1 Reported in 266 N.W. 455, 267 N.W. 143.
Defendant appeals from the judgment.
The action was brought by the plaintiffs, the makers of the promissory note hereinafter described, to set aside and cancel the note on the ground of usury and to recover certain collateral securities transferred to the defendant as security for the payment of the note. The defendant denied that there was any usury and counterclaimed for the balance due on the note, the note having
been reduced by certain collections made on the collateral securities held by defendant. The note is dated December 18, 1931, and matured four months after date, according to its terms. There was interest at the rate of eight per cent per annum for the four-months period, amounting to $133.33, retained by the defendant at the time the note was given, and the balance of the money, $4,866.67, paid over to the plaintiffs.
The usury claim now presented by the plaintiffs is that prior to the signing of the note there was an oral agreement between the plaintiffs and the defendant that the note should be paid in four monthly instalments, on the 18th day of January, February, March, and April, 1932. The note itself reserved no interest before maturity, and the legal rate of six per cent after maturity. Plaintiffs rely solely on this oral agreement that the note, in contradiction to its plain terms, was payable in monthly instalments instead of in four months from date.
The case was tried without a jury, and the trial court found in plaintiffs' favor, that the note was usurious, and ordered its cancellation and the return of the collateral pledged therewith for its payment. Judgment was so entered.
The question is squarely presented whether, as found by the trial court, this oral agreement that the note should be paid on dates different from those stated therein can here be shown for the purpose of establishing usury. The evidence of this alleged oral promise or agreement not only contradicts the terms of the note itself, but it is in contradiction of the general rule that parol evidence cannot be shown for the purpose of varying the terms of a written contract made, covering the same subject, prior to the execution and delivery of the note.
There are numerous cases holding that on the question of usury parol evidence may be received to vary the terms of a written contract for the purpose of showing that it is illegal. There is a minority of decisions to the contrary. Lewis v. Willoughby, 43 Minn. 307, 45 N.W. 439, states the general rule that the fraud, illegality, or any other matter which, if proved, would affect the
validity of a writing, may always be proved by oral evidence. In that case, however, the oral evidence was introduced for the purpose of showing that a bonus was actually taken and that the price of the property there involved was made to include this bonus of $400. The evidence, as we take it, did not contradict the written contract except as to the amount of the consideration. This oral evidence did not tend to vary the terms of the chattel mortgage there in question, but went only to show that the amount of the mortgage debt included a $400 usury bonus; that this much was added under cover of the price of the chattels over and above the lawful interest and in excess of the debt secured. Evidence to show the actual amount of consideration of a contract is generally competent in any case where the question arises. Our attention has not been called to any other case in this state passing on the precise question presented.
Upon examination it will be found that most, though not all, cases generally cited in support of admission of parol evidence to show usury, when the result is to vary or contradict the terms of a written contract, are cases where some bonus, or other payment or consideration in excess of lawful interest, has been received by the lender in some form. That was all that appeared in Richeson v. Wood, 158 Va. 269, 163 S.E. 339,82 A.L.R. 1189. In Stein v. Swensen, 46 Minn. 360, 49 N.W. 55,24 A.S.R. 234, the agreement claimed to have been for usurious interest was in a written instrument, and the money had actually been paid thereunder. Few, if any, of the decisions apply the majority rule where the oral evidence varies and contradicts the express terms of the note or contract sued upon in other respects than in reference to the consideration. To allow the time of payment to be changed by parol evidence, while the contract is still executory, is a very different process from using similar proof to show conduct of the parties in performance of it, where it has been executed in whole or in part. The distinction is clearly noted in Koehler v. Dodge,31 Neb. 328, 334, 47 N.W. 913, 914, 28 A.S.R. 518, where it is said:
"It is doubtless true that when a person borrows money and gives his note therefor, specifying a lawful rate of interest, a verbal promise
of the borrower made at the time the indebtedness is incurred to pay an unlawful rate of interest for the use of the money would not of itself make the transaction usurious. Butterfield v. Kidder, 8 Pick. 512; Allen v. Turnham [83 Ala. 323], 3 South. Rep. 854; Van Beil v. Fordney, 79 Ala. 76; Bank v. Waggener, 9 Pet. 379, 400 [9 L. ed. 163]. But where the verbal agreement is carried into effect by the borrower, at the time of making the loan or subsequently thereto, paying the unlawful interest, or where it appears that the lender, in pursuance of the agreement, has by any shift or device reserved or secured a rate of interest in excess of that allowed by law, it will make the transaction usurious, notwithstanding the note given for the repayment of the money borrowed should on its face express a legal rate of interest."
In Butterfield v. Kidder, 8 Pick. 512, the court said:
"The verbal promise to pay eight per cent when the note was made, by which there was a promise to pay the money lent and lawful interest only, ought not to vitiate the note, for it was wholly without consideration and cannot be taken as part of the contract, which was in writing and must be considered as evidence of the intention of the parties. Supposing the agreement to pay and receive more than six per cent, the plaintiff could recover nothing but what is promised by the note; the additional promise was therefore wholly nugatory and cannot affect the note."
The parol evidence here relied upon was without legal effect. It changed not at all the obligation resulting from the written contract, it could not add to nor diminish that undertaking, it could not accelerate payment. Following the thought of Chief Justice Parker, in Butterfield v. Kidder, 8 Pick. 512, that which is wholly nugatory cannot have effect.
There can be no usury without a contract obligating the debtor to pay interest or return in excess of that provided by law, or else an actual payment or retention by the lender of such excessive interest. 66 C.J. § 110, p. 198, and cases cited in note 4.
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1 Reported in 266 N.W. 455, 267 N.W. 143.
Defendant appeals from the judgment.
The action was brought by the plaintiffs, the makers of the promissory note hereinafter described, to set aside and cancel the note on the ground of usury and to recover certain collateral securities transferred to the defendant as security for the payment of the note. The defendant denied that there was any usury and counterclaimed for the balance due on the note, the note having
been reduced by certain collections made on the collateral securities held by defendant. The note is dated December 18, 1931, and matured four months after date, according to its terms. There was interest at the rate of eight per cent per annum for the four-months period, amounting to $133.33, retained by the defendant at the time the note was given, and the balance of the money, $4,866.67, paid over to the plaintiffs.
The usury claim now presented by the plaintiffs is that prior to the signing of the note there was an oral agreement between the plaintiffs and the defendant that the note should be paid in four monthly instalments, on the 18th day of January, February, March, and April, 1932. The note itself reserved no interest before maturity, and the legal rate of six per cent after maturity. Plaintiffs rely solely on this oral agreement that the note, in contradiction to its plain terms, was payable in monthly instalments instead of in four months from date.
The case was tried without a jury, and the trial court found in plaintiffs' favor, that the note was usurious, and ordered its cancellation and the return of the collateral pledged therewith for its payment. Judgment was so entered.
The question is squarely presented whether, as found by the trial court, this oral agreement that the note should be paid on dates different from those stated therein can here be shown for the purpose of establishing usury. The evidence of this alleged oral promise or agreement not only contradicts the terms of the note itself, but it is in contradiction of the general rule that parol evidence cannot be shown for the purpose of varying the terms of a written contract made, covering the same subject, prior to the execution and delivery of the note.
There are numerous cases holding that on the question of usury parol evidence may be received to vary the terms of a written contract for the purpose of showing that it is illegal. There is a minority of decisions to the contrary. Lewis v. Willoughby, 43 Minn. 307, 45 N.W. 439, states the general rule that the fraud, illegality, or any other matter which, if proved, would affect the
validity of a writing, may always be proved by oral evidence. In that case, however, the oral evidence was introduced for the purpose of showing that a bonus was actually taken and that the price of the property there involved was made to include this bonus of $400. The evidence, as we take it, did not contradict the written contract except as to the amount of the consideration. This oral evidence did not tend to vary the terms of the chattel mortgage there in question, but went only to show that the amount of the mortgage debt included a $400 usury bonus; that this much was added under cover of the price of the chattels over and above the lawful interest and in excess of the debt secured. Evidence to show the actual amount of consideration of a contract is generally competent in any case where the question arises. Our attention has not been called to any other case in this state passing on the precise question presented.
Upon examination it will be found that most, though not all, cases generally cited in support of admission of parol evidence to show usury, when the result is to vary or contradict the terms of a written contract, are cases where some bonus, or other payment or consideration in excess of lawful interest, has been received by the lender in some form. That was all that appeared in Richeson v. Wood, 158 Va. 269, 163 S.E. 339,82 A.L.R. 1189. In Stein v. Swensen, 46 Minn. 360, 49 N.W. 55,24 A.S.R. 234, the agreement claimed to have been for usurious interest was in a written instrument, and the money had actually been paid thereunder. Few, if any, of the decisions apply the majority rule where the oral evidence varies and contradicts the express terms of the note or contract sued upon in other respects than in reference to the consideration. To allow the time of payment to be changed by parol evidence, while the contract is still executory, is a very different process from using similar proof to show conduct of the parties in performance of it, where it has been executed in whole or in part. The distinction is clearly noted in Koehler v. Dodge,31 Neb. 328, 334, 47 N.W. 913, 914, 28 A.S.R. 518, where it is said:
"It is doubtless true that when a person borrows money and gives his note therefor, specifying a lawful rate of interest, a verbal promise
of the borrower made at the time the indebtedness is incurred to pay an unlawful rate of interest for the use of the money would not of itself make the transaction usurious. Butterfield v. Kidder, 8 Pick. 512; Allen v. Turnham [83 Ala. 323], 3 South. Rep. 854; Van Beil v. Fordney, 79 Ala. 76; Bank v. Waggener, 9 Pet. 379, 400 [9 L. ed. 163]. But where the verbal agreement is carried into effect by the borrower, at the time of making the loan or subsequently thereto, paying the unlawful interest, or where it appears that the lender, in pursuance of the agreement, has by any shift or device reserved or secured a rate of interest in excess of that allowed by law, it will make the transaction usurious, notwithstanding the note given for the repayment of the money borrowed should on its face express a legal rate of interest."
In Butterfield v. Kidder, 8 Pick. 512, the court said:
"The verbal promise to pay eight per cent when the note was made, by which there was a promise to pay the money lent and lawful interest only, ought not to vitiate the note, for it was wholly without consideration and cannot be taken as part of the contract, which was in writing and must be considered as evidence of the intention of the parties. Supposing the agreement to pay and receive more than six per cent, the plaintiff could recover nothing but what is promised by the note; the additional promise was therefore wholly nugatory and cannot affect the note."
The parol evidence here relied upon was without legal effect. It changed not at all the obligation resulting from the written contract, it could not add to nor diminish that undertaking, it could not accelerate payment. Following the thought of Chief Justice Parker, in Butterfield v. Kidder, 8 Pick. 512, that which is wholly nugatory cannot have effect.
There can be no usury without a contract obligating the debtor to pay interest or return in excess of that provided by law, or else an actual payment or retention by the lender of such excessive interest. 66 C.J. § 110, p. 198, and cases cited in note 4.
There must be either a contract for the future payment of excessive interest or return, or a present taking or reservation of such
excessive interest or return. 66 C.J. § 110, p. 199, and cases cited in note 8.
A collateral oral agreement to pay interest in excess of the rate allowed by law is void and cannot be shown to vary the terms of the contract or note. Allen v. Turnham, 83 Ala. 323,3 So. 854; Flint v Sheldon, 13 Mass. 443, 7 Am. D. 162; Butterfield v. Kidder, 8 Pick. 512; Bowers v. Douglass, 2 Head (Tenn.) 376; Hogmire's Lessee v. Chapline, 1 Harr. J. (Md.) 29; F. B. Collins Inv. Co. v. Mills (Tex.Civ.App.)254 S.W. 999; Koehler v. Dodge, 31 Neb. 328, 47 N.W. 913,28 A.S.R. 518.
Payment of interest for a longer period than the money has actually been retained by the borrower does not render the note usurious. Grall v. San Diego B. L. Assn. 127 Cal.App. 250,15 P.2d 797; Cooke v. Young, 89 S.C. 173, 71 S.E. 837; Vela v. Shacklett (Tex.Com.App.) 12 S.W.2d 1007; Eldred v. Hart, 87 Ark. 534, 113 S.W. 213.
Under the evidence here presented, there has been no contract obligation entered into by which the plaintiffs could in any event be required or called upon to pay any amount in excess of the money borrowed with legal interest thereon, and no excessive interest has been paid or exacted. The invalid oral promise to pay the note before maturity has not been and cannot be enforced, even if there were no usury statute. The defendant has not taken, exacted, reserved, or received, and cannot collect, any excessive interest, and claims none.
This oral agreement or promise to pay the note in monthly instalments, made before the note was given, was merged and integrated in the note and could not thereafter be shown by either party so as to vary the express terms of the written contract.
2 Mason Minn. St. 1927, § 7036, provides:
"No person shall directly or indirectly take or receive in money, goods, or things in action, or in any other way, any greater sum, or any greater value, for the loan or forbearance of money, goods, or things in action, than eight dollars on one hundred dollars for one year."
Section 7038 of the statute provides, in substance, that all bonds, bills, notes, mortgages, and all other contracts and securities, whereby there shall be reserved, secured, or taken any greater sum or value for the loan or forbearance of any money, goods, or things in action, than at the rate of eight per cent per annum, shall be void.
What is prohibited by these sections is the reserving, securing, or taking of excessive interest or return by some contract.
The very first clause of § 7036 of the statute seems applicable. It provides that the interest rate for any legal indebtedness shall be at the rate of $6 upon $100 per year, unless a different rate is contracted for in writing. Accordingly, this court held in Swank v. G. N. Ry. Co. 63 Minn. 258,65 N.W. 452, and again in Staughton v. Simpson, 72 Minn. 536,75 N.W. 744, that any oral promise or agreement for interest in excess of six per cent per annum is invalid as to the excess. These cases did not involve claims of usury, but the holdings are based on the provisions of § 7036 of the usury statute. Neither the statute nor the decisions contain any exception or qualification limiting their application to cases where no question of usury is involved. This court should not now read any such limitation into the statute. The alleged oral promise here in question should be held ineffective and invalid for any purpose under this statute. It would be illogical to hold that a nugatory oral promise is invalid for any purpose, but may have validity and be sufficient to establish usury.
The usury statute is one imposing a penalty. There is no good reason why, at this late period of our industrial and legal development, it should not be applied with the same reasonable strictness as other laws imposing penalties. Mere nugatory offers or promises to pay excessive interest are not the things sought to be reached by the law. What is condemned is the actual taking or receiving of excessive interest, or the inclusion in the contract, otherwise valid, of a contract obligation to pay excessive interest. The statute expressly permits the payment or retention of lawful interest in advance for a period up to one year.
A nugatory oral promise to pay excessive interest, if performed, and excessive interest actually received thereunder by the lender, would result in usury, not because of the invalid promise, but because the lender had actually taken and received the excessive interest. But, where no such excessive interest is taken or received, the mere executory promise, otherwise unenforceable and no part of the written contract, is of no effect.
As already noted, there were transferred to the defendant, as collaterals to the note, certain trade accounts, to be collected or paid and applied on the note. Collections were made on these accounts and credited in plaintiffs' passbook, hereinafter referred to, commencing about January 11, 1932, and continuing up to June 29, 1932, covering times both before and after the maturity of the note. All payments were moneys so coming from these accounts, and all moneys so received were properly credited. After crediting all payments made, there remains a balance of some $1,373.80 unpaid on the note. No payments of $1,250 are shown to have been made at any time. There were some 19 payments in all, made during the time stated, varying in amount from a few dollars to $687.72, the largest one. All these payments were from the collateral accounts held by defendant.
Plaintiffs give weight to some notations on a two-leaf folder furnished to Benjamin and Harry Blindman, in which to keep a record of payments made. The folder is designated a "passbook." It does not purport to contain any agreement by anyone and is not signed by anyone. The most that can be said for it is that it may to some extent corroborate the testimony of Benjamin Blindman and Benjamin Solomon that there was some oral agreement that the note was to be paid in instalments as claimed. It may be noted here also that this money was borrowed for Benjamin and Harry Blindman, doing business under the name of the Grand Fur Company. The three other plaintiffs, Benjamin Solomon, F.S. Blindman, and I. Silverman, signed the note as accommodation makers. Of the plaintiffs, only Benjamin Blindman and Benjamin Solomon testified as witnesses in the case.
In Blindman v. Industrial L. T. Corp. 194 Minn. 462,260 N.W. 867, an action to cancel a promissory note given by these same parties to this defendant on February 4, 1932, a like claim of usury was presented. That note, according to its terms, was payable in one year. The claim was that there was an oral agreement that the note should be paid in monthly instalments. The trial court found there was no usury. The question presented and passed upon by this court was whether the evidence sustained the court's finding. The finding of the trial court was sustained.
In conclusion, attention may be called to the established rules in this state that the usury law is a shield for defense and not a sword for offense, and that the burden of proof rests upon the party claiming usury to negative, by his evidence, every fact which, if true, would render the transaction lawful.
The conclusion reached is that there is no evidence in the case to sustain a finding of usury.
The judgment appealed from is reversed with directions to the trial court to amend its findings and conclusions of law accordingly and to cause judgment to be entered in defendant's favor for the amount found by the trial court to be due and owing upon the note in question.
Reversed.