Lotz v. Cromer

David Newbern, Justice. William and Tammy Lotz, the appellants, prevailed on their allegation that the appellees, Harold and Nellie Cromer, had charged interest at a usurious rate on an installment note for the purchase of a home. The Chancellor held that the Lotzes were entitled to twice the amount of interest paid and to have the remaining interest cancelled in accordance with Ark. Const, art. 19, § 13. The Lotzes are dissatisfied with the decree, however, because the Chancellor limited the award to twice the interest the Lotzes paid up to the time they filed their suit, thus declining to award twice the interest which was paid after the Lotzes filed their complaint. They also contend the Chancellor erred in holding that their payments were to remain at the rate of $400 per month as provided in the note but with the full amount of each payment going to reduce the principal debt. We agree with those contentions and thus reverse and remand the case for proceedings consistent with this opinion. The note in question was given as partial consideration for purchase of a home in the amount of $31,600 at an interest rate 9.50% which was more than 5% over the federal discount rate on the date the note was made. The complaint requested a judgment for twice the amount of interest paid, which was $2,122.85, as well as a declaratory judgment that the contract was void as to unpaid interest. The complaint requested “all remaining monthly payments under the contract be only for the amount of principal which would have been paid each month.” The complaint was later amended to add an allegation of interest paid during the pendency of this lawsuit, bringing the total amount of interest paid to $3,896.58 and asking double that amount. 1. Interest paid Article 19, § 13, of the Arkansas Constitution states: (a) General Loans: (i) The maximum lawful rate of interest on any contract entered into after the effective date hereof shall not exceed five percent (5%) per annum above the Federal Reserve Discount Rate at the time of the contract. (ii) All such contracts having a rate of interest in excess of the maximum lawful rate shall be void as to the unpaid interest. A person who has paid interest in excess of the maximum lawful rate may recover, within the time provided by law, twice the amount of interest paid. It is unlawful for any person to knowingly charge a rate of interest in excess of the maximum lawful rate in effect at the time of the contract, and any person who does so shall be subject to such punishment as may be provided by law. That section says one who has paid usurious interest is entitled to twice the amount of all interest paid and says nothing with respect to when the interest was paid. The decree limiting the double recovery to interest paid prior to the filing of the suit is thus inconsistent with the Constitution. In McElroy v. Grisham, 306 Ark. 4, 810 S.W.2d 933 (1991), we interpreted art. 19, § 13, strictly. Addressing the portion of the section that states, “A person who has paid interest in excess of the maximum lawful rate may recover . . . twice the amount of interest paid,” we noted the penal nature of the section and concluded the penalty is mandatory. Quoting Arkansas State Racing Comm’n v. Southland Racing Corp., 226 Ark. 995, 295 S.W.2d 617 (1956), we stated, ‘“It is of course a familiar rule of statutory construction that ‘may’ is to be construed as ‘shall’ when the context of the statute so requires.’ Constitutional provisions are construed in the same manner as statutes.” We have not directly addressed whether “all interest paid” is limited to interest paid before the filing of the suit. We stated in the McElroy opinion, however, that “to allow trial courts to dispense with the penalty at their discretion would be to defeat this [penal] purpose.” In view of our literal and strict interpretation in favor of imposing the very penalty stated in the Constitution, we hold it was error not to award the Lotzes twice the amount of all interest which had been paid on the note. 2. Future payments Although the Chancellor found the remaining interest on the note void, his order requires them to continue making $400 monthly payments. The Lotzes argue the Chancellor should have ordered each future monthly payment reduced by the part of the payment representing interest. The record contains an amortization schedule the Lotzes introduced into evidence reflecting the amount of principal and interest to be attributed to each payment. There is no question that a portion of the $400 monthly payments agreed to by the parties to this note was to be composed of interest. The interest portion was to decrease progressively over the life of the note, while the remainder of each payment was composed of principal which would increase with each payment. In fashioning a remedy, a Chancellor has broad power, limited only to the extent that the remedy must be reasonable and justified by the proof. Chambers v. Manning, 315 Ark. 369, 868 S.W.2d 64 (1993); Smith v. Eastgate Properties, Inc., 312 Ark. 355, 849 S.W.2d 504 (1993). Article 19, § 13(a)(ii), provides that “interest in excess of the maximum . . . shall be void as to the unpaid interest.” If the payments are left at $400 per month, all to be attributed to principal, the contract will have been altered because part of each payment was to have been attributed to interest and the payments will terminate sooner than contemplated. If the decree were to provide that only the principal portion of each future payment be made, the contract would be altered as the parties contemplated $400 per month payments and the payments would be progressively less. If the $400 payments are left intact, the payees get the benefit of the use of the Lotzes’ money earlier than if the payments are reduced. In view of the penal nature of art. 19, §13, the alternative applied by the Chancellor is less reasonable and less justified by the proof in this case than the alternative of simply reducing the payments by the amount to have been attributed to interest each month. While we do not reverse a Chancellor’s factual findings unless clearly erroneous, we are free in a de novo review to alter the result, Winn v. Chateau Cantrell Apartment Co., 304 Ark. 146, 801 S.W.2d 261 (1990), and we do so here. The case is remanded for orders consistent with this opinion. Reversed and remanded. Glaze and Corbin, JJ., dissent.