount of the loan was $53,000 and the nominal interest was 8%, 2% less than 10% which was then the maximum rate of interest chargeable. The borrowers in that case actually received $51,145, however, the lenders withheld $1,855 as “commissions and membership fees.” It was alleged that this $1,855 was an advanced interest payment and that it brought the total interest over the 10% maximum and that the loan was therefore usurious. This Court held, however, that it was not usury. The following reasoning was used to reach that conclusion:

“The rule which this court has announced and followed with respect to the manner of determining whether usurious interest has been charged or collected is stated in Easton v. Butterfield Live Stock Co., 48 Idaho 153, 279 P. 716, as follows:

‘In determining whether usurious interest has been charged or collected under a particular contract it is not permissible to consider only a portion of the term. The test is, Did the lender under his contract charge or receive a profit on his investment in excess of the maximum rate for the full period of the loan? If he has, there is usury; otherwise, not.’ (See annotation of cases 82 A.L.R., page 1214.)

“ * * * There appears to be no question that the interest on $53,000 payable as the note and mortgage herein provided and figured at the rate of 8 per cent per annum was correctly computed and amounted to $24,210.40 for the full term of 120 months. Under the law existing at the time the contract was made the parties might lawfully have contracted for the payment of interest not to exceed the sum of 10 per cent per annum. * * * Simple computation discloses that interest at 10 per cent rather than at 8 per cent would increase the total amount of interest for the same term by the amount of one-fourth of $24,210.40, or by $6,052.60, which latter amount may be used as a yardstick or margin to determine whether the interest was usurious or exceeded the sum of 10 per cent per annum.” ⁴

This, then, is the “Eagle Rock formula” ; the difference between the maximum allowable interest rate and the nominal interest rate, as a numerator, over the nominal interest rate, as the denominator, times-the amount of money properly chargeable as interest over the entire term of the note, the product equaling the amount of money which could be charged as extra, “hidden” interest without breach of the usury law. In the present case the equation would be as follows:

(8% - 6.9%) 1.1%

6.9% 6.9%

$10,154.40 = $1,618.82

This resulting margin of additional allowable interest is substantially more than the deducted sum of $1,200 plus $51.73 which was charged over the amount of the stated interest in this case. The holding in the Eagle Rock Corp. case and the figures used by this Court in that case should, therefore, control the result in this case and the lower court’s judgment should be upheld. The appellants argue compellingly, however, that the “Eagle Rock formula” is an inadequate basis for decision and offer their own formula in its stead. We disagree with that contention.

The appellants urge us to adopt a formula which is, they argue, a more accurate device for computing effective interest rates. It is, they say, the formula which is generally used in accepted accounting practice. While it is true the laws should strive for precision, the appellants’ argument ignores two important considerations are the legislative purpose behind the laws of which we must be acutely aware in the performance of our function as the final interpreters of the law of this state, they which we construe and the beneficial policies underlying the doctrine of stare decisis.

Although at this date it hardly seems necessary to further elaborate on the doctrine of stare decisis, we will discuss it briefly in order that the principles which underlay our decision today may be clear. The late Professor Henry M. Hart set out a concise catalogue of the considerations which are thought to support a general practice of adherence to prior holdings:

“1 In furtherance of private ordering—

“(a) The desirability of enabling people to plan their affairs at the stage of primary private activity with the maximum attainable confidence that if they comply with the law as it has theretofore been announced, or can fairly be expected to be announced thereafter, they will not become entangled in litigation.

“(b) The desirability of providing private counsel so far as possible with stable bases of reasoning. * * *

“(c) The desirability of encouraging the remedial processes of private settlement by minimizing the incentives of the parties to try to secure from a different judge a different decision than has been given by the same or other judges in the past.

“2. In furtherance of fair and efficient adjudication—

“(a) The desirability, from the point of view of the litigants, of expediting litigation and minimizing its costs by sparing them the necessity of relitigating every relevant proposition in every case.

“(b) The need, from the point of view of the judicial system, of facilitating the dispatch of business — indeed, the sheer impossibility of reexamining de novo every relevant proposition in every case.

“(c) The need of discouraging a rush of litigation whenever there is a change of personnel on the bench.

“(d) The desirability, from the point of view of fairness to the litigants, of securing a reasonable uniformity of decision throughout the judicial system,, both at any given time and from onetime to another.

“(e) The desirability of promoting genuine impersonality of decision by minimizing the elements of personal discretion, and of facilitating the operation of the check of professional criticism.

“(f) The propriety of according respect to the conclusions of predecessor judges.

“(g) The injustice of disappointing expectations fairly generated at the stage of primary private activity.

“3. In furtherance of public confidence in the judiciary — ■

“(a) The desirability of maximizing the acceptability of decisions, and the importance to this end of popular and professional confidence in (1) the impersonality of decisions and (2) their reasoned foundation, as manifested both by the respect accorded to them by successor judges and by their staying power.

“(b) The necessity, considering the amorphous nature of the limits upon judicial power and the usual absence of an effective political check at the ballot box, that judges be subject to the discipline and the restraint of an obligation to build upon the prior law in a fashion which can withstand the test of professional criticism.” ⁵

In the course of our decisions we have consistently attempted to serve these important purposes.⁶ And, recognizing the necessity of a stable environment for private planning, we have been particularly concerned not to unsettle the law relating to matters of property and commercial transactions. Thus we said in the case of Scott v. Gossett:

“The former decision of this court, having been acted upon by the people, who have adjusted the business matters of the county, funded old indebtedness, and created new, should not be disturbed at this late day. No good would be accomplished by overruling that decision, but much evil and confusion would result therefrom. Whether that decision was right or not, public policy and sound legal principles demand that we now adhere to it, and regard that question as a sealed book, which is no longer open to public scrutiny.” ⁷

This is not of course a rule of unreasoning acquiescence. We will not follow incorrect decisions merely because they are there, “the rule, to stand by decided cases, and to maintain former adjudications, contemplates more than blindly following some former adjudication, manifestly wrong.”⁸ We should, nonetheless, be most careful before we consider overruling a holding such as the one announced in the Eagle Rock case which has lasted for over thirty years and upon which unnumbered contractual and property relationships may be founded. As was early said by this Court, in the leading case of Walling v. Bown,

“[i]t seems to be generally conceded that where the beneficial results to be obtained by a departure from the construction and interpretation placed by a court of last resort upon a constitutional or statutory provision will not greatly exceed the disastrous and evil effects likely to flow therefrom, courts should refuse to reopen such questions.” ⁹

Before we risk, therefore, unsettling the countless relationships which may have been entered into in reliance on the Eagle-Rock holding, we should examine that rule in terms of its service to the policies of the -usury laws. We should only overrule the formula in the Eagle Rock case if it is ■clearly at odds with the purposes of the statute.

The usury laws have aptly been •called blunt instruments of social control.¹⁰ They have but a single purpose. That is ■to protect “the necessitous debtor against ■extortion which he is practically helpless to resist.”¹¹ We have repeatedly, and recently, held that the usury laws were not ■designed to permit a debtor to default -on a contract which was not clearly oppressive, which was not clearly within the prohibition of the usury law, and into which be had entered knowingly, freely and with .arms length bargaining.¹² The twin goal ■of protecting the helpless debtor while avoiding unnecessary disruption of commercial transactions may be succinctly summed up in the aphorism that usury laws are meant to be shields and not swords.¹³ In service of this two-legged principle a number of rules have evolved designed to protect the right to fairly and freely contract from the harsh penalties of the usury laws. It is said, for instance, that the usury statute will not be construed to include matters not explicitly within them.¹⁴ The burden is on the party alleging usury to show it by clear and convincing proof, especially if the unlawful overcharge is not obvious on the face of the transaction.¹⁵ And, a lender, in order to be held liable to the forfeitures prescribed in the usury statute, must be found to have knowingly and with corrupt intent charged usurious interest.¹⁶ And it has been held that excessive interest charged for only part of a term is irrelevant if the interest charged for the entire period of the loan was within the law.¹⁷

The scheme which these rules mark out is one in which the purpose of the “quasi-penal” usury statute to reach the knowing lawbreaker, the intentional extortionist, is easily served without dilution in close cases of the law’s traditional protection of the right to contract. The Eagle Rock rule is in no sense inconsistent with this scheme. Indeed, it is in substantial accord with the law’s intent. The formula adopted by this Court over 30 years ago, because it provides an easily computable “bright line” for determining what “hidden” interest charges are large enough to be usurious, gives clear warning to the lending professions of what will run afoul of the law, while not penalizing the accidental, marginal contract.¹⁸ We, therefore, refuse to overrule the formula announced in the Eagle Rock case, including the use of the face amount of the loan, apparently freely and openly bargained for in this case, as the base amount upon which the interest may be calculated. If our formula is so at odds with the statutory scheme, the legislature may, of course, at any time change it. It should be noted that throughout the frequent revisions of the usury statutes made since Eagle Rock Corp. v. Idamont Hotel Company was decided in 1938, there has been no attempt by the legislature to substitute an alternative formula for the one announced in that case.

Holding, as we do, that there is no good reason to depart from the normal principle of stare decisis and that, therefore, the formula in the Eagle Rock case is the correct one, we must affirm the computations and judgment of the court below based on that formula.

Affirmed. Costs for respondent.

MARTIN and SCOGGIN, D. JJ., concur.

1 . I.C. § 27-1905 (1948). This section has since been amended and recodified; it may now be found in 5A I.C. § 28-22-105, and the maximum rate of interest is now 10%. The law at tlie time the contract was made governs, Union Central Life Ins. Co. v. Kahn, 63 Idaho 243, 246, 118 P.2d 717 (1941).

2 .Respondent has taken no appeal from this finding and -we need not and will not reach it in this opinion. It may, however, be noted that merely because a service fee is charged in advance, when the number and kind of services to be performed are only potential and contingent, it does not necessarily follow that the fee is a cover for usury. Many of the services involved in a mortgage transaction could probably be predicted with fair accuracy and could reasonably be charged in advance, when it is certain that the debtor has enough money and without the trouble and expense of a later periodic billing. An apt analogy is the lawyer's practice of charging a retainer before he begins to work on a case.

3 . 59 Idaho 413, 85 P.2d 242 (1938).

4 . Eagle Rock Corp. v. Idamont Hotel Co., supra n. 3, at 424, 85 P.2d at 245, 246.

5 . H. M. Hart, Jr. and A. M. Sacks, The Legal Process: Basic Problems in the Making and Application of Law, 587-588 (Cambridge tentative ed. 1958).

6 . E. g. Scott v. Gossett, 66 Idaho 329, 158 P.2d 804 (1945) ; State v. Cranston, 59 Idaho 561, 85 P.2d 682 (1938) ; In Re Speer, 53 Idaho 293, 23 P.2d 239, 88 A.L.R. 1086 (1933).

7 . Scott v. Gossett, supra n. 6, 66 Idaho at 334, 158 P.2d at 806; accord, International Mortgage Bank v, Barghoorn, 43 Idaho 24, 24 P. 868 (1926) ; Robinson v. Colonial Discount Co., 106 Ga.App. 274, 126 S.E.2d 824 (1962); Monday v. Millsaps, 197 Tenn. 295, 271 S.W.2d 857 (1954).

8 . Higer v. Hansen, 67 Idaho 45, 64, 170 P.2d 411, 423 (1946) ; see also Kerr v. Finch, 25 Idaho 32, 135 P. 1165 (1913).

9 . 9 Idaho 740, 743-744, 76 P. 318, 319 (1904) ; accord, Abbott v. Continental National Bank of Lincoln, 169 Neb. 147, 98 N.W.2d 804, 807 (1959).

10 . Shanks, Practical Problems in the Application of Archaic Usury Statutes, 53 Ya.L.Rev. 327, 329 (1967).

11 I. Freedman v. Hendershott, 77 Idaho 213, 219, 290 P.2d 738, 741 (1955) ; accord, Meridian Bowling Lanes, Inc. v. Brown, 90 Idaho 403, 415, 412 P.2d 586, 592-593 (1966).

12 . See Meridian Bowling Lanes, Inc. v. Brown, supra n. 11, at 412-415; see generally Petersen v. Philco Finance Corp., 91 Idaho 644, 428 P.2d 961 (1967); Bell v. Idaho Finance Co., 73 Idaho 560, 255 P.2d 715 (1953) ; Easton v. Butterfield Live Stock Co., 48 Idaho 153, 279 P. 716 (1929).

13 . Meridian Bowling Lanes, Inc. v. Brown, supra n. 11.

14 . Petersen v. Philco Finance Corp., supra n. 12; Milo Theater Corp. v. National Theater Supply, 71 Idaho 435, 233 P.2d 425 (1951) ; Finney v. Moore, 9 Idaho 284, 74 P. 866 (1903).

15 . Meridian Bowling Lanes, Inc. v. Brown, supra n. 11; Olson v. Caufield, 32 Idaho 308, 313, 182 P. 527 (1919)

16 . Patrick v. Bisbee, 52 Idaho 369, 373, 15 P.2d 730, 731 (1932); Musser v. Murphy, 49 Idaho 141, 145-146, 286 P. 618, 619 (1930) ; Easton v. Butterfield Live Stock Company, supra, 48 Idaho at 162-163, 279 P. 716; Anderson v. Creamery Package Manufacturing Co., 8 Idaho 200, 67 P. 493, 56 L.R.A. 554 (1902). But cf. Freedman v. Hendershott, supra, 77 Idaho at 218, 290 P.2d 738.

17 . Easton v. Butterfield Live Stock Company, supra, 48 Idaho at 159-160, 279 P. 716; cited with approval Eagle Rock Corporation v. Idamont Hotel Co., supra, 59 Idaho at pp. 424, 426, 85 P.2d at pp. 245-247.

18 . It should be noted that the purposes for which appellant’s formula was designed are those of the accounting profession. These bear no logical relationship to the purposes of the usury laws which our formula is meant to serve. Indeed, the difficulty encountered by the trial court in Ms attempt to find two accountants to agree on wliat the effective interest rate actually was militates strongly in favor of our clear, easily to compute formula. Memorandum opinion of District Judge Arthur P. Oliver, transcript at 116.