Borrowers' & Investors' Building Ass'n v. Eklund

Mr. Chief Justice Boggs delivered the opinion of the court: The transactions between the appellees and the appellant association were not sales of their stock to the company, but were loans of money to the appellees. (People’s Loan and Homestead Ass. v. Keith, 153 Ill. 609.) The same is the view taken by the courts of last resort in Connecticut, Iowa, Kentucky, Maryland, Nebraska, New York, North Carolina, Pennsylvania, South Carolina, Texas and West Virginia. 4 Am. & Eng. Ency. of Law, (2d ed.p. 1056. It appeared from the proof that by the first of these transactions the appellant association obtained the note of the appellee Charles Eklund in the ordinary form of a negotiable note for the sum of $1400, payable eight years after date and bearing- interest from date at the rate of one-half of one per cent per month, payable monthly,— that is, at the rate of six per cent per annum, and payable monthly,—and paid to the appellee for said note the sum of $850, less the costs" and expenses of making .the loan. By the other transaction the appellant association obtained the negotiable note of the appellee for the sum of $400, due also eight years after its date and bearing interest from date at the same rate as the other note, viz., six per cent per annum, payable monthly, and the appellee received from the appellant association $250 (less the costs and expenses of making the loan) for the note of $400. It was then legal to contract in writing to receive interest at .the rate of seven per cent per annum. At this rate the interest on $850 for eight years would be $476, making a total of principal and interest of $1326. Under this contract appellee could only discharge the liability created by the loan of $850 to him by paying- six per cent interest on $1400"for eight years, which would amount to $672, and the sum of $1400 in addition, which would comprise a total of $2072. Thus the appellee would be required, on this loan of $850, to pay $746 more than the interest laws of the State permit to be exacted by individuals or associations not exempted from the operation of the usury laws. The other transaction is, in proportion, equally oppressive. The interest at seven per cent—the highest legal rate—on $250 (the amount received by appellee) for eight years would be $140, which, together with the amount loaned and to be re-paid, would make a total of $390 to be paid by appellee. The contract by which he received the $250 would require him to pay six per cent interest on $400 for eight years, a total of interest of $192, and also pay the principal sum named in the note of $400, making a total of $592. Thus, in this loan of $250 appellee would be required to pay $202 in excess of the greatest amount the interest laws of the State permit to be exacted from a debtor whose creditor has no special exemption from the operation of the usury laws. The transactions must therefore be considered as usurious, unless it shall be found that associations of the class to which this appellant association belongs have authority of law to enter into contracts such as are here shown to have been made, to receive interest at rates which would render the contract for the payment of interest illegal under the general interest and usury laws of the State. Section 11 of the act under which this association was created (Hurd’s Stat. 1899, par. 88, p. 454,) confers on this association that measure of exemption from the operation of the interest laws of the State which it is entitled to enjoy. Section 11 is as follows: “Corporations organized under this act being of the nature of co-operative associations, therefore no interest, premiums, fines nor interest on such premiums that may accrue to said corporation, according to the provisions of this act, shall be deemed usurious and the same may be collected as other debts of like amount may be collected by laws in this State.” The exemption of this section is restricted to interest, premiums, fines or interest on such premiums that may accrue “according to the provisions of this act.” In order to be protected frpm the consequences which would otherwise attach to a transaction usurious under the general laws of the State, associations organized under this act must observe the provisions of the statute enacted for the purpose of authorizing the course of dealing to be pursued1 with their borrowing stockholders. The statute does not by any means invest these associations with unrestricted authority to enter into private contracts with individual stockholders for interest or premiums without regard to the general laws limiting the rate of interest which may be lawfully contracted for. On the contrary, there are but two modes by which such associations may make loans of this privileged character. These modes of procedure are set forth in section 8 of the act under which such associations have existence. The provisions of this section, so far as here material to be considered, are as follows: “The board of directors shall hold such stated meetings, not less frequently than once a month, as may be provided by the by-laws, at which the money in the treasury, if $100, or more, shall be offered for loan in open meeting; and the stockholders who shall bid the highest premium, for the preference or priority of loan, shall be entitled to receive a loan of $100 for each share of stock held by said stockholders; the said premium bid may be deducted from the loan in one amount, or may be paid in such proportionate amounts or installments, and at such times during the existence of the shares of stock borrowed upon, as may be designated by the by-laws of the respective associations: Provided, that any such association may, by its by-laws dispense with the offering of its money for bids in open meeting, and in lieu thereof loan its money at a rate of interest and premium fixed'by its by-laws, and either with or without premium, deciding the preference or priority of loans by the priority of the applications for loans of its stockholders.” These modes of making loans and contracting for interest by way of premiums were not declared by the legislature for the mere purpose of directing an orderly manner of business procedure for the associations, but for the purpose of operating as a restraint upon the power of such associations to enter into oppressive contracts for interest or gains for the use of their money. The appellant associátion did not adopt a by-law dispensing with the statutory requirement that it should offer its money for bids at open stated meetings of its board of directors, as it had authority to do under the proviso to the section. Nor did it offer its money to appellee and its other stockholders at public meetings of its directors, to be loaned at the highest premiums which might be bid for it, but without any authority of law whatever, or any by-law fixing a stated general rate of premium, it' assumed authority to enter into private contracts with appellee, as one of its stockholders, for the payment of the greatest rate of premium which it could induce him to consent to pay. The plan marked out by the statute, of requiring the association to offer its money for sale at a regular stated meeting of its directory for the highest rate of premium which its stockholders were willing to bid therefor, or the other alternative plan authorized by the provisions of said section 8, but not adopted by this association, of fixing a rate of premium by a general by-law applicable to all and uniform in its operation as to all stockholders, are the only two plans to be followed in order to exempt a loan,, otherwise usurious, from the operation of the general interest laws of the State. Under neither of these plans can an ‘association, by private contract, demand and fix the rate of premium to be paid by each individual borrower in view of and based upon the necessities, improvidence, weakness, ignorance or present stress of adverse circumstances of the borrower. The premium is a bonus paid by the stockholder for the privilege of being preferred as a borrower over other stockholders. If contracted for in the way of a bid at a public meeting of the directory or fixed at a uniform rate by a general by-law of the association it may be lawfully collected, though, as between individuals, it would be but the payment of a greater sum or rate for the use of money than the law permits, and would taint the transaction between individuals with usury. The privilege to contract for premiums accorded to these associations is not an unbridled license to exact any rate of premiums the present situation or stress of the affairs of each individual borrower may induce him to consent or agree to pay. On the contrary, if they would avoid the imputation of usury and the forfeiture of all interest consequent thereupon, they must, whenever they have as much as $100 in the treasury, either publicly offer the same at a regular meeting of the board of directors, to be loaned to the stockholder who will pay the greater premium therefor, or they must fix by a by-law a uniform rate of premium at which their stockholders may borrow their money, in order as their applications are filed and without distinction between stockholders. Such associations have power to offer their money (when they have more than $100 in the treasury) to be loaned to the highest bidder at stated meetings of their directors, or to loan it to the stockholder first applying therefor under a by-law fixing a uniform rate of premium to be paid by all borrowers, and obtain more 'than the rate which may otherwise be contracted for, but they have no power to contract to loan on private terms of contract without incurring the same liabilities the law would visit on other offenders ag'ainst the interest laws of the State. The Appellate Court did not err in deciding the transactions under review were usurious and that the association had forfeited the right to collect any interest whatever, but that only the sums loaned should be required to be re-paid by the appellee. Counsel for the appellant association are in error in asserting this court announced a different doctrine in Lurton v. Jacksonville Building Ass. 187 Ill. 141. The defense of usury sought to be interposed in that case was based on a clause in the mortgage there involved which provided that in default in the payment of taxes and insurance on the mortgaged premises the mortgagee might pay the same, and any money so paid should bear interest at the rate of eight per cent per annum, being one per centum in excess of the highest legal rate. _The trial court disallowed interest upon such payments and held the agreement to pay the usurious rate per centum applied only to those advances, and we affirmed this action of the trial court. In that case the money was not offered to the highest bidder at a stated meeting, but the directors arbitrarily fixed the premium, and the defense based upon this state of the case was not that of usury, but that the note and mortgage were absolutely void, and we held the appellant was estopped to insist the note and mortg'age were illegal and void. The rule is, usury must be specially pleaded, (Rev. Stat. chap. 74, sec. 7, p. 615, entitled “Interest,”) and if a party to a bill in equity desires to rely on the defense of usury he must specifically allege the facts wherein the usury charged consists. (Goodwin v. Bishop, 145 Ill. 421.) The defense of usury in the Lurton case did not present the question arising on this record. If the defense in this case had been that the notes and mortgages sought to be foreclosed herein were void, as was the defense sought to be made in the Lurton case, the ruling here would be, as it was in-the Lurton case-, adverse to that defense. The judgment of the Appellate Court is affirmed. Judgment affirmed.