Court: West Virginia Supreme Court; December 17, 1981; West Virginia; State Supreme Court
Actions No. 14728 and No. 14722, involving Community Bank and Trust and Middletown National Bank, have been consolidated for argument due to similar fact patterns. Both cases stem from final orders of the Circuit Court of Marion County, West Virginia, which ruled in favor of the banks regarding unpaid balances on notes executed by the appellants in 1971. The appellants, granted permission to appeal under W.Va. Code § 58-5-25, are contesting these final orders.
In the case against Community Bank, the appellants—Charles Keyser, Willene Keyser, and Hamilton Electronics Corporation—are appealing a jury verdict that awarded the bank $22,104.94, plus interest and costs, following the appellants' default on a $50,000 loan. The Keyser couple, with Charles as the president and sole stockholder of Hamilton Electronics, applied for the loan on June 7, 1971. The appellants executed a note to repay the loan with interest over ten years, secured by a savings account and convertible debentures owned by Keyser. The savings account was created with an initial deposit from Hamilton Electronics and managed by the bank, which restricted withdrawals.
After default, Community Bank filed suit for the unpaid loan balance, and the appellants counterclaimed for usury. However, the circuit court dismissed Hamilton Electronics’ counterclaim based on a state law that prohibits corporate usury defenses.
On January 23, 1978, the circuit court ruled that under federal law, Charles Keyser and Willene Keyser's potential recovery against Community Bank was limited to twice the interest they had paid on their loan. The trial commenced on October 10, 1978, with the jury ultimately ruling against the Keysers on their usury counterclaim and in favor of Community Bank, awarding $22,104.94.
In a similar case involving Middletown National Bank, the appellants, Charles Keyser and Hamilton Electronics Corporation, sought an appeal regarding a May 11, 1979, jury verdict where the bank was awarded $11,161.30, plus interest and costs, due to the appellants' default on a $25,000 loan. The loan, initiated on June 30, 1971, required repayment at an interest rate of 7.5% over ten years, secured by Hamilton Electronics debentures and a life insurance policy, with a non-interest-bearing checking account opened at the bank. The bank restricted withdrawals from this account without its consent.
After the default, Middletown Bank applied funds from this account to the unpaid loan balance and filed suit against the appellants on October 19, 1978. Willene Keyser was not included as a party in this action. The circuit court ruled that West Virginia law prohibited a corporation from asserting a usury defense, dismissing Hamilton Electronics' counterclaim. The court also reaffirmed that Charles Keyser's recovery was limited to twice the interest paid on the loan. The trial for this action began on May 8, 1979.
On May 11, 1971, the circuit court ruled against Keyser on a counterclaim, awarding Middletown Bank $11,161.30. The appellants appealed this ruling. The circuit court determined that the appellants' counterclaims were governed by federal law, specifically that Hamilton Electronics could not claim usury, and that the recovery for Charles and Willene Keyser was limited to twice the interest paid on their loans of $50,000 and $25,000. Both Community Bank and Middletown Bank are national banking associations, and under 12 U.S.C. § 85, the interest rate for national banks is dictated by state law. The court applied West Virginia law to determine usury, referencing W. Va. Code § 47-6-10 (1979), which prohibits corporations from using usury as a defense in civil actions. A precedent case, Monongahela Appliance Company v. Community Bank, reinforced that under 12 U.S.C. § 85, national banks may charge any agreed-upon interest rate to corporate borrowers in states where the defense of usury is not available. Consequently, the circuit court dismissed Hamilton Electronics' usury counterclaim but did not apply West Virginia law to limit the Keyser's recovery.
The circuit court applied 12 U.S.C. § 86, which states that knowingly charging an interest rate exceeding legal limits results in forfeiture of the entire interest on the debt. If excessive interest has been paid, the payer or their representatives may recover twice the amount paid, provided the action is initiated within two years of the usurious transaction. This section is the exclusive remedy for recovering usurious interest from national banks, and while national banks are subject to state usury laws, the penalties for usury are governed by federal law. The circuit court correctly dismissed Hamilton Electronics' usury counterclaims based on this federal law and limited recovery for Charles and Willene Keyser to twice the interest paid on their loans.
The appellants in the Community Bank case argue that a loan executed on June 7, 1971, was usurious since Community Bank required a $25,000 savings account as collateral, effectively reducing the loan amount to $25,000, which would incur illegal interest rates above the state maximum of 8 percent. Similarly, in the Middletown Bank case, the appellants claim that a loan from June 30, 1971, was usurious because a $12,500 checking account collateral reduced the effective loan amount to $12,500, leading to an interest rate of approximately 15 percent, exceeding legal limits. They support their claims with a legal rule stating that requiring a borrower to leave part of the loan on deposit constitutes usury if the interest exceeds the legal rate on the amount available for use. The appellants reference Reid v. National Bank of Georgia, where a similar usury claim was made based on maintaining a deposit as a condition for a larger loan.
The defendant argued that a 20% demand deposit constituted a withholding of loan proceeds by the bank, making the loan usurious. However, the Court of Appeals of Georgia in Reid affirmed a summary judgment for the bank, ruling there was no significant factual dispute regarding usury. The appellants claimed that because withdrawals from their savings and checking accounts required bank consent, the loans were usurious. In Carper v. Kanawha Banking & Trust Company, the court determined that the usury statute allows courts to look beyond the form of agreements to identify any concealed usurious intent, indicating that if material facts are contested, the issue of usury should be decided by a jury. The court in Commercial Discount Company v. Rutledge stated that whether a transaction is usurious is a factual determination, also noting that courts have the obligation to investigate the true nature of transactions. In Bradley v. Houston State Bank, the court upheld a directed verdict favoring the bank against a usury claim, even though the appellants alleged a requirement for a $20,000 compensating balance. The court found that the appellants had full access to the loan proceeds and that the compensating balance did not originate from their funds, thus not affecting the loan's interest rate or rendering it usurious.
The Court declines to grant a directed verdict favoring Community Bank and Middletown Bank on the usury issue, aligning with Bradley's reasoning that a transaction may not be usurious if the compensating balance was deposited by a non-borrower and not from loan proceeds. Key questions regarding loan receipt, deposit of compensating balances, and their composition were correctly submitted to the jury. The loans in question were made to Charles Keyser, with proceeds issued to him, while the compensating accounts were in the name of Hamilton Electronics. There is insufficient evidence to determine that the loan proceeds were used for those accounts, making it a jury consideration. The Court dismisses the appellants' claim that Keyser repaid the loans personally, affirming that if separate funds were used for compensating balances, it would not establish usury. The Court also finds no error in the admission of Keyser's tax return, which was relevant to his understanding of the loans as personal obligations. Additionally, the presence of jurors who were bank depositors or borrowers does not disqualify them legally, as bias determination is typically left to the trial judge. Consequently, the Circuit Court's orders in both bank actions are affirmed. Usury is defined as a loan with interest rates exceeding legal limits.
Usury, historically, differentiates between acceptable interest (moderate profit) and excessive rates (usury), the latter being intolerable in society, as articulated by Sir William Blackstone. Keyser claims that Hamilton Electronics charged him for loan payments by debiting his corporate account for both a $50,000 loan and a $25,000 loan from Middletown Bank. Under 12 U.S.C. § 85, associations can charge interest in line with state law or a specified federal rate, whichever is higher, with state-defined limits applying to state-organized banks. West Virginia Code § 47-6-6 (1968) nullifies any contracts with interest rates exceeding legal limits and allows borrowers to recover four times the interest paid, with a minimum recovery of $100. It also presumes willful intent in usurious contracts, but allows for rectification of bona fide errors within fifteen days. In 1971, the maximum allowable interest for installment loans was 8%, per W. Va. Code § 47-6-5a (1969), which permitted a maximum of 6% on the loan amount, while also outlining conditions for legitimate interest agreements and prohibiting charges that exceed this limit.
In the Community Bank case, the appellants calculated a 10.5% figure by doubling the 7.5% interest rate and subtracting 4.5%, which represented the interest initially earned on Hamilton Electronics' savings account. In the Middletown Bank case, they derived a 15% figure by doubling the 7.5% interest charged on a $25,000 loan. The Court referenced Reid v. National Bank of Georgia and cited Bank of Lumpkin v. Farmers State Bank, which established that a loan requiring the borrower to maintain a deposit with the lender is considered usurious. The Georgia Supreme Court indicated that such a condition taints the loan with usury. The appellants used this precedent in their current cases. The determination of whether a transaction is a loan or an attempt to circumvent usury laws often hinges on the parties' intent and is generally a question of fact. Additionally, when usury is not evident from the contract's face, it is solely for a jury to decide. The Texas Supreme Court, upon reviewing Bradley, noted no reversible error in the Court of Civil Appeals' judgment.
