Untitled Texas Attorney General Opinion

: NO. 3050 (Affirmedby,Letter to Hon. Callan Graham, Ch. Comm$tte.e Rouse of,Representatlves,Jan. 31, 1951) on State.Affair.4, .HOU SE BILL NO. 420~IS'BECONSTITUTIONA L' Opinion holding House Bill~Ro..& .(&all 'A Bill3 unconstitutionalbecause:,. . .~ . '(.(1;. "It violates ~&tic& ‘XVI, Section 11, by -attempting .; to authorize interest' of -dre.thah-ten,pef,,,cent.per .an$um. ,. (2) It is a special'law.88flxing the +aii'$e of interest+in violation of .Constitution, Artlcle~ .~ III;~?$@tlon 56i Q)*.~ It.is dlscrimlnatory~lnviolation of .*%qual"Protec-' .'.: tlon? Clause of Federal~Const@ut$onand-'TexasConstitution,: Article'I Section 3, Article I;.~S~otlon'1~,~~~~~~ticle III, SectIon 56;' ;.~ _’

OFFICE'OE.: THE AfiOREEY GENERAL '-' ':~': .'

May 13, 1939 Honorable R. Emmett'Morse .OpinionEo; 9-726, Speaker of the House of Ret.Constltutionalityof Commlt- Representatives .. .:: tee amendment to Iiouse.Bill No. ,Austin,. Tees 420, ,whlch&'a bill to regulate the business of making loans of -~$5C@.OOor less-and provides.‘, that such lenders may make cer- tain &are;@ in additlon,to lO$ Dear Sir: Interest. 4ie beg ‘to ~ackno#edge receipt of your request .ofMay 1st for an opinion of.th$s department on <theconstitutionality ,~of the above mentioned .bill@ibh~ls now pending before the'cur: .'. ,rent'sessionof,-theLegislature. Bue:to'the importance of-the

Hon. R. Emmett Worse, r@e 2 (O-&6)

question and the complexityof the many legal problems involved, we have given the matter extensiveand deliberate consideration. We are pleased, therefore,to submit this conference.opinion which reflects the research and deliberationof the entire Attor- ney General's department. The Committeeamendment to House Bill No. 420 consti- tutes a comprehensiveact to regulate the business of making small loans not exceeding9b5CQ.00.We attach hereto a copy of the bill so that the same may be referred to in conjunc. this opinion, but shall summar$.ze the salient features RhIith o :.bia,asfollows~: .:' Section 1 sets gouts at length ~thepurposes of the bill, which are stated to“b~"‘~~'lie~d':~or're~ted-~~credit .to small and necessitousbcrrowers,brought about by.econdc conditions. The bill provides for 'thesu@ervisionand'licensI.ng by the Rank- ing Commissionerof the State:~of al.Yperscns,:corporations, etc., who engage in the business of making..smaUloans expresslyex- ~. cepting however banks.'savings b&ks~.?4orrisF&n banks in- dustriai banks; &i'a&investni&t co&nies insurance gompan- &es,~trust companies,,building:~andl&n,..assocIatlons,credit unions Andypawnbrokers (Section,20)::~~Licensees'underthe act are expressly permitted (under,SeotlonU-A) to charge inaddition to .lO$ per anuum interest (l).'an initial~.chargeof 5$ and (2) a monthly charge of.lMeth8:~unpaid bal&nce of the loan not to 8Xc88d,$2,CO.-- In th8 8v8nt these:pertissive'8additiona~charges*' should be held by a~court inn&y partlcula,r case %ot to be charge- able $o the borrower",the:licensedlender shall be entitled to a return of principal less 10% penalty (S8ctlonIQ-&. The bill con- ~~~ins.many.regulatorj~.pr~9si~ns~and.provides.a'criminal penalty forvIolations (Section19). The Bill, in Section 24 thereof, expresslyrepeals the 'LoanBrokers' Regulatory,Act (Acts 1927, 40th Le islature, 1st Called Session, page 30, Chapter 171, the annual 1150.00 occupation tax on Loan Brokers (Section14 of Ar- title 5069,:5071, 5073, Title 79 R.C.S. 1925).only in so far as they ar8 inconsistentw$th,thls <ill. The~AttorneyGeneral, in passing upon the constitution- ality of proposed or enacted legislation,may.not look to the policy, wisdom, or deslrabllltyof the'Act, but he is concerned solely with ~thequestion of whether or not the particularAct comes within the limitationsprescribedby th8'Stateand Federal Constitutions.'~-,,In determining this question, he must b8 guided by the decisions.andpronotuicements of th8 Courts of Texas end the United States. 'When the Supreme~.Courtof Texas has defined the.meaningand applicationof a particular provision of the Con- stitutionof TexaS,.it.is$ot with%n the province of the Attorney General to seek,to~place-any~'djffsrentconstruction upon it. It '.. is.hLs duty to follow the:interpretationas defined by the Court. : ,~, :;;~~,: ;

Hon. R. Emmett Morse, page 3 (O-726)

The essence of House Bill 420 is the legislativesanc- tion, contained in Section 13 thereof, permittingthe lender "to contract for and receive8 from the borrower, in addition to ten per cent per annum interest, certain "charges as reimbursement for all expenses incurred and payment for all servicesrendered in connectionwith the loan." May the Legislatureproperly per- mit such charges in view of Article XVI, Section 11, of the Constitutionof Texas? which provides: "All contractsfor a greater rate of interest than ten per centum per annum shall be deemed usurious, and the first Legislature after this amendment is.adopted, shall provide appropriate pains and penalties to pre- vent the sam8....". What-is the definition ,ofinterestas used in this pro- vision of the Constitution? Does it.mean.tW ekf;return on the loan to th8~ lender, or does it mee.the total amgmt paid by the borrawer to-the lender including incidentalexpenses in connec- tion with the loan? Gaines J speakingfor .the..Supreme Court of Texas.in Parks v..Lubbo&(i899), 92.Tex. 635, 5l.S.W. 322, .quo$?d-the.,commonlaw definition of'.interest from Abbott's Law Dictionaryas 'being8aUcompensationusually .reckonedby a per- centage of the loan, use,or forb8arance'ofthe money;" Article 5069 Revised Civil Statutes.of Texas, 1925,:adds&he word "de- tention" to this common law definition. It reads: n'Interestl,isthe'compensationallowedby law or fixed by the parties ,toa contractfor the use or for- bearance or detention of mosey......" With the possible excepticnof..theword Nd8tention1f definition is.declaratoryof the common law. 1% the stat$itory~ is self-evidentthat the legislature,.~ynot change the meaning and effect of the constitutionalprovision by altering either the statutory definition of !%iteresttl or by amending the stat- utes heretofore enacted,providlngpains and penalties to prevent usury as directed~bythe.Consti.tution. As to whether expenses connect8d.witha Sloanare in- cluded in VnteresV1 as that word is used in Article jor1,Section 11, of the Texas Constitution,let uslookto the ~cases. Texas courts have uniformly held that .the,compensation to the lender may in no event be more than 10 per cent. This prohibitionmay not be circumventedby subterfuge suchas calling a part of the compensationa "service charge?, ncommission~tInspection fee" or "storage charge91if it isin fact'V.nteres , .I;in disguise". ItIfthe amount paid.by th8~borrower to the lender in excess of the.legal,,interestwas as.compensation

.- . Hon. R. Rmmett Morse, page 4~ (O-726)

for the us& of the money loaned it is usury, whatever may be the guise under which the transactionis clothed." Hudman v. Foster (AustinCourt of Civil Appeals) 210 S.W. 262, Thus in Joy v. Provident Loan Society 37 S.W.(2) 2% (writ of error diSIdSS8d) the Texarkana Court :f Civil Appeals held that a pawn broker'dght not collect."s.torage charges'! from the borrower in addition to ten percentinterest. 'The court said:

than the regular.zra~of&$erest :.woXi&dgiv8.*!'. ....,. - ,,_ -:. (Empha- sis ours) -,. .~-~Forres~o~~S~~~~~~~~o~~~~~~e~to~'~v..:~ooks~~(Waco Courtof~ Civil ;Appeals:,1932)zq,51 ‘&W;'(2); &5 ,:the':court:~declared theloan:usurious.~becapsethe-barik:&arged &e.%rrower'a ten yer 'center "servlce~~charge"-:~~'-ddit~on.~to::'a,,:ten 'R&:cent:interest. that:. opinion tht$ -icourt said?,,-., .:'

such e v c s. The evidence wholly .failed.to~,sh~~.~t--~~~i,~~,,tra~ service wasrendered as would authorize a charge therefor,~'.~~:.~means em-... ployed in this case cannot be used to avoid the effect of the usury:statutei~~r To;allowextra;c&rgas:~forsuch service~s;,.would:de.stroy::.the~ pqrp0se.I o$-.,thel usury flaws. Independent:::L~ber,~~Company,-~..'.Gulf,,Sta.te;Bank,.. 299 :ZLW. 939;:~':Slaughter:Com$any,~v.~~,,Rller,- 196~.-S.W.~~,704.",... (Empha- sis.o*.,)., ..- ~.

.:$&.ce :RcCl&d~on sp&king,f'&j~jjh,~ 'Austin. Court of Civil Appeals In Reltimore.Trus~t6ompan.y ;r;.:-.~nders.,~~~,:S.fdo,(2) 710, (writ-of error ~diq&ssed)l said:, ~~

. .

Hon. R. Emmett Morse, page 5 (o-726)

"Under this state of facts it is clear that the ex- penses, testified to by Viner as going to make up note 2, were expenses incurred by the bond company in the conduct of its business; that is for printing, negotiating,etc., its own bonds and guaranteeingthe collateral securing them. They were not in any proper sense expenses incurred or services rendered to appel- lees by the bond company in the ca city of broker or agent for appellees (the borrowersp"or otherwise. The bona company might as properly charge to appellees its office rent salaries of its officers,~agentsand employees and o-&er expenses of operating its busi- ness." In the case of IndependentLumber Company v. Gulf State Bank 299 S.W. 939,'(writof error refused), the Galveston Court of Civil Appaals held to be usurious a series of loans on which a bank charged the borrower eight per cent "inspectionfee" for inspecting the property by which the.loans~wereSecured. The evidence showed that the "inspectionfee? was charged in all in-. stances regardless of whether or.not an:inspection.actually was made. The court said: %idln&tte~~ it 'was&v8% ~eken.contemplatedthat appel- lant(the borrower) was to..nordid it in fact ever get anything except the use of'the money. No quid pro quo could thereforehave gone to it,for anything else..... Th8 mere takingoutin advance, by the, discountingmeth- od, of the full conv8ntionalrate in Texas of 10 per cent per annum didnot constituteusury but that malum prohibitumlay in tacking on still another six per cent per annum charge,for,noadditional or different service to the borroweri,,but for 'th8 amount of trouble to the bank in carrying that type of loan.' Fowler v. Equitable Trust Company, 141 U.S. 384, 3.2 S.Ct. 1, 35 $.Ed. 786; F8d8ral Mortgage Company V. Bank, 254 S.W.,1002." In the case of Texas Farm~MortgageCompany v. Rowley 98 &W.(2) 8% the~FortWorth Courtof Civil Appeals held that certain notes earing 7&% interest secured by deed of.$&&t were i usurious because the deed of trust stipulatedthat the borrower should pay all taxes which might be assessed against the notes, which contingent taxes When added to the 7+$interest of the notes tip&&&total more than 10% which would amount to usury. It is to be noted that th8Se taxes were clearly *expenses incurred in connectionwith the loan* as contemplatedby Section 13-A of House Bill 420. Yet the Court of,Civil Appeals considered them to be within the meaning of "interest"if chargeableto the bor- rower. We quote from.that opinion:

. . Hon. R. Emmett Morse, page 6 (O-726)

"And th8 provisionin the mortgage, to‘the effect that the borrower would gy~any taxes that might be assessed against the note while the holder is a resident of another~county manifestlywas in- tended.to prwide for ~paymen 4 of taxes~on the n ote in the event it shouId have"a taxable situs in that county by reason'of establishinganof- fice or agency in that county for transactionof any.of~its buciness. The stipulation could not. have been employed,'with any other contingencyfin view; and therefore.itmanifests an intention to charge more than 10 Der cent interest forkthe use of the monev borroved;'in the event of the happening ,of that.contingencya.@ if the ..taxes ofi$f&! ':cote ;.i !$,+$f ~f&$&j't;. ff44ereo$.; 'shotid:&- ; +&ea!;q:$.F ;dnt pr '&iilfm' "~‘~miiphasis: oys.).: '. .: .A~.cwT&'- &I:.&iT'@&c.g*&#? yg.: t,j& i&a:&r qjy;j@ Texas ~&,~~~&&;:~~~i': !~fi&;~;,;.&&,j&~&~ w. ,~~i&&s~i,~~@a GeT'&&,;~ o;$'.ae &j~&g~~fix~~~~pfi&ql ~db~~ajibJi"t~:~~eine~,.~Co~t a*:~+~ '10, 1939.;7*~~7+ig1ygg&.*a) o~~y~~a,+&g&+~ ;.tibajssw cd** et .a1v. Elizabeth Rowley ec al, the ab&:.Q~o~~jC@&~f &:::bpmon of 'theFort,Worth.Courtwas expresslyaaprovdd. though the case ,, ,,,&.: keve'r&a f&.$$@'!,+@j-~d-i *hat:<jja~~$&~ :'t;ie ~hh~~~,lhad:;:6een.., Didmrlv &e'dij&d..'ZWe!.Qdbt& 'from'wg. ejj&fon.b?: th& ~&~&ssion &&tis;ll;si”i, ‘. ~,- ..: :,-: .‘A .:r: ‘~., ;~;‘i:,~j- _i

never stated: ."Howeve.r; in'bur ~o$i#on the ,questionhas been foreclosed by the'SnI&me'~Court'inthe recent case 'of Kansas City 'LifeInsurance Company v. Duvall,' :lOk'S.Wi(2)ll:'and~tkiat'-casecontrols 'thisone..,. It was held that such prokision~inthe contract cre- ated a contingencywhich madadethe Ioan usurious from its beginning;....The record shows that it'was proven. that'for the'year 1933 the rates for State, County, school and road purposes in~hentonCounty; where 'the land was situated,were siichthat upon the face'value of the note the taxes,-'woiild have amounted to such sum that when added to the interest provided for in the

Hon. R. Emmett Morse, page 7 (O-726)

loan the interest rate would have exceeded 10 par cent. We think the decision above mentioned has again decided the question thus urged. It was there held that because of the tax provision in the contract, if the contingencyarose in the fu- ture by which the tax wh$bh might be paid would cause the rate to exceed 10 per cent then the contract was *potentiallyusurious' hrom the begin- ning." The foregoing cases clearly illustrate the well-estab- lished rule in Texas, that when it appears that any charges made against a borrower in addition to the maximum rate of Interest of 10 per cent per annum, whether they b8 called nexpensesllanservice chargesnt,Ynspection fees", "storage chargesYor "taxes fact additional compensationto the,lender; ,andas such 4.n~~8% in alsguls8", it then follows as.8 matter of ,law'thatthe loan is usqrlous. We are, therefore,forced to the conclusion that the courts of Texas have-definedYlnterestwso as to include all com- pensation paid to the lender for th8 ,nse'of money, though a part thereof mayrepresent nr8imburs8m8ntfor expenses incurred in connectionwith the loan." Applying this definition of nlnt8rest1R to the "charges" expressly rmitted to be made by lenders under Section 13-A of House Bill r 20, we are unable'to excape the con- clusion that these %harg8sn are presumptlv8lyadditional %nter- 8st"within the meaning of Article~XVI,Section 11, of the *sti- tution of Texas. We are not-ware of the"&&,e holding ~thata borrower may be properly Chargedwithout-of-pocket expenses arisi$ggin connectionwith a'loan which are paid to visions in notes providing that th8 in the event the note be placed in the handsof an attorney for col.lection.havebeen upheld. StanfordV. united States InV8St- m8;t zorporatiQ@~<272 S.W. ‘568;Min8r vi Paris Exchange~Bank,53 . "A commissionpaid to.the agent or broker of a borrower for'servicesrendered in respect of the transaction,will not ren- der a loan usuriou~.~~~42 Texas Jurisprudence934; Williams v. Bryan, 68 Tex. 593, 5 S.W. &Ol. I?or.dothe courts consider com- missions pald'to agents of the lender to be in the nature of addi- tional interest,where the'agent is ~the "special"as distinguished from the ng8neralnagent of the lender. This rule is well stated by Judge Smith of the San Antonio Court of Civil Appeals in Hughes v. Security F!ullding.andLoan Association, 62 S.W.(2) 219: Ylhe act of an agent, having only special and limited authority; in charging the borrower a fee by way of a commission for making a loan or for examining title to property to be mortgaged $0 s8cure th8 amount of

. . Hon. R. Emmett Morse, page 8 : (O-726)

the loan is not the act of his principal,and the fee so charged does not render the loan usurious. Jones on Mortgages,642... '*Therule would be different, so as to charge the lender, if the agent were a general agent, with authority to make loans for the lender in such sums or at such.timesas he pleases. Jones, 642-a. In this case the agent had no such authority. His au- thority extended no further than that of receivingand forwardingapplicationsfor loans, deliveringmoneys actually lent, and collectingand remitting install- ment payments from the borrower. He had no authority whatever to make loans, to :pass:upon~.risks,,or ap- praise se'curities for ..apuelleei.S. ~i.~ t388 also: N ‘oelv.'Paahandle.~Building and-LoanAssoclatlon, 85 S.W.@. 733 hrit of error~refus8d);::.Sales v. .Wrcantile:lVa- .tional.Dank, 89 S.W.(2!3.2+?7:.+rit of error~diSmiSS8d).'.-Pla. same rule with respectto .ganeraLagents;~would apply:to Servants or .' ~employeesof the lender::..Baltimore:Trust CompanyV:Sanders, 105 S.W.(2) 710&rritof .8rrordh~missad)~.~ Cost of..-preparation: ana ::examination'of.abstracts mayLbech+rged to~the borrowers::e. : In all OS sh8se::caSes where'the cou&~sanction8d'pap- ments by the borrower for.8xpenS8.6 &r.connection:withthelloan it ‘<isto be noted that in every instance the payments were:not mad8 to the lender, but to $hir nartieg We beli8V8 this fact:clearly distinguishesthese caS8s ~rom~.the.&tuation~contemplated by Set- tion 13-A~:.Ofthis Bill&,. W8;hav8 been unable to find a ~SingleT8XaS case which permits the lender.-to:collect from.the borrower, in addition to interest in8xcesS of ,lO&for expenses incurred or ,servi.ces rendered:byhim in connectionwith the loan. See.Trinity Fire InsuranceCompany v. Kerrville~ Hotel .Comuany(Texas Supreme Court) 103~~S.W,~ (2) 121. -:

Doubtless it may be'argued that the lender could.render services to the borrower in connectionwith.th8~,loan which serv- ices are not .ofthe.ty$e ordinarilyincidental.toa loan and which could be rendered by.the lender.moreeconomicallythan the.same service could be rendered by,a&hird party. .IIt may~be further argued that compensationfor such service is.not to be construed as interest if the slendercanrender an accurate.accounting.show- ing that such services represent out-of-pocket.expense,which can be isolated as chargeableto the particularloan and distinguish- able from the lender's general overhead.expenseor expenses, which are incidental tothe lender,'sgeneral business.. The decisions of.ourvarious appellate courts negative this argument but if they did not, 'we think the bill attempts to

Hon. R. Emmett Morse, page 9 (O-726)

authorize interest of more than ten per cent in another respect. Section 13(A)(b) attempts to authorize the,borrowerto contract at the time of the making of the loan to pay not to exceed 13 per cent per month of th8 monthly balance as a service charge presum- ably to compensate the lender for the cost of collecting {he amount of the note. It iS importantt0 not8 that th8 borrow8r's obligationto pay for such potential services which have not been rendered at the time of the creation of the .fY o ligation to pay there- for is unconditionaland is not dependent upon the lender actually rendering such services thereafter. The act would authorize the borrower to obligate himself to pay an amount certain whether such servicesmay be rendered or not. Since the validity of the con- tract must be tested as of the date ~ofits execution, the fact that such s8rvic86 are thereafteractually rendered by the lender do86 not remove th8 vice that the borrower uncond&tionallycon- tracts to pay an additional sum for such services regardless of whether or not they may be rendered., It cannot be questioned that the borrower's obligationto pay for servlcas that are never readered is properly construed as .interest.-3y the 'samelogic the borrower'sunconditionalpromise .to..pay:~forfuture services which may ormay not be.renderedbyethe '~8nd8r;must~alsobe construed as interest. .Siticethe bill.attemptsto authorize such unconditionalobligationin addition:tolnt+rest,of10 per cent per annum; it is clearly contrary to :theconstitutionalprohibi- tion against usury. &ikeWi& clearly diSt,ing&.habi8ar8 ~thosecases wherein the lender 1s.paid by the~?wrroy8r :for property or .s&-vic8s not connectedwith the customary cr8.ditor-d8btOr relationship. "Without violating the'usurylaw charges,maybe tide for legitimatebenefits to a borrower;.~received by him either .from third persons who did not share them with th8 lender or from the lender himself for some~distinctly separate and additional con- sideration other than the simple loanof money" - 42 Texas Juris- prudence 931 40. Thus a man may'properly'chargefor his services in buying b&ding materials although he may be lending the money to buy them with. ~Crrv. McLniei 5 S.W. (2) 175, 30 S.W.(2) 487, affirmed by Corn.of App. 33 ~S!Wi (2) 427. In Slaughterv. Eller (AmarilloCourt of Civil Appeals, writ of error refused) 196 S.W. 704; the court held that the lender might receive compensationfor his labor in supervisingthe conduct of the borrower'sbusiness. The.court said: (IThecontract in this case provided the means by which Slaughter might keep informed of the condition of Eller's business and prevent a use of funds other than in the business which Slaughter,wasfinancing. The

. . Hon. FL Emmett Morse, page 10 (C-726)

attention to the details by which this was to be ac- complishednecessarily imposed some labor. !lkebor- rower might legitimatelyagree'to compensate the lender for servicersof.such char& ter, although per- formed in the interest of the lender, providedal- ways that such charges are not made a mask behind which to conceal the true purpose of the parties." The court said further: "It is also stated generally that any advantage or benefit exacted which, added to the interest reserved, increases the compensationreceived for the loan to an amount in excess g&the lawful interest constitutes us@f.i;;)' ". ',' ,;,

Inthe~same~category may be placed the.casesrelating to buildingaud ~ldan~associati'ons !whereinthencourtShave recognized ,theam capacity,ofa&an as borrower atia StOCkhOld8r. Conti- n8ntal 'Savingsa.ria l3ui1ding~~~Association v. w00a @astlana~~Courtof civil' AppeCI~~).~3.'S.W;:,~~2).:770i'affimaed ,641;: ,- .,: ;:; ,: ,'~:. by com+pp. 56 S.w.(2) T&&g'n~'from :the'qUestion~,of what is and what is not YnteresV' as d8fiXIed.by thecoUrts.of this state;let us con- Sid8r the more general question:. to what extent a-s the Usury revision of the T8xaSCOnStitUtiOn circumscribethe authority of %l 8 Legislatura~to.ex8rCise ,its'.discretion with'referenceto regulatingthe busiriess;of making loans?.~May the tigislatureig- nore'the constitutionalmandate to.npr'ovide'appropriate pains ma penalties to prevent" us,Uryas to a,specific cla~ssof lenders in the furtherance of what it .deems'tobe the public welfare? This question was squarely'beforethe Supreme Court of Texas in Watson v. Alken,. Tex.'536, wherein it consideredan usurious loan made~after the adoption of the Constitutionof 1876 but prior to the enactment by the Legislatureof any statute pro- viding "pains and penalties*'for usury. 'Chief Justice Gould in that opinion said: :~'

“on I&y 27, 1876,~Watson~%&r$@Iedof Aiken $3,000 agree- ing to pay interestat the ranted of eighteen per cent Der annum. The constitutionwhich took effect in April of that year provided that in the absence of contract the rate of interest should not exceed eight per cent per annum, and authorised'partiesto contra.& to "agree upon any rate not~to exceed twelve per cent per annum.' It then proceeds thus: 'All interest'chargedabove this last named rate'shall be deemed u.su%=ious, and the Legislature shall at its first session provide appro-, priate pains and penalties'toprevent and punish usury.'

- .

Hon. R. Emmett Morse, page 11 (O-726)

Article 16, Section 11. . . . "In our opinion Aiken occupiesno more favorable position than if his loan had been made after the act of the Legislaturetook effect. When his loan tue of the cpn- bush sti t 0 it was left to the Legislatureto 'nrescribe' rains and uenalties fl 'I a contr ct for usur- ious interest was a contract in violation of law." @mphas,i~ours) Equally persuasive of the proper constructionof such a constitutionalprohibitionisthe, more recent case by the Texas .SupremeCourt, City of Wink v. Griffith.AmusementCompany 100 S.W. (2) 695, wherein the court was required to construe&ticle III, Section 47, of the Stat8 Constitutionwhich prOVid86 that "the Iegislatureshall pass laws prohibitingthe establishment of lotteries and gift enterprisesin this state, as we1.las the sale of~ticketsin lotteries,giftenterprises or other evasions involving the,lottery~principle, astablished~orexisting in other states." Chief Justice'Cureton.found that "lotteries&have b88n prohibitedby the.,RenalCode inaccordance withthe consti- tutional mandate. 'Gift enterpriss# ana~,%therevasions involv- ing the lottery principleI neverthel' 's;remainand stand con- ~~. demned by the constitutionof'the sta as being against public policy....rfjefendant in Error's 'Rank.Night'plan was obviously an evasion "o?"thelottery laws~ by the-~avoidance.ofa direct charge for prize chances.... but neverth81ess.~r..manif8stlyan attempted 'avoidance'o,fthe'lotterystatute ~:'by artifice' in accordance with the generally accepted definition of ~'.evasion'.Tnerefore defendant in error's 'Rank Night' plan stands condemned bv the Constitutionof Texas. Being condemn@ by the Constitution,it is against the 'publicpolicy of the'Statelt'. (Emphasisours) Chief Justice Cureton wasthere speaking of a constitu- tional provision which directea~the legislature to pass remedial legislation as does the usury provision;,theLegislaturehad there failed to provide a remedy for a part of the evil recited- by the Constitution,and ye,tthe Chief Justice declared that the defendant'sact "stands condemned by.the Constitutionof Texas." Applying this reasoning to our question, it follows that the usury provision of the Constitutionpermits of no discretion by the Legislatureto withhold as to any class the "pains and penal- ties" for usurywhich the Con,s.titution~prescribes. In view of the above,two clear pronouncementsby the Supreme Court ~ofTexas, we feel it unnecessary to burden this opinion with additional citation of authorities. Our conclusions as to the limitationsplaced upon the Legislaturewith reference

Hon. R. Emmett Morse, page.12 (O-726)

to loans which, under the d8fiXXitiOn of ~'inter8st1~ announced by the tourts, are in fact usurious could not be better expressed than in the language of Judge Laitimore,speaking for the Texas Court of Criminal Appeals in Juhan v..:&ate, 216 S.W. 873: 'We are not permitted to concern ourselves '. with the question as to whether the loan broker is necessary and useful in a community, to meet the wants of those~wholack ability to measure up to the financial standing required by the bankers, nor as to whether the loan shark is an evil that should be effectively banished from our midst. Evils must be met and abolish8d or minimized according to the wisdom of our ~&hl'8, u within he limits fixed bv our $%mstitution.w &m$Lasis 0-A) We therefore,respectfullyadViS8 you that it is the opinion of t&is department that th8 Committee amendment to House Bill 420 exceeds the limitations of.ArticleXVI, Section 11, of th8 Constitutionof -Texas in that Section 13-A thereof purports to put the cloak of legis~tive sanction about a special class of loans which may be usurious as a matter of law. We also believe that this bill is unconstitutionalfor several additional reasons. We shall mention th8Se briefly with- out attempting to discuss each one exhaustively. Section l3-C.of th8 bill seeks to give to,all charges permitted by Section 13-A a presumptionof validity. This we believe is contrary to the spirit.ofth8 constitutionali&bition against usury. As said by the Texas Supreme Court in Hemphill v. Watson, 60 Tex. 679: Vhe section of the Constitutionabove alluded to (Article16, Section 11, of Constitutionof 1876) made usury a quasi offense which the Legislaturewas charged with suppressLlg and punishing. It even de- fined what should amount to the offense of usury, ae- claring such offense to consist in charging interest at a greater rat8 than twelve per cent per annum. This provision is prohibitoryin its nature and self- executing so far as to render all contracts of the kind denounced immediatelyillegal; and it left to the .Legislaturethe only remaining duty of saying what penalties should be impo.seaupon offenders against this clause of the Constitution. Cooley on Constitu- tidnal Limitations,100 nOtej Law v. People, 87 111. 385. "'A3 power to uass laws of a certain character is urohibitory

a ,.,

Hon. R. Emmett Worse, page l3 (O-726)

of such acts as those laws would authorize.13t We believe.Section 13-C of,this bill is discriminatory as to certain features thereof and thereforeviolates the "equal protection"clause of the United States Constitutionand the following provisionsof the Constitutionof Texas: Article III, Section 56. "The Legislatureshall not, except as otherwise provided in th&Constitu- tion, pass any local or'special law authorizing..... fixing the rate of interest." Article I, Section 3. "All free men, when they form a social compact,have equal rights,.and.no man, or set of men, is entitled to exclusivesseparate public emoluments,or privil8ges,~~but in considerationof public services." : ,. Article.I Saction~19: oivo.'kti&i of. this state shall.be'JrpriV8d:'of'~,lif8.;~ liber.ty,.. property, privi- leges or immunities;.orinanymanner disfranchised:, ~8XC8ptby Ch8 dUeCoUrS8,Of the +3W~Of th8.tind.w -1 Section.l3C prOvid8S.that~if:a;loan.made~by a licensed lender in accorpance'withthe rate provisions-ofSection 13-A be found by a.court to.,beusurious, suchlender will be ~penalizea~ only to the extent of lC$.Of the principalamount of the lOan;

whereas if.a'non-licensedlender (a!idhe;<may.be.in the 8Xempted categoriesand therefore:ineligible 'for.a license) should make the identical loan, h8 issubj8ct to the penalty of double the amount of usurious interestpaid, under Articla 5073 of the Re- vised Civil Statutes. The last paragraph of.Section3 of the bill requires every licensee to appointthe RankingCommissioner his attorney for process of service; No provision is made in the bill requir- ing the Ranking Commissionerto give notice of any service of?; process to the defendant...Such provisionswere held to invali- date the Loan Brokers statute of 1918. (Acts 34th Leg. 1915, C 28, Vernon's.AnnotatedCivil Statutes, Supplement1918, Arti- cles 6171-a-6171-1)as per the opinion of Lattimore,J in Juhan v. State (Tex.Ct.of Crim.App., 1919) 216 S.W.(2) 873 at page 877: n....and then to fU#her write in section 7 of said act (article617lg), as a.part of 'the law governing such business', that such private citizen shall file with the county clerk of each county where he does business a written, irrevocablepower of attorney, naming the county judge of such county as his duly

Hon. R. Emmett Morse, page 14 (O-726)

authorizedagent and attorney in fact, for the pur- pose of accepting service for him or it or being served with citation in any suit brought against him or it, in any court of this state, 'and consenting that the service of any civil process upon such county judge as his or its attorney for such purpose, in any suit or proceeding,shall be taken and held to be valid, waiving all claim and right to object to such service or to any error by~reason of such service,'is to attempt to place such obligationin said bond as to make it unreasonableand.discrimina- tory. No citizen of this state can be compelledto relinquish or.waivehis right to his day in court'as a condition to engaging in any lawful business. Nor will a law requiringa bond seeking to impose such condition be upheld by us. We,are not surprised that the bonding companies and solvent citizens,as iS disclosed by this record, r8fUS8d t0 make for appellant the bona required by this act. uIId8rits conditions and th8 terms of this law, th8 county judge~mighi!accept service, or~b8 served with cita- tion in a suit against appellant in the most remote county in the state, and in a lawsuit wholly foreign to th8 loan brokeragebusiness, ma In such case, even without lnnniledgeon the part of appellant of Said Suit Or SeZTiC8, Or acC8pt8d 68IViC8, a-jUdg- ment m$ght be rendered against him and his bondsmen for any amount; ana,.8ven though the service be d8- fective, erroneous;and illegal, appellant andhis suretieswould be powerless,-forby the express provisions of the law such written appointmentof the county judge as his'attorney in fact must con- tain ~appellant'sconsent to,sUch service, and his waiver of any right to object..to:anyerror therein. 'Notwithstandingthe fact that;'asto :the.ordinary citizan erroneousand defective service renders the judgment either void~or voidable, as the caSe may appear, for some reason effort.ishere mad8 to take from the man engaged in the business of loan broker such right, and he is thus penalized and denied the right of equal protection of the law, and deprived of his property and privileges~withoutdue coUrse of law. !Phereis no provision in this law requiring the county judge to notify, or in any other way ac- quaint, the loan broker with the fact that he has accepted service or been served with citation in any suit against him, which facts may result from the considerationthat it would do the loan broker no good, inasmuch as he could not take any steps to~re- lease himself by reason of any defect in the cita- tion....."

Hon. R. Emmett Morse, page 15 (0-726)

See also Hess v. Pawloski,274 U.S. 352, 47 Sup.Ct. 632, 71 L.&I. 1091, wherein the Massachusettsstatute providingfor substituted service on non-residentmotorists was upheld because "it is re- quired that he shall actually receive and receipt for notice of the service and a copy of the process." We, therefore,believe. this provision of Section 3 of the bill is a denial of due process. 'Ihecommitteeamendment to House Bill No. 420 being un- constitutionalfor the various reasons above enumerated,we shall pretermitany more detailed considerationof its specificprovi- sions. Yours very truly AT!CORNEYGENERAL OF TEXAS By/& Walter R. Koch Walter R. Koch~Assistant (s&Victor W. Bouldin Victor : W.. Bouldin,Assistant

WFtK:FL/wb This opinionhas been consideredin conference,approved, and ordered recorded. g;wCld&Mann .. Al!TORNEYGENERALGF!l!FXAS APPROVED: tX'&NI;~CQJC.TEE BY: ,

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