|FROM:||The Legal Taxi|
|RE:||Michigan Usury Statute|
Michigan Usury Statute
Does the Michigan Usury Statute apply where funds are borrowed between two individuals?
Marc filed suit for collection based on a written promissory note for $30,000.00 at 10% interest. The note was dated 2/23/94. Marc only acknowledges payment of $17,000.00 on the note. Steve claims the note was fully paid in 1998. Marc claims the last payment on the note was received in 2006. The note is between two individuals and Marc testified that the loan was a personal loan and not a business loan. Does the Michigan Usury statute apply in this instance? If so, no interest can be charged in excess of 7%. As this note called for interest at 10%, then according to the Statute, no interest can be charged at all and Plaintiff is responsible for attorney fees and cost. See MCLA 438.31 and MCLA 438.32
Originating Jurisdiction only
Standard Research Memo
Does the Michigan Usury Statute apply where funds are borrowed between two individuals?
Michigan Compiled Laws & Case Law
In the present matter, Marc filed suit for collection based on a written promissory note for $30,000.00 at 10% interest. The note is between two individuals and Marc testified that loan was a personal loan and not a business loan. The research plan revolves around whether the usury statute is applicable to the interest charged to the defendant. In addition, we will address whether the defendant is entitled to recover his attorney fees and court costs.
Generally speaking, usury is receiving a greater sum or value for the loan or forbearance of money, goods, or things at a high interest rate that is not allowed by law. The maximum is typically referred to as the "usury limit”. In Michigan, Michigan Compiled Laws (MCL) 438.31 governs the maximum interest rates that can be charged on any loan given by any individual or corporations.
The Michigan Code states:
MCLS § 438.31 Legal interest rate; scope; limitation; construction; foreign obligations:
- Sec. 1. The interest of money shall be at the rate of $ 5.00 upon $ 100.00 for a year, and at the same rate for a greater or less sum, and for a longer or shorter time, except that in all cases it shall be lawful for the parties to stipulate in writing for the payment of any rate of interest, not exceeding 7% per annum. This act shall not apply to the rate of interest on any note, bond or other evidence of indebtedness issued by any corporation, association or person, the issue and rate of interest of which have been expressly authorized by the public service commission or the securities bureau of the department of commerce, or is regulated by any other law of this state, or of the United States, nor shall it apply to any time price differential which may be charged upon sales of goods or services on credit. This act shall not be construed to repeal section 78 of Act No. 327 of the Public Acts of 1931, as amended, being section 450.78 of the Compiled Laws of 1948. This act shall not render unlawful, the purchase of any note, bond or other evidence of indebtedness theretofore issued by any borrower not then domiciled in this state, which bear any rate of interest which is lawful under the law of the domicile of the borrower at the date of issue thereof, and in such case any such rate of interest may be charged and received by any person, firm, corporation or association in this state.
MCLS § 438.31.
MCLS § 438.32, Violation of act; attorney fees and court costs, recovery:
- Sec. 2 Any seller or lender or his assigns who enters into any contract or agreement which does not comply with the provisions of this act or charges interest in excess of that allowed by this act is barred from the recovery of any interest, any official fees, delinquency or collection charge, attorney fees or court costs and the borrower or buyer shall be entitled to recover his attorney fees and court costs from the seller, lender or assigns.
Usury has been defined and interpreted by the courts in many cases, such as in People v. Lee, 447 Mich. 552, 554 (Mich. 1994) that involves a case of usury:
- The law of usury is not a new concept in law. Indeed, it dates back as far as Biblical times. See Wilcox v Moore, 354 Mich 499, 504; 93 N.W.2d 288 (1958), citing Leviticus 25:35-37, Deuteronomy 23:19, 20, and Saint Chrysostom s Fifth Homily on the Gospel of St. Matthew. Usury is, generally speaking, the receiving, securing, or taking of a greater sum or value for the loan or forbearance of money, goods, or things in action than is allowed by law. Hillman s v Em N Al s, 345 Mich 644, 651; 77 N.W.2d 96 (1956), citing 55 Am Jur, Usury, § 2, p 324. Michigan has statutorily adopted this principle in MCL 438.41 RUBIN v. RUBIN, 1996 Mich. App. LEXIS 1141, 13-14 (Mich. Ct. App. July 16, 1996). The purpose of the usury statute is to "protect the necessitous borrower from extortion”.
In Heide v. Hunter Hamilton Ltd. Partnership, 826 F. Supp. 224, 226 (D. Mich. 1993) the court stated:
- Defendants argue that the Notes executed prior to May 10, 1991 were usurious. Defendants argue that the monies referred to in the May 10, 1991 documents upon which plaintiff bases her claim consist of amounts carried over from prior related usurious transactions; as a result, say defendants, the transactions upon which plaintiff now attempts to collect are tainted with usury.
- Specifically, the 1989 and 1990 notes set interest at a rate of 12% which, under the circumstances, is usurious unless the money loaned was "an extension of credit to a business entity." [**5] M.C.L. § 438.61(3). Defendant Kontos has stated in a June 15, 1993 affidavit that the 1989 loan he received from plaintiff was personal to him and used by him to discharge his personal obligations. Kontos declares that as a result of his longstanding personal relationship with plaintiff, she agreed to loan him the money in his individual capacity and personal to him. Kontos states that plaintiff dictated the terms of the promissory notes, including the 12% rate of interest. Thus, defendants argue, the rate of 12% in the 1989 Notes is usurious sine it was loaned to an individual for non-business reasons . The same argument applies, contend defendants, to the 1990 Notes.
- Accordingly, there is a genuine issue of material fact as to whether the interest rates in the 1989 and 1990 Notes are usurious. As stated above, the amount of $ 182,360.06 in the May 10, 1991 Note consisted of the combined principal amounts of $ 50,000 and $ 100,000, plus previously accrued interest at 12% in the amount of $ 32,260.06. Thus, because there is a genuine question of material fact as to whether the 12% interest rate in the previous Notes is usurious, I can not grant plaintiff s motion for summary judgment which includes this $ 32,260.06 amount.
- Currently, M.C.L. § 438.32 says in relevant part: "Any . . . lender . . . who . . . charges interest in excess of that allowed by this act is barred from the recovery of any interest, any official fees, delinquency or collection charge, attorney fees or court costs." Thus, even with a usurious interest rate, defendants are still entitled to pay the amount loaned to them by plaintiff.
- It would be unjust for a court to say that even though party A loaned money to party B, party B does not have to repay the loan to party A solely because an illegal interest rate was charged by party A. The court would be turning a loan transaction into a gift transaction. As the above authorities make clear, party A s punishment for charging an excessive interest rate is that it forfeits the interest charged to the borrower; party A does not forfeit the entire amount of money it loaned to the borrower.
- In sum, as a matter of law, all three defendants are obligated to pay plaintiff the sum of $ 150,000. Because there appear to be questions of material fact as to whether a usurious rate of interest existed on any of the notes existing between the parties, I cannot say as a matter of law what interest plaintiff is entitled to, if any.
- Generally speaking, if it was a loan to an indvidual for non-business reasons then the maximum rate of interest could not exceed 7% per annum. M.C.L § 438.31.
- The defendants executed a promissory note and security agreement in favor of plaintiffs in the amount of $ 40,000, bearing interest at the rate of 8% per annum and payable at the rate of $ 500 per month. The negotiations commenced around Christmas of 1976 and continued through April 1, 1977, at which time the closing occurred and the documents were executed. The documents were drafted by defendant Gordon Yowell, who was a licensed real estate broker. When asked by plaintiff Edward Osinski what the going rate of interest was, Mr. Yowell replied that the going rate was 8-1/2%. Mr. Osinski indicated he would be willing to accept 8% interest on the promissory note. Plaintiffs filed suit on February 4, 1981, seeking a declaration that defendants were in default and demanding
- immediate payment of the unpaid balance. The trial court observed that the promissory note, which set interest at 8%, would be an apparent violation of the usury statute in Michigan in that under the circumstances of the case interest would be limited to no more than 7%.
- Where a lender/seller seeks to enforce a usurious contract; the borrower/buyer can avail himself of the statute and have all of the interest he previously paid applied against any outstanding principal debt. Based on the above cases, the trial court erred in allowing plaintiffs to keep the 8% interest paid through March, 1980, and to receive 7% interest on all future payments. We recognize the trial court s attempt to be fair and equitable. However, this is not an equity case. This case involves interpretation of the usury statute and the underlying legislative intent behind it. Although the Legislature has provided a number of exceptions to the usury statute, it has not modified or amended its language to allow the relief sought by plaintiffs. Defendants are entitled to apply all of the interest they have paid on the loan to the remaining principal debt. Plaintiffs shall collect 12% interest on the judgment, calculated from February 4, 1981, which is the date that the complaint was filed, and which shall continue until the judgment is satisfied. MCL 600.6013(4); MSA 27A.6013(4). Judgment interest is statutory and mandatory and is designed [***13] to compensate a party for its loss of use of its funds. Militzer v Kal-Die Casting Corp, 41 Mich App 492, 496-497; 200 NW2d 323, lv den 388 Mich 789 (1972).
- Based on MCL 438.32; MSA 19.15(2), the buyer is entitled to recover its fees and costs from the seller. Further, the defendants are awarded reasonable attorney fees and costs from plaintiffs, but only as to matters pertaining to their assertion of the usury defense.
Based on these cases, we conclude that if any seller or lender’s assignee who enters into any contract or agreement that does not comply with the provisions of this act, or who charges interest in excess of that allowed by this act, is barred from the recovery of any interest, any official fees, delinquency or collection charge, attorney fees, or court costs. The borrower or buyer is entitled to recover attorney fees and court costs from the seller, lender, or their assigns.
In Washburn v. Makedonsky, 271 Mich. App. 95, 96-97 (Mich. Ct. App. 2006) the court found:
- Defendant Mary Michailoff executed a $ 40,000 promissory note payable to plaintiff Washburn, with an interest rate of ten percent and monthly payments of $ 667. Defendant Michael Makedonsky signed the note as guarantor. The note contained an acceleration clause that allowed the holder of the note to demand immediate payment of the entire debt upon a failure to make any payment within thirty days of its due date. Plaintiff Washburn assigned the note to plaintiffs Janet VanTubergen and Patricia Williams, and later also assigned the note to his ex-wife. [Michailoff] withheld further payments until the proper holder of the note was determined. Plaintiff Washburn revealed that he still had possession of the note, and he then turned it over to plaintiffs VanTubergen and Williams.
- A dispute then arose between the parties regarding how much was owed in back payments. The trial court, in a separate action, determined that $ 6,003 was owed in back payments. Defendant Michailoff paid this amount within thirty days. Plaintiffs then brought the instant action, seeking to accelerate the debt because defendant Michailoff had been over thirty days late on several payments.
- Plaintiffs moved for summary disposition under MCR 2.116(C)(10), arguing that no factual dispute existed and that they were entitled to accelerate the debt under the terms of the promissory note. However, the trial court refused to enforce the acceleration clause, holding: "All payments have been timely made except those excused by the plaintiffs or during a period when defendants had a legitimate right to withhold payment until a correct payee could be determined or during a one-month period when there was a good faith dispute as to the amount in arrears." Plaintiff does not dispute that the note provides for a usurious interest rate. Plaintiff argues, though, that MCL 438.32 does not afford a usury defense to defendant guarantor of that note. Contrary to this assertion, however, MCL 438.32 specifically provides that a lender who charges interest in excess of that permitted by the usury act is "barred from the recovery of any interest" and other specified fees and costs. (Emphasis added.) MCL 438.32 does not merely preclude the recovery of usurious interest from the borrower, it also precludes the recovery of any interest on the usurious note. While the Legislature specifically provided that only "the borrower or buyer" was entitled to recover attorney fees against a usurious lender, as this Court discussed in Washburn, supra at 674-677, the Legislature did not so limit its prohibition against a lender recovering usurious interest. The omission of language in one part of a statute that is included in another part should be construed as intentional, and the courts should not include provisions not included by the Legislature. Polkton, supra at 103. Plaintiff would have this Court insert the words "from the borrower" into MCL 438.32, so that it would read that a usurious lender is barred from the recovery of any interest, any official fees, delinquency or collection charge, attorney fees or court costs only from the borrower. This Court is not permitted to do so. The Legislature s intent, as clearly and unambiguously expressed by the plain language of MCL 438.32 is that a usurious lender is barred from the recovery of any interest. n2 Therefore, the trial court properly concluded that plaintiff is barred from recovering interest from defendant.
Therefore, private individuals may challenge excessive rates by using the legal defense of usury. In Michigan, if successful, the defense of usury will cause all interest payments made over the entire life of the loan to be credited to the balance—effectively transforming the loan into an interest-free loan.
In Paul v. U S Mut. Financial Corp., 150 Mich. App. 773, 780-781 (Mich. Ct. App. 1986) the court stated that the court must look beyond form to characterize the real nature of the transaction in order to determine whether the transaction falls within the usury statute.
- Similarly, usurious intent need only be ascertained when it is not clear from the face of the instrument whether the usury statue is applicable. See Domboorajian v Woodruff, supra; Ferguson v Grand Rapids Land Contract Co, 242 Mich 314; 218 NW 685 (1928). Where, as here, the instrument is patently in violation of the usury statute, there is no need to determine a usurious intent. Indeed, it appears that the intent of the parties is totally irrelevant where the instrument is usurious on its face. Union Trust Co v Radford, 176 Mich 50; 141 NW 1091 (1913); Houghteling v Gogebic Lumber Co, 165 Mich 498; 131 NW 109 (1911).
- MCLA 438.31; MSA 19.15(1) provides, in part:
"This act shall not apply to the rate of interest on any note, bond or other evidence of indebtedness issued by any corporation, association or person, the issue and rate of interest of which * * * is regulated by any other law of this state * * * ."
- MCLA 438.31; MSA 19.15(1) further provides, in part:
" * * * nor shall [this act] apply to any time price differential which may be charged upon sales of goods or services on credit."
- The defense of usury under the general usury statute, MCLA 438.31 et seq., supra, would be available only if the transaction was not subject to the provisions of some other statute.
Therefore, the defense of usury is available only if the transaction is not subject to the exceptions provided in other statutes or administrative provisions.
In Kadrovach v. Watkins, 1999 Mich. App. LEXIS 1350, 1-3 (Mich. Ct. App. 1999) the court stated:
- Plaintiffs are defendant s aunt and uncle and adoptive parents. Plaintiffs loaned defendant the sum of $ 500, secured by a promissory note providing for repayment with an interest rate of one percent per annum. Eventually, plaintiffs were required to pay an outstanding card balance of $ 3,850. Plaintiffs filed suit in 10th District Court seeking both payment of the $ 500 loan and reimbursement of the card balance.
- Defendant asserted the affirmative defense of usury, and contended that the card interest rate of 14.1 percent was usurious for a loan between individuals. MCL 438.31; MSA 19.15(1). The district court rejected plaintiffs assertion that they did not loan funds to defendant, and found that plaintiffs charged a usurious rate of interest. The district court entered judgment in favor of plaintiffs in the amount of $ 62.50 on the card transaction, and in the amount of
- $ 500 plus interest on the promissory note. The court awarded defendant costs and fees in the amount of $ 2688.50. MCL 438.32; MSA 19.15(2). The circuit court affirmed the judgment of the district court.
- We reverse the decision of the circuit court. The legal interest rate on a loan between individuals is five percent, unless the parties stipulate in writing to payment of a rate not exceeding seven percent. MCL 438.31; MSA 19.15(1). The purpose of the usury law is to protect a necessitous borrower from extortion. To accomplish this purpose, a court must look at the real nature of the transaction at issue. Boyd v Layher, 170 Mich App 93, 97; 427 NW2d 593 (1988). The finding of the district court, affirmed by the circuit court, that plaintiffs loaned funds to defendant, is clearly erroneous. MCR 2.613(C). Plaintiffs placed no sum of money with defendant, and defendant made no promise to repay any sum to plaintiffs. Plaintiffs sued only to recover sums they themselves were required to pay when defendant defaulted on his agreement to pay charges he incurred on the card. Defendant was allowed to use plaintiffs credit card, and was required to pay the card balance. The credit card time differential rate of 14.1 percent was not usurious. Corrigan v Insilco Corp, 176 Mich App 262, 269; 439 NW2d 350 (1989). The prohibition against usury did not reach the instant transaction. Plaintiffs were entitled to recover interest on the credit card transaction. Because usury was not established, defendant was not entitled to costs and fees.
If the intent of parties is clear from the contract and one party has asserted a usurious (excessive) rate of interest payable by the lender, the Michigan act will prevent the collection of interest. A defendant borrower needs to show that the intent of the contract violates the limit of the usury law.
Per the facts of the Query, the court must determine if the claim of Steve that the usury rate has been exceeded has been clearly shown. The problem surrounding a usurious interest rate has been addressed in an article in the 43 Wayne L. Rev. 1103, 1110.
- Usurious loans in Michigan are voidable, not void. A number of important points follow from this proposition. The law is clear that if usury is discovered after the debt has been fully paid, the lender need not return the interest. Even if the contract is still executory, the lender is allowed to retain the interest if more interest than principal has been paid. There is no absolute notion that discovery of a usurious loan nullifies the contract and requires all usurious interest be returned. Because usurious loans in Michigan are voidable rather than void, the trial court was correct in its instinct that reforming the contract in these circumstances was a reasonable thing to do. One of the classic maxims of usury is that it is a shield, not a sword.
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