FIRST NAT'L BANK V. DANEK, 1976-NMSC-077,
89 N.M. 623, 556 P.2d 31 (S. Ct. 1976)
FIRST NATIONAL BANK IN ALBUQUERQUE,
Trustee,
Plaintiff-Appellee and Cross-Appellant,
vs.
Robert B. DANEK, Sylvia B. Danek, Melvin B. Porter,
Patricia M. Porter, Richard R. Danek, Lucille F.
Danek and Telephonic, Inc., a corporation,
Defendants-Appellants and Cross-Appellees.
SUPREME COURT OF NEW MEXICO
1976-NMSC-077, 89 N.M. 623, 556 P.2d 31
Adams & Foley, Quincy D. Adams,
Albuquerque, for defendants-appellants.
Rodey, Dickason, Sloan, Akin & Robb,
Joseph J. Mullins, Albuquerque, for plaintiff-appellee.
EASLEY, J., wrote the opinion. OMAN, C.J.,
and SOSA, J., concur.
{1} The plaintiff-appellee,
First National Bank in Albuquerque (Bank), as trustee under a trust created by
Frank A., Jr., and Mabel W. Hubbell, brought suit in the District Court of
Bernalillo County for the balance due on a promissory note. After a nonjury
trial, judgment was entered against the defendants, Robert B. and Sylvia B.
Danek, Melvin B. and Patricia M. Porter and Telephonic, Inc. for $16,583.02,
from which the defendants appeal. The plaintiff-appellee cross-appeals, alleging
that Richard R. and Lucille F. Danek, parents of Robert Danek, are not released
as guarantors on the note. We reverse the judgment of the trial court and deny
the cross-appeal.
{2} On November 28, 1969, the
defendants signed a promissory note for $60,000.00 payable in various
installments all to be paid within a one-year period. The interest was not
specified but can be calculated from the schedule of payments to be a little
less than 10% per annum on the unpaid balance. The note was originally signed
by the Porters and the Robert Daneks and guaranteed by Robert Danek's parents,
the Richard Daneks. A guaranty was later endorsed on the note by Telephonic,
Inc. The loan was secured by shares of capital stock owned by Mr. Porter. This
collateral was released after a payment of $30,000.00 on the note in August,
1970.
{3} At the trial the Bank
introduced parol evidence, to which no objection was made, which tended to
alter the terms of the written instrument to show that the
{*625}
money was primarily to be used to establish and operate the corporation and
that the corporation was actually the maker and the individuals, the
guarantors. This would have nullified the defense of usury.
1 Telephonic, Inc. was incorporated
ten days after the note was executed.
{4} Robert Danek testified
that in addition to the note, a stock transaction was arranged so that Hubbell,
the lender, could receive more than the interest that was indicated in the
note. Danek and Porter arranged a sale of one hundred fifty shares of United
Services Life Insurance Company stock and fifty-five shares of Pepsico Company
stock valued by the parties on the date of execution of the note at $8,631.00.
2 Mr. Hubbell, however, paid only
$4,655.00, or $3,976.00 less than the value of the stock. This
"bargain" was to constitute additional interest on the note,
according to the uncontradicted testimony of Mr. Robert Danek. (Mr. Hubbell is
now deceased.)
{5} The note in fact was not
paid in one year. In August, 1970, the collateral was released in exchange for
a $30,000.00 payment on the note. Mr. Robert Danek apparently received
"extensions" for payment on the note but by April, 1973, had reduced
the balance indicated by the face of the note to only $11,148.29.
{6} The trial court ruled
that the note was primarily a corporate obligation of Telephonic, Inc., was not
affected by the stock transaction and was not usurious. The appellants claim on
appeal that Telephonic, Inc. was not a primary maker on the note but was a
guarantor, that the interest on the note in light of the stock transaction was
usurious and that the individuals who signed as makers are entitled to assert
the defense of usury. We agree.
{7} We first examine the
nature of the obligation under the note. On its face the note was clearly the
personal obligation of the Robert Daneks and the Porters, who signed as
comakers. The guarantors were the Richard Daneks and later, Telephonic, Inc.
The trial court, however, ruled that the note was primarily a corporate
obligation of Telephonic, Inc., because the money was used to establish the
business. But Telephonic, Inc. was not even in existence at the time of
execution of the note and endorsed only as a guarantor some time after the
execution of the instrument.
{8} Furthermore, there is the
uncontradicted testimony of Robert Danek:
Q. Why did you sign your name on the note, then, for
Telephonic, Inc., before it was actually incorporated?
A. We anticipated this corporation and Mr. Hubbell said that
he wanted it.
Q. He said he wanted what?
A. He said he wanted the corporation to guarantee this note.
Q. Was there any discussion with Mr. Hubbell as to whether he
would accept a note from Telephonic, Inc., a corporation?
A. Yes, there was quite a bit. We tried desperately to get
this note in the name of Telephonic, Incorporated as the borrower. Mr. Hubbell
would hear nothing of it. He insisted that Melvin Porter and myself do this
note individually, and he would have the corporation guarantee it, but he would
not have the corporation borrow the money. We tried desperately but he just
wouldn't do it.
Therefore, we must conclude that the parties intended the
note to be the personal obligation {*626} of
the Robert Daneks and Porters. We so hold. Cf. American Bank of Commerce v.
Covolo, 88 N.M. 405, 410-411, 540 P.2d 1294, 1299-1300 (1975).
{9} The appellants also
allege that the interest on the note is usurious. The defense of usury is not
available to a corporation. § 50-6-26, N.M.S.A. 1953 (Supp. 1975).
3 Since we have held that the
individuals were the makers of the note the defense of usury can be raised.
{10} The rates of interest
are regulated by statute under § 50-6-16, N.M.S.A. 1963:
Rates of interest allowed -- Minimum charge. -- The interest
rate shall be the rate agreed to by the parties, except that no interest rate
shall be higher than twelve per cent (12%) per annum computed upon unpaid
balances for the actual elapsed time during which such balances respectively
are unpaid where the evidence of indebtedness of the loan is not secured by
collateral security, and shall not exceed ten per cent (10%) per annum computed
upon unpaid balances for the actual elapsed time during which such balances
respectively are unpaid where the evidence of indebtedness is secured by
collateral security;....
{11} The appellants argue
that if the stock transaction is considered, the interest rate on the loan for
the one year is approximately 17%
4
and therefore usurious, whether the note was secured or unsecured. The Bank
argues to the contrary that the interest should be calculated over the entire
time during which the balance was unpaid which according to its calculations is
six years. Under this theory, the interest rate is a permissible 4.32% with the
profit from the stock transaction considered as interest and even less if this
transaction is not considered. The trial court held that the profit on the stock
transaction did not constitute interest on the note and that the note was not
usurious.
{12} The trial court also
found a novation in August, 1970, when the collateral was released. Yet there
was no definite agreement to extend the note or to set a new maturity date and
payment schedule. This finding of a novation by the trial court is not
supported by substantial evidence and must be reversed.
Cantrell v. Lawyers
Title Insurance Company, 84 N.M. 584,
506 P.2d 90 (1973).
{13} Since there was no new
binding obligation or valid extension of the note, the term of the note must
remain at the one-year period agreed to by the parties. The interest then must
be calculated over that period and not the six years argued by the Bank.
{14} Usury must exist at the
inception of an agreement.
Hays v. Hudson,
85 N.M. 512,
514 P.2d 31
(1973);
Armijo v. Henry,
14 N.M. 181,
89 P. 305 (1907); 45 Am. Jur.2d
Interest and Usury § 111, at 97 (1969). Other courts have disregarded the form
and looked to the substance of a transaction in order to determine whether
usury exists.
Starkovich v. Southwest Savings & Loan Ass'n, 14 Ariz.
App. 382, 483 P.2d 795 (1971) [citing
Seargeant v. Smith, 63 Ariz. 466,
163 P.2d 680 (1945)];
Burr v. Capital Reserve Corporation, 71 Cal.2d
983, 80 Cal. Rptr. 345, 458 P.2d 185 (1969) [citing
Milana v. Credit
Discount Co., 27 Cal.2d 335, 163 P.2d 869 (1945)]; Restatement of Contracts
§ 529 (1932); 45 Am. Jur.2d Interest and Usury 112 (1969). An ostensibly
independent and unrelated contract for the sale of property from the borrower
to the lender at an inadequate price has rendered a loan usurious
{*627} in other jurisdictions if the sale is a
condition of the loan and intended as a device to disguise usury.
Mission
Hills Dev. Corp. v. Western Small Business Inv. Co., 260 Cal. App.2d 923,
67 Cal. Rptr. 505 (1968); cf.
Kessing v. National Mortgage Corporation,
278 N.C. 523, 180 S.E.2d 823 (1971); Annot., 81 A.L.R.2d 1280, 1286 (1962). We
will follow these principles in New Mexico. The stock sale in this case was a
condition of the loan from Mr. Hubbell and according to the uncontradicted
testimony of Mr. Robert Danek, the reduced price was to constitute additional
interest. Usury was present in the transactions from the outset.
{15} When then are the
consequences? Under § 50-6-18, N.M.S.A. 1953, knowingly charging an illegal
interest results in forfeiture of the entire amount of interest.
"Knowingly" has been interpreted by this court to require only the
general intent of taking illegal interest by the lender rather than by any
specific one.
Hays v. Hudson, supra, 85 N.M. at 513, 514 P.2d at 32.
There is no question of the presence of the requisite intent here.
{16} Thus, all interest on
the note is forfeited. The Robert Daneks and Porters received the benefit of
$56,024.00 from the various transactions.
5
They have made payments to date of $57,547.22. Therefore, their obligation to
the Bank is completed.
{17} The trial court also
awarded $2,200.00 in attorney's fees to the Bank's attorneys. Under
Hays v.
Hudson, supra, reasonable attorney's fees are recoverable only to the
extent necessary to enforce the legal portion of the obligation. At the time
suit was commenced, the Bank had no legal cause of action against the
defendants since the note was usurious and payment on the net principal of
$56,024.00 had been made. Thus, the Bank's attorneys are not entitled to
attorney's fees, and the order of the trial court allowing attorney's fees is reversed.
{18} Finally, the Bank
cross-appeals, alleging that there was no novation and thus the Richard Daneks
should not be released as guarantors under the note. This claim becomes
meaningless since we hold that the obligation to the Bank has been satisfied.
Therefore, the guarantors are not liable under the note.
6
{19} The judgment of the
trial court is reversed.
OMAN, C.J., and SOSA, J., concur.
1
See § 50-6-26, N.M.S.A. 1953 (Supp.1975).
2
The United Services Life Insurance stock was owned by Robert Danek's parents
and was transferred to Mr. Hubbell at an agreed value of $38.25 per share, or
$5,737.00. The Pepsico stock was owned by the Melvin Porters and transferred at
an agreed value of 52 5/8 per share, or $2,894.00. There was a minor
discrepancy between the agreed value and the market value testified to by a
stock broker. The difference is immaterial to the issues before us.
3
A virtually identical statute was in effect at the time the note was executed.
See ch. 87, § 8, [1967] N.M. Laws 656.
4
On the face of the note $60,000.00 is the principal. When the stock sale is
considered, Hubbell bought the stock at $3,976.00 less than the agreed value.
This amount constituted additional interest on a net principal of $56,024.00
($60,000.00-$3,976.00), or an additional 7.1% interest on the note. Thus, the
approximate total interest is the 10% called for by the note plus 7% from the
stock sale, or 17%, well in excess of the 12%.
6
Telephonic, Inc. also guaranteed the note. Its liability is also at an end
since we hold the note has been satisfied. It most likely could defend on the
grounds of usury since the comakers could raise the defense. See Annot., 63
A.L.R.2d 924, 957 (1959).