Brown v. Polk

George Bose Smith, J.

We have consolidated these three appeals, which are from separate foreclosure decrees obtained by the appellee Polk in suits involving three different mortgages. The various debtors contend that Polk’s claims are usurious and therefore void. The chancellor rejected this contention and entered a foreclosure decree in each case.

We may confine our discussion of the facts to Case No. 5-1828, which is typical of all three appeals. On December 13, 1956, the appellants Isiah Brown and his wife, to refinance a debt against their forty-acre farm, borrowed $4,000 from Polk. To evidence the debt the Browns executed five promissory notes, payable serially at $800 a year, bearing interest at 8 per cent per annum, and secured by a real estate mortgage upon the farm. When the debtors failed to pay the first annual installment of the principal Polk declared the entire debt due and filed this suit in January, 1958.

The Browns base their charge of usury not upon the real estate mortgage but upon a separate account by which Polk furnished them with cash and supplies during the 1957 crop year. This furnishing account was evidenced by a $550 note which the Browns signed in January, 1957, the amount of the note being the parties’ estimate of the total advances that Polk would make during the year. The note recited an interest rate of 10 per cent per annum and was secured by a chattel mortgage on the 1957 crops. As it turned out, the proceeds from the sale of the crops were insufficient to pay the furnishing account in full. When Polk filed his suit to enforce the real estate mortgage he included in his complaint a demand for the balance due on the furnish account, under a clause in the mortgage which made that instrument security for all indebtedness owed by the mortgagors to the mortgagee at the time of foreclosure.

At the end of the 1957 crop year Polk’s wife, who acted as his bookkeeper, prepared a written statement of Brown’s furnishing account. This statement, dated October 17, 1957, listed Polk’s advances from January through September, totaling $1,075.86. Interest was added in the amount of $107.58, which is exactly 10 per cent of the total sums advanced, regardless of when the advances were actually made. In filing his complaint Polk attached a sworn itemized statement of the account, which reflects the same practice of charging interest at the rate of 10 per cent of the total amount advanced.

The appellants are correct in their contention that the three furnishing accounts are usurious. Upon almost identical facts we held in Brooks v. Burgess, 228 Ark. 150, 306 S. W. 2d 104, that the excessive interest charge constitutes usury. In the cases at har when the pleas of usury were filed Polk tried to purge the accounts by recomputing the interest, and in his testimony he attributed the usurious charges to mistakes on the part of his wife. With respect to a similar assertion of mistake we said in the Brooks case: “Here the lender made no effort to compute the interest at the legal rate, nor was there a mathematical error in his calculations. At the most Burgess made a mistake of law, that of thinking that his method of charging interest was lawful. If the usury laws are to mean anything at all it is plain enough that those who engage in the business of lending money must at their peril familiarize themselves with those laws. Otherwise there is nothing to prevent every lender from habitually collecting excessive interest charges, as long as he purges the account of usury when it becomes necessary to go into court.” That the account in the Brooks case extended over a period of eight years, while those now before us relate to a single year, is not a sound reason for making a distinction between the eases. The point is that Polk, through what was at most a mistake of law, sought to collect interest from these appellants at a usurious rate. Indeed, Polk admits that he actually collected excessive amounts of interest from other farmers that he furnished during the same crop year.

Even though the furnishing accounts are unenforceable, the appellants are not entitled to the additional relief they seek. First, it is asserted by their pleadings and intimated by their brief that the invalidity of the furnish accounts also renders usurious the real estate notes and mortgages. This argument is unsound, for the real estate loans and the crop loans were separate and independent contracts, so that the invalidity of the one would not affect the other. Starling v. Hamner, 185 Ark. 930, 50 S. W. 2d 612; Hirsch v. Perkins, 211 Ark. 388, 200 S. W. 2d 796; Hughes v. Holden, 229 Ark. 15, 316 S. W. 2d 710. That the furnishing account balance constituted other indebtedness within the catchall clause in the real estate mortgage did not, in our opinion, establish such a connection between the two loans as to permit one to contaminate the other.

Secondly, the proceeds from the sale of the crops were applied as payments upon the furnish accounts. It is now contended, on the authority of Edwards v. Rumph, 48 Ark. 479, 3 S. W. 635, and Humphrey v. McCauley, 55 Ark. 143, 17 S. W. 713, that when the debtor owes the creditor both a valid debt and a usurious debt, the creditor cannot without the debtor’s consent apply a payment to the illegal account. Here, however, it is clear that the debtors consented to the application of the payments, not only because the chattel mortgages contemplate that the proceeds from the crops will be applied to the furnish accounts but also because those mortgages expressly provide that the mortgagee shall have “the exclusive right to apply the net proceeds of sale of all crops” to any indebtedness which the mortgagee may select.

For the error of granting the appellee judgments upon the furnishing accounts the decrees are reversed and the causes remanded for further proceedings upon the real estate mortgages.

Holt, J., dissents.