Cumberland Capital Corp. v. Patty

CUMBERLAND CAPITAL

CORPORATION,

Appellant, PATTY, Appellee. D.

Hubert

Supreme of Tennessee. Court

Aug. 22, 1977. Farris, Jr., Farris, Ewing,

born & Frank M. Warfield, Nashville, David G. Wil- Evans & liams, Heiskell, Donelson, Adams, Williams Kirsch, Kline, Lowry F. Miller Memphis, & Shumate, Jr., Martin, W. F. Chattanooga, & Ridenour, Ridenour, Ridenour, Bowers & Borod, Shumate, Knoxville, Ronald Ro- S. Kremer, senfield, Borod, Mem- Bogatin & Ward, Wilson, phis, Worley, Donald G. Ward, Tenn., Kingsport, Gamble & for Ass’n, Inc., amicus Tenn. Bankers curiae. Cornelius, Jr., Michael Charles L. G. Collins, White, Cornelius, Higgins & Yopp, Nashville, Savings & Loan for Tennessee League, amicus curiae. Sanford, Gullett, Gullett, Steele,

B. B. Nashville, Merritt, for Tennes- Robinson & Ass’n., amicus curi- see Consumer Finance ae.

OPINION HENRY, Justice. interlocutory appeal

This involves of the Indus- constitutionality portion Act,1 Companies Thrift trial Loan and and a 7, Consti- construction of Article Section tution Tennessee.2 I.

Pleadings Proceedings and Trial a Ten- Capital Corporation, Cumberland existing corporation, organized nessee Loan and Thrift Com- under the Industrial Act, against Hu- panies complaint filed its Mary- D. in the Circuit Court Patty bert Sanford, Nashville, William B. Valerius ville, seeking promissory to recover on two Felknor, for Maryville, appellant. $61,- having aggregate It is further al- State Constitution. lies in an tial The solution significance. charges service were leged that excessive 11, 7 of the Consti- of Article Sec. analysis made Cumberland. consti- light in the of earlier tution of 1870 hearing testimony, judge, After the trial statutes, of a succession provisions, tutional “the opinion, in a memorandum held that perti- this Court prior decisions of usurious under Article Sec. loans were public nent records. of the of Tennessee” and Constitution He Section 45-2007 was unconstitutional. II. a charges further held that the lender “[i]f (1796-1835) Pioneer Period fee for services that are not rendered or incurred, expenses that are or if the Tennessee’s first Constitutional Conven- expended, charged tion, amount exceeds each composed of five members ” Additionally, excess is interest. Territory, of the met eleven counties of he held that Cumberland was entitled to 11,1796.3 Twenty- January Knoxville on 10%, “after compute interest at the rate of convened, six days after it the Convention paid in ad- giving proper credit for loans It was adopted our first constitution. by money, refinancing, vance either or fore- largely adapted from the North Carolina closure.” basically Constitution of which was the organic Territory law of the of Tennes- entered, granting A formal order was an see, and had been in effect in Tennessee each and cer- interlocutory appeal party prior becoming Territory.4 to our a tifying controlling questions two of law: Code An- 1. Are the terms of Tennessee of 1796 not even Constitution does 45-2007, of notated, violative Section passing contain a reference to interest or of the Article Sec. 7 Constitution usury. delegates It is that the apparent of Tennessee? State our first constitutional convention believed that the matter of interest addressed itself Anno- If the terms of Tennessee Code 2. place to the law the market and could of tated, are violative Section 45-2007 County, subsequent conventions Jefferson 3. While constitutional who served as a United may lay higher years claim to intellectual attain- Comp- States Senator for sixteen and as ments, States, the Convention of 1796 was undoubted- Treasury troller of the of the United ly composed promi- of more Tennesseans of County, William Blount of Knox the Territorial public County, Governor, nence affairs. Davidson for White, James the founder of Knox- Jackson, example, represented ville, was Andrew Judge Claiborne, William C. C. first States, seventh President of the United James Mississippi Territory Governor of the and later Robertson, Nashville, founder of John Caldwell, Governor of Louisiana. See J. Con- McNairy, judge, our first federal who served in History Tennessee, stitutional 130-132 capacity forty years. for Future Governor Joseph McMinn and States Sena- future United represented tor William Cocke Hawkins Coun- Ibid., p. ty. Joseph Anderson of Other members were interest, recovery for the of excess made regulated by legisla- most be effectively ture, offense, body represent people usury specifically created to an indictable varying to the designed respond repealed the 1741 Act. economic, needs and demands of the state’s It at the outset that should be noted political, social and cultural affairs.5 recognized in practice discounting was Act, and, Under Condition 8 of Cession early days the 1741 Act since the North Acts of all Chapter Carolina statehood, practice in this our has been in effect the North Carolina acts that were transaction any given commercial state. became effective at the time of the cession discounting, involving the practice Article territory. in the ceded existing against stat- gauged result must be provided: of 1796 Constitution As the provisions. utes and constitutional force and analyzed now in earlier cases are reviewed and All laws and ordinances not inconsistent with the first territory, use in this borne in mind that for must be constitution, continue to be century shall of our statehood quarters three of a state, they and use in this until force on inter- limitation we had no constitutional altered, repealed by expire, shall Thus, rate, including dis- est. the interest legislature. count, by statute until governed solely the Constitution of 1870. Thus, by virtue of the Cession Act and this constitutional provision,6 Chapter practice discounting While the is dis North Carolina Acts of relating to infra,7 cussed more fully present pur interest, took effect in the State of Tennes- poses we merely discounting note that is see 1, 1796, as of June upon our admission taking advance”, “the of in interest Black’s to the federal Egnew Cochrane, union. 1968). Law Dictionary (Rev. 4th Ed. It is (1859). Tenn. 320 by characterized a transaction wherein the

The North lender princi Carolina Act deducts the interest from the provided of 1741 in pertinent part: pal at the time the loan is made. person shall, That no . . . directly early recognize may Our cases that a note take, or indirectly for any monies, loan of discount, agrees be sold at a if seller wares, merchandizes, or commodities will be whole amount he bound for the whatsoever, above the value of six note, may of the be ren- the transaction pounds, by way of interest, discount or dered v. Read and Campbell usurious. the forebearance of one hundred Gray, (1828). 8 Tenn. 392 pounds, for one year, and so after that to denounce early quick Our courts were rate for greater sum, a or lesser or for a usury, arising discounting whether longer or shorter time. otherwise. Bank v. g. See e. Nashville Violations were punishable by forfeiture Hays, (1829) 9 Tenn. 243 and Lawrence v. of monies, “the double wares, value of the Morrison, early An case Tenn. 444 lent, merchandizes and other things so bar- Eastham, particular of Dews v. note is gained, exchanged, or shifted. .” the Act of arising Tenn. 463 under Thus, at very outset the amount of attempted There the borrower

interest was restricted usury and was pun- negotiate a by cash loan and was told ished severely. lender that he none to lend but would had discount. The buy cash notes at the usual The 1741 Act remained in effect in Ten- arranged borrower then for his brother to nessee until on adoption November $112.50, totalling payable to of execute notes Chapter 32 of the Acts him, 6%, This act him endorsed to the lender. fixed the rate at provided 5. Thirty-seven states of the Union have no con 6. See also Art. Sec. Constitutions of 1834 provisions relating stitutional to interest. and 1870 for similar continuation clauses. III infra.

7. See jus- “pioneer period in a has been called the judgment a what agreed to parties The amount of court in the peace of Tennessee.10 tice of twenty four months payable $112.50 1834 Constitutional The Journal transaction of this part later. As days It re- meager. distressingly Convention the sum the borrower tendered the lender was re- of interest the matter flects that $37.50, plus $75.00, taking a discount pri- local and on ferred to the Committee a total judgment, on the amount 6% report its submitting legislation. vate court over “140%”. rate of recom- July the Committee to sell “notes were made held that as to read provision mended a constitutional this and branded at a discount” the market follows: high- “a usury “extremely gross” as fix the rate of in- Legislature shall 464, 466. Tenn. at oppression”. handed be terest, established shall and the so were any consequence cases No other State, throughout uniform equal and during period. decided so may that every person corporation provision allowed the But this same. III. existing corporations. shall not affect 1834; statutes, Constitution of decisional reads, pertinent report The Committee law and developments leading up part, as follows: to the Constitution of 1870. There best inter- nothing by which the a. The Constitution of 1834 soon, be so community may ests of the The Constitution of 1834 came as a result de- severely, imperceptibly and so and so growth development Tennes- regulating stroyed, mode of forty see over a year period that saw our loaned. The commit- money interest on state primitive evolve from a society into great importance tee its deserves believes the early stages agriculture, manufactur- law. This notice in the fundamental ing pursuits. and cultural We outgrew Legislature that the shall requires clause old Constitution and a de- new one “was This (Emphasis original). fix a rate. especially manded improve method of being open is to the from prevent matter taxes, officers, levying electing state avoid- contract, may the necessitous whereby ing conflicts between the different courts (Em- by be devoured the more astute. and promote a good system of internal phasis supplied).11 ”8 improvements mo- rejected two formal Convention The population of Tennessee in 1796 was provision tions to write in a thousand; less than one hundred 1830 it an- per per should not exceed “six centum 681,902.9 had risen to Journal, num.” Conven- See Constitutional sixty delegates The Convention’s met in 1834, 301, tion of 353. 19,1834, Nashville on May and remained in the adopted, As 6 of Article Section days, adjourning August session for 104 reads as follows: Constitution of 1834 product 1834. The finished was ratified 6, 1835, the rate of in- people Legislature the on March 5 and and shall fix terest, became shall be proc- effective with the Governor’s and the rate so established lamation issued on March 1835. The throughout the equal and uniform adoption of this Constitution terminated State.12 Journal, State, Moore, Tennessee, 11. Convention of Constitutional

8. 1 J. The Volunteer (1923). 404-405 at 161. White, Messages of 9. 2 of the Governors R. precisely the this is It will be noted that Tennessee, (1952). language in the first same as is contained the clause of Article of Constitu- White, Messages of R. of the Governors tion of 1870. Tennessee, (1952). the Again, the left rate of purchas- Convention transaction of between a “business and judgment interest to the discretion for a loan of negotiation and “a ing a note” legislature. mandatory It made it the a at 245. The sale of money.” 23 Tenn. a rate of duty legislature to fix per than six cent greater at a discount note interest, such rate be required to a opposed note was treated as lawful throughout the state. equal uniform loan, unlawful made for a which was greater was than usurious if the discount Watson, (1872), In Perkins v. 61 Tenn. 173 six per cent. See also Gooch v. Massey, 23 purpose stated the of this consti- Court (1843). Tenn. 374 tutional provision as follows: Notwithstanding the Act of In May v. Campbell, Tenn. 450 Legislature to banks and granted had Court, citing Ramsey, without changed other moneyed corporations privilege the terminology by holding somewhat taking per more than six for the a “real transaction” note discounted at 25 charters, use of these money, special usurious, cent was not but a note made privilege granted or rather this to them to raise money and discounted at the rate of XI, gave rise to sec. Article 25%was usurious and unlawful. In the one 1834, whereby pro- Constitution of it is instance transaction, there was a e., real i. Legislature vided that “the shall fix the purchase paper; commercial in the rate of interest and the rate so estab- latter a loan. lished equal shall be and uniform The holding May clarified Hole throughout object That the State.” Hobson, man 27 Tenn. 127 In provision legis- of this was to inhibit volved were notes, purchased several all banking granting corpo- lature before maturity and at a discount in excess privilege taking greater rations the of the legal rate of holding interest. rate of interest than was allowed to indi- purchases usurious, not to be the Court viduals, journals is manifest from the said: supplied). (Emphasis Convention. Tenn. at 177. is a between a note or [There distinction] bill, transaction, in its inception, a real Acts of 1835-1836 Chapter b. Public and a note or purpose bill for the raising money by sale in market. A fix This “An Act to Chapter, captioned former, transfer by endorsement of the State”, the rate of interest in this interest, though beyond rate of 20, 1836, adopted February approximately will regarded note, aas sale of the date of eleven months after the effective transaction; a valid and legal but the act the Constitution of 1835.13 This made latter, being only endorsement of the change no in the Act of 1819. significant negotiation, nominal will be held a was fixed at six usuri- The rate of interest annum, contract, ous per provision was made for if transferred at more than centum the recovery usury, usury the of and made lawful rate of interest. 27 Tenn. at 129-130. an indictable offense. Tennessee, Hazen v. Union Bank of 33

c. Decisional law under Act of 1835—1836 (1853), Tenn. 115 arose under a charter pro- significant A portion jurisprudence of our vision the allowing bank discount short relating discounting, interest and usury term rate of 7 The paper per the cent. developed arising in cases under this act. rate of in- legal Court that the recognized cent; Clark, Ramsey v. 244 that the “reformed (1843), per Tenn. terest was 6 Court, the speaking through Justice Nathan Constitution of 1834”declared that interest Green, time, uniform, for the first drew a distinction would be noted that “no law 47-14-104,

13. This act was the basis of Sec. 1944 of of Sec. Code Official T.C.A. consideration, or of a grant legal right franchise can have exist- to do so would opposition ence which stands in to it.” 33 corpora- seem to conceded to impliedly be Court, However, Tenn. at 121. noting money, tions whose it is to lend business provision (Art. 7) the constitutional Sec. functions banking— and exercise other against impairing the validity existing under certain restrictions. contracts, that, held because bank’s negotia purchasing And this business constitution, pre-dated charter and was extent, is, sanc paper ble to a certain granted when, at the time under the Consti- law, by although purchaser tioned tution of no we had constitutional may greatly more than thereby get requirements, provisions its charter money. interest for the use of his could stand. pa transaction distinction is between real interesting The most and informative paper purpose made for the Brien, case of Wetmore v. 40 Tenn. 723 raising money by a sale in the market. Banking arose under the Free Act of 450; [May Campbell,] Humph. See v. 1851-1852, as amended. Involved was a Clark,] Humph. 244. This [Ramsey note discounted at the bank at the rate of loan, a important, distinction is between cent. The Banking provid- Free Act sale, in the form of a and an actual sale ed inter alia that operating banks under the purchase. The purchase must be ac act “shall not authorized to be discount or faith, tual, not good and made in notes, shave directly indirectly, or at a colorable, merely to cover a usurious greater discount than the other banks are transaction. A note made in the course ” allowed, existing under laws. transaction, of a real business for which Tenn. at 724. The concluding portion of the original party given has valuable opinion significant: is consideration, regarded as property, notes, The regular discounting business of and, like property, may owner by the interest deducting from their face sell it get, for the most he can and what- run, for they the entire time have to profit ever the make purchaser may though in itself usurious —as the borrow- purchase, nothing on his certainly there is er de- pays interest on the amount thus usurious in be in- may it. The owner long ducted —has been sanctioned duced, solvency of the by doubts as to the courts, necessity upon rather than maker, necessities, pressure or the of his principle; plain and thus far the act is face, to sell the note less than its or enough. But the prohibition upon the value, and, less than its market in the Banks,” “Free not to “shave” notes at a fraud, absence of all this will not affect greater rate of discount than the other transaction, impart validity of the laws, existing banks are allowed under But if the usury. to it the character of quite not so clear. The term has “shave” being purpose note were for the made not, perhaps, regarded heretofore been as sold, money, to raise or as an artifice term; juris- technical but in our local laws, evade the under the color of a usury least, prudence, at it can longer no purchase paper, sale and this will regarded untechnical, as inasmuch as its such purchaser, avail and the under use is sanctioned the authors of the circumstances, knowledge with “Code of Tennessee.” facts, either inferable from the actual or popular signification phrase case, guilty of facts of the will be held notes,” “shaving contra-distinguished have been usury, if the discount shall legitimate from the business of discount- legal rate of interest. greater than the banks, ing negotiable paper by the is well sense, In this the “shave” is to be understood. The business of word purchasing notes, And in market, in understood in the act of 1855-56. the at less than the face, sense, amount is the par only, called for on their or this to this effect and value, amongst notes, is common individuals in ne- “shaving” business of or other the the community; and act under individuals or gotiable paper, either by law. 2 rates comparing tolerated Tennessee’s

banking corporations, states, supplied). at time with the Commit- (Emphasis Pars. on Con. 421. other reported: graphically tee rather 40 Tenn. at 726-728. facts, however, The show a marked con- of 1859-1860 Report Legislative

d. The the rates of interest between trast “discounting”, that readily apparent It is The compared with ours. those as States practices kindred usurious “shaving” and laws has effect of their tendency and public concern. matters of vital became at home —that keep capital been to session, at the 1859-1860 Legislature, Their it from the State. ours to drive “to in- a Joint Select Committee appointed ours, from a capital laws invite distance — Usury effect of vestigate present it from our bor- contrary, repels on Tennessee; ascertain the to Laws borrower, protect laws ders. Their shaving; used in money amount of to obtain mon- him some chance give taken from the capital of domestic amount ours, contrary, on the ey at fair rates — elsewhere, average and the to be used State interest, and rates of create exorbitant cent, for the use of paid by borrowers per mercy at places borrower Report money. .” Committee original). (Emphasis dealer. money to the appears appendix as an Senate at 462. Id. Legisla- the 1859-1860 House Journals of page 457. This beginning tive Sessions reported:

Committee e. The Act of 1859-1860 money little comparatively “that 1. Bill report was “A Appended to the Tennessee, at out in is now loaned State, and to Laws of the Usury Amend the 457); (Id. page rates” Interest.” rate of establish a Conventional passed proposal This supplied). (Emphasis in Tennes- of interest “that the rate 2. of 1859- Acts legislature Chapter is es- is over that which largely see conven- first 1860, and, thus, had our we 458); (Id. page by law” tablished tional interest law. that rate for fixing “that the law 3. longer opera- no money,

borrowed is clause, enacting omitting price down keeping tive provided: (Id.); money” That any person persons whenever in- have no men abiding law 4. [that shall contract for the loan of money, it “pre- make loans ducement and] shall and may be lawful for the lender special money their place fer to to receive a rate of interest on it in or loan up, hoard deposit —to up the same to the time payment when States, permit laws whose made, not to exceed ten remuneration like a fair something Provided, annum: parties That the to the 459); (Id. page capital” (sic) agreed, shall have so [contract] ban- has been amount “large that such agreement expressed in the face our because from the state ished contract, whether the same be has ar- legislation, unfortunate bond, bill, evidenced by note or other use for the price fixed bitrarily written (Emphasis supplied). instrument. its below at a standard money (Id.); and value” actual section, in be noted It should It is interest. essence, conventional in Tennes- defines the rate of discount referred rate, frequently agreed fifteen an ranges see between to be It seems interest. 461). as contractual (Id. at twenty-five percent 525 Collins, 491 universally recognized that conventional in- v. 49 Tenn. In Jackson law the conventional interest agreed purpose terest is “the rate and fixed upon by of 1860 is stated as follows: parties distinguished themselves as prescribe from that which the law would to relieve of said statute object The agreement.” explicit the absence of an it the interest making people, by (Rev. 1968). 4th Dictionary Black’s Law ed. to induce sue, and also not to creditors v. Company See also Hunt Tool Southern bring or money, their to loan capitalists Co., Towing Salvage F.Supp. & 275 139 it, loan from other States money Jensen, (E.D.La.1967); 117 Farnworth v. interest; and, rate of increasing the by (1950); Utah 217 P.2d 571 Saulsberry section, re- it was not the first under Wood, v. (1935); 180 Wash. 39 P.2d 592 agree- any part quired Elston, Prince & McDade v. First State upon ment should be stated the note Bank Plain Dealing, La.App. pay contract to interest at the tha[n] Smith, (1932); So. 510 v. Fowler Cal. 568 per rate of ten centum. 49 Tenn. at 498. (1852); Am.Jur.2d, Interest and Usury, 21, 1860, was passed February This act Section 1. The same authorities make it 1,1860. September and became effective It interest, clear that “legal” sometimes called days, being repealed was in effect for 153 “judicial” interest, imposed is the rate by by Chapter passed Acts of January law in the absence of an agreement. These 31, 1861, day reports one before the first not, rates may, may be the same. The was, however, It were due. construed in distinction between a and a conventional reported several cases. legal rate of interest is crucial to a proper first, of these significant The and most resolution question of the constitu- cases, is the controversial case of Caruthers tionality of 45-2007(f). Sec. Andrews, 42 Tenn. 378 The note interest at the rate provided involved It is beyond question early that as as 1859 judge Chapter The trial held per cent. legislative our leaders knew and un- fully 1859-1860, Acts of to be unconstitution- legal derstood the between differences reversed, Supreme pointing al. The Court conventional rates of interest. imposes out that “the constitution no re- 41, Acts of 1859- Chapter upon legislature, upon straint or limit reads, part: subject except of interest” that the rate throughout uniform equal “shall be That the rate of interest now established state.” 42 Tenn. at 386. law, shall continue equal and uniform heretofore; Court treated the throughout Act of 1860 as State cent, an greater being 1835,14 no amendment to the Act amount than six per shall be held that the 1835 act paid any on as amended was obliga- contract or tion, “equal throughout and uniform agreed unless the state.” parties, ac- cording holding to the basis for this provisions of the first sec- was that all lend- Act; ers could bring provi- tion of this themselves within its . sions. The pointed “[ajfter Court out that Section 3 specifically authorized the pur- passage of the Act of as before its notes, chase of etc., “made for the purpose passage, there equal was but one and uni- sale, at a rate of discount not to exceed form rate of interest . . . which was cent, ten per annum,” per upon the pay- six But, annum.” said the ment of a privilege tax. required Section 8 Court, under the 1860 act “it was made that reports be made by February 1861 lawful for any person ... to take and each February aggre- thereafter of the more or less than the rate of interest. ” gate amount of all loans made. 42 Tenn. at 389. repealing specific clause.

14. The 1860 Act contains no 526 indicia were executed note or other of debt opinion repercussions serious

This had purpose money. the of raising contributed of the 1870 and to the action Convention.15 of a matter discounting The notes became ap- to the public

of concern and this led a pointment Legislative of Joint Commit- Summary. f. go- tee. The that the reported Committee left The Constitution of 1834 the ing rate of interest in excess of the was judgment rate of to the discre rate, fifteen and legal ranging between object of legislature. tion of the The Arti and that our interest twenty-five 11, requir the state to driving cle section 6 that constitution rates were from capital of of economy. the detriment our The Com- ing the interest “be uniform rate of inter- mittee “inhibit recommended a conventional the was to the throughout state” was the adopted by legislature, est law that banking cor from the Legislature granting in effect five stayed months and then was taking greater privilege of the porations meantime, to individ In the its constitu- repealed. was allowed of interest than rate Watson, Tenn. at Perkins An- 61 in Caruthers v. upheld was tionality uals”. v. might drews, paper (1872). Real transaction supra. 177 of the in excess at a rate be discounted The case law under the decided Constitu- purpose for the of but made notes legal in given great weight tion of 1834 must be Camp v.May not. money might raising construing provisions the Article of Sec- no valid law bell, supra. There could our present tion 7 of constitution. a rate in authorizing to discount banks rate, except where the of the excess IV. of 1834. predated the Constitution charter Tennessee, supra. of v. Union Bank Hazen The Constitution of 1870 prev Senate,

drew Johnson in the United States legislature convened in Nashville on served as Postmaster-General under Presi- 4,1869. October It dispatch. Hayes, acted with It dent and became a United States 1800, adopted Judge a District was another out- 15, resolution17 on November standing member of the convention. Other submitting the question calling a distinguished future members included convention to a people vote of the in a Porter, Joseph Governor James D. B. Heis- special election to be December held on kell, a former member of the Confederate conducted, 1869. The election was dele- Congress Attorney and afterwards General gates selected, and thereafter the conven- (See 48-59, of Tennessee Volumes Tennes- tion met January 10, 1870, in the David- see Reports); Henry and Chancellor R. Gib- son County Courthouse in Nashville.18 We son, Gibson’s, author of famed Suits in presume the courthouse was selected as the Chancery. convention site in view of the fact that the legislature was in simultaneous session dur- The most distinguished delegate was ing the entire course of the convention. probably A. O. P. Nicholson. He served in The basic underlying purpose of the the Senate of the United States and as the convention was the restoration of the citi first Chief Justice under the Constitution of zenship of thousands of Tennesseans dis 1870. qualified under Parson Brownlow’s fran chise acts.19 Notwithstanding the emotion leadership of the 1870 Con- Such was ally charged political atmosphere, this con primary purpose vention. While the vention was marked by fact, restraint. changes of political convention was and few it has been said that “the true policy was to in the major importance were made Consti- do as possible.”20 little as Delegate A. O. significant change tution of a Nicholson, P. later Chief Justice of this relat- provision made in the constitutional Court, key-note: sounded the ing to interest. The conventional interest repealed, law of 1859-1860 had been but careful; Let us be let us do no more than conventional interest continued as a critical

is absolutely necessary. In ten years issue. from now all this be again.21 must done There seems to be a unanimity among 4, 1869, On November after the introduc- historians that this convention seventy- tion of a bill to establish a conventional rate five “was, Tennesseans probably, the most interest, Representative R. B. Cheatham

intellectual body of men ever assembled in Representatives. addressed the House of any Tennessee for purpose.”22 His remarks are verbatim reported in the Major General Brown, issue, John C. November of the Nashville of Giles County, who served governor American, page 1871 Union and and constitute .to was elected as chairman. His older a argument most forceful in favor of the brother, former Governor Brown, Neill S. quote portion: law. We Chapter Ibid, 17. Acts of 1869. 21. 300. American, January 18. Nashville Union and Caldwell, History 22. J. Constitutional of Ten 1870, page 1. (1907); Moore, Tennessee, nessee 298 1 J. White, (1923); Volunteer State 551 6 R. Mes Caldwell, History J. Constitutional of Ten sages (1963); of the Governors of Tennessee 84 (1907); Moore, Tennessee, nessee 296 1 J. Laska, Legal A History and Constitutional (1923). Volunteer State 552 Tennessee, Memphis State L.Rev. (1976). Caldwell, History J. Constitutional of Ten nessee 299-300 Money is worth an eminent acknowledged in the market has been whatever it will least bring. to be at saying Laws this house lawyer in

shall only good no decision, worth six there is do not doubtful fix we price; acknowledge, its when penal will licensing lawyer and no or may be regulations bench, can this decision govern price, strong have a re- strain the sale price at whatever it may reversed.

bring. 4, 1869, Un- the Nashville On December an editorial published ion and American prohibiting It our evident laws law. endorsing the conventional loaned, money to be and contracts to be the Joint reviewing report of After the any higher made at of than interest legislature, the the 1859-1860 Committee of cent, per years, for and six has been is editorial reads: still, capital only preventing foreign not from coming Tennessee, has into years What was true ten of State out, continually driving driven and mil- is ago, is so equally to-day. Money worth with capital lions of our into States cent, more not in Ten per only than six it into in- laws, forcing more liberal and nessee but in every State of the Union. . . . producing. vestments which are non midst, and in Money to-day in our own 1870, 6, Again, February on the Nashville us, every surrounding is worth State cent, editorially urged pas- Union and American annum, per and per from 8 to sage of law. The the conventional interest farmer, by so classes. The recognized all recognizes argument editorial the that trader, get the the manufacturer cannot conventional law is interest unconstitution- cent., per price it the fixed law. and quotation al counters it extensive They expect They have to it. do ceased Andrews, from v. supra. Caruthers it. unable Being ask to borrow it from private individuals from estates Thus, appears it inter- conventional security, of kind on kind of on any any extensively prior est was debated to and exist, usury they account of the laws as during the time the Conven- Constitutional they forced into go are to the bank on legislature deliberating. tion the were short, paper inconveniently go or to to are compelled, shavers who on account of proceedings. b. The laws, these same to exact exorbitant rates. We the have examined Journal

Constitutional of ef- Convention 1870 in an fort to of determine the intent the conven- the Joint Committee argument, This like tion. The matter was the of rates ring and one familiar report of has a subject many of motions. Repre- today. to be sounded continues County ad- Robertson of sentative Sadler On February the Journal reflects that Representatives House of the dressed the adopted Convention Article Sec. 6 His remarks are re- the to bill. opposition amended, Legislature power “as giving Union Nashville page ported of pass to a conventional rate interest not 27, 1869. In obvious American, November per exceed ten centum annum.”23 Andrews, supra, to Caruthers reference operated This complete formulation said: Mr. Sadler present provision. Wednesday morning, Supreme February I of a On am aware decision cent, body proceeded in a law the Convention Court on old ten 1870, page Convention Journal Constitutional proceedings, These in orderly progression, presented copy enrolled the Con- produce combined to the final version stitution to Governor.24 Article section 7 the Constitution. In its final form Article read follows: c. Analysis. Legislature the rate of in- shall fix terest, and the rate so established shall used, in the language We think that State;

equal throughout and uniform statutory and decisional the context of Legislature may provide but the documents, law, debates, public public interest, ex- not to conventional rate of compels its these leading adoption up ceed ten per per annum.25 conclusions: must fix a rate of legislature a. The the proceed- summary, appears interest. delegates, ings the Convention that in order: equal must be so fixed b. The rate state. throughout uniform giving rejected

a. an amendment to fix a convention- legislature power legislature may provide c. for a interest; al rate of conventional rate interest. a authorizing an amendment rejected b. Ad. conventional rate of interest must money; loaned per cent for rate of ten not exceed per ten cent. legal fixing a rejected c. an amendment the per rate at 6 cent with of interest to yield must legislative All enactments rate; legislature a fixing conventional charter, this, and must be tested our basic Statutory against plain provisions. these rejected d. report a committee contain- relating usury only to are of enactments ing proposed a section under the which passing relevance. The Constitution con- rate per was at fixed cent but made except against usury tains no provision lawful any rate agreed upon by par- the in the second clause of implicit which ties, contract, inserted in a written not to 11, Article section 7. cent; per exceed 10 rest, set to at point, We this the 6, 11, section Consti- Article adopted e. heard our suggestion so often Consti Article clause of (the first tution of per fixes a ten cent limitation on tution 1870); Constitution section leg is misconception. interest. This a amendment: “but adopted f. an islature, clause of Article under first a conven- provide for Legislature may fix may any section rate interest interest”; tional rate not a required It is fix proper. it deems point no rate. We out that conventional providing amendment an g. adopted of Article section is self-execu part power have no shall Legislature that the ting. rate higher allowing any law enact an- per per ten than of interest If, however, legislature elects fix num”; and interest it is limited to conventional giving adopted an amendment h. ten cent. conventional pass a power to legislature ten convention- exceed Our Constitution not to contains interest rate of phrase “conven- al clause and interest cent. 440. Id. Id. at 436. in the face of the instrument. . . " expressed tional interest” particularized legal had a significance in meaning 1870 and that has changed. III supra, Again, See Sec. e. Section 2 provided: the distinction between conventional and That the rate of interest now established legal rates of interest is crucial. by law shall continue equal and uniform throughout heretofore, recognize

We State insistence that in- greater no rate of sertion of a than six per fixed limitation in a constitu- cent, per annum shall be charter, any tion or other received on basic and thus consti- contract or obligation, agreed unless tutionalizing with fixed rigidity, matters parties, and reduced to writing in better left to statutory flexibility, violates the face of the contract obligation, Indeed, recognized principles. this has been according to the provisions of the first said to be “the chief criticism of the 1870 section of this Act. Constitution most scholars.”26 This Act repealed by Chapter 21 of This contention harmonizes with Justice Acts of with the result that Cardozo’s statement in The Nature of the Act of as codified in the Code of 1858 Process, Judicial that “a constitu- was again effective. tion states or ought to state not rules for the passing hour principles for an ex- Thus, panding future.” under view it VI. is the duty of a constitutional convention to Decisional law since 1870

achieve a balance between the demands of stability change. and the need for Cases decided under the Constitution of 1870 add no dimension to earlier cases de- Be this as it may, the second clause of cided under the of 1834 Constitution and/or Article section 7 is in our Constitution. statutes governing conventional interest. Its meaning plain; is our is duty clear. We Some, relevant, however, are and because shall enforce it. construction, urge able counsel we differing signifi-

note those we consider to be most cant. V. Counsel for Capital Cumberland relies

Our second conventional interest law upon Bank, Chafin Savings v. Lincoln We have Tenn. 499 opinion seen that Chief Justice during the entire Con- Nicholson, vention aptly of 1870 described in brief as “one General Assembly was of the chief simultaneous architects and of session. builders Two days after constitution of 1870” (quoting Convention 113 Tenn. at finalized its action on Arti- cle 736). section 7 Counsel relies upon opinion and on this as February very day “approving discounting legally per- date the finished Constitu- tion was presented missible rate.” Governor, accept impli- to the We cannot Legislature cations of adopted our this construction. second convention- law, al Chapter Public Acts of In Chafin the facts were that the bank 1869-1870. discounted, cent, had at a rate per of 15 1 provided Section that “it shall be lawful note that purpose was made for the to contract not any raising rate of interest money. The Court held that cent, annum, exceeding per ten per provid- fact that the note was made to sold for writing ed that the rate interest be in the purpose raising that the money, and Laska, History Legal Tennessee, Memphis Constitutional State L.Rev. per ten at the rate of year, ille- when discounted this, made the knew transaction bank a net of $90.00. borrower gives the said, perti- The Court gal and usurious. year pays he that for one the use of For part: nent rate, this interest and 11.1% approximately impermissible. constitutionally Although in the term “discount is strictness therefore Appendix. see notes,” computations originally meant the further purchase For notes, of real transaction as contradistin- & Co. that Caldwell contends Cumberland notes, guished from mere accommodation (1924) 272 S.W. Lea, 152 Tenn. yet practice the distinction has been most au- single “must be considered long disregarded, too and has been too meaning pronouncement thoritative legislation, often in our ignored to be now XI, 7.” While section of Article scope authoritative, ground judicial made the of a decision. agree opinion that we supportive it is lending money legiti- impressed is one of the not we are bank, position. mate franchises of a and it exercis- of Cumberland’s es privilege when it discounts a note Chapter arose under 69 of the Caldwell purpose which it knows was made for the firms authorizing corporations, Acts of 1925 raising money. The bank lends its and individuals to issue bonds or notes money and takes the note of the borrow- $50,000.00 or more at a rate aggregating er as security for repayment. its If the (7½%) half per not to exceed seven and one

loan is made at interest or a rate of constitu- cent. The Court held the act to be discount exceeding cent., tional. transaction legitimate. If the note was discounted, or the loan made at a greater opinion points out that 7 of cent., rate than 6 the transaction is Article 11 of “except the Constitution re- illegal and (Emphasis usurious. quiring the legislature to fix an interest supplied). 54 Tenn. at 501-502. nothing adds to section 8 of article 1 land], of the and section 8 of article 11 [law nothing opinion We read in this legislation], present constitu- [class would any discounting would validate tion.” 152 Tenn. at 272 S.W. at 716. result in a rate of interest in excess Then, the Court said: statutory constitutional or limit. The con- mayWe lay aside so much of section 7 of Cumberland, struction contended for article 11 as authorizes the legislature to only would not be at variance with the provide for a conventional rate of inter- limitation, nullify constitutional it would its est. 52, 152 Tenn. at 272 at S.W. meaning. own Next, provisions the Court notes the true, Cumberland, It is as contended 11, the Article section 6 of Constitution that the Crowley Kolsky, Court held in 57 1834, Caruthers, supra, cites and (Tenn.Ch.App.1900) S.W. 386 that a lender Trotter, 453, being McGhee v. 48 Tenn. interest until “right legal has a to deduct “that the two cases wherein the Court held note, the is to exact maturity of the —that to fix a contract legislature empowered was . . .” prepayment legal interest . exceeding per . . not ten was valid.” Id. These two cases were de- We do not regard precisely this as a cor- cided under our conventional interest first if, rect statement of the It law. is correct (Ch. 41, 1859-60). law Acts of if, only two criteria are met. First the repayment must be on an annual basis Thus, only question the reaches the Court secondly, lawsuit, the rate must be less than 10%. in the viz whether the classification This follows from the fact that a made in Act 1925 reasonable. note was In $100.00, responded The Court in the affirmative. payable sum of at the end of the 532 Inc., 162 Enterprises, doing

so Dowler v. Ga. language opinion by of the 59, Justice significant. (1931), Green is most Tenn. 34 445 the Court S.W.2d on interest (1) payments partial held The object provision of section 6 of first to applied must be bearing obligations 1834, article 11 of the Constitution of (2) that principal; interest and second to carried into section 7 of article if it varied contract “may this rule Constitution of 1870 that interest rate 63, 34 162 Tenn. at usury”, does not savor of should be equal and uniform was to cut 446; compu- in interest (3) S.W.2d grant powers off the of charter to banks (4) year days; is 365 tation to exact a moneyed institutions days to 360 results shortening year were individual lenders greater rate than usury. sup- (Emphasis permitted to obtain.” 53, 272 at 716. Tenn. at S.W. plied). 152 Union, 210 Dupont Emp. Rush v. Cr. 344, Tenn. arose un- S.W.2d background of The derivation and statutes, der union 45-1801 the credit Sec. explained as first Art. 11 is clause of Sec. et seq. T.C.A. 45-1820 authorizes follows: credit union to lend to its members “at a rate of interest not in excess of the Under 11 of the section of article Con- rate, and the total interest and all legislature stitution of 1834 the was au- per one charges for a loan shall exceed corpo- charters of grant thorized “to such (1%) unpaid balance per cent month on the they might expedient ration as deem Citing (now . .” 47-1604 47- Sec. legislature had public good.” 14-104) fixing the rate of interest at T.C.A. by their charters empowering been banks 6%, payable the Court held a note “with interest, for a rate of special contract unpaid interest on balance at the rate of au- just quoted apparently and section one cent month” was usurious on its practice. thorized a continuance of this face and unenforceable. The Court de- Section 6 of the Constitution of [now parol clined to permit the introduction of prevent sec. art. adopted 11] word “interest” evidence to show that grant any special power of this sort. as used in the note included “all other (Emphasis Id. at supplied). S.W. charges.” at 716. VII. meantime, legislature in 1921 the In the interest law. our third conventional adopted Loan & Thrift Act The Industrial 1921. It was re- Chapter Acts of See Companies Industrial Loan and Thrift Again, Acts of 1923. Chapter pealed by Chapter have their Tennessee origin in the Code of Act of as codified only concerned Public Acts of 1951. We are operative. became original portions with those Ini- acts as relate to interest. amendatory suggests The record that Tennesseans respect, simply in this the act autho- tially, law cannot live with a conventional companies: rized such one. and cannot live without money personal To on the undertak- lend 1925 Small constitutionality The persons, of a borrower or other with ing 1925) upheld was (Ch. Acts of Loan Act including certificates security or without State, 573, 39 S.W.2d in Koen v. 162 Tenn. purchased of indebtedness or investment the interest (1931). This act fixed with the by simultaneously the borrower transaction, otherwise, pri- case was loan and to per at six cent. This said charge on the face is deduct interest advance fees and marily concerned with service amount of the loan for the full term infra. discussed not in excess a rate (Main vol. interest 45-2007(f) deduct See Sec. thereof.27 on the face annum, in advance per 7½% 8) term full for the amount loan there posture was in this the act While supplied). (Emphasis thereof. District States before the United came portion of Tennessee of this constitutionality District for the Western The Court the Court. F.Supp. issue before Bogan, In Re the basic the case of the act is presented question (W.D.Tenn.1968). the basis of a forming whether a note

was VIII. bankruptcy claim Company and Thrift Loan signed a note for The debtor was usurious. 45-2007(f) Constitutionality of Sec. $612.00, received the use of $556.08 per at the rate of repay 45-2007(f), T.C.A. must be con agreed $34.00 Sec. month, months. The period for a of 18 strued rate of provide for a conventional at the rate of this to be interest held necessary Court is a construction interest. This per per cent annum.28 approximately that conven the conclusion consequence of an arises contract tional interest opinion contains the fol- Judge McRae’s was the evident That agreed rate. lowing significant language: may gleaned be legislature intent of this court does not It should be noted that 47-14-104, fact that Section from the upon to deter- that it was called consider interest T.C.A., regulating law general the Industri- constitutionality mine the rate and a conventional fixes both Act; it in- nor does al Loan and Thrift and Thrift Loan excepts Industrial any portion thereof tend to hold of the con application Companies from the of the State violative of Constitution Chapter provision. interest ventional does hold that of Tennessee. The Court April effective Acts of 1969 became to be limited interpreted the Act must be the effective days before twenty-five by Article 7 of Constitu- Section Acts of 1969 260 of the Chapter date Court, therefore, tion of Tennessee. Thrift Loan and Industrial amending the finds the instant case that the claim regulates specifically act Act. The latter note was usurious on its face because by Industrial charged of interest the rate was in provided shows that the interest and, as the Companies, Thrift Loan and maximum. excess the constitutional act, super it would latest, specific and as F.Supp. at 248. sede all others. decided, legis After In Bogan Re was therefore, must, 45-2007(f) Section adopted lature Chapter 466 of the Public 7 of Article against Section tested Acts of relating to refunds and refund for an provides If it Constitution. Then, by Chapter credits. Acts of constitutional per ten cent rate within 2007(f) put present Sec. in its 45 — interest, it is con- conventional limitation on In pertinent part, form. it now reads as results stitutional; provided but if the follows: cent it is of ten in excess yield in a and void. unconstitutional undertak- personal money on To lend with persons, or other ing of a borrower 45-2007(f) expressly certificates autho including security

or without Companies Loan and Thrift purchased rizes Industrial or investment of indebtedness a rate not in excess of “to deduct interest at simultaneously with by the borrower otherwise, (7½%) per cent an- seven and one-half transaction, or said loan Appen- Actually, governed rate was See 47- Sec. The interest rate was 12.7%. 14-104, statute, fixing general the rate of dix. interest, as it existed at that time. operates to produce a rate in excess of ten num, of the in advance on the face amount per cent obligations. on installment is thereof.” This loan for the full term But this discounting purest in its form. of the that the declaration We hold fact, render the act standing alone does not 45- unconstitutionality of Sec. limited rests unconstitutional. This determination T.C.A., restrict Industri 2007(f), operates to computations. upon mathematical to a maxi Companies Thrift al Loan and were, litigation The notes involved in this interest, irrespective mum effective rate effect, obliga- monthly in installment per of ten payment, of the manner of tions, In the Appen- discounted in advance. maximum. constitutionally permissible showing dix we have made calculations comput will be upon rate the advance remand interest effective interest On basis with the per installment loans. cent discount discounting of such a 7½ ed on in rate of that the effective qualification The per cent. shall not exceed ten terest result of these com inescapable The the in in mind judge trial will bear putations Chapter is that 1 of 260 of what the lender quiry must be directed appears Acts which in the Public will the borrower will receive not what 45-2007(f) is Supplement Code Sec. all is admonished that judge The trial pay. void, insofar as it is unconstitutional respective to the given credits be proper obligation, discount applied any to note parties. in per payable ed at centum and 7½% installments,

monthly any or to trans made we have disposition In view action, regardless payment pro of how to discuss necessary we do not deem if the end result is an effective grammed, figures respect any facts and with per ten cent. rate of interest excess of judge The trial indi- loans involved. has complex

cated that these matters would be approve master. We special referred IX. point out that our use procedure. this We rate The interest applicable Appen- of the constant ratio formula in the dem- only purpose analysis dix is to what rate arises as now question remand, should be inquiry onstration. On litigation should the notes of interest taken, made, and should be as to proof bear. and the trial computation other methods of interest on held that the judge The trial thereon, proper make a court, may based computed “at loans should be the various determination. annum, giving proper per centum per ten either in advance paid credit for loans X. foreclosure.” This refinancing or money, entirely is not correct. conclusion Fees and Maintenance Charges Service responded have perhaps we Technically, for' specific legal is no sanction There certified; however, two questions Loan and Thrift permitting an Industrial sufficiently broad to one is question number ten charge an interest Company to exact 45-2007, of Sec. pertinent portions cover all 47-14-104, autho- T.C.A. per cent. Section assignment appellant’s We note T.C.A. interest cent conventional rizing a ten VII, as follows: which reads interest its face that shows on failing to hold Loan and erred in to Industrial Circuit Court apply does 45-2007(f) 45-2007(i), (q), (p) autho- that Section Companies. Thrift Sec. charges service defining regulating to deduct companies rizes these con- in ad- fees ... cent and maintenance up to seven and one-half stitutional. demonstrated vance. We have

535 to charge amounts 5. The service assignment respond to to We elect compensation usury if exacted as additional pur- within the fairly think it because we attempted evasion money for the use of one; further, is neces- question view of Pugh v. Her against usury. of the statutes insistence for treat with this that we sary Co., mitage supra. Loan on remand. judge of the trial guidance this matter has addressed This Court cases, these from which reported

numerous not in charge may 6. The service emerge: rules rents, sala as expenses such clude overhead losses, Co. v. Family Loan ries and loan not autho Legislature may 1. The preclude Hickerson, but this does supra, monthly fix a arbitrarily rize a lender to to the related directly for services charging State, 162 Tenn. fee. Koen v. expense It employees. salaried by rendered loan Fin. v. (1931); 39 283 Personal Co. S.W.2d ex extraneous indirect or only excludes Hammack, 45 528 163 Tenn. S.W.2d Co., Finance v. Personal pense. Williams the max (1932), charge nor to all borrowers supra. fee, Family imum in addition to interest. Plant Prop. As we said in Aztec v. Union Hickerson, 36, 73 Loan v. 168 Tenn. S.W.2d (Tenn. Bank, etc., 756 ers Nat. 530 S.W.2d (1934). 694 1975): 2. The lender and the borrower Interest includes all compensation for the service agree upon are free to a reasonable use money. “Any payment to the limit, v. statutory within the Koen charge lender in addition to the rate of interest con State, this “freedom of supra; legally permissible, whether called 7 is limited Article tract” name of bonus or or by any commission interest, v. Pugh conventional relating to name, other is usurious.” (Emphasis sup- Co., Tenn. 70 Hermitage Loan 167 plied). 530 at 757. S.W.2d S.W.2d and is further limited and

governed by principles set forth in charge in any We hold that service this sequence. fair and reasonable worth excess of the directly to

expense and service attributable com a loan must be treated as additional charges 3. Service must bear constitutes in pensation to the lender and and ser expense reasonable relation must be added to Any terest. such excess Hermitage vice of the Pugh lender. v. stated, amount of interest resulting, or Co., supra. Loan validity of the in order to determine the course, excess, is conven charge. charge is the service 4. When tional interest. facie prima limits it is statutory within on the borrower valid, fees, the burden is set maintenance Installment evidence preponderance aby show governed to be 45-2007(h) are forth in Sec. a reasonable does not bear charge that the same rules. by the Family services. expenses relation to 45-2007(i) (p) or We do not hold Sections Hickerson, When supra. Loan v. Co. hold, that, in case, to be unconstitutional. We do facie prima makes out a borrower constitutionality order to Golightly sustain to the lender. burden shifts sub-sections, must be construed Co., they Tenn. these Hermitage Loan forth, on the interpreted burden is as hereinabove set (1937). The S.W.2d established, uniform, fixed, rigid loan is usurious. and not as that the borrower to show Co., 172 Tenn. arbitrary charges, provisions Finance of sub- Williams v. Personal contrary notwithstanding. (q) section S.W.2d Hickerson, by another con- supra, principal amount and the Family Loan Co. v. See stant amount.2 Pugh v. 694 and 168 Tenn. at 73 S.W.2d Co., Hermitage supra. Loan is This formula3 enactments legislative We do not test morality

our or merit. Our conception of legislation com- duty

sole is to insure that with the mandates of our Constitution. plies = = (effective in which i of charge rate) one year payment periods m number of judgment sit in privileged Nor are we - payments n number of to discharge We provisions. merits of constitutional debt =D charge in dollars them and and abide may only construe = principal P they respected. mandate that having a to a loan apply this formula We Modified, and Remanded. Affirmed at the with discount face value of $100.00 equal month- payable twelve

rate of 7½% ten- The borrower ly installments. FONES, COOPER, J.,C. BROCK This the loan. at the time of dered $92.50 JJ., HARBISON, concur. of inter- resulting rate tabulation shows est:

ADDENDUM Capital. all Cumberland against Tax costs formula, Using the same we demonstrate application having its in the case of a loan APPENDIX face value of at an add-on interest $100.00 payable equal rate of 7½% in twelve month- we computations of these purposes For installments: ly $100.00,bearing inter- will assume a loan of the rate of 7 n %. is If loan est at the payable in advance and is discounted ap- resulting yield year,

end of one a 7½ example, further we show that By a is constitu- which proximately 8.00 rate on a note of annual discount $100.00 % month- payable If it is tionally permissible. monthly installments equal in four payable basis it is not declining balance and on a ly, effective rate: in a somewhat lower results or But discounted constitutionally infirm. installments, interest, payable add-on result. entirely an different

present methods different a number of There are the value for example In this note rate or interest computation for the exam- previous remains the same as in “m” use the “uni- have elected to yield.1 We is the frequency payment ples since method, because ratio form” or “constant” same; “n”, however, reflects the value for method accuracy. This simplicity of its of this loan. period the shorter charge that the allocation assumes cost rate final we show the By example periodic pay- number of proportional to ratio method for a balloon by the constant periodic each ments, result with the formula, forth in M. Nei- by constant note. as set charge payment reduces Computa- expressed 1.Technically, charge 2. M. Neifeld’s Guide to Installment interest is the Thorndike, borrower, (1951); Encyclopedia percentage paid while tions as a (1973). Banking yield Sec. 16 M. and Financial Tables is the rate of return to the lender. Ayres, Handbook 107 Installment Mathematics Id. at 195. charge) (using total Computations feld’s to Installment Guide is: (using only) = charge in dollars D in which = advance cash principal P - = + of note P D face A = year one periods payment of m number = debt discharge payments entered number rate n percentage The annual = charge i rate = payment 15.25, computed or balloon L final Capital Cumberland this formula to one of apply We not fault Z. We do according Regulation controversy transactions in the instant of the for- Irrespective computation. $70,629.87pay- where indebtedness was varia- slight there will be mula method $1,600.00 monthly able in 35 installments of tion. $14,- payment with a final or balloon chart on effective following $15,883.62 fi- 629.87, with interest of the results of discounts demonstrates rates in ad- charge nance deducted $380.60 interest rates calcu- at various and add-ons given first above. lated the formula computation vance. The is as follows: of the United to the Constitution ment REHEAR PETITION TO OPINION ON clause” States, as the “commerce as well an elabo- Capital1 has filed Cumberland 3). I, clause (article section exceptions to taking to rehear petition rate zeal, have seemingly Petitioners, their rearguing the the Court and holding us came before this matter due overlooked that it invokes the Additionally issues. jurisdiction interlocutory appeal. Amend- on Fourteenth clause of the process corporation, erroneously opinion corporation. 1. An Indiana identified in our as a Tennessee 27-305, operation this Court was invoked under Sec. and that of relation backward. T.C.A., upon the basis that it involved “a may It say highest decisions of its controlling question of as to law which court, overruled, though later are law there ground is substantial for difference of none the less intermediate transac- opinion.” certified, questions Two were tions. Indeed there are cases intimating, viz.: (citations too broadly omitted) it 1. Are the terms of Tennessee Code An- effect; must give them that but never notated Section 45-2007 violative of Arti- has expressed may doubt been so XI, cle 7 of the Constitution of injus- treat them it pleases, if whenever of Tennessee?2 State hardship tice or will thereby be averted. is the en- original complainant [If so] (Emphasis original). 287 U.S. at titled to a computation interest at the S.Ct. prescribed XI, by Article Section of Walker, In Linkletter v. U.S. the Constitution of the State of Tennes- S.Ct. 14 L.Ed.2d 601 the Court see? it makes clear that: We elected to take of the jurisdiction accepted the rule is today appeal questions and answered both fully appropriate in cases the inmay Court the finally. upon Further comment interest of justice prospec- make the rule opinion various ramifications of the is im- 628, tive. 381 at at 1737. U.S. 85 S.Ct. proper and would be sheer dicta. It is Court, We think it beyond doubt that appeal unfortunate that the nature of the discretion, acting judgment in its and the principles appellate established within legal the framework of established review have combined produce a narrow principles, holding may apply resulting consideration of limited issues retroactively prospec- instant case either or many questions, the resolution of which is tively. not before this cannot give Court. We ad-

visory opinions. Vigorously competing principles law

Our resolution of the issues thus present- are urges involved. Petitioner a rule of research, ed came as a painstaking result of complete prospective application based study conferences, intensive and intra-court validity” the “presumption theory, while during which phases all of the controversy respondents urge application were vigorously debated and discussed. “void ab initio” doctrine. A discussion of The product finished the con- represents these principles appropriate. sidered judgment of this Court. Further ap Under the “void ab initio” pur- consideration would serve no useful therefore, overrule, proach given the statute is no effect and pose. We, ex- without existed, discussion, merit, though tended treated as it never whereas and as without all questions presented except relating validity” ap under the “presumption single issue of retroactive versus pro- proach, presumed it must be valid until spective application. juris competent invalidated a court of The ab progenitor diction. of the “void The leading subject case on the ” approach jurisprudence initio in American prospective application of decisional law is Shelby County, is Norton v. 118 U.S. Ry. Great Northern Co. v. Sunburst Oil & 1121, 1125, (1886), 6 30 L.Ed. 178 S.Ct. Co., Ref. 287 53 77 U.S. S.Ct. L.Ed. theory wherein the Court formulated 360 Justice Cardozo’s discussion of thusly: this issue has as come to be known technique: “Sunburst” doctrine or law; An unconstitutional act is not a it duties; confers no rights; imposes A state in it no it defining the limits of adher- precedent protection; ence to make a choice for affords no it creates no of- may fice; is, itself principle between the of forward it legal contemplation, inop- as presented 2. No issue was Federal Constitution. under

539 411 at 93 at supplied). sis U.S. S.Ct. though it had never been erative passed. States, Supreme

The Court of United seeming demise of Notwithstanding however, retreated, partially, has at least creator, of its it contin- Norton at the hands broad formulation where neces- from this validity in Ten- ues to have at least limited equitable practi- to achieve a more sary nessee. cal result. cited, language pertinent It was and the questioned County- was first in Chicot It Hall, Tenn. in Beaver v. 142 quoted, Bank, Dist. v. Baxter State 308 Drainage however, the (1919); Court S.W. 318-319, 371, 374, 60 S.Ct. U.S. it. declined to follow (1940), speaking where Court L.Ed. 160 Tenn. County, In Roberts v. Roane Hughes, Justice said: through Chief Norton was cited 23 S.W.2d as to the effect broad statements [S]uch rule”, the court intro- general as “the unconstitutionality of a determination estoppel by adding duced an element qualifications. taken with must be so parties may recognized But statute, prior existence of a actual faith of upon with each other deal determination, operative is an fact such a may neither invoke such a statute that which cannot may consequences have they what the aid of the courts to undo cannot al- justly ignored. past 160 Tenn. at themselves have done. judicial erased a new declara- ways be S.W.2d ruling subsequent tion. The effect of the Henry Norton was cited and followed considered invalidity may as to have to be 485, Co., Tenn. County v. Oil 167 Standard respect par- in various aspects, —with (1934). 71 S.W.2d 683 relations, corporate, ticular individual and conduct, offi- private particular Hobbs, v. It was in again followed State Questions claimed to have rights, cial. of 323, and in (1952), 194 Tenn. 250 549 S.W.2d vested, status, deter- prior become Tenn. County, O’Brien Rutherford 199 v. finality have minations deemed to 642, (1955). 708 288 S.W.2d in upon accordingly, public policy acted Collins, (Tenn. In v. 814 State 528 S.W.2d of the statute light nature both 1975), rule to a case “where applied we previous application, and of its demand question in the before the court was questions among examination. These are statutory punishment for the appropriate the most difficult of those which have defendant was criminal offense with which courts, attention of state and engaged charged.” federal, from numerous and it manifest However, State, Capri v. Adult Cinema an statement decisions that all-inclusive 896, (Tenn.1976), 537 899 the latest S.W.2d of a retroactive in- principle absolute Court, Court, pronouncement of this validity justified. cannot be Norton, citing v. citing without State Kurtzman, 192, In Lemon v. 411 93 U.S. Hobbs, language, qualifying with its supra, 1463, (1973), 151 Norton S.Ct. 36 L.Ed.2d rule, follow the Norton in effect declined to scrutiny. further critical There came under holding instead: Burger Chief Justice said: litiga- is well settled in civil principle logic However of Norton appealing parties tion that when have dealt with abstract, its aban- may have been length upon each the basis other at arms’ recognition donment reflected our statute, are they an unconstitutional rules of judge-made or even statutory actions. of their bound the results must people law are hard facts on which Capri cited dissenting shaping opinion and in rely making decisions County v. Henry forth in legal life un- Norton rule as set their conduct. This fact of however, re- Co., supra; recognizing our Standard Oil derpins modern decisions context of a conviction nonretroaetivity. (Empha- liance was in the a doctrine of 540 Develle, subsequently

under a criminal statute de- v. 289 (La.1974); So.2d 129 West clared unconstitutional. 765, brook v. 2 Mihaly, Cal.Rptr. Cal.3d 87 (1970); 471 P.2d 487 and Austin v. reported No Tennessee case has discussed ” Campbell, 91 Ariz. 370 P.2d 769 the “void approach ab initio in the context prospective appli- retroactive versus the landmark case of Linkletter v. Walker, cation of a declaration of the unconstitu- 381 U.S. 85 14 S.Ct. tionality (1965) of a L.Ed.2d 601 statute. While Norton Court established may criteria for determining have some whether new continuing validity under some con circumstances, rulings, stitutional in both civil we and criminal do not consider author- cases, applied would be retrospectively itative or dispositive of the issues at hand. prospectively. The Court said: better, We think the equita more premise Once the accepted that we are ble and more realistic rule is that “an un neither required apply, prohibited nor void, constitutional act ‘is not but voidable applying, retrospectively, decision only,’ until by judicial condemned pro we must weigh then the merits and de nouncement.” Roberts v. County, Roane merits in by looking each case prior to the supra. phrased Sims, As in Bricker v. 195 history of the question, rule in its purpose 361, 368, Tenn. (1953): S.W.2d effect, and whether retrospective op Every act of Legislature is presump eration will further opera or retard its tively constitutional until judicially de tion. 1738, 14 U.S. 85 S.Ct. at clared otherwise L.Ed.2d at 608. The decisional law of Tennessee has fol- Many considerations enter into a lowed the “presumption of validity” rule in determination of whether to apply deci reported numerous cases.3 sion of this nature A retroactively. fore In the case of Eskridge, Perkins v. 278 most consideration must be fundamental Md. (1976), 366 A.2d 21 Maryland Court, fairness. The in Cipriano City Court of Appeals, in a most opin- excellent Houma, U.S. S.Ct. ion, upon focuses the issue thusly: L.Ed.2d 647 recognized this: it seems clear that the modern a decision of this Court could [where] trend has away been from the doctrinaire produce inequitable substantial results if void ab initio approach toward the applied more retroactively, ample there is basis realistic views which have applied tests of in our avoiding “injustice cases for good reasonableness and faith to hardship” by holding deter- of nonretroactivi- mine consequences ty. 706, 1900, flowing from con- 395 at at 23 U.S. 89 S.Ct. pursuant duct undertaken to an unconsti- L.Ed.2d at 652.

tutional act. 366 A.2d at 29-30. The Supreme Court in Chevron Com- Oil Huson, v. pany 97, 349, 404 reported Numerous cases with the 92 30 deal U.S. S.Ct. (1971), issue of L.Ed.2d 296 prospective application of set forth standards or decisional in dealing law factors cases with declaring retroactivity: state statutes to be unconsti- See, g. tutional. e. Deltona Corporation First, v. the decision . . . must estab- Bailey, (Fla.1976); 336 law, So.2d 1163 Barnett lish a principle by new either Montgomery County, statute); State, Claybrook 3. Collier v. 103 a void Tenn. under 164 705, (1900) (a (1932) (criminal 54 S.W. 989 contract made be- Tenn. 51 S.W.2d 499 lia- county bility may predicated upon tween and sheriff under a law later not be conduct law- binding upon subsequently declared held unconstitutional ful under a statute declared un- parties permitted Rust, constitutional); Newby, and sheriff not to disaffirm et al. v. 171 amount); Hall, greater (1937) (The pre- and collect Beaver v. Tenn. 100 S.W.2d 989 (1919) (an sumption validity 142 Tenn. 217 649 S.W. uncon- favor of the of statutes stitutionally requires they created court was a de facto court be observed until declared judicial by there tribunal); until was a determination of its void an authoritative State v. invalidity); Hobbs, County, (1952) Roberts v. Roane 194 Tenn. 250 S.W.2d 549 (1929) (county (county permitted salary paid Tenn. 23 S.W.2d 239 es- to recover topped recovering money paid act). to sheriff under an unconstitutional unconstitutionality of a on which declaration of overruling past precedent clear by prospec- . . . or versus a litigants may retrospective have relied statute on a deciding impression an issue of first tive basis are these: clearly fore- whose resolution was not (1) ques- the rule prior history The Second, . it has been shadowed. . . Linkletter, tion, effect. purpose its * * * weigh that “we must stressed Chevron, supra. supra; by the merits and demerits in each case will operation (2) retrospective Whether of the rule in looking prior history to the Linkletter, its operation. further or retard effect, question, purpose its Rivera, Chevron, supra. supra; supra; fur- retrospective operation whether will Finally, ther or we operation. retard its (3) operation retrospective Whether weighed inequity imposed by have re- produce inequitable would substantial . application.” retroactive . Cipriano, supra. sults. 106-107, at at U.S. 92 S.Ct. (4) litigants similarly Whether and others at L.Ed.2d upon situated have relied the unconstitu- Circuit, Rose, 465 The in Rivera v. Sixth Rivera, Chevron, tional su- supra; statute. F.2d listed the criteria for pra. determining prospective application as fol- (5) Whether the declaration of unconsti- lows: Chevron, tutionality was foreseeable. su- (1) to be served purpose pra. (2) the new standard the extent of the (6) The effect on the administration of reliance law enforcement officials Rivera, Rexach, justice. supra; Benitez su- subject, and upon prior decisions on the pra. (3)the effect on administration of justice of a retroactive standard. speaking, we have not de- strictly While unconstitutional,4 any clared statute to be Kurtzman, Finally, supra, Lemon v. bar, at these criteria to the case apply we Court, cogni- in a matter of equitable to Industrial specific and with reference zance, determining against retroactivity, Companies. Loan and Thrift saying: In equity, else, as nowhere courts eschew and stat- history of the constitutional rigid absolutes practical and look to the relating to utory provisions of Tennessee realities and inescapably necessities in- great detail in the interest are set forth in interests, volved in reconciling competing effect of opinion. purpose main notwithstanding that those interests have of unconstitution- qualified declaration constitutional roots. 411 U.S. at Tennessee ality bring was to the laws of 36 L.Ed.2d at 162. S.Ct. charged by Indus- relating to interest rates companies Thrift into har- trial Loan and The most excellent case United States pertinent provisions with the Rexach, mony F.Supp. v. Benitez 411 1288 purpose This of Tennessee. Chevron, Constitution (D.Puerto 1976),relying upon Rico irrespective accomplished and effect will be factor of “fore- supra, important adds view, general In our thereof, application. that the of its seeability of the lack only serve as application would be retroactive will question doctrine or statute in nor retard neither further penalty declared unconstitutional.” and will the decision operation the effective authorities and Prompted by these reached. concept motivated our of fundamental pro- fairness, Wholly retrospective operation will controlling we believe the consid results. Cum- apply inequitable erations in whether to duce substantial determining transaction, stallments, regard- any 45-2007(f) opinion or to 4. The main that “Sec. holds void, payment programmed, less of how if the end is unconstitutional insofar as it is any applied obligation, an in at result effective rate of interest excess note or discounted percent.” monthly payable in in- of ten annum and Th% 542

berland rule Capital petition prospective asserts in its of limited application rehear that of transactions in- have we announced. This is an unavoidable “[millions volving billions of consequence dollars have been under- principle basic that this taken in may give reliance on it.” While we do not Court not advisory opinions. If know the we do not specifics, persuaded apply we are the rule we announce to bar, the case at impact general applica- everything retroactive we have said becomes advisory tion in nature pure would be enormous. and is dic- ta. If we apply do not it to Industrial Loan While we are only concerned this ac- and Thrift Companies that have fully not tion with the constitutionality of Sec. 45- complied with statutory provisions, we 2007(f) T.C.A., possible it is that the ration- would be legitimating unfair lending prac- opinion ale of this will to other apply stat- tices. utes, however, they are not before the Supreme Court of the United States consideration, Court for would be faced problem Denno, in Stovall v. 388 improper for us to make an advance deter- U.S. 87 S.Ct. 18 L.Ed.2d 1199 mination on par- financial institutions not (1967), and said: ties controversy. to this Inequity arguably according results from Companies Industrial Loan and Thrift parties benefit of a new rule to the have upon relied constitutionality the case in which it is announced but not 45-2007(f) Sec. T.C.A. to other litigants similarly situated in the Applying this decision on a wholly retro- trial or have raised appellate process who active basis only would not result in finan- the same regard issue. But we the fact cial disaster to the affected lending agen- parties involved are chance bene- cies that have in the loaned manner and at an cost for ad- insignificant ficiaries as the rate authorized the Industrial Loan herence decision principles to sound Act, and Thrift clog but would the courts making. at 388 U.S. at S.Ct. years for to come with untold lawsuits 18 L.Ed.2d at 1206. brought by those who would seek to avoid Further, and on somewhat less esoteric their solemn contractual commitments. grounds, party we find that “the who apply We the decision in this case brings change may about in law notes, contracts, to all obligations of his properly deprived of the fruits incurred, signed, August on and after Schaefer, “The victory”. Control ‘Sun 1977, and to accruing all interest on and Prospective Overrul Techniques bursts’: date, after irrespective of the date the (1967), reprinted ing," N.Y.U.L.Rev. instrument signed, obligation was or the Leflar, Opinions, Judicial Appellate R. However, apply incurred. we it retro actively to all cases wherein there has not Supreme And as the California said Court been strict with compliance the Industrial Co., in Li Yellow 13 Cal.3d Cab Company Loan and Thrift Act as set forth 858, 876, Cal.Rptr. 532 P.2d through 45-2021, in Section 45-2001 (1975): T.C.A.; (Main Supple volume and 1976 new rule here announced should be [T]he ment). applied additionally to the case at bench public poli- Consideration fairness and provide as to so incentive in future cases discussed, cy, along with the criteria herein parties who may have occasion command this conclusion. raise of un- involving “issues renovation ap- As in we opinion, indicated our main sound or doctrines.” outmoded the decision to the instant ply retroactively Hence, we new rule to the case apply the suit. bar, present at but to all or prospectively fullyWe realize that there are other liti- litigants, except future in those cases where now in trial or gants stages comply various the lender with the Industri- did appellate process by who will be foreclosed al Loan and Thrift Act. charge to J., permitting “A statute lender J., FONES, concur.

COOPER, C. mon- the use of for compensation sums as HARBISON, J., dissenting part, in con- than at the which to more ey amount curring part. in is in clear cent annum of ten Constitution, whether the conflict with HARBISON, concurring part, in Judge, the statute in charge the be denominated dissenting part. in name.” any or other interest or fees opinion overrul- majority I concur in the on the reasons, this time and For these rehearing, except petition ing in so record, to concur I am unable present opera- dealing prospective with portion to Rehear on Petition Opinion much of the of the Court. tion of the decision appli- prospective the issue of as deals with majority opinion, pointed As out in Interlocutory ap- cation of the decision. limited, on a before the Court this case was doubt, purpose, useful no serve a peals, in which interlocutory appeal, expedited appellate proce- utilizing special this parties questions had been certified only two were, dure, in the midst of occurring, as it in the judge. emphasized trial This was court, trial the case in the handling lending principal brief filed behalf respond to to expect the Court should not in stated agencies, which it was here. those certified any except issues case was in this “for consideration Court I that Mr. Justice am authorized to state he certified questions of the two solely Opinion. in this BROCK concurs brief, appellants their Again, . .” in stated: abstract, constitutional general,

“The determinative issue

question is sole case, here.” it will be so treated answered the opinion

In the Court my fully completely questions

two certified opinion

in its and remanded principal testimony to the trial court for further

case pointed

and for As was out final decision. in the Department case of Tennessee POTTER, Appellant, Marie Helen Hughes, Mental Health v. 531 S.W.2d v. (Tenn.1975), dealing with interlocuto- ry appeals the Court the exact and requires CHATTANOOGA, Appellee. OF CITY precise stat- questions to be reviewed of Tennessee. Supreme Court granting appeal, ed in the order specific ques- limits its decision to those Oct. reason, tions. inappropri- For this it seems ate to me with the attempt to deal any of the decision or with

ramifications it, light questions pertaining record incomplete undeveloped

which is before Court.

Further, the deci- I not consider that do was a material principal opinion in the

sion prior decisional major departure contrary, it seems

law in this On State. with the entirely consistent

to me to be Hermitage Loan Pugh

previous cases. 389, 393, 167 Tenn. S.W.2d

Company, said: the Court notes an balance Meares, Black, Mary- Rom L. David T. 887.58, attorneys fees there- together with Black, ville, L. appellee; Martha S. that, complaint alleged on. It Knoxville, of counsel. with the execution of each simultaneously Schlater, note, and delivered an Lassiter, Jr., Patty also executed Taylor, William H. Bass, Savings Certifi- Tidwell, Bass, Installment appropriate James Lassiter & O. Warner, Jr., cate. Sims, J. Dear- Berry & Robert approve 45-2001, ney seq., further heard.” We to be 1. Sec. et T.C.A. General Indeed, in his comment. his action and concur respec- Attorney lodged submitted counsel for the the briefs 2. The of Tennessee General appearing parties intervening petition taking as Amicus and those with this Court an tive Curiae, conspicuous position issues “are articulate the issues with that the constitutional fully presented parties ability. and that the both skill and require the Attor- interests of the state do 7 of the Constitu- and counterclaim raises a Article Section Patty’s answer Tennessee, is the counterclaim seeks usury. defense of tion State to a against decree credit entitled original complainant to have the Court claims, judgment for the at the plaintiffs computation of interest obligations. usury allegedly paid on by Article Section prescribed of Ten- of the State the Constitution answer, Patty as- amendment to his By nessee? “is serts his contract with Cumberland violation of illegal on its face because of holding from the appealed Cumberland Article 7 of the Section Constitution 45-2007, is unconstitution- T.C.A. Sec. allega- Additional of Tennessee.” State holding Patty appealed al. forth, usury tions of are set and the Indus- computed at 10%. interest should be Loan and Thrift trial Act is assailed a constitu- to settle upon We are called being in of Article 7 of violation and substan- impression first tional issue of

Notes

notes discounting of practice The is relevant and however, political background we find during the period; alent significant.16 where the practice the approving case no Id., 6, p. (1959); It was this Court vol. 8. IV, infra. Sec. See 15. Andrews, supra. No decided Caruthers by guilt devastation, of Tennessee, suf- was convicted this Court doubt tom war association, tyrannical, but the despotic, and dicta- fact remains that its deci the fered under 41-47, sions, reported regime Brownlow in “Parson” Volumes Tennessee of William G. torial long designated April Reports by contemporary April 1869—four were law 1865 until Green, yers guiding genius subservient of a years. As the as “Coldwell’s Fables.” The Su only preme the over- legislature he disfranchised of in 16 Tenn.L. “not Court Tennessee citizens, whelming majority (1941). Tennessee’s of Rev. 768-69 constantly Upon hostile with additional pursued them Parson election to Brownlow’s White, Messages of legislation.” Senate, See 5 R. United States he was succeeded Tennessee, (1959). He was Senter, Speaker Governors the Sen- DeWitt Clinton coarse, vulgar, vicious, vindictive, his avo- White, Messages ate. 6 R. Governors gospel to the con- as minister (1963). cation trary with broke Tennessee Senter soon notwithstanding. faction, majority of the Radical removed commissioners, ap- Ten- Brownlow’s election regime Radicals The ruthless pointed at 373-390. stead. After Id. in their is well documented. Conservatives nessee “perhaps than evident more what has been area was this characterized as no iniqui- law, an Chapter bitterly fought Acts of gubernatorial contest ever Amell most deny operating tous, disfranchising State”, suf- waged act he was re-elect- in the Volunteer Laska, privileged A frage few. all but a open in an to all citizens. ed election Tennessee, History Legal Leg- Along and Constitutional with him was a Democratic elected Memphis 628-629 L.Rev. State During campaign, Sen- islature. Governor appointed members Parson ter had called for a convention. constitutional statutory Supreme face of in the Court strangle election broke hold of the This they 5 R. White requirement be elected. Radicals. Ibid. Tennessee Messages of the Governors Background a. contemporaneous was an influential member of the conven- events. Key, tion. David M. who succeeded An-

Case Details

Case Name: Cumberland Capital Corp. v. Patty

Court Name: Tennessee Supreme Court

Date Published: Aug 22, 1977

Citation: 556 S.W.2d 516

Court Abbreviation: Tenn.