Southern Building & Loan Ass'n of Knox County v. Johnson

The question raised by the appeal in this case is a narrow one. The contract is a Tennessee contract, and is to be construed .by the law of Tennessee. It is settled by the supreme court of Tennessee that the- premium exacted, not being by competitive bidding, was illegal, and must be credited on the loan. McCauley v. Association, 97 Tenn. 421, 37 S. W. 212, 35 L. R. A. 244, 56 Am. St. Rep. 813; Post v. Association, 97 Tenn. 408, 37 S. W. 216, 34 L. R. A. 201. This premium was exacted by the following’device: The intending borrower was required to subscribe for twice as many shares as at their matured value would equal the loan. He was required to give security that he would mature all the shares for the benefit of the association, and in par-ment of the loan. This was illegal and usurious under the laws of Tennessee. By the rule of settlement adopted by the special master and approved by the decree of the circuit court, half of the stock was treated as “borrowing stock,” and the other half as “premium stock.” This was in accordance with the actual transaction, and is not excepted to, and it is admitted to be in conformity with the decisions of the supreme court of Tennessee. It was directly so held by the supreme court of Tennessee in Carpenter v. Richardson, 101 Tenn. 178, 46 S. W. 452. In that case it was shown that altogether a certain sum had been paid in on the premium stock. The chancellor ruled that this should be credited on the loan. On appeal this was urged as error, but the supreme court affirmed the ruling of the chancellor. This rule of settlement was also accepted as the Tennessee rule in Bowman v. Foster & Logan Hardware Co. (C. C.) 94 Fed. 592—599, the circuit court saying, “It will be seen by this rule that all dues paid on premium stock and all interest are credits on the'note.”

The only matter assigned a§ error is this: The by-laws provided that no loan should be granted to a member until three months from the date of his certificate, and it frequently happened, before the loan was actually consummated and the money paid, that the borrower had paid in several months dues both on the borrowing stock and the premium stock. The sole question raised by this appeal is whether the dues paid on the premium stock before the date when the money loaned was actually paid over are to be cred-*663bed to the loan, as well as the dues paid afterwards. To obtain the loan the borrower contracted to mature his borrowing stock, and to pay 6 per cent, interest on the loan during the time required to mature it. This was legal, and every payment of dues he had idready made and every payment of dues thereafter made on that stock went to his benefit, because it contributed to the maturing of his stock, dating from his first payment. With regard to the “premium stock,” every payment he had already made before obtaining the loan and every payment thereafter made went to the benefit of the association, because lie, in effect, surrendered the premium stock to the association as a bonus or usurious exaction. He surrendered to the association all he had already paid in and all he agreed thereafter to pay as dues on the premium stock, as the consideration for obtaining the loan on his borrowing stock. \s to this stock he ceased to have any beneficial interest. It went to the association as a premium for the use of the money advanced. This was not sanctioned by the Tennessee law, and was usurious and illegal; and in settlement he is entitled, we think, to credit for all those payments from the commencement, because under the scheme they were usurious exactions. Counsel for the association urge that until there was a loan there was no premium stock, and that prior to the loan all was investment stock; but, as is pointed out in the opinion of Judge PAUL, the payments made before the loan, as' well as those made afterwards, were paid for the purpose of maturing this premium stock, and these payments advanced the stock towards maturity. The transaction exacted of the borrower that he should surrender all interest in this premium stock to the association, and it was a usurious consideration for the loan. Equity requires that all payments thereon should he credited.

There is no other question raised by this appeal of the Southern Building & Loan Association. None of the borrowing stockholders have appealed.

Binding no error in the decree, it is affirmed.