Opinion
(7365)
By statute ( 37-8), a lender who loans money at an illegal rate of interest is barred from recovering both interest and principal. The plaintiff sought to recover $50,000 due on a promissory note. The defendants alleged several special defenses including the defense that the interest rate stated on the note exceeded the amount permitted by statute ( 37-4). The matter was referred to an attorney trial referee who filed a report recommending judgment for the plaintiff in the face amount of the note. The referee found that the parties had never discussed interest, that the note was prepared by a third party who was given no instructions on interest, that the plaintiff did not seek interest, and that a check issued by the defendants in the amount of $50,000 would have been accepted as full payment had the defendants not stopped payment. The trial court rendered judgment in accordance with the referee's report, and the defendants appealed to this court. Held: 1. The defendants could not prevail on their claim that under 37-4(a) stated interest exceeding an annual rate of 12 percent is per se usurious and that therefore the trial court erred in taking into consideration whether the plaintiff had intended to exact a usurious amount of interest; because 37-4 is penal in nature, it must be strictly construed, and the issue of the lender's intent is relevant. 2. The defendants' challenge to the trial court's finding that the plaintiff lacked the requisite intent charge usurious rate of interest was unavailing.
Argued January 17, 1990
Decision released April 3, 1990
Action to recover on a promissory note, brought to the Superior Court in the judicial district of Stamford-Norwalk and referred to M. Patrick Ryan, attorney state trial referee, who filed a report recommending judgment for the plaintiff in part, and for the defendants in part; thereafter, the court, Emmett, J., rendered judgment in accordance with the referee's recommendation; subsequently, the court, Cioffi, J., granted the defendants' motion to open the judgment and rendered judgment in accordance with the referee's report, and the defendants appealed and the plaintiff cross appealed to this court. No error on appeal; cross appeal dismissed.
A. Hunter Bowman and Carolyn R. Bowman, pro se, the appellants-appellees (defendants).
Myra L. Graubard, for the appellee-appellant (plaintiff).
The plaintiff brought this action against the defendants, A. Hunter Bowman (Bowman) and his wife, Carolyn R. Bowman, to recover money loaned on a promissory note. In their answer, the defendants alleged several special defenses, including that the interest rate charged on the promissory note was usurious. The defendants appeal from the judgment of the trial court accepting an attorney trial referee's recommendation that a $50,000 judgment, the face amount of the challenged promissory note, be rendered for the plaintiff. The defendants claim that, with respect to their special defense of usury, the trial court erred (1) in considering whether the plaintiff intended to violate General Statutes 37-4, and (2) in finding an absence of such intent by the plaintiff. We find no error.
The plaintiff filed a cross appeal contesting the propriety of certain actions taken by the trial court, Cioffi, J., after judgment was initially rendered. Because we find no error on the appeal, we need not reach the cross appeal.
General Statutes 37-4 provides in pertinent part that "[n]o person and no firm or corporation or agent thereof . . . shall, as guarantor or otherwise, directly or indirectly, loan money to any person and, directly or indirectly, charge, demand, accept or make any agreement to receive therefor interest at a rate greater than twelve per cent per annum."
The referee found the following facts. In April, 1982, W. Patric Gregory, president of the plaintiff corporation, advanced $50,000 to Bowman. This advance was evidenced by a promissory note in the face amount of $50,000, executed and delivered by both defendants, and payable to Gregory or his assigns. The note was prepared by a third party who was not instructed as to the interest rate. Gregory assigned the note to the plaintiff. The maturity date of the note was fifteen days from the date of execution, and its stated interest rate was 18 percent per annum. Shortly after the due date, Bowman wrote a check to the plaintiff for $50,000, which would have been accepted in full payment of the loan. Payment on this check was stopped, however, and the loan has not been repaid. At no time was there any discussion of interest between Gregory and the defendants. The plaintiff was not seeking interest on the loan, and Gregory had no intent to exact a usurious rate of interest.
I
The defendants first claim that the trial court erred in denying their special defense under General Statutes 37-8. They argue that under General Statutes 37-4; see footnote 2, supra; a stated interest rate of more than 12 percent is per se usurious, and a lack of intent by the lender to charge in excess of the lawful rate of interest is irrelevant. The defendants contend that a lender's intent to exact more than the legal rate of interest is applicable only for violations of General Statutes 37-5. We disagree.
General Statutes 37-8 provides that "[n]o action shall be brought to recover principal or interest, or any part thereof, on any loan prohibited by sections 37-4, 37-5 and 37-6, or upon any cause arising from the negotiation of such loan."
General Statutes 37-5 provides that "[n]o person and no firm or corporation, or agent thereof, shall, with intent to evade the provisions of 37-4, accept a note or notes for a greater amount than that actually loaned."
Connecticut's usury statutes provide a particularly severe penalty. Stelco Industries, Inc. v. Zander, 3 Conn. App. 306, 308-309, 487 A.2d 574 (1985); see also Scientific Products v. Cyto Medical Laboratory, 457 F. Sup. 1373, 1377-78 (D. Conn. 1978). Under General Statutes 37-8, a lender who loans money at an illegal rate of interest is barred from recovering both interest and principal. Because of the penal nature of this forfeiture, the statute has been strictly construed; see Stelco Industries, Inc. v. Zander, supra, 309 (usury statutes do not apply to sale of goods on credit); and our cases have made the issue of the lender's intent a relevant inquiry. "[A] lender can evade the usury bar by showing that he had no intent to extract more than the lawful rate of interest." Maresca v. DeMatteo, 6 Conn. App. 691, 696, 506 A.2d 1096 (1986).
The relevance of intent in transactions involving usurious noninterest-bearing notes, where the illegal interest is embedded in the face amount of the note, is well-settled. A showing of lack of intent has been considered in various lending arrangements otherwise violative of 37-5, including notes with no stated rate of interest; see, e.g., Wesley v. DeFonce Contracting Corporation, 153 Conn. 400, 405-406, 216 A.2d 811 (1966); Atlas Realty Corporation v. House, 123 Conn. 94, 100-102, 192 A. 564 (1937); notes in which the stated interest is at or below the legal rate; see, e.g., Bochicchio v. Petrocelli, 126 Conn. 336, 339, 11 A.2d 356 (1940); Mutual Protective Corporation v. Palatnick, 118 Conn. 1, 4-5, 169 A. 917 (1934); and notes that include payments characterized by the lender as something other than interest. See, e.g., Community Credit Union, Inc. v. Connors, 141 Conn. 301, 307, 105 A.2d 772 (1954) (interest described as a fine); Douglass v. Boulevard Co., 91 Conn. 601, 604-605, 100 A. 1067 (1917) (interest described as a commission).
The defendants argue that this line of cases does not extend to violations under 37-4. They claim that because 37-4 applies to notes that are clear and unambiguous on their faces, the lender's intent in these circumstances is irrelevant. We are not persuaded.
Section 37-4 is a blanket prohibition against lending money at a rate in excess of 12 percent. Section 37-5 prohibits a lender from circumventing the 37-4 interest cap by accepting either a noninterest-bearing note or a low interest-bearing note whose actual rate of interest is greater than 12 percent. These statutes read together, therefore, operate to prohibit usurious loans no matter what their form. Under our usury laws, it is of no import whether the illegal rate is explicit on the face of the note or included in its face value.
Under General Statutes 37-9, numerous loans are not subject to the usury statute including, inter alia, loans made by banks or savings and loan associations, real property mortgages in excess of $5000, and commercial loans in excess of $10,000.
Because of the relation between these provisions, a violation of 37-5 is also a violation of 37-4. As a result, cases addressing noninterest-bearing notes in violation of 37-5 have referred to both 37-4 and 37-5; see Wesley v. DeFonce Contracting Corporation, supra; Mutual Protective Corporation v. Palatnick, supra; Contino v. Turello, 101 Conn. 555, 126 A. 725 (1924); and solely to 37-4. See Atlas Realty Corporation v. House, supra.
A particularly instructive case on the relevance of intent under 37-4 is Golden v. Lyons, 151 Conn. 21, 193 A.2d 487 (1963). In Golden, a note evidencing a $13,970 loan had a face value of $20,000. Id., 23. The note called for monthly payments of interest at 12 percent per annum and quarterly repayments of principal. Id. The plaintiff accepted payments on the note according to its terms, and also demanded full payment of the note. Id., 25. The court, finding the note to be usurious and in violation of 37-4; id., 23; held that where a lender has actually charged, demanded or accepted interest in excess of the legal rate, "his action [is] per se usurious and cannot be condoned by any declaration of lack of intent to violate the law." Id., 27.
The court in Golden distinguished that case, where the lender by his actions had already declared his intent to exact usurious interest, from a situation where the lender "never assessed, collected or intended to collect" the usurious interest. Id., 26. A lender who has not acted to negate any stated intent, however, may explain why the loan is not usurious. Id.; see also Maresca v. DeMatteo, supra (lack of intent acknowledged as a basis to evade the usury bar to a deficiency judgment that was usurious on its face under 37-4); Community Credit Union, Inc. v. Connors, supra (usurious intent relevant to a note claimed to be usurious under General Statutes [1949 Rev.] 6779 [now 37-4]).
Here, the referee found that there was no discussion of interest at any time between the parties, that the note was prepared by a third party who had no instructions regarding the interest provision, and that the plaintiff was not seeking any interest on the loan. The referee also found that Bowman's $50,000 check, on which a stop payment order was issued, would have been accepted by the plaintiff in full payment of the loan. We conclude, therefore, that the court properly considered whether the plaintiff lacked usurious intent under 37-4 so as to exculpate it from forfeiture under 37-8.
II
The defendants next claim that the court erred in finding that the plaintiff lacked the intent to charge a usurious interest rate. They argue that such a finding was contrary to the weight of the evidence based on the terms of the note itself, and based on the facts that the plaintiff was a sophisticated businessman who read the note and knew of the interest provision, and that the plaintiff obtained a prejudgment remedy in the sum of $80,000. We disagree.
On the basis of the findings discussed above, the referee concluded the plaintiff lacked the requisite intent. These findings are not clearly erroneous. All American Pools, Inc. v. Lato, 20 Conn. App. 625, 628, 569 A.2d 562 (1990).
Regarding the prejudgment remedy, the supporting affidavit indicates that the plaintiff sought an attachment of $80,000 to secure the $50,000 note and accrued statutory interest of approximately $28,000. No accrued interest on the note, based on an 18 percent rate, was included.