Court: New Mexico Supreme Court; November 17, 1976; New Mexico; State Supreme Court
The plaintiff, First National Bank in Albuquerque, sued defendants Robert B. and Sylvia B. Danek, Melvin B. and Patricia M. Porter, and Telephonic, Inc. for $16,583.02 due on a promissory note originally for $60,000. The note, signed on November 28, 1969, included a guaranty from Robert Danek's parents, Richard R. and Lucille F. Danek, and was secured by shares of stock owned by Mr. Porter. After a payment of $30,000 in August 1970, the collateral was released. At trial, the Bank introduced parol evidence aiming to show the money was primarily for corporate purposes, which could negate a usury defense. Robert Danek testified about a stock transaction that effectively constituted additional interest.
The trial court ruled the note was primarily a corporate obligation of Telephonic, Inc., which was not incorporated until after the note was executed. The court determined that the stock transaction did not render the note usurious. On appeal, the defendants contended that Telephonic, Inc. should be considered a guarantor, not a primary maker, and claimed interest was usurious. The appellate court agreed, noting the note was clearly a personal obligation of the Daneks and Porters. The ruling of the trial court was reversed, and the cross-appeal regarding the Daneks' guarantor status was denied.
The individual seeking a loan wanted the corporation to guarantee the note, but Mr. Hubbell insisted that the note be executed personally by Melvin Porter and another individual, with the corporation only providing a guarantee. This indicates that the note was intended as a personal obligation of the individuals rather than the corporation. The appellants claimed the interest on the note was usurious; however, corporate entities cannot raise usury defenses, while individuals can. The applicable interest rates are defined by statute, allowing a maximum of 12% per annum for unsecured loans and 10% for secured loans. The appellants argued the effective interest rate was approximately 17% based on a stock transaction, but the Bank contended it should be calculated over the entire six years, yielding a permissible rate of 4.32%. The trial court ruled that the profit from the stock transaction was not considered interest and determined the note was not usurious. Additionally, the court found a novation occurred in August 1970, but this was unsupported by substantial evidence, leading to the conclusion that the original one-year term of the note remained unchanged. Usury must exist at the inception of the agreement, and courts often consider the substance over the form of a transaction to determine usury.
An independent contract for property sale, viewed as a condition of the loan and intended to disguise usury, can render a loan usurious. In this case, the stock sale was tied to the loan, with testimony indicating the reduced price functioned as additional interest. Consequently, usury was established from the beginning. Under New Mexico law (50-6-18, N.M.S.A.1953), charging illegal interest leads to the forfeiture of all interest. The lender's intent to charge illegal interest was clear, resulting in the forfeiture of all interest on the note. The borrowers had received $56,024.00, and after making $57,547.22 in payments, their obligation to the bank was deemed fulfilled. The trial court's award of $2,200.00 in attorney’s fees to the bank was reversed, as the bank had no legal claim due to the usurious nature of the note at the time the suit commenced. The bank's cross-appeal regarding the release of guarantors was rendered moot since the obligation had been satisfied. The judgment of the trial court was reversed, confirming that the guarantors, including Telephonic, Inc., are not liable under the note. The stock transfer values and discrepancies were noted but deemed immaterial to the legal issues.
