Hoffman v. Key Federal Savings & Loan Ass'n

Smith, J., delivered the opinion of the Court. We shall here hold that allegations of usury presented by appellants, Paul R. Hoffman and wife, against Key Federal Savings and Loan Association should have been submitted to a trier of fact. For purposes of our decision the facts are gleaned from the amended declaration. Prior to January 29,1976, Key Federal issued a “construction-permanent” loan commitment to the Hoffmans for the purpose of erecting a home.

Settlement was held on January 29 at which time $14,000 was paid over to the Hoffmans. They endorsed this sum to two individuals who were trustees under an agreement entered into at the same time. This trust agreement, appended to the declaration, recited that $14,000 had been borrowed from Key Federal and that a mortgage had been executed to Key Federal to secure repayment of that sum. It further stated that the mortgage proceeds had been turned over to the trustees, “to be ³¹ deposited by said Co-Trustees, in their own names, with Key Federal ... as a pending fund to secure the erection of the aforesaid improvements and should be advanced to [the Hoffmans] during the course of the construction of said improvements in installments . ...” The agreement then went on to provide for various payments totalling $50,500 to be made at the time of the completion of specified work insofar as the erection of the home in question was concerned.

The declaration stated that in addition to the $14,000 the Hoffmans paid $53,000 to the trustees to be held by them in the trust account. 1 Examples of the payment schedule are that $10,100 was to be disbursed “[wjhen the roof and outside walls [were] sheathed and [the] house [was] completely enclosed” and $7,500 was to be paid out “[w]hen [the] roof [was] complete, [and the] plumbing, heating and electric wiring [were] roughed in.” The agreement provided that if the Hoffmans stopped work for a period of 20 consecutive days or failed to have the improvements completed within nine months, the trustees, in either instance in their discretion, had the authority to use the balance of the loan “towards the cost of completing said improvements” or to pay Key Federal “on account of its aforesaid mortgage loan.” The amended declaration alleged: The Trustees were officers, agents and employees of Key Federal and were acting on behalf and under the control and direction of Key Federal. The monies endorsed to the Trustees were placed in a trust account subject to the sole control of the Trustees acting for and on behalf of Key Federal.... The Hoffmans executed a promissory note in the amount of $14,000 payable with interest at the rate of 7% % per annum. The note specified that it should be payable in monthly installments of $105.75 beginning on May 1, 1976, and continuing on the first day of each month thereafter until April 1, 2001.

These installments included principal and ³² interest. Payment of the note was secured by a deed of trust covering the land upon which the home was to be erected. The Hoffmans were “billed and paid interest on the full amount of the loan from January 29,1976 through October, 1976, even though the monies in the trust account were partially advanced and disbursed as completion of the residential home progressed.” They paid “approximately $800.00 in interest between January 29, 1976 and the date the last advance was made pursuant to the terms of the Trust Agreement.” The narr. alleged that this trust agreement “was created by Key Federal merely as a subterfuge to evade the Maryland usury law,” that “[t]he requirement of the payment of the interest on the full amount of the monies held in the trust account prior to their disbursement [was] in violation of [Maryland Code (1975)] § 12-101, et seq., Commercial Law Article,” and that approximately $800 in “usurious and illegal interest” was in fact paid. A second count contained allegations relative to interest on escrow funds in a context not pertinent to the issues now before the Court.

The trial judge (Haile, J.) referred to our opinion in Tri-County Fed. S. & L. v. Lyle, 280 Md. 69 , 371 A.2d 424 (1977). In that case the borrowers executed a note and a deed of trust to a lending institution to secure the repayment of $60,000. They in fact received this sum from the lender. They paid $15,000 of the money thus obtained to the seller of the lot upon which the deed of trust was placed.

The borrowers endorsed the remaining balance of $45,000 back to the lender. It then deposited that sum in the same account where its other funds were maintained. No escrow account of any kind was established. The lender charged interest on the full $60,000.

The $45,000 was to be disbursed by the lender in certain installments as work progressed on a home. Judge Singley observed for the Court, “At no time was this under the Lyles’ control, or under their partial control, as it might have been had it been held in escrow by others for their account, even though subject to restrictions.” Id. at 73 . In this case the trial judge observed, “[B]y dictum \Lyle\ seems to say that... if the money were not in the sole control of the lender the ³³ decision would not apply.” He stated he would “decide the case on the assumption that the law of Maryland is that in a situation where the construction loan money is trusteed ... and the trustees enter into an agreement with the borrowers and certify as trustees for the borrowers ..., that the money is under the borrowers’ control or at least their partial control even though subject to restrictions.” Accordingly, he “sustained] the argument of [Key Federal’s] counsel based on the dictum in the Tri-County case in the Court of Appeals, 280 Md. 69 .” Because he had made this ruling, the trial judge did not rule on the second point raised by Key Federal. As the trial judge put it, this was “the contention ... that even if this money was sitting around for nine months, even if the borrowers were paying interest on it, when you add that to the seven and three-quarters percent calculated over the whole loan it is not actually usurious.” The Court of Special Appeals in Hoffman v. Key Fed. Sav. & L. Ass'n, 40 Md. App. 438 , 392 A.2d 1121 (1978), affirmed the judgment below.

However, it did so on the basis of the second contention to the trial judge, that over the entire 25-year life of the deed of trust the effective rate of interest would be less than the statutory maximum of 10%. Hoffman petitioned us for the writ of certiorari, posing the question of “[w]hether the lower court erred in holding that Key Federal ... did not practice usury when it charged interest on a sum not part of an unpaid balance.” Key Federal filed an answer and a conditional cross-petition. See Maryland Rule 813 a. In the cross-petition we were asked to address the question of whether the Court of Special Appeals had “incorrectly rejected] the decision of the Circuit Court for Baltimore County that the Amended Declaration and the exhibits in this case establish as a matter of law that the $14,000.00 of construction money was held in escrow for the Hoffmans by their Trustees, under a Trust Agreement and, therefore, was part of the unpaid balance.” We granted the writ in order that we might consider both questions.

For the purpose of determining whether a trial judge has erred in sustaining a demurrer without leave to amend we are required to assume the truth of all material facts which are ³⁴ well pleaded as well as all inferences which can reasonably be drawn from those well pleaded facts. Arnold v. Carafides, 282 Md. 375, 382 , 384 A.2d 729 (1978); Krieger v. J. E. Greiner Co., 282 Md. 50, 52 , 382 A.2d 1069 (1978); Zion Evang. Luth. Ch. v. St. Hwy.

Adm., 276 Md. 630, 632 , 350 A.2d 125 (1976); and Schwartz v. Merchants Mort. Co., 272 Md. 305, 307-08 , 322 A.2d 544 (1974). In considering this case we first note two opinions of our predecessors, Plitt v. Kaufman, 188 Md. 606 , 53 A.2d 673 (1947), and Andrews v. Poe, 30 Md. 485 (1869). In Plitt Judge Delaplaine said for the Court: This Court has held that no device or subterfuge of the lender will be permitted to shield him in taking more than the legal interest on a loan.

In whatever part of the transaction usury may lurk, or in whatever form it may take, or under whatever guise the lender may attempt to evade the law, the court will seek to ascertain what the contract actually was between the parties and give the debtor relief. Andrews v. Poe, 30 Md. 485 ; Brenner v. Plitt, 182 Md. 348 , 34 A.2d 853 [(1943)1. [Id. 188 Md. at 611 .] In Andrews Judge Robinson said for the Court: Now, if there be a principle clearly established by judicial decision, it is that the laws against usury ought to be strictly enforced. Such, indeed, has been the uniform course of decisions under statutes penal in their character, and by which the usurious contract was wholly avoided, or the userer visited with the penalties of the law; and there is certainly no reason why, in this State, the law should be less rigidly enforced, where no contract is set aside or penalty imposed, but the excessive interest alone forfeited. It has so happened, from the earliest times to the present, that every device and shift which the wit of man could suggest, have been invoked to exempt contracts for illegal interest from the operation of the law, but courts have not hesitated, in every case, to tear off, with unsparing hands, the ³⁵ mask under which it has been attempted to conceal the usury, and to declare the true nature of the transaction. [Id. 30 Md. at 487 .] To place matters in better perspective it must be noted that in Lyle Judge Singley said for the Court: We are entirely in accord with the concept adopted by the Court of Special Appeals, that whether a loan is usurious depends on the collection of interest on the unpaid balance at a rate greater than that permitted by statute, and that the balance clearly means that which is owed by a borrower to a lender.

Webster’s New International Dictionary of the English Language 206 (2d ed. 1949) defines balance as “An equality between the sums total of the two sides of an account,” or alternatively as “The excess on either side, or the difference between the two sides, of an account.” Here the “unpaid balance” referred to by Art. 49, § 3 was the $15,000.00 owed by the Lyles to Tri-County; the $45,000.00 was a balance beyond their control to which they had no access until they commenced the construction of their house. So long as it remained in the sole control of Tri-County, and was not utilized by the Lyles, the imposition of the interest charged was usurious, because the $45,000.00 was not and could not be a part of the unpaid balance of the loan to the Lyles. [Id. 280 Md. at 75-76 .] Maryland Code (1957, 1968 Repl. Vol., 1969 Cum. Supp.) Art. 49, § 3, which governed in Lyle and B. F. Saul Co. v. West End Park, 250 Md. 707 , 246 A.2d 591 (1968), forbade charging interest in excess of six percent “on the unpaid balance, except that interest m[ight] be charged at the rate not in excess of eight percent (8%) per annum simple interest on the unpaid balance under an agreement in writing between the lender and the borrower.” In the case at bar Judge Wilner ³⁶ noted for the Court of Special Appeals that the maximum permissible rate of interest at the time of the Lyle loan was eight percent, which was the amount specified in the loan.

Accordingly, the court reasoned that if interest had been charged in Lyle on an amount which had not yet been advanced, then the yield to maturity rate would have been in excess of 8%, unlike the situation here where the maximum permissible rate of interest is 10%, the amount called for in the loan is 794%, and the interest charged on funds which had not been advanced (if such in fact be the case) would have made a yield to maturity rate of less than 10%. Thus, the Court of Special Appeals found Lyle not controlling, a conception with which we disagree. According to the schedule published by Financial Publishing Company of Boston, Massachusetts, and relied upon by many lending institutions, a loan of $14,000 to be repaid, as was this one, in equal consecutive monthly installments of $105.75, intended to cover interest and principal, over a period of 25 years would be at the rate of seven and three-quarters percent. Thus, it is obvious that, as concluded by the Court of Special Appeals, if this mortgage went to its maximum of 25 years, there is no way the total interest paid would equal a rate in excess of 10 percent per annum even if, as alleged, interest was charged for a few months on money which had not yet been advanced.

We do not regard that as determinative, however, for reasons which we shall hereafter develop. We have found no case directly in point. On the issue before the Court see generally 45 Am. Jur. 2d Interest and Usury §§ 113 and 181 (1969); 91 C.J.S. Usury § 35 (1955); Annot., 76 A.L.R. 1467 (1932); and Annot., 12 A.L.R. 1422 (1921).

Williamson v. Clark, 120 So. 2d 637 (Fla. App. 1960), is factually analogous to Lyle and has a similar holding. See also Mindlin v. Davis, 74 So. 2d 789 (Fla. 1954). In B. F. Saul Co., supra, 250 Md. 707 , the Court was concerned, among other things, with whether in a situation where points had been charged at the inception of a loan the voluntary prepayment of the loan before the maturity date specified in the loan instrument would cause the transaction ³⁷ to be usurious.

In that context Judge Finan said for the Court, “[T]he transaction is not usurious as long as the interim payments of the effective interest rate would have been legal in contemplation of continued payments to the maturity specified in the contract.” Id. at 719. The virtually universal rule is that a contract legal at its inception will not be rendered usurious by voluntary prepayment. See, e.g., 45 Am. Jur. 2d Interest and Usury §§ 184, 185 (1969), and the cases collected and analyzed in Annots., 75 A.L.R.2d 1265 , §§ 2 and 3 (1961), and 130 A.L.R. 73 , § II (1941).

The present usury statute is but a recodification of the law which was applicable in Lyle and was before the Court in B. F. Saul. Our predecessors observed in Welch v. Humphrey, 200 Md. 410, 417 , 90 A.2d 686 (1952), citing Welsh v. Kuntz, 196 Md. 86, 97 , 75 A.2d 343 (1950), that recodification of statutes is presumed to be for the purpose of clarity rather than change of meaning and, thus, even a change in the phraseology of a statute by a codification will not ordinarily modify the law unless the change is so radical and material that the intention of the Legislature to modify the law appears unmistakably from the language of the Code. Maryland Code (1975) § 12-101 (k), Commercial Law Article, defines “usury” as “[t]he charging of interest by a lender in an amount which is greater than that allowed by [the Subtitle, ‘Interest and Usury’ of that Article].” At the time here relevant § 12-103 (b) provided as to residential real property that the maximum permissible rate of interest was “an effective rate of simple interest not in excess of 10 percent per annum on the unpaid principal balance of a loan . . . .” (Emphasis added.) The term “effective rate of simple interest” is defined in § 12-101 (d) as “the yield to maturity rate of interest received or to be received by a lender on the face amount of a loan, computed in accordance with § 12-107 . . . .” (Emphasis added.) The latter section states: If a charge or fee considered interest under this subtitle is charged at or before the inception of a loan contract, the effective rate of simple interest permitted to be charged by §§ 12-102 and 12-103 of ³⁸ this subtitle [(referring to the general legal rate of interest of 6% and “other permitted rates of interest,” respectively)], and required to be disclosed by § 12-106 of this subtitle shall be determined in the same manner as if the fee or charge had not been charged, except that the principal of the loan used in determining the rate of interest is the face amount of the loan less the fee or charge. The revisor’s note to § 12-101 (d) states: This subsection is new language added to clarify the meaning of the term “effective rate of simple interest” as used in this subtitle.

It combines without substantive change the definition of that term contained in B. F. Saul Co. v. West End Park N., Inc., 250 Md. 707, 717 (1968), and, by cross-reference, provisions of former Article 49, § 2 (b) — now § 12-107 of this subtitle — which relate to the computation of the interest rate when charges are assessed at the inception of a loan. The prior law found in Code (1957, 1968 Repl. Vol., 1969 Cum. Supp.) Art. 49, § 2 (b) is virtually identical with present § 12-107.

It was the proper interpretation of this section with which the Court was concerned in B. F. Saul Co. where Judge Finan said for the Court: Let us assume that the borrower has applied for a loan of $10,000 bearing interest at the rate of six per cent (6%), with the interest and unpaid balance being paid in fixed monthly installments over a period of twenty (20) years, with a charge of five “points” being deducted by the lender. This $10,000 loan with five “points” charged results in a five per cent (5%) discount applied to the principal sum and yields a $9,500 net loan to the borrower.3 The borrower who thus receives a net of $9,500 after deducting five “points” and pays back $10,000, plus interest, in monthly installments over twenty (20) years is not paying the $500 deducted from the ³⁹ face amount of the loan in the first year but is paying a small portion of this each month over the entire twenty (20) years. The determinative factor as to whether or not the interest in such a case is usurious is the annual effective rate of interest (not to be confused with the term “stated interest”). If the annual effective rate of interest does not exceed eight per cent (8%) then it is not usurious and this annual effective rate of interest is computed as follows, again borrowing the example used by the court below: “The dollar amount of interest payable during the life of the loan is ascertained by multiplying the amount of each monthly payment by the number of months and subtracting the net principal of the loan.

Hence, in the case of a $10,000 loan at six per cent (6%) with five points deducted, payable over 20 years, with the fixed monthly payment of $71.65: $71.65 X 240 (20 years X 12 mos.)= . . . $17,196.00 total paid by borrower Less net loan after subtracting points deducted.......................9,500.00 Total dollar amount of interest paid for the use of $9,500.00 during life of loan . . .7,696.00 The stated rate of interest in the note itself is ... . 6% The current yield to the lender, who receives interest at the rate of $600.00 per year for a $9,500.00 loan, is $9,500.00 divided into $600.00=. . . . 6.31% But because the lender not only receives a current yield of 6.31% but during the life of the loan also receives back the $500.00 deducted from the face amount of the loan, he has a yield to maturity of____6.65%” 4 (6.65% being the annual effective rate of interest) ⁴⁰ The 6.65% annual yield to maturity set forth in the above example is the annual effective rate of interest and is not usurious.5 Adopting the validity of the above illustration this Court concludes that the charge of a fee, commonly called “points” made at the inception of the loan, should not be considered interest paid in the initial year of the loan but is. to be computed or spread over the term of the loan. [Id. 250 Md. at 715-16 .] In footnotes 3, 4, and 5 of that opinion it was stated: 3. Section 2B of the Act: “In the event that charges or fees which, under this Article are deemed interest, are assessed at the inception of the contract of indebtedness, the rate of interest required in Section 10 of this Article shall be determined in the same manner as if fees and charges had not been assessed except that the principal of the loan used in determining the rate of interest shall be the face value of the loan less any fees or charges which are interest.” [Id. at 715.] 4. Yield figure obtained from “Prepayment Mortgage Yield Table for Monthly Payment Mortgages,” Sec. Ed., p. 338. 5. Were the 5 points to have been construed as interest during the initial year of the loan the transaction would be usurious as the interest during the first year would have been 11%. [Id. at 716.] In B. F. Saul, 250 Md. at 718 , in interpreting the application of then § 2 (b) the Court equated the term “effective annual interest rate” (which obviously is the same as “annual effective rate of interest”) with the term “yield to maturity.” As we have already pointed out, B. F. Saul was concerned with points. 2 It was in the context of points that “yield to ⁴¹ maturity” was used and that the Court stated that a prepayment would not make