Mason v. Callender, Flint, & Co.

2 Minn. 350 | Minn. | 1858

By the Court.

Flandrau, J.

The case below was upon a note made by defendants for one hundred and fifty-one dollars and fifty cents, payable in ninety days from date “ with interest at the rate of three per cent per month payable,” and containing this further clause, “ and with interest after maturity upon principal and interest at the rate of five per cent per month until paid.” The note was drawn payable to the order of one of the defendants, and indorsed by him; it was payable at a certain place, and demanded on the day of its maturity.

The defendants appeared and objected to the assessment of damages as follows:

“To the allowance and assessment of damages by way of interest after maturity of the note for a greater rate and sum than seven per cent per annum. Because there was no law or valid contract warranting the same,

“To the allowance and assessment of damages, by way of compound interest after maturity of the note because there was no law or valid contract warranting the same.”

The defendants made other objections, which the conclusion this Court has arrived at on those stated will make it unnecessary to notice, as their force was dependent upon the failure of above. The Court below overruled the objections of Defendants and they reserved their exceptions; the plaintiffs had judgment for the note, and the increased rate of interest compounded upon the rate stipulated in the note.

The questions presented here are—

1. Is the clause in the note that the rate of interest shall be increased after maturity, one which can be enforced to its full extent?

2. If not, what rate of damages does the note draw after maturity?

3. Can the clause for compound interest be enforced?

The very extensive interests depending upon the decision of these questions, have led the counsel who argued them, to make a most thorough and elaborate examination into their merits, and have furnished the Court with very learned and able expositions of them from both sides, which have very materially aided in their solution.

The consideration of the first point as to whether an increased rate of interest can be recovered after the maturity of a contract which had a stipulated rate, leads naturally to an examination of the law of interest, which I shall do, but necessarily in a more incomplete manner than I would desire, from the limited resources in authorities I have to draw upon.

Prior to the reign of Henry the Eighth the taking of interest or compensation for the use of money was unlawful in England, and contracts for it were deemed usurious and could not be enforced. It seems to have been held by the church to have been actually sinful as against the laws of God, and morality, and by tbe courts to have been unlawful from the political reason that money was only a medium of exchange, and naturally barren and unproductive. Both of which reasons are equally fallacious when put to the proper test. It never could have been malwn vn, se to take money, because the revealed law allows it as between an Israelite and a stranger, and only prohibits it between the Jews, and the prohibition is by no means confined to money, but usury among the Jews is prohibited on every article that can be loaned. Deuteronomy, 23, Chap. 19-20 verses.

The political reason of the natural barrenness of money making it improper to render it profitable, was untenable and at variance with the common practice of that day, which allowed profit to be made on many other things quite as barren as money. 2 Blackstone's Com. 454.

The Statute of ST Henry 8, Chapter 9, first fixed the interest of money in England at ten per cent, or rather provided that no more than ten pounds in the hundred shall be taken on a loan. The subsequent statutes on the subject of usury in England, and generally in the States of the Union, have been of this negative character, prohibiting the taking of an amount beyond the rate allowed, not declaring what character of demands shall draw interest, or requiring it to be paid, leaving the question of what shall, and what shall not draw interest to the contracting parties, or in other words,making the subject of interest being recoverable or not, dependent upon agreement, and not law, the latter only limiting the amount of the recovery.

Such has been the character of the laws on interest, under which the great mass of the judicial decisions involving such questions have been made.

In considering this question, I desire to establish in the first place exactly what interest is, and when, and during what period of the existence of the contract it attaches to it, and in doing so I will refer to the case of the Rensselaer Class Company vs. Reid, 5 Cow. 587, wherein Senator Spencer, in a very able opinion classifies and arranges the cases on the subject of interest under various heads, and attempts to show that wherever interest is allowed, it is only by reason of an agreement between the parties to that effect. So far as this statement is concerned there can be no doubt' about its accuracy, but I think that case overlooks one great and material distinction, wbicb, bad it been more accurately observed in tbe decision of tbe cases collated by tbe Senator, be would bavebad less labor to perform, and bad be recognized and adhered to it himself, the whole case would have been more in harmony with tbe great principle wbicb be first asserts, that tbe recovery of interest must depend on agreement.

Tbe distinction is, that interest being the creature of contract, is recoverable strictly as interest, only during tbe continuance of tbe contract, and as provided by its terms, before breach, and not after. When tbe agreement is once violated, tbe promisee has sustained a wrong for wbicb tbe law gives him redress-by way of damages, and whenever the cases have allowed a Plaintiff to recover any thing more than tbe principal sum and tbe interest up to tbe time of tbe breach of tbe contract, it is solely on account of tbe default of tbe party failing, and although in many cases the term interest has been used indiscriminately to designate tbe accession to tbe principal by the terms of tbe contract, and also tbe amount allowed in consequence of tbe breach of tbe contract, yet tbe distinction is perfect in law, and tbe synonymous use of tbe expression interest, with the term damages has arisen from tbe fact that wherever tbe law regulates tbe amount of interest, that rate becomes tbe standard of damages on the'breach of all money contracts; the result being tbe same, it is quite natural that the same name should frequently be employed in both cases. Tbe true rule Us as expressed by tbe Court in 6 How. U. S. 154. “Every one who contracts to pay money on a certain day, knows that if be fails to fulfil bis contract, be must pay tbe established rate of interest as damages for bis non-performance.” See also American leading Cases, Vol. 1, ¶. 498; Sedgwich on the Measure of Damages, 233-4.

Let us see if tbe analysis and classification of tbe cases by Senator Spencer above referred to, would not have been more symmetrical and harmonious, bad be recognized tbe distinction between damages and interest.

He divides tbe cases where interest is recoverable into two principal beads; First, where tbe agreement for interest is expressed; Second, where it is implied. He then subdivides tbe second bead into five separate ones. Tbe first and fifth of which alone, sustain the idea that it is the implied agreement which allows the interest; the 2d, 3d and 4th being clearly damages for the breach of a contract and no part of the contract itself. They are as follows in substance:

1st. From custom known to both parties. Here he is evidently treating of the contract before breach.

2d. “ Where the principal is co be paid at a specific time, the law has always implied an agreement to make good the loss arising from a default by the payment of interest.” He cites Lord Mansfield in Robinson vs. Bland, 2 Burr, 1086, and adds “This proceeds entirely on the idea of a default, and it is a universal maxim, that where interest does not run with the principal, none accrues imtiZ a defanlt is made inpayment.”

It is clear that this is an unwarrantable mingling of the idea of interest, which it is admitted is the child of contract, with damages which are created by operation of law. Call it damages and it follows legitimately from the breach of the contract; call it interest and you are driven to create a contract by implication to sustain it. When a right or a remedy ranges itself as a logical sequence under one class, it much more properly belongs there, and it will conduce to greater accuracy and system, to continue it there, than to place it in a category which requires the creation of a fiction to gain it admittance.

3d. “Where an account has been liquidated by both parties, ' and the debt therefore becomes due and payable, it carries interest on the same ground of a debt payable at a specific time.” The real condition of such an account is, that before liquidation, where the accounts are mutual, or where they are not, the credit is not terminated, the debt is not due until the liquidation takes place, and then it at once becomes the duty of the . debtor to pay the balance or amount found due by him, and on default, the law makes him pay damages for the breach of the contract to pay, and was there no legal standard of interest to control the damages, they would have to be ascertained in the same manner as damages in any other case are determined, by proof.

The fourth head is similar in principle to the third and proceeds entirely upon the breach of the contract to pay when the debt is found to be due.

The fifth is confined to cases where an agreement or promise to pay interest, as interest, is cleazdy implied, by the very acts of the parties, as where charges of interest are made and not objected to, or where interest has under like circumstances been allowed by the debtor to other creditors, and the parties act upon the knowledge of the fact. In such cases the contract is clear*, and it depends vypon the contract and not upon its breach that interest is recoverable.

What places it beyond doubt that the Court in the case in 5 Qowen confused the term interest with the term damages, is, that after enumerating the various cases in which interest can be recovered by virtue of a contract expressed or implied, it proceeds to hold that interest may be allowed by a jury in cases of tort ■“ as tresspass or trover for taking chattels, ” aizd after citing a laz*ge number of authorities, concludes that “ all these eases allow interest where there has been fraud, injustice or delinquency. ” The incompatibility of this idea with the principle that interest can only be recovered by virtue oí a contz*act expressed or implied is manifest, while it consists strictly with the recovezy of damages to be regulated in amount by the standard of legal interest.

I have cited the case in 5 Qowen, and commezzted zzpon it so much at length, because it contains a full collection of the ■ cases on the subject of interest, and damages which az*e controlled by the rate of intez*est, and pz*esents pezhaps the best illustration of the extent to which this synonymous use of damages with interest has been indulged in by the Courts. The case in 5 Qowen was decided correctly, as were all the cases cited by Senator Spencer, that I have been able to find, and notwithstanding the difficulty complained of, it is, when studied with that difficulty izi view, a most valuable auxiliaz-y to an understanding of the question of interest.

Numerous authorities were cited by the counsel in support. of their position, that what is recovered after the maturity of a contract is damages and not interest, some of which I have been able to examine since the argument, and sozne not, bzzt sufficient to establish the principle. See U. S. Bank vs. Chapin, 9 Wend. 471; 6 How. U. S. 154; 4 Peters, 205.

The Statute of Minnesota does not in any manner change the nature of interest, but leaves it the creature of contract. R. S. p. 155, Chap. 35.

The clause in the note in question, “and. with interest after maturity upon principal and interest at the rate of five per cent, per month until paid, ” cannot be regarded as a stipulation to pay interest strictly speaking, because the contract into which the parties were entering, precludes the idea under the rule above adopted. The contract or promise, was to pay the principal sum on a specified day, with interest at the rate of three per cent, per month, and the promise so to do, is utterly inconsistent with the position that the parties did not intend to perform, and provided the interest which was to run on a new and different contract to commence when the first terminated, which is essential to its being interest. The express contract to pay at the certain day, must destroy the idea of an agreement not to pay, and a new contract with a new rate of interest to commence, the two propositions cannot stand together. The only intelligible interpretation of the clause is, that the party promising to pay meant to do so, and terminate the contact, and this was expected of him by the promise, and both knowing that the promise might not be fulfilled, agreed that on default of payment, the promisor should pay as damages for his breach of contract, the increased rate of five per cent, per month until he paid the note. This in other words was an attempt to liquidate the damages for the failure to perform the contract, and I will, examine whether the contract was of the nature in which parties may liquidate their damages in advance.

The case of Bagley vs. Peddle, 6 Sand. Supr. Ct. R., 192. contains the rules on the subject of when damages may be liquidated by agreement in advance, and when not, and how such agreements are to be construed, stated in as clear terms as the subject is susceptible of, and as they agree with the conclusions my own researches have produced, I will state them in the language of that case.

“ 1. "Where it is doubtful, on the face of the instrument, whether the sum mentioned was intended to be stipulated damages, or a penalty to cover actual damages, the Courts hold it to be the latter. ”

“ 2. On the contrary, where the language used is clear and explicit to that effect, the amount is to be deemed liquidated damages, however extravagant it may appear, unless the instrument be qualified by some of the circumstances hereafter mentioned. ”

“ 3. If the instrument provides that a larger sum be paid on the failure of the party to pay a less sum in the manner prescribed, the larger sum is a penalty, whatever may be the language used vn describmg it. ”

“4. When the covenant is for the performance of a single act, or several acts, or the abstaining from doing some particular act or acts, which are not measurable by any exact pecuniary standard, and it is agreed that the party covenanting shall pay a stipulated sum as damages for a violation of any such covenants, that sum is to be deemed liquidated damages, and not a penalty. ”

“ 5. Where the agreement secures the performance or omission of various acts of the kind mentioned in the last proposition, together with one or more acts in respect of which the damages on a breach of the covenant are certain, or readily ascertained by a jury, and there is a sum stipulated as damages to be paid by each party to the other for a breach of any of the covenants, such sum is held to be a penalty merely. ”

It appears then that the only cases in which the Courts will carry into effect an agreement to pay a fixed and stipulated amount of damages, are those where the nature of the damages provided against are not regulated by any rule of law with certainty, and cannot be readily ascertained by a jury, and the whole contract must be of this character, because if on the breach of any one covenant contained in it, the damages are ascertainable by a jury with any degree of certainty, the stipulation will be held to be a penalty to cover the damages on such breach, and cannot be changed, to meet the others when the damages are uncertain.

' The case of Bagley vs. Peddie above quoted from, was of this kind. ,

The case of Smith vs. Smith, 4 Wend. 468, was that of one physician selling his business and a lot in a village to another, and covenanting that he would not locate and practice in the village or within six miles of it, and in case he did so locate or practice, that he would pay the Plaintiff on demand $500 for each month he should so practice, etc., which was held to be of such a nature that the amount’stipulated could be recovered.

Dakin & Bacon vs. Williams, and Seward, 17 Wend. 446, and reported again in the Court of Errors where it was affirmed, 22 Wend. 201, was a case where the Defendants sold to the Plaintiffs, a newspaper and the good will of the concern, and covenanted that they would not start another of the same description in the same village or county, and stipulated the damages on a breach at $3000. It was held that the sum could be recovered.

Many other cases are in the books, but the two cited are quite sufficient to illustrate the principle.

When the damages for the breach are susceptible of proof, the stipulation of a certain amount of damages will be held to be a penalty to provide for the actual damages sustained. On this point see 3 John Cas. 291 with notes “a” and “b," where many cases are cited, 5 Cow. 144, and very learned note of Reporter at end of case; Spear vs. Smith, 1 Denio, 464, per Bronson, C.J.

“ Where there is an agreement to pay a gross sum in the event of the non-performance of a contract, and the case is such that a jury can ascertain, with Reasonable certainty, how much damages the injured party has actually sustained by the non-performance, the Courts are strongly inclined to regard the gross "sum as a penalty, and not as liquidated damages.” Hoag vs. McGinnis, 22 Wend. 163.

“ The distinction between a penalty for securing the performance of the contract, and a stipulation which makes part of the contract itself, may be illustrated by the rule, that if a certain rate of interest is reserved on a mortgage, with an agreement that if it be not paid punctually, the rate shall be increased, the larger interest is in the nature of a penalty, and may be relieved against in egvity. Rut, on the other hand, if the larger rate be originally reserved, with an agreement for reduction on punctual payment, the condition for such punctual payment is part of the contract, and relief cannot be given if it'is not fulfilléd.” Nicholls vs. Maynard, 3 Atk. 519; Adam's Equity, American Notes, ps. 108-9, marginal, 2 Story’s Equity Jurisprudence, Sec. 1314—15-16-17; Bonafous vs. Bylot, 3 Burr. 1374.

The true reason of the interference of equity in this class of cases, is stated by Chancellor Kent, in his opinion in the case of Skinner vs. Dayton, 2 John, Cham. Rep. at page 535. He says, “ The true foundation of the relief is, that when penalties are designed to secure money or damages really incurred, if the party obtains his money or damages he gets all that he expected or requi/red.”

The boohs abound with cases holding this view, and they universally declare the doctrine that where the stipulation is to pay a greater sum, on defaulj of paying a lesser one, nojorm of words will change it from a penalty to liquidated damages.

Such stipulations are by their nature and effect necessarily comminatory, and to allow any arrangement of words to change that effect, would be to permit the parties to override a well fixed rule of law, that the rate of interest shall be the measure of damages.

The case at bar falls distinctly withiD this latter class; the stipulation is, that if the Defendants fail to pay the principal sum of the note with interest on a certain day, they will pay that sum with increased rate of interest upon principal and interest, or in other words if they fail to pay the lesser sum as agreed they will pay a greater. The greater sum must be held to havebeen inserted in terrorum, and as a penalty. I am unable to find any authority that satisfies me of the propriety of abandoning this long and well established rule.

There is another reason why this stipulation cannot be regarded in the light of liquidated damages; the greater sum agreed to be paid on breach was evidently not intended to be given or received in lieu of performance of the contract, and in full satisfaction for the breach, which is an essential feature in this character of stipulation. Gray vs. Crosby, 18 John, 219; Slossen vs. Beadle, 7 Johns, 72.

This point arrived at, leads us to enquire whether the stipulation to compound the interest can.be enforced.

Chancellor Walworth in Quackenbosh vs. Leonard, 9 Paige, Ch. R. on page 345 says, “The principle of not giving effect to a stipulation for the compounding of future interest upon a debt, does not arise from the usury laws. It is merely adopted as a rule of public policy to prevent an accumulation of compound interest in favor of negligent creditors, who do not collect their interest when it becomes due, which negligence is found, in the end, to be an injury rather than a benefit, to the debtor.”

In the case of The State of Connecticut vs. Jackson, 1 John, Ch. R,. 13. The Master reported his computation of the amount due upon a bond allowing interest upon interest. The report was sent back for correction. In this case the Chancellor reviews in an able manner the cases on the subject of compound interest from the earliest English decisions in the reign of Charles the Second to the date of the case he was deciding. From which review he concludes that the “ decisions show the existence of the general principle, and the exceptions and limitations by which it is attended; and though creditors will be very apt to think with Lord Thurlow, that there is nothing unjust in compelling a debtor who neglects to pay interest when it becomes due, to pay interest upon that interest, yet the wisdom of our laws has ordained otherwise.”

lie then shows that the Homan law was constant in its condemnation of compound interest, and establishes by reasons of the most unanswerable character,, that to allow such contracts to be enforced, would be productive of the worst possible evils, harsh and oppressive, and tend to inflame the avarice and harden the heart of the creditor.

See Van, Benschooten vs. Lawson, 6 Johns, Ch. R. 313, where 1 Jolm, Ch. R. 13, is cited with approbation. Toll vs. Hiller, 11 Paige, Ch. R. 228; Mowry vs. Bishop, et al, 5 Paige, Ch. R. 98 Boyer vs. Elizabeth Pack, 2 Denio, 107, Where compound interest which had been paid under a mistake of fact was allowed to be recovered back. Hammond's Digest, p. 331.

There is no limit to the authorities on this point. The principle established is that a contract to pay interest on interest which is not due, is inequitable and will not be enforced, while on the other hand if the interest is due, it may be added to the principal, and a contract to pay interest on such, new principal will be enforced.

The only remaining question is, what shall determine the rate of damages the note is to draw after breach.

The Statute of Minnesota on the subject of interest, is quite peculiar, and must be read with care to be fully understood.

Section one provides, “ Any rate of interest agreed upon by parties in contract, specifying the same in writing, shall be legal and valid.”

“ Sec. 2. "When no rate of interest is agreed upon, or specified in a note, or other contract, seven per centum per annum shall be the legal rate.”

■ It is quite clear that the legislature intended to remove all obstacles from the subject of interest, and leave the parties free to contract for such rate as they should consider their money worth; and we will in examining this statute be careful to mate the distinction between the interest that the parties contract for, and the damages they are entitled to recover on a breach of the contract. The only change then, that this law of 1851 mates, is to remove the restrictions which previously existed on the right to contract for interest, and repeal all laws then in force on the subject. The counsel for the Defendants made a very ingenious argument to show that as the law did not expressly repeal any thing, and would only apply to the subject of interest, the old law which fixed the rate of interest and by reason of such rate, established the measure of damages on money contracts, must be held to be still in force so far as the question of damages was concerned, and still fix the rate. Without discussing the principle that the mam objeot of the old act being the establishment of a rate of interest, and its being used by the Courts, from that fact alone, as a just measure of damages on money contracts, if the main feabu/re should be changed, every thing incident to, and consequent upon such main feature, .would undergo a corresponding change; it is quite sufficient to state that the counsel was mistaken in fact; the Devised Statutes of which the interest law is only one chapter of a whole act, contains a provision on page 518, Sec. 1, which repeals expressly all laws in force either those of the State of Wisconsin or the Territory, with certain express reservations, of which the interest law is not one.

I make these remarks on the supposition that there was some statute on interest in force at the passage of the Revised Statutes, as the counsel has cited one, but I have been unable to find the laws of Wisconsin; however the repealing act which I cite clears the subject of any doubts, and leaves the present interest act as the only statute law in force on the question of interest, at the date of this note.

The two sections which compose this chapter on interest, stand distinct from, and independent of each other, and either could be operative alone. The declaration in the first section, that “any rate of interest agreed upon by parties in contract,, specifying the same in writing, shall be legal and valid,” is merely declaratory of what would be law if nothing was said on the subject, but imposes the condition that the contract shall be in writing. So we see that the only change it makes in the natural right to contract for interest, is that the contract shall be in writing. Suppose therefore to test the independency of the two sections, that the second one had not been enacted, and the first one stood alone. In this case if a contract should be made which simply contained a stipulation to draw interest, without any rate being specified, it would be like any other contract uncertain in its terms, and would draw no interest, because the law of interest required the rate to be expressed in writing, but after breach there would be uo difficulty in recovering damages because the current value of the money can always be readily ascertained by proof, and such value would be the measure of damages.

Suppose again that a contract should be made (the first section standing alone,) in which a rate of interest was specified in writing, and a breach be made by the promisor, what would be the measure of damages? The Courts would say the law has permitted the contracting parties to fix a rate of interest to suit themselves, and declared any rate so fixed to be “ legal and valid. ” . In a State where the law fixes the rate of interest, it measures the damages by that rate. In this State there is no legal rate of interest except such as the parties agree upon, and by similar reasoning that rate should control the measure of damages as being a standard of the value of money adopted by the parties to govern the particular, contract in all its aspects, as thoroughly as a, statutory standard would produce the same effect.

If section two stood alone upon the Statute book, parties would have the same right to contract for interest that they now possess, and the only difference in the law would be that the contract would be valid without wilting, and if no rate of interest was agreed upon, seven per cent, would be the rate of interest, as well as the measure of damages on a breach.

But if the contract specified a particular rate of interest, say three per cent, per month, and a default should be made in the payment, what would be the measure of damages ? Certainly not seven per cent., because we have shown that it is the rate of interest, either statutory, or agreed, which governs the measure of damages after default, and the second section expressly declares that it is inoperative in the matter- of interest as concerns any contract that expresses a rate of interest for itself, consequently it must be equally inoperative upon the measure of damages on the breach of such a contract. Its own words .separate it entirely from any contract that specifies its own rate of interest, and confine its influence strictly to those cases where “no rate of interest is agreed upon, or specified in a note, or other contract. ”

Where a contract bears interest, and the rate is agreed upon and specified in writing, it falls within the first section of the interest statute, and must be controlled in all its aspects by that section, and as if there was no other provision of .law on the subject, because the second section refers to contracts of another, and different nature, to wit: contracts where “no rate of interest is agreed upon or specified. ” And on the other hand, where “ no rate of interest is agreed upon or specified, in a note or other contract, ” it falls within the second section and bears seven per centum per annum, and is equally free from any influence whatever from section one, which is confined to a totally different class of instruments. I think there can be very little doubt that the two sections are wholly independent of each other, and that a contract which by its nature falls within the first, cannot be influenced by the last, and vice versa.

It is urged that seven per cent, is the general rate of interest established by law, and that the right to contract for a different rate is the exception, and that therefore the general rate is to control the measure of damages; but it seems that the more consistent view of the statute is, that it intended to inaugurate an era of perfect freedom in money dealings, to remove all restraints upon the value of money, and throw the whole subject open to contract; and that the second section was enacted merely to cover those cases of implied contracts to pay interest, and others in which it was expressed, but no rate named, and without which provision the Statute would have lacked symmetry and completeness. The emancipation of money was the aim and object of the Statute, and the seven per cent, clause was to provide for cases where parties failed to avail themselves of the general privilege.

The only effect that a fixed rate of interest by statute, has , upon the rate of damages upon the breach of a money contract, is, that it furnishes the Courts with a standard value of money, which standard is arbitrarily applied as the measure of damages in all such cases. Therefore where there is no such fixed rate of interest, nor standard value of money by statute, the Courts must look to some other rule to apply as a measure of damages, and it would seem by far the most reasonable, in harmony with precedent principles, and consistent with the monetary freedom inaugurated by the Statute, to adopt such standard value of money as the contracting parties have by virtue of the Statute fixed upon for themselves, and not one which it was the principal object of the Statute to abolish. The rate of interest by la/w controlled the damages before the Statute; the rate of interest by corvt/raet under the Statutes, should perform the same office now.

But we are not without the light of judicial interpretation upon this Statute by our own Courts. In the case of Wakefield vs. Brewster, 1 Min. R. 352, the Supreme Court of the late Territory of Minnesota, gave the Statute the same construction, with the exception that they call the damages which they allow after maturity of the note, interest. Their views on the Statute, however, are the same as our own.

The fact that their decision has been made for over two years, and stood as an interpretation of the Statute on this point, would be a very strong argument with this Court to hold the same way even if it had entertained doubts of the correctness of the reasoning, which we do not. Stability in decision is of the utmost importance to the progress and well being of a commercial community, and we will always regard it as a weighty consideration in the determination of any question.

The Court below erred in allowing the Plaintiff to recover the increased rate of interest as damages, and also in allowing the compound interest stipulated in the note.

The true rate of damages should have been the principal sum of the note with interest at three per cent, per month up to the time of default, and damages at the same rate from default to judgment.

The judgment is reversed and the case remanded to the District Court of Eamsey County, for retaxation under the rules above established.

The following dissenting opinion was filed by Emmet, C. J.

I fully concur in the decision of the points involved in this case, in all, save the damages awarded.

That the agreement for interest does not extend beyond the day fixed by the contract for the payment of the principal, is a proposition too well supported by authority to admit of a well founded doubt. But as the damages awarded for withholding money after it becomes due, have always corresponded with the legal rate of interest, where a legal rate has been es. tablished, interest and damages have sometimes, through carelessness or inadvertence, been confounded, and this has created some little confusion. As often, however, as the question has been presented to any jurist, or writer, whose authority is entitled to respect, the distinction between interest and damages has uniformly been recognized.

~We have decided in this case that the contract for interest, under our Statute, does not extend beyond the maturity of the note, and that the measure of damages which the Plaintiffs are entitled to recover, after maturity, is identical with the legal rate of interest. But a majority of the Court holds also, that as any rate of interest agreed upon by the parties in contract is declared, by statute to be legal and valid, the rate agreed to he- paid before maturity becomes the “ legal rate” for that contract; and that, therefore, damages should be assessed according to this rate, and not at seven per cent.per annum.

From this position I am constrained to dissent, believing, as I do, that if the Plaintiffs can recover for the detention of their money, after the same became payable, by way of damages only, and if the measure of such damages is arbitrarily fixed by construction of law at the legal rate of interest, then the inevitable conclusion is, that sevenp&r eemtmm per cmrmm is all that "can be recovered, whatsoever may have been the rate which the Defendants agreed to pay, either before or after the maturity of the note.

I think the majority has misapprehended the meaning of the term “ legal rate of interest,” when referred to as .the measure of damages for withholding money due, and has misconceived the reasons by which the Courts have been influenced in adopting that as a rule.

The term, as I understand it, cannot properly apply to such a rate as would be legal and valid merely; as any rate is legal which does not exceed the limit fixed by law, but it is used to designate and distinguish from all others that particular rate of interest which the law gives, where no rate is agreed upon by the parties. The one is undoubtedly a legal rate, but the other is ilia legal rate. The one can be recovered only when specified in tho contract — the other is given by law, whether specified or not. — The one, depending upon the contract of the parties, is called the conventional, or contract rate, while the other only, being founded upon the Statute alone, can with propriety be termed the legal rate. Our Statute seems to me to have been worded with especial reference to this distinction; for while one section declares that “ any rate of interest agreed upon by the parties in contract shall be legal and valid,” the next provides that when no rate is agreed upon, or specified in anoée, or other contract, seven per cent, per a/nmim shall be the legal rate. When therefore we speak of the legal rate of interest, under our statutes, we mean seven peer cent p&r arm/wm. But when speaking of any other rate which parties have agreed upon we refer to the conventional or contract rate, and seldom fail so to designate it by name. In Ohio, for example, the rate of interest, when not otherwise specified, is sixper cent p&r a/rvnvm • although the parties may contract for a rate not exceeding 'tenper cent per arn/nvm. Any rate, thei*efore, from one to ten per cent, per cmnumi'm&j be perfectly legal and valid in Ohio,- and yet sixper cent per a/nmim, to the exclusion of every other rate, is known as the legal rate for that State; and for the simple reason that this is the rate given Tyy the /Statute, where interest is due and the parties have failed to stipulate as to the rate.

Where usury laws exist, the Courts have confined the damages on money contracts within the limits of the legal rate of interest; because if the rate of damages could exceed the legal rates, parties might recover more, by way of damages, than they could legally have contracted for. And they have adopted the legal rate of interest, as the measure of damages, where such a rate is established, mainly because it furnishes a safe and reliable estimate of the actual average value of money. It has not been arbitrarily selected simply because it was the legal rate, but because, in the opinion of the Courts, the Legislature was competent to judge of the actual value of money' — • and that when giving interest on contracts or demands in which the rate was not specified it intended to give to the party all that money was actually worth.

Damages are awarded in such cases for the sole purpQse of making the party whole, and, unless a positive rule of law intervenes to prevent it, they always bear some relation or proportion to the injury actually sustained. Where, therefore, equal sums of money have been detained after they became payable, by different persons, during the same time, the damage to each is, in reality, precisely the same. Each, in theory, is entitled to recover as damages just what it would have cost him in the market to supply the sum due him during the time it has been detained. In other words, the rate of damages is the current rate of interest. This, I believe, is the practice in England. There no rate is fixed by law, bnt one only is named, which cannot be legally exceeded, except in certain specified cases; and the damages there depend upon the actual value of money. They may be less, but can never exceed the limited rate of'interest. But wherever the law fixes the rate which money shall bear, when the parties have failed to specify, there I think it will be found that the measure of damages is arbitrarily fixed, by mere operation of law, at the rate of interest thus established. The creditor may, in reality, have suffered a far greater loss, yet he can recover no more. But, on the other hand, he is not required to prove any damage, and can recover the legal rate of interest, as damages, although in point of fact he may have suffered no damage at all. n

That the rate of interest specified in the contract, cannot influence the measure of damages, after maturity, is a proposition abundantly sustained by both reason and authority. The decision in the case of the United States Bank vs. Chapin, 9 Wend. 471, is directly in point. A judgment had been rendered in favor of the bank on two promissory notes which it had discounted, and damages had been assessed thereon, at the rate of seven peer cent per a/nmmm after maturity — that being the legal rate of interest where the action was brought. A motion was afterwards made to set aside this assessment of damages, on the ground that the bank was limited by its chaHer to six peer cent only. The motion was denied — the Court holding that, the contract with the bank having been broken, the Defendant was liable to pay the rate of interest fixed by the law of New York from the time the debt became due.

The Supreme Court of Pennsylvania also have held to the same doctrine. In the case of Ludwick vs. Huntzenger, 5 Watts & Sargeant, 51, the action was upon a bond dated July 1,1830, conditioned for the payment of $1143 75 on the first day of April,*A. D. 1832, with three per cent interest from date; and a question arose as to the rate the Plaintiff was entitled to recover after the bond became payable. The Defendant contended that as three per cent was the rateagreed to be paid up to the time fixed for payment of the bond, the Plaintiff could re-recover only according to that rate after maturity. But the Court held that “ until the bond became due and payable, the agreement of parties regulated the allowance of interest and the rate of it — but after that the law interposed to regulate and allow the rate that should be paid by the debtor on account of his illegal detention of the debt from the Plaintiff. That the agreement of parties in respect to the interest extended no farther than the time fixed for the payment of the principal; after that, it was left to mere operation of lam, which allows ska per cent’’ See also, Watkins vs. Morgan 6 Carrington & Payne, 661.

It was urged in argument, as against these authorities, that in States where the Statutes peimit parties to contract for a rate of interest beyond the legal rate, the Courts have given the same rate after maturity that the contract bore before; and a case decided in California was brought to our notice. I do not think a single case sufficient to change the rule, or to overcome the authorities cited by the Plaintiffs in Error, even if the decision went to the extent claimed for it. I think it will be found, however, that the decision in California is based upon the peculiar statutes of that State, and does not, therefore, conflict with the general current of authority. T have not been able to secure a copy of the California Statutes — but according to the synopsis in Brown’s Collection Laws, page 213, they expressly authorize parties to stipulate for the payment of any rate of interest due, or to become due, and provide also that the judgments recovered thereon shall conform to and bear the same rates.

It would seem [from this that in rendering judgment the Court could not do otherwise than conform to the rate agreed upon by the parties — and indeed this is clearly intimated in the decision itself. Similar provisions exist in the Statutes of Louisiana, Mississippi, Ohio, Michigan and Iowa; but no decisions like that from California have been cited from either of these States; and it is confidently asserted that not a' single decision can be found extending the agreement of the parties as to interest beyond the time fixed for the payment of the debt which cannot be traced to some statutory provision.

Cases arise very frequently in which it would be impossible to apply such a rule to advantage, even when aided by such a statutory provision. Suppose, for instance, that a loan is made for three months, or three years, at three p&r cent per month for the first month, or year, two p&r cent for the second, and one per cent, for the third, or vice versa — and suppose that the note”given to secure the loan is not paid at maturity, and action is brought thereon; which of the three rates is to constitute the measure of damages which the Court shall award ? I must insist that in such a contingency the rule which my learned colleagues have laid down, in the case at bar, would not prove entirely satisfactory.

For centuries it has been the settled policy of all civilized nations to interfere by law for the protection of borrowers against the rapacity of usurers. The history of the jurisprudence of our own and the mother country, records a constant conflict between Legislatures and Courts, and the money lender. Legislation on the subject of usury has ever been followed by subterfuge and evasion, and these in turn have been met and exposed by enlightened judicial decision, until the law had become so well settled that it was almost impossible to raise a question which had not already been adjudicated. But suddenly this whole policy is changed by our Legislature— whether wisely or not is not the subject of enquiry here. It is a rule of construction, however, which we would do well to remember, that when statutes in derogation of the common law are passed, they should be strictly construed. Considerations of public policy, and, indeed, of common prudence, require that this rule should be applied with the utmost strictness to the statutes under consideration. If, therefore, the Statute permits parties to contract for exorbitant rates of interest, the Courts should see to it that the privilege be confined within the strict letter of the law. The latitude allowed to the parties furnishes but an additional reason for greater strictness on the part of the Courts.

But this decision appears to be predicated upon the assumption that whatsoever rate the parties may have in writing agreed upon can be recovered under any circumstances; whereas the object of our Statute seems rather to have been to remove the restriction imposed by the usury laws then existing, and to inaugurate the principle of free trade in money as in other commodities. The effect of the provision, in my opinion, is simply to declare that no contract for interest shall he void merely because it may exceed a given rate, if the rate be specified in writing; but it by no means interferes with the rights of a Court, in the exercise of its chancery powers, to relieve a party from the hardships of any contract which it would be inequitable to enforce.

Before the passage of this Statute the Chancellor was obliged to interfere if the interest exceeded a given rate, although the money loaned might in reality have been worth even more than the rate agreed to be paid. Now, however, he is not trammelled by the Statute. He must determine each case upen its own merits, and relieve against unconscionable contracts only.

The theory of free trade in money has grown out of the known and constant fluctuation in its value. It may be worth at the rate of five per cent, per month, for the current month, or even more for a shorter time, and but one per cent.per month for the next month, or on long time — depending upon time, the amount borrowed and other circumstances. But to hold, because money -may be worth to me one per cent, per diem, or even more for ten days, and I have agreed in writing to pay it, that I must continue to pay at that rate for as many months or years, if I am unable to pay before, or the lender has purposely kept it out of my reach in order to obtain this high rate, is utterly to ignore the idea of any change in the value of money from the time the contract was made until judgment is obtained, however long the interval may have been. According to this rule it would make no difference in the damages recovered that money was actually worth but seven per cent, per mvrmm and that the creditor would have been able to have obtained it at that rate in the market — I must nevertheless pay at the rate promised, whether it be seven per cent, per annum only, or seven per cent, per day. And yet damages are supposed to be awarded the creditor as a compensation for the injury which he has sustained by reason of his not having been paid his money at the time it became due. One could readily conceive how, in this manner, a very insignificant sum, borrowed for a few days only, at rates which would not be thought exorbitant for so short a time, might, if purposely kept out of the reach of the debtor, consume a fortune, in spite of every effort to prevent it.

Again, this decision denies the right of parties to stipulate as to the measure of damages which shall be recovered, because the rule of law, as to liquidated damages, does not apply to a money contract. Yet it will be found that, by the rule laid down in this very case, the damages are determined, not by the actual injury sustained, nor the value of money during the time, nor yet by the rate known as the legal rate of interest, but by the stipulation of the parties in regard to the interest. The contract for interest is gravely determined to have ended at the maturity of the note, only to be immediately revived and adopted as the measure of damages. There are apparent inconsistencies here which I am unable to reconcile. If we pay such regard to the stipulation of the parties, we recognize their power to control the law, and authorize them, in effect, to determine for themselves what the rate of damages shall be, notwithstanding the damages are arbitrarily fixed by mere operation of law át the legal rate of interest.

Another reason might here be urged against allowing more than seven per cent, pew cmnum in this and kindred cases. We have, in accordance with the uniform current of authority, refused to allow the Plaintiffs in this case to recover compound interest, although the contract expressly authorizes the interest to be compounded. The reason always given why interest should not be compounded is because it is inequitable and against public policy to allow an accumulation of interest in favor of negligent creditors who do not collect their interest when it becomes due, which negligence is found in the end to be an injury, rather than a benefit to the debtor, and because equity will permit no one, by talcing advantage of the default of another, to make exorbitant gain, especially if, as in this case, the default may be attributable more to the misfortune than the fault of the debtor. But with how much greater force do these reasons apply to this question of damages after maturity of the note. Where money is drawing such exorbitant rates of interest, the creditor could do his debtor no greater favor than at once to put his demands in the form of a judgment, nor a more serious injury than to delay action thereon for any considerable time. The longer the delay the greater the injury, and the more money is put into the pocket of the creditor. They are very apt to give indulgence under such circumstances. There seems to be something so fascinating in thus kindly accommodating their debtors, that they seldom resist the generous impulse until they find their securities nearly exhausted, and not even then if additional securities are forthcoming.

For these reasons I have felt compelled to withhold my assent to the rule of damages adopted by my learned associates. No measure of damages ought to be adhered to which is not uniform in its application — which gives to A. only seven p&r cent, per amnvm as damages for detaining a thousand dollars for a year, and to. B. seven p&r cent, per month on money detained from him during the identical time that A. was kept out of his money. The one is damaged to the extent of seventy dollars only, while the other is so seriously injured by the nonpayment of the same sum that it requires eight hundred and fifty dollars to compensate him for the loss he has sustained. There is no equality in such a rule. It is a rule of decision rather than a rule of damages; and I cannot resist giving expression to the hope that, at no distant day, it may be reviewed, and so far modified as to recognize, in common with nearly every citizen of the State, seven per cent, per anwwrn as the legal rate of interest, and as the measure of damages for the illegal detention of money after it becomes payable.

Case Details

Case Name: Mason v. Callender, Flint, & Co.

Court Name: Supreme Court of Minnesota

Date Published: Dec 15, 1858

Citation: 2 Minn. 350

Court Abbreviation: Minn.