Guaranty Financial Corp. v. Harden

George Bose Smith, Justice, This is a suit by the appellants, Guaranty Financial Corporation and its wholly owned subsidiary, Joe-Lee Homes, Inc., to foreclose a mortgage securing a promissory note payable in 144 equal monthly installments of $75.01. The note makes no distinction between principal and interest, merely reciting the total obligation of $10,801.44 (144 x $75.01), The single question is whether the inclusion of an acceleration clause in the note made the entire transaction void for usury. The chancellor held the note to be usurious but allowed the plaintiffs a partial recovery upon an allied construction contract. We think the chancellor fell into error in construing the promissory note all by itself, without regard to the building contract which was executed at the same time, as a part of the same transaction, and which gave rise to the debt evidenced by the note. It is a familiar rule of law that in such a situation the two instruments are to be read together as a single contract. Gowen v. Sullins, 212 Ark. 824, 208 S.W. 2d 450 (1948); W. T. Rawleigh Co. v. Wilkes, 197 Ark. 6, 121 S. W. 2d 886 (1938). We are not here concerned with the possible status of a holder in due course of the note alone, for Guaranty Financial Corporation took the instrument from its own subsidiary. [See Ark. Stat. Ann. § 85-3-119 (Add. 1961).]) The building contract, note, and mortgage were all executed together on October 1-, 1965. The building contract was the basic instrument. By that contract Joe-Lee Homes agreed to construct a specified dwelling house for the Hardens for $6,288. The' contract, after reciting a down payment of $10, goes on to say.: “The balance of $6,278.00, plus interest, shall be paid in monthly installments of $75.01 beginning on the 1st day of January, 1966, and on the first day of each succeeding month thereafter until the whole of said indebtedness is paid. The Owner has concurrently herewith executed a promissory note and mortgage to cover the balance.” The accompanying promissory note was in exact harmony with the building contract. As we have said, it recited a .lump sum • obligation of $10,801.44, payable in 144 monthly installments of $75.01, beginning January. 1, 1966. There followed this acceleration-clause: “In the event of default-in the payment of any installment . . . the entire unpaid principal indebtedness aforesaid shall, at the option of the payee herein, become immediately due and payable without notice. ’ - When the building contract and promissory note are read as one contract, as our decisions require us to do, it is crystal clear that the original principal. debt was $6,278, with interest which can readily be calculated to be slightly less than the legal rate of. 10 percent per annum. All. that the plaintiffs seek to recover - is the unpaid principal plus accrued interest. Hence the case falls precisely within our holding in Mid-State Homes v. Knight, 237 Ark. 802, 376 S.W. 2d 556 (1964), where we said: “The chancellor in holding the instrument to he usurious, apparently based his decision upon the fact that the appellant had exercised its option to accelerate the maturity of future payments and had filed suit for the full amount without making any deduction for the interest that had not yet accrued. This procedure, however, did not render the transaction usurious. In such a situation the court should merely refuse to permit the creditor to recover the unaccrued interest. Eldred v. Hart, 87 Ark. 534, 113 S. W. 21; Sager v. American Investment Co., 170 Ark. 568, 280 S. W. 654.” Reversed. Ward, J., concurs. Harris, C. J., and Byrd J., dis'sent.