The First National Bank of Birmingham, Appellant, v. W. E. Daniel, Appellee, 239 F.2d 801 (5th Cir. 1956)

The Bank, after trial pursuant to remand, Daniel v. First National Bank of Birmingham, 5 Cir., 227 F.2d 353, on rehearing, 5 Cir., 228 F.2d 803, again appeals¹  seeking another review of the basic question of usury penalties, 12 U.S. C.A. §§ 85, 86 and, failing in that, a substantial dollar modification under the two year Statute of Limitations, 12 U.S. C.A. § 86.

Re-examination which we may, Messinger v. Anderson, 225 U.S. 436, 32 S. Ct. 739, 56 L. Ed. 1152; Seagraves v. Wallace, 5 Cir., 69 F.2d 163, certiorari denied 293 U.S. 569, 55 S. Ct. 80, 79 L. Ed. 668; Commercial National Bank in Shreveport v. Connolly, 5 Cir., 176 F.2d 1004, but are not required, to make, convinces us that the former decision was correct.

We adhere to the underlying basis that, in these circumstances, the sale between the dealer, and Daniel, the purchaser, was at a cash price with the loan of credit, and not, as it might have been under Alabama²  law, Dykes v. Bottoms, 101 Ala. 390, 13 So. 582, at a "time" price. This leaves then only the Bank's contention that, assuming a usurious transaction between dealer (seller) and purchaser of the vehicle, the Bank "made" no loan or advance to Daniel, for all it did was to buy commercial paper — a Conditional installment Sale Contract — from the dealer at a discount.

For reasons previously pointed out, we look upon these as separate but connected transactions which make the Bank privy to the arrangement by which the dealer was to sell at a cash price, and the money by which to do that was to be supplied for Daniel's use by the Bank.

A re-examination persuades us that there are additional reasons which demonstrate that this was not, as there may be, a routine purchase at a discount of commercial paper from a regular or new customer which might insulate the Bank from pre-existing usury.

Before the tractor was purchased, Daniel, concerned over being obligated for both a tractor and a trailer (covered under an earlier contract also held by the Bank as assignee from the dealer), at the dealer's suggestion went to see the Loan Officer of the Bank. The general impression of this conference was that the Bank suggested that the trailer not be refinanced, that it remain under the existing contract shortly maturing, and that the tractor be covered by a separate arrangement. If, as claimed, the dealer was selling a tractor at a higher price because of credit it was extending, it seems highly unlikely that it would send a truck driver-owner off to a bank to see if that institution would, by purchase of the paper, advance funds to it. These circumstances add up to the total impression that the Bank, through the expected procedure of a sales contract assigned to it, nominally appearing as a purchase, was outlining the arrangements by which Daniel could expect to get from it the needed funds.

This seems overwhelmingly established by the fact that the Bank, repeatedly insisting that it purchased the Conditional Sales Contract at a 5% discount (10% of face amount, 5% for the 24-months contract period), did no such thing. Demonstrated by the actual differences in percentages, the significant thing is not that arithmetical errors by the Bank are discovered, but that the Bank, to charge what it did, at the rate it did, was, and had to be concerned with the base transaction³  between dealer and purchaser and ignored altogether the face amount ($13,295.80) of the Conditional Sales Contract.

Daniel paid to (or through) the Bank, we have held, the total ($1425.55) interest. Even if, as the Bank staunchly claims, it retained only $1187.12 for itself, with an unconditional credit of $237.43 as a deposit to the dealer's "Contract Reserve Account", it is plain that neither figure bears any relation⁴  whatsoever to the face amount of the contract, $13,295.80 (note 3, supra).

Indeed, uncontradicted evidence⁵  from the Bank shows its purpose to "discount" it at 5% but is categorical⁶  that it was premised, not on the face amount of the Conditional Sales Contract, but on the base transaction.⁷  The Bank, as had the dealer, therefore, used the cash price of the tractor (plus insurance) as the basis for calculating the charge for the use of its credit. The Bank not only knew, it had to know, what the transaction was, either to determine what its compensation (5%) would be, or to enable the dealer to fix a total contract price which would be acceptable as a basis for an expected purchase of the paper.

Add to this the further fact that when, in September 1953, Daniel prepaid the last five installments, the Bank, after considerable discussion over the correct calculation but none over the propriety of the allowance, gave him a discount of $66.40. The Conditional Sales Contract, on the usual form, was for payment of stated installments with no mention of interest. If, as the Bank claims, it was the mere purchase of commercial paper, there was no credit extended by it to Daniel and no rebate of interest due him.

We come then to the question of the correct computation of the penalties.

Since the Statute of Limitations begins to run upon the payment of interest, McCarthy v. First National Bank of Rapid City, South Dakota, 223 U.S. 493, 32 S. Ct. 240, 56 L. Ed. 523, the Bank insists that for all five payments of monthly contract installments made prior to the two-year period, deduction must be made for such interest at the usurious rate (11.18% or 9.32 depending upon whether the Bank is deemed to have "discounted" at 6 or 5 per cent). Since the Bank's brief, with commendable candor, recognizes that, "It is the general rule that in the absence of statute or agreement of the parties, partial payments made upon a usurious contract are applied in payment of principal until the principal is fully repaid * * *," see also 91 C.J.S., Usury, § 92 a; 55 Am.Jur., Usury § 151, it relies on Section 64, Code⁸  of Alabama, to reconstruct the application between interest and principal.

Presumably because the Alabama Code, §§ 65, 66, also provides that usurious contracts "cannot be enforced either at law or in equity, except as to the principal" and "if any interest has been paid the same must be deducted from the principal and judgment rendered for the balance only," see Nicrosi v. Walker, 139 Ala. 369, 37 So. 97, cf. Jones v. Meriwether, 203 Ala. 155, 82 So. 185; and Alabama Cash Credit Corp. v. Bartlett, 225 Ala. 641, 144 So. 808, the District Court thought that since no interest would be legally recoverable, the requirement of Section 64 of "interest due" could not apply and hence the section is "without application to usurious payments of interest."

While there is much to support this view which would prevent the usurer, by the fiction of constructive application substantially to reduce the penalties, we need not determine this. For in this case the contract did not specify any amount, in percentage or money, for interest, nor did it call for the payment of interest at all. And, the record is quite clear, that at no stage did the Bank or the parties treat it as though interest was being collected and handled as such. The statute, intended, we believe, to cover primarily the case of partial payments on contracts calling for payment of principal and some specified or described interest in which, in the partial payment, no separation is indicated, would not apply under these circumstances.

By operation of the general rule, the principal of this contract ($11,871.25) was not fully paid until September 1953. The remaining payments representing the "interest" were well within the two-year statutory period.

However, as to Count 1 for the trailer, it is undisputed that the only sums of any character paid within the two-year period prior to suit was $310.76. The District Court allowed the recovery of twice $495.88, the total interest paid. On no theory was more than $310.76 paid within the statutory period, and the judgment must be accordingly modified to reduce the award to twice that sum, $621.52.

Modified, and as modified affirmed.