OPINION OF THE COURT BY
LUM, J.
In this case, we need to determine whether the usury laws of Hawaii were violated in regard to three loan agreements between plaintiff-appellee THC Financial Corporation and defendants-appellants Managed Investment Corporation, Durrel L. Robison and Jeanne B. Robison.
Plaintiff filed a complaint in the circuit court for collection of principal and interest due on these promissory notes
and for the
foreclosure of the real estate securing these notes. The court later found the notes to be in default, and entered its findings of fact and conclusions of law in which the court determined the amounts owed by the defendants and decreed that the property be sold.
The trial court’s findings left no doubt that the 365/360 method
was used to calculate the amount of interest the principal amounts accrued each day.
The court found that the amount of interest owed was $61,116.21 and that the principal sums continued to accrue interest in the aggregate sum of $60.00 per day. After the mortgaged property was sold, a dispute arose concerning the interest amount legally owing.
Defendants denied liability for interest, relying on HRS § 408-16, and counterclaimed for refund on account of usurious interest. Plaintiff filed a motion for summary judgment. The motion was granted and the counterclaim dismissed. Judgment was entered in favor of plaintiff in the sum of $85,950.73; the amount representing interest due was within the maximum annual interest rate. Defendants brought this appeal. We affirm.
Defendants contend that plaintiff exceeded the interest limitations of HRS § 408-15
(1976 & Supp. 1981) when it computed interest by means of the 365/360 method. Since plaintiffs use of the 365/360 method results in an annual interest charge of 18.25 percent and the 365/365 and 360/360 methods would result in an annual interest charge of 18.0 percent,
defendants assert that the sanction of HRS § 408-16
(1976) applies.
The 365/360 method of computing interest has been a standard method of the banking industry for the past two centuries. The majority of early cases refused to hold that interest resulting from the use of the 365/360 method at the maximum legal rates is usurious. These cases held that computational convenience and banking custom justified the use of the 365/360 method.
See
cases cited in Comment,
supra
at 145-50. But interest is now calculated by computers, and the rationale of the earlier cases is no longer persuasive to all courts.
In American Timber & Trading Co. v. First National Bank of Oregon,
511 F.2d 980 (9th Cir. 1974),
cert. denied,
421 U.S. 921 (1975), the United States Court of Appeals for the Ninth Circuit, applying Oregon law, found that the bank’s use of the 365/360 method of computation was usurious and agreed with the district judge’s determination that the usury statute “should be construed with regard to its net effect upon the borrower rather than upon the bookkeeping burden, custom, or convenience of the lender.”
Id.
at 983.
American Timber
has been followed by most courts who have subsequently considered this issue.
See Cagle v. Boyle Mortgage Company,
261 Ark. 437, 549 S.W.2d 474 (1977);
Ellis National Bank of Tallahassee v. Davis,
359 So.2d 466, 468-69 (Fla. App. 1978);
cert. denied,
365 So.2d 711 (Fla. 1978),
cert. denied,
440 U.S. 976 (1978);
Cochran v. American Savings & Loan Ass’n,
568 S.W.2d 672 (Tex. Civ. App. 1978),
modified
586 S.W.2d 849 (1979);
O’Brien v. Shearson Hayden Stone, Inc.,
90 Wash.2d 680, 586 P.2d 830, 836 (1978).
But see Martin v. Moore,
269 Ark. 375, 601 S.W.2d 838, 839 (1980);
Beazley v. Georgia Railroad Bank & Trust Co.,
144 Ga. App. 215, 241 S.E.2d 39, 40 (1977).
Although we agree with the reasoning of
American Timber
and its progeny, we do not find it dispositive of the instant case. We must determine whether, in light of
American Timber’s
reasoning, the sanc
tion provided by HRS § 408-16 is available to defendants.
HRS § 408-15(j) permits an industrial loan company to “contract for and receive” interest at a rate not exceeding one and one-half percent per month on the unpaid balance of a loan.
HRS Chapter 408 provides two sanctions where an industrial loan company violates the limitations on interest rates set by HRS § 408-15. One sanction is established by HRS § 408-29 (1976) which mandates a fine for any willful and knowing violation of any provision of the chapter. The other sanction is contained in HRS § 408-16 which provides:
[I]f, in any action on the contract, proof is made that a greater rate of interest than that permitted by this chapter has been directly or indirectly contracted for, the plaintiff shall only recover upon the contract the amount actually received by the borrower on the contract....
The legislature has defined usury in different ways, arid these definitions indicate the legislature’s intent to draw distinctions between “charging” excessive interest, “receiving” excessive interest, and “contracting for” excessive interest.
Since HRS § 408-16
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OPINION OF THE COURT BY
LUM, J.
In this case, we need to determine whether the usury laws of Hawaii were violated in regard to three loan agreements between plaintiff-appellee THC Financial Corporation and defendants-appellants Managed Investment Corporation, Durrel L. Robison and Jeanne B. Robison.
Plaintiff filed a complaint in the circuit court for collection of principal and interest due on these promissory notes
and for the
foreclosure of the real estate securing these notes. The court later found the notes to be in default, and entered its findings of fact and conclusions of law in which the court determined the amounts owed by the defendants and decreed that the property be sold.
The trial court’s findings left no doubt that the 365/360 method
was used to calculate the amount of interest the principal amounts accrued each day.
The court found that the amount of interest owed was $61,116.21 and that the principal sums continued to accrue interest in the aggregate sum of $60.00 per day. After the mortgaged property was sold, a dispute arose concerning the interest amount legally owing.
Defendants denied liability for interest, relying on HRS § 408-16, and counterclaimed for refund on account of usurious interest. Plaintiff filed a motion for summary judgment. The motion was granted and the counterclaim dismissed. Judgment was entered in favor of plaintiff in the sum of $85,950.73; the amount representing interest due was within the maximum annual interest rate. Defendants brought this appeal. We affirm.
Defendants contend that plaintiff exceeded the interest limitations of HRS § 408-15
(1976 & Supp. 1981) when it computed interest by means of the 365/360 method. Since plaintiffs use of the 365/360 method results in an annual interest charge of 18.25 percent and the 365/365 and 360/360 methods would result in an annual interest charge of 18.0 percent,
defendants assert that the sanction of HRS § 408-16
(1976) applies.
The 365/360 method of computing interest has been a standard method of the banking industry for the past two centuries. The majority of early cases refused to hold that interest resulting from the use of the 365/360 method at the maximum legal rates is usurious. These cases held that computational convenience and banking custom justified the use of the 365/360 method.
See
cases cited in Comment,
supra
at 145-50. But interest is now calculated by computers, and the rationale of the earlier cases is no longer persuasive to all courts.
In American Timber & Trading Co. v. First National Bank of Oregon,
511 F.2d 980 (9th Cir. 1974),
cert. denied,
421 U.S. 921 (1975), the United States Court of Appeals for the Ninth Circuit, applying Oregon law, found that the bank’s use of the 365/360 method of computation was usurious and agreed with the district judge’s determination that the usury statute “should be construed with regard to its net effect upon the borrower rather than upon the bookkeeping burden, custom, or convenience of the lender.”
Id.
at 983.
American Timber
has been followed by most courts who have subsequently considered this issue.
See Cagle v. Boyle Mortgage Company,
261 Ark. 437, 549 S.W.2d 474 (1977);
Ellis National Bank of Tallahassee v. Davis,
359 So.2d 466, 468-69 (Fla. App. 1978);
cert. denied,
365 So.2d 711 (Fla. 1978),
cert. denied,
440 U.S. 976 (1978);
Cochran v. American Savings & Loan Ass’n,
568 S.W.2d 672 (Tex. Civ. App. 1978),
modified
586 S.W.2d 849 (1979);
O’Brien v. Shearson Hayden Stone, Inc.,
90 Wash.2d 680, 586 P.2d 830, 836 (1978).
But see Martin v. Moore,
269 Ark. 375, 601 S.W.2d 838, 839 (1980);
Beazley v. Georgia Railroad Bank & Trust Co.,
144 Ga. App. 215, 241 S.E.2d 39, 40 (1977).
Although we agree with the reasoning of
American Timber
and its progeny, we do not find it dispositive of the instant case. We must determine whether, in light of
American Timber’s
reasoning, the sanc
tion provided by HRS § 408-16 is available to defendants.
HRS § 408-15(j) permits an industrial loan company to “contract for and receive” interest at a rate not exceeding one and one-half percent per month on the unpaid balance of a loan.
HRS Chapter 408 provides two sanctions where an industrial loan company violates the limitations on interest rates set by HRS § 408-15. One sanction is established by HRS § 408-29 (1976) which mandates a fine for any willful and knowing violation of any provision of the chapter. The other sanction is contained in HRS § 408-16 which provides:
[I]f, in any action on the contract, proof is made that a greater rate of interest than that permitted by this chapter has been directly or indirectly contracted for, the plaintiff shall only recover upon the contract the amount actually received by the borrower on the contract....
The legislature has defined usury in different ways, arid these definitions indicate the legislature’s intent to draw distinctions between “charging” excessive interest, “receiving” excessive interest, and “contracting for” excessive interest.
Since HRS § 408-16 is
phrased in terms of “contracting for” excessive interest, it imposes a sanction only where a greater rate of interest than permitted has been directly or indirectly contracted for. Thus, merely charging or receiving excessive interest is not sufficient to make HRS § 408-16 applicable.
The necessity of a contract for excessive interest was recognized in
Paulat v. Pirello,
353 So.2d 1307 (La. 1977), in which the usury statute, La. Rev. Stat. Ann. § 9:3501 (West), provided,. “[a]ny contract for the payment of interest in excess of that authorized by law shall result in the forfeiture of the entire interest so contracted:” The lender brought suit on notes, and the borrower asserted the defense of usury. Since the notes bore interest at the maximum rate of 8 percent per annum, they were not usurious on their face. But the court observed:
By mutual agreement of the two parties following maturity of the notes, payments of interest were made and received at the rate of 18% per annum. These payments were thus made and received by virtue of the contract or agreement, express or implied, entered into by the parties after maturity of the notes that interest would be paid in that manner and at that rate. Articles 1797 et seq.
Since the interest payments so made by virtue of agreements) are usurious, the “entire interest so contracted” by the borrower is forfeited by the lender. La. R. S. 9:3501.
Id.
at
1310. Also see Forte v. Nolfi,
25 Cal. App.3d 656, 102 Cal. Rptr. 455 (1972).
In the present case, the three promissory notes provide that defendant Managed agreed to pay interest at the rate of 18 percent per annum. Thus, a rate of interest greater than the lawful rate has not been directly contracted for.
Defendants argue that the 365/360 method is a way of indirectly contracting for more than the lawful rate of interest. They rely on
American Timber
&
Trading Co. v. First National Bank of Oregon, supra,
where the court found that it was implicit in the agreement that the bank would calculate interest by means of the 365/360 method. However, in
American Timber
the court’s finding was based on the fact that the 365/360 method was the bank’s customary basis of computing interest charged to individual and corporate borrowers. In the instant case, the record on appeal contains no evidence that
the 365/360 method was the defendant’s customary basis of computing interest charged to borrowers.
Consequently, the use of the 365/360 method cannot be implied in this agreement.
Since the record reveals no agreement, express or implied, that interest would be computed by means of the 365/360 method, a greater rate of interest than 18 percent per annum has not been directly or indirectly contracted for. We conclude that the sanction of HRS § 408-16 does not apply.
Defendants rely upon
American Timber & Trading Co. v. First National Bank of Oregon, supra; Cagle v. Boyle Mortgage Company, supra; Ellis National Bank of Tallahassee v. Davis, supra; Ditmars v. Camden Trust Co.,
10 N.J. 471, 92 A.2d 12 (1952); and
Cochran v. American Savings
&
Loan Ass’n, supra.
These cases are inapplicable to our analysis of HRS § 408-16 because the relevant statutes vary signifícandy from HRS § 408-16. The statutes expressly provided that the exacting, receiving, or taking of a greater rate of interest than allowed made the sanctions available.
Since the mere exacting,
receiving, or taking of a greater rate of interest than allowed is not sufficient to make HRS § 408-16 applicable, these cases are inapposite.
For the reasons stated above, we conclude that no genuine issue of material fact exists and plaintiff, was entitled to summary judgment as a matter of law.
Affirmed.
Tobias C. Tolzmann
for defendants-appellants.
James N. Duca (Vernon Woo
with him on the brief) for plaintiffappellee.