Crest Investment Trust, Inc. v. Cohen

McWilliams, J., delivered the opinion of the Court. Cohen 1 needed $10,000 to buy a taxicab and the Public Service Commission permit authorizing its use. Crest 2 loaned him the money. Cohen, nearly three years later, says the loan is usurious.

The trial court (Harris, J.) agreed with him. Crest ⁶⁴¹ contends Code, Art. 58 A, § 22 empowers it to charge, as it did here, 13.46 percent interest. The factual details are not in dispute. In November 1962 Cohen had been driving a Yellow taxicab for 28 years.

He was, at the time, 57 years old. His schooling ended with the eighth grade. When the permit 3 was offered to him he went to Crest and said he needed “100% financing.” Crest had him sign a $14,500 note which required 261 successive weekly payments of $55.00 and a final payment of $145.00. The note was secured by a chattel mortgage on the taxicab and the permit.

It was further secured by a “Performance Bond Mortgage” on improved leasehold property at 3011 East Monument Street in Baltimore and on his home on Kent Island. The latter mortgage, despite its exotic label, recites the essentials of the note, explicitly declares that it secures the note and “is in consideration of the money loaned” to Cohen. Crest also obtained from Cohen’s employer a guaranty, to the extent of $1,-500, of Cohen’s note. The closing took place on 21 November 1962.

From the $14,500 there was deducted $4,500 for “interest/service” and $269 for transfer costs, which includes an attorney’s fee of $175. Although the balance shown on the settlement sheet to be due to the borrower was $9,731.00 Crest issued its check, two days later, to Cohen (and wife) for $10,000. They returned it, endorsed, to Crest’s attorney, who deposited it, the same day, in his own account. Six months later (15 April) Crest issued another check to Cohen in the amount of $500.

This amount, Crest explained, was withheld to pay for a 5 year $10,000 insurance policy on Cohen’s life. When Cohen was found to be uninsurable the $500 was paid to him. In September 1965, having made 139 payments, Cohen filed a suit in which he asked the court to declare the note to be usurious. On 4 April 1966 the court ordered Crest to release the mortgages and mark the note “paid in full” upon the receipt from Cohen of $2,536.70.

As the learned chancellor explained in his opinion, that amount was determined “by applying the weekly payments first to interest at a rate of 6% per annum on ⁶⁴² a direct reduction basis, and the balance to the principal.” When Crest appealed the court permitted Cohen to pay the $2,536.70 to the Clerk of the Court. We shall resist the temptation to enlarge this opinion with still another dissertation on the evils of usury for, despite oft repeated admonitions such as Polonius urged upon his son Laertes, the world is full of borrowers and lenders and the protection of the one from the artifices of the other has been, and probably always will be, a matter of public concern. Cohen does not allege fraud. His counsel stipulated that he was possessed of “business acumen” and that he “knew what he was signing.” Thus the issue, while technical, is at the same time simple.

Early in 1957 the deputy Bank Commissioner, at the request of the chief executive of a state bank, asked the Attorney General to express his opinion in respect of the application of the usury laws to the widespread practice of discounting loans, indulged in “by practically every banking institution in the State of Maryland.” The Attorney General, answering the first of two specific inquiries, advised the deputy Commissioner that the practice “constitutes usury under Section 3 of Article 49 of the Code.” His answer to the second inquiry, i.e., whether the “legislature affirmatively authorize[d]” the practice by Code, Art. 58 A, § 22, because of its present importance and significance, is set forth in full: “There is little doubt under Section 57 of Article 3 of the Maryland Constitution that the Legislature may exempt from the usury laws under specified conditions certain types of transactions. For example, under Section 16 of Article 58A of the Code, any person, co-partnership or corporation which obtains a license to operate a small loan company may charge interest at a rate not to exceed 3% per month on loans not exceeding $300.00. Section 196 of Article 11 permits licensed industrial finance companies, on loans not exceeding $1500.00, to charge 6% interest in advance and to require repayment in equal monthly or periodic instalments. Section 119A of Article 83 authorizes ‘finance charges’ of 9%, 12% and 15% on the principal ⁶⁴³ balance of instalment automobile loans, depending on the age of the motor vehicle involved. [ 4 ] “The question to be determined in the present instance is whether the Legislature by virtue of Section 22 of Article 58A of the Code intended to permit banks and other lending institutions to make loans at 6% interest paid in advance, with the principal to be paid off in equal weekly or monthly instalments.

The provisions of this statute are as follows: “ ‘This Article shall not apply to any person, co-partnership or corporation doing business under any law of this State, or of the United States, relating to banks, trust companies or building and loan associations, or to companies or corporations making loams at a rate of interest not exceeding 5% per annum, on the principal amount of the locm, in advance, charging an investigation fee not exceeding four (4%) per cent of the amount of the loan, on loans of Three Hundred Dollars ($300) or less and charging a fee of not exceeding 2°f0 on amount above Three Hundred Dollars ($300) which companies, persons or corporations may require the borrower to give as security for such loan, mortgage on real or personal property, or to purchase Certificates of Investment or choses in action equal in amount to the sum borrowed and to pay therefor in equal weekly or monthly instalments covering approximately the period of the loan, provided that the proceeds of said Certificates of Investment or choses in action shall, at the option of the borrower, be received at maturity in payment of said loan.’ (Emphasis added.) “This Section was originally enacted as Section 19 of Chapter 88 of the Acts of 1918, which introduced into the Maryland law a comprehensive plan for licensing and regulating small loan companies. The pro ⁶⁴⁴ visions of the 1918 Act, as amended from time to time, now constitute the present Article 58A of the Code. The original language of said Section 19 did not contain the words ‘in advance’ and in place of the present provisions relating to an investigation fee permitted the charging of a fee not exceeding 2% of the loan ‘to cover the cost of investigating the character and circumstances of the borrower and of the co-makers of the borrower’s note evidencing the loan. * * *’. The remainder of the said Section 19 was substantially in the same form as the present Section 22. “By Chapter 564 of the Acts of 1929, this Section was amended and a provision was inserted permitting the charging of a fee in Frederick County not exceeding 4% on loans of $300.00 or less, and 2% on loans above $300.00.

Chapter 560 of the Acts of 1939 further amended the Section permitting such increased investigation fees to be charged in all counties throughout the State, providing for the giving of mortgages on real or personal property as security for such loans, and inserting the words ‘in advance’ in the statute. Since 1939 there have been no further amendments. “A careful reading of Section 22 in the light of the legislative history above set forth does not, in our opinion, clearly establish that the Legislature intended thereby to exempt the discount procedure under discussion from the application of the usury laws. The primary objective of Section 22 is to specify the types of businesses and lending institutions which would not be subject to the provisions of Article 58A. Had the Legislature likewise intended affirmatively to authorize the practice in question, such might have been accomplished in a far more direct and logical manner.

For example, Section 196 of Article 11 clearly spells out the exemption enjoyed by licensed industrial finance companies from the application of the usury laws on loans not exceeding $1500.00. A similar provision in Article 11 applying to other types of lending institutions would have left no doubt that the Legislature in ⁶⁴⁵ tended that the usury laws should likewise not apply to a transaction such as the instant one. “However, the mere fact that the legislative intent in this instance might have been more clearly or more logically expressed does not impel us to conclude that no such intent existed, particularly since other considerations suggest that the Legislature did intend to permit this practice. The language in Section 22 underlined hereinabove undoubtedly recognizes that lending institutions in the State of Maryland make loans at an interest rate of 6% per annum, payable in advance, and require the borrowers to repay the principal in equal weekly or monthly instalments. The title to Chapter 560 of the Acts of 1939, providing that the amendment therein was ‘to alter the amount of the fee allowed to be charged on certain loans by banks and certain other companies’, indicates that the Legislature intended to include in this otherwise negative Section at least one type of affirmative grant of power to the banks and other lending institutions involved.

The title of Chapter 564 of the Acts of 1929 suggests a like intent. The same sort of affirmative interpretation to negative language in a statute relating to the usury laws was given to Section 121 of Article 23 of the Code by the court in United Divers Co. v. Commercial Credit Co., 289 Fed. 316, 319 (5th Cir. 1923). That Section provides that ‘No corporation shall interpose the defense of usury in any action.’ The court held that this Section repealed that usury law as applied to corporations and laid down a rule of substantive law applicable in whatever jurisdiction suit on a Maryland contract is brought. “Any doubt as to the Legislature’s intention by Section 22 to exempt from the usury laws the practice in question is resolved by the long-standing administrative construction of this statute. You advise that ever since this Act was initially passed in 1918, commercial banks throughout the State have entered into transactions involving instalment loans of the type under ⁶⁴⁶ consideration in an aggregate amount of many millions of dollars.

As we have pointed out above, the statute has been twice amended since 1918, and at no time did the Legislature include any