                                                     :
                           NO.   3050
       (Affirmedby,Letter to Hon. Callan Graham, Ch. Comm$tte.e
                        Rouse of,Representatlves,Jan. 31, 1951)
       on State.Affair.4,
       .HOU
          SE BILL NO. 420~IS'BECONSTITUTIONA
                                          L'
       Opinion holding House Bill~Ro..&       .(&all 'A   Bill3
       unconstitutionalbecause:,.                        .
                                                      .~
                                                       .
   '(.(1;. "It violates  ~&tic&    ‘XVI, Section 11, by -attempting
   .; to authorize   interest' of -dre.thah-ten,pef,,,cent.per .an$um.
                                         ,.
      (2) It is a special'law.88flxing      the +aii'$e
                                                     of interest+in
      violation of .Constitution,    Artlcle~
                                    .~        III;~?$@tlon 56i
      Q)*.~ It.is dlscrimlnatory~lnviolation of .*%qual"Protec-'       .'.:
      tlon? Clause of Federal~Const@ut$onand-'TexasConstitution,:
      Article'I Section 3, Article I;.~S~otlon'1~,~~~~~~ticle
      III, SectIon 56;'       ;.~
                                                                   _’



                   OFFICE'OE.:
                            THE AfiOREEY GENERAL '-' ':~':
                                                         .'

                                               May 13, 1939
 Honorable R. Emmett'Morse           .OpinionEo; 9-726,
 Speaker of the House of             Ret.Constltutionalityof Commlt-
  Representatives     ..         .:: tee amendment to Iiouse.Bill No.
 ,Austin,.
         Tees                        420, ,whlch&'a bill to regulate
                                      the business of making loans of
                                    -~$5C@.OOor less-and provides.‘,
                                      that such lenders may make cer-
                                      tain &are;@ in additlon,to lO$
 Dear Sir:                            Interest.
           4ie beg ‘to ~ackno#edge receipt of your request .ofMay
 1st  for an opinion of.th$s department on <theconstitutionality
,~of the above mentioned .bill@ibh~ls now pending before the'cur: .'.
 ,rent'sessionof,-theLegislature. Bue:to'the importance of-the
 Hon. R. Emmett Worse, r@e 2   (O-&6)


 question and the complexityof the many legal problems involved,
 we have given the matter extensiveand deliberate consideration.
 We are pleased, therefore,to submit this conference.opinion
 which reflects the research and deliberationof the entire Attor-
 ney General's department.
            The Committeeamendment to House Bill No. 420 consti-
 tutes a comprehensiveact to regulate the business of making
  small loans not exceeding9b5CQ.00.We attach hereto a copy of
 the bill so that the same may be referred to in conjunc.
 this opinion, but shall summar$.ze the salient features RhIith
                                                         o
:.bia,asfollows~:                        .:'
            Section 1 sets gouts
                               at length ~thepurposes of the bill,
 which are stated to“b~"‘~~'lie~d':~or're~ted-~~credit .to small
 and necessitousbcrrowers,brought about by.econdc conditions.
  The bill provides for 'thesu@ervisionand'licensI.ng by the Rank-
 ing Commissionerof the State:~of  al.Yperscns,:corporations,  etc.,
 who engage in the business of making..smaUloans expresslyex-
~.
 cepting however banks.'savings b&ks~.?4orrisF&n banks in-
 dustriai banks; &i'a&investni&t      co&nies    insurance gompan-
 &es,~trust companies,,building:~andl&n,..assocIatlons,credit
 unions Andypawnbrokers (Section,20)::~~Licensees'underthe act are
 expressly permitted (under,SeotlonU-A) to charge inaddition to
.lO$ per anuum interest (l).'an initial~.chargeof 5$ and (2) a
 monthly charge of.lMeth8:~unpaid bal&nce of the loan not to
 8Xc88d,$2,CO.-- In th8 8v8nt these:pertissive'8additiona~charges*'
  should be held by a~court inn&y partlcula,r case %ot to be charge-
 able $o the borrower",the:licensedlender shall be entitled to a
 return of principal less 10% penalty (S8ctlonIQ-&. The bill con-
 ~~~ins.many.regulatorj~.pr~9si~ns~and.provides.a'criminal  penalty
 forvIolations (Section19). The Bill, in Section 24 thereof,
  expresslyrepeals the 'LoanBrokers' Regulatory,Act (Acts 1927,
 40th Le islature, 1st Called Session, page 30, Chapter 171, the
  annual 1150.00 occupation tax on Loan Brokers (Section14 of Ar-
  title 5069,:5071, 5073, Title 79 R.C.S. 1925).only in so far as
  they ar8 inconsistentw$th,thls <ill.
            The~AttorneyGeneral, in passing upon the constitution-
  ality of proposed or enacted legislation,may.not look to the
  policy, wisdom, or deslrabllltyof the'Act, but he is concerned
  solely with ~thequestion of whether or not the particularAct
  comes within the limitationsprescribedby th8'Stateand Federal
  Constitutions.'~-,,In
                     determining this question, he must b8 guided
  by the decisions.andpronotuicements of th8 Courts of Texas end
  the United States. 'When the Supreme~.Courtof Texas has defined
  the.meaningand applicationof a particular provision of the Con-
  stitutionof TexaS,.it.is$ot with%n the province of the Attorney
  General to seek,to~place-any~'djffsrentconstruction upon it. It
'..
  is.hLs duty to follow the:interpretationas defined by the Court.
                   : ,~, :;;~~,:
                               ;
Hon. R. Emmett Morse, page 3   (O-726)

          The essence of House Bill 420 is the legislativesanc-
tion, contained in Section 13 thereof, permittingthe lender "to
contract for and receive8 from the borrower, in addition to ten
per cent per annum interest, certain "charges as reimbursement
for all expenses incurred and payment for all servicesrendered
in connectionwith the loan." May the Legislatureproperly per-
mit such charges in view of Article XVI, Section 11, of the
Constitutionof Texas? which provides:
          "All contractsfor a greater rate of interest than
     ten per centum per annum shall be deemed usurious, and
     the first Legislature after this amendment is.adopted,
     shall provide appropriate pains and penalties to pre-
     vent the sam8....".
           What-is the definition ,ofinterestas used in this pro-
vision of the Constitution? Does it.mean.tW ekf;return on the
loan to th8~ lender, or does it mee.the total amgmt paid by the
borrawer to-the lender including incidentalexpenses in connec-
tion with the loan? Gaines J speakingfor .the..Supreme   Court
of Texas.in Parks v..Lubbo&(i899), 92.Tex. 635, 5l.S.W. 322,
.quo$?d-the.,commonlaw definition of'.interest
                                             from Abbott's Law
Dictionaryas 'being8aUcompensationusually .reckonedby a per-
centage of the loan, use,or forb8arance'ofthe money;" Article
5069 Revised Civil Statutes.of Texas, 1925,:adds&he word "de-
tention" to this common law definition. It reads:
          n'Interestl,isthe'compensationallowedby law or
     fixed by the parties ,toa contractfor the use or for-
     bearance or detention of mosey......"
          With the possible excepticnof..theword Nd8tention1f
              definition is.declaratoryof the common law. 1%
the stat$itory~
is self-evidentthat the legislature,.~ynot change the meaning
and effect of the constitutionalprovision by altering either
the statutory definition of !%iteresttl
                                      or by amending the stat-
utes heretofore enacted,providlngpains and penalties to prevent
usury as directed~bythe.Consti.tution.
          As to whether expenses connect8d.witha Sloanare in-
cluded in VnteresV1 as that word is used in Article jor1,Section
11, of the Texas Constitution,let uslookto the ~cases. Texas
courts have uniformly held that .the,compensation to the lender
may in no event be more than 10 per cent. This prohibitionmay
not be circumventedby subterfuge suchas calling a part of the
compensationa "service charge?, ncommission~tInspection fee"
or "storage charge91if it isin fact'V.nteres
                                           , .I;in disguise".
          ItIfthe amount paid.by th8~borrower to the lender
     in excess of the.legal,,interestwas as.compensation
                                                        .-   .




Hon. R. Rmmett Morse, page 4~ (O-726)


    for the us& of the money loaned it is usury, whatever
    may be the guise under which the transactionis
    clothed." Hudman v. Foster (AustinCourt of Civil
    Appeals) 210 S.W. 262,
          Thus in Joy v. Provident Loan Society 37 S.W.(2) 2%
(writ of error diSIdSS8d)  the Texarkana Court :f Civil Appeals
held that a pawn broker'dght not collect."s.torage charges'!
from the borrower in addition to ten percentinterest. 'The
court said:




     than the regular.zra~of&$erest :.woXi&dgiv8.*!'.
                                       ....,.
                                            - ,,_
                                               -:.  (Empha-
     sis ours)
         -,.
         .~-~Forres~o~~S~~~~~~~~o~~~~~~e~to~'~v..:~ooks~~(Waco
Courtof~ Civil ;Appeals:,1932)zq,51
                              ‘&W;'(2); &5 ,:the':court:~declared
theloan:usurious.~becapsethe-barik:&arged &e.%rrower'a ten
yer 'center
         "servlce~~charge"-:~~'-ddit~on.~to::'a,,:ten
                                              'R&:cent:interest.
   that:.
        opinion tht$
                   -icourt
                         said?,,-.,
                                 .:'



                    such e v c s. The evidence wholly
    .failed.to~,sh~~.~t--~~~i,~~,,tra~  service wasrendered
     as would authorize a charge therefor,~'.~~:.~means
                                                      em-...
     ployed in this case cannot be used to avoid the effect
     of the usury:statutei~~r
                            To;allowextra;c&rgas:~forsuch
     service~s;,.would:de.stroy::.the~
                                pqrp0se.I
                                        o$-.,thel
                                               usury flaws.
     Independent:::L~ber,~~Company,-~..'.Gulf,,Sta.te;Bank,..
                                                    299 :ZLW.
     939;:~':Slaughter:Com$any,~v.~~,,Rller,-
                                      196~.-S.W.~~,704.",...
                                                       (Empha-
     sis.o*.,).,
               ..- ~.

         .:$&.ce :RcCl&d~on sp&king,f'&j~jjh,~
                                            'Austin.
                                                   Court of Civil
Appeals In Reltimore.Trus~t6ompan.y
                                  ;r;.:-.~nders.,~~~,:S.fdo,(2)
                                                         710,
(writ-of error ~diq&ssed)l
                         said:, ~~
.     .




    Hon. R. Emmett Morse, page 5   (o-726)

          "Under this state of facts it is clear that the ex-
          penses, testified to by Viner as going to make up
          note 2, were expenses incurred by the bond company
          in the conduct of its business; that is for printing,
          negotiating,etc., its own bonds and guaranteeingthe
          collateral securing them. They were not in any proper
          sense expenses incurred or services rendered to appel-
          lees by the bond company in the ca city of broker or
          agent for appellees (the borrowersp"or otherwise. The
          bona company might as properly charge to appellees
          its office rent salaries of its officers,~agentsand
          employees and o-&er expenses of operating its busi-
          ness."
              In the case of IndependentLumber Company v. Gulf State
    Bank 299 S.W. 939,'(writof error refused), the Galveston Court
    of Civil Appaals held to be usurious a series of loans on which
    a bank charged the borrower eight per cent "inspectionfee" for
    inspecting the property by which the.loans~wereSecured. The
    evidence showed that the "inspectionfee? was charged in all in-.
    stances regardless of whether or.not an:inspection.actually was
    made. The court said:
          %idln&tte~~    it 'was&v8% ~eken.contemplatedthat appel-
          lant(the borrower) was to..nordid it in fact ever get
          anything except the use of'the money. No quid pro quo
          could     thereforehave gone to it,for anything else.....
          Th8 mere takingoutin advance, by the, discountingmeth-
          od, of the full conv8ntionalrate in Texas of 10 per
          cent per annum didnot constituteusury but that malum
          prohibitumlay in tacking on still another six per cent
          per annum charge,for,noadditional or different service
          to the borroweri,,but    for 'th8 amount of trouble to the
          bank in carrying that type of loan.' Fowler v. Equitable
          Trust Company, 141 U.S. 384, 3.2 S.Ct. 1, 35 $.Ed. 786;
          F8d8ral Mortgage Company V. Bank, 254 S.W.,1002."
              In the case of Texas Farm~MortgageCompany v. Rowley
    98 &W.(2) 8%    the~FortWorth Courtof Civil Appeals held that
    certain notes earing 7&% interest secured by deed of.$&&t were
                  i
    usurious because the deed of trust stipulatedthat the borrower
    should pay all taxes which might be assessed against the notes,
    which contingent taxes When added to the 7+$interest of the
    notes tip&&&total more than 10% which would amount to usury. It
    is to be noted that th8Se taxes were clearly *expenses incurred
    in connectionwith the loan* as contemplatedby Section 13-A of
    House Bill 420. Yet the Court of,Civil Appeals considered them
    to be within the meaning of "interest"if chargeableto the bor-
    rower. We quote from.that opinion:
                                                                          .     .




Hon. R. Emmett Morse, page 6                       (O-726)


     "And th8 provisionin the mortgage, to‘the effect
     that the borrower would gy~any taxes that might
     be assessed against the note while the holder is
     a resident of another~county manifestlywas in-
     tended.to prwide for ~paymen   4 of taxes~on the
     n ote in the event it shouId have"a taxable situs
     in that county by reason'of establishinganof-
     fice or agency in that county for transactionof
     any.of~its buciness. The stipulation could not.
     have been employed,'with any other contingencyfin
     view; and therefore.itmanifests an intention
     to charge more than 10 Der cent interest forkthe
     use of the monev borroved;'in the event of the
    happening ,of that.contingencya.@ if the ..taxes
     ofi$f&!
           ':cote
                ;.i
                  !$,+$f
                       ~f&$&j't;. ff44ereo$.;   'shotid:&- ;
     +&ea!;q:$.F ;dnt pr '&iilfm'  "~‘~miiphasis:     oys.).: '. .:
          .A~.cwT&'-
                 &I:.&iT'@&c.g*&#?         yg.: t,j& i&a:&r qjy;j@ Texas
~&,~~~&&;:~~~i':
               !~fi&;~;,;.&&,j&~&~  w. ,~~i&&s~i,~~@a     GeT'&&,;~
                                                                 o;$'.ae
&j~&g~~fix~~~~pfi&ql ~db~~ajibJi"t~:~~eine~,.~Co~t           a*:~+~ '10,
1939.;7*~~7+ig1ygg&.*a) o~~y~~a,+&g&+~            ;.tibajssw  cd**        et
.a1v. Elizabeth Rowley ec al,  the   ab&:.Q~o~~jC@&~f           &:::bpmon
of 'theFort,Worth.Courtwas expresslyaaprovdd. though the case ,,
,,,&.:
    keve'r&a f&.$$@'!,+@j-~d-i
                            *hat:<jja~~$&~ :'t;ie       ~hh~~~,lhad:;:6een..,
Didmrlv &e'dij&d..'ZWe!.Qdbt& 'from'wg. ejj&fon.b?:        th& ~&~&ssion
&&tis;ll;si”i,    ‘.   ~,-   ..: :,-:   .‘A .:r:    ‘~.,     ;~;‘i:,~j-
                                                      _i




                                                                              never
                                                                              stated:
              ."Howeve.r;
                        in'bur ~o$i#on the ,questionhas been
         foreclosed by the'SnI&me'~Court'inthe recent case
        'of Kansas City 'LifeInsurance Company v. Duvall,'
        :lOk'S.Wi(2)ll:'and~tkiat'-casecontrols 'thisone..,.
         It was held that such prokision~inthe contract cre-
         ated a contingencywhich madadethe Ioan usurious from
         its beginning;....The record shows that it'was proven.
         that'for the'year 1933 the rates for State, County,
         school and road purposes in~hentonCounty; where 'the
         land was situated,were siichthat upon the face'value
         of the note the taxes,-'woiild
                                     have amounted to such sum
         that when added to the interest provided for in the
Hon. R. Emmett Morse, page 7   (O-726)


     loan the interest rate would have exceeded 10 par
     cent. We think the decision above mentioned has
     again decided the question thus urged. It was
     there held that because of the tax provision in
     the contract, if the contingencyarose in the fu-
     ture by which the tax wh$bh might be paid would
     cause the rate to exceed 10 per cent then the
     contract was *potentiallyusurious' hrom the begin-
     ning."
          The foregoing cases clearly illustrate the well-estab-
lished rule in Texas, that when it appears that any charges made
against a borrower in addition to the maximum rate of Interest of
10 per cent per annum, whether they b8 called nexpensesllanservice
chargesnt,Ynspection fees", "storage chargesYor "taxes
fact additional compensationto the,lender; ,andas such 4.n~~8%
in alsguls8", it then follows as.8 matter of ,law'thatthe loan is
usqrlous. We are, therefore,forced to the conclusion that the
courts of Texas have-definedYlnterestwso as to include all com-
pensation paid to the lender for th8 ,nse'of money, though a part
thereof mayrepresent nr8imburs8m8ntfor expenses incurred in
connectionwith the loan." Applying this definition of nlnt8rest1R
to the "charges" expressly rmitted to be made by lenders under
Section 13-A of House Bill r 20, we are unable'to excape the con-
clusion that these %harg8sn are presumptlv8lyadditional %nter-
8st"within the meaning of Article~XVI,Section 11, of the *sti-
tution of Texas.
          We are not-ware    of the"&&,e holding ~thata borrower
may be properly Chargedwithout-of-pocket expenses arisi$ggin
connectionwith a'loan which are paid to
visions in notes providing that th8
in the event the note be placed in the handsof an attorney for
col.lection.havebeen upheld. StanfordV. united States InV8St-
m8;t zorporatiQ@~<272 S.W. ‘568;Min8r vi Paris Exchange~Bank,53
        . "A commissionpaid to.the agent or broker of a borrower
for'servicesrendered in respect of the transaction,will not ren-
der a loan usuriou~.~~~42 Texas Jurisprudence934; Williams v.
Bryan, 68 Tex. 593, 5 S.W. &Ol. I?or.dothe courts consider com-
missions pald'to agents of the lender to be in the nature of addi-
tional interest,where the'agent is ~the "special"as distinguished
from the ng8neralnagent of the lender. This rule is well stated
by Judge Smith of the San Antonio Court of Civil Appeals in Hughes
v. Security F!ullding.andLoan Association, 62 S.W.(2) 219:
     Ylhe act of an agent, having only special and limited
     authority; in charging the borrower a fee by way of a
     commission for making a loan or for examining title
     to property to be mortgaged $0 s8cure th8 amount of
                                                            .    .




 Hon. R. Emmett Morse, page 8 : (O-726)


      the loan is not the act of his principal,and the
      fee so charged does not render the loan usurious.
      Jones on Mortgages,642...
        '*Therule would be different, so as to charge the
        lender, if the agent were a general agent, with
        authority to make loans for the lender in such sums
        or at such.timesas he pleases. Jones, 642-a. In
        this case the agent had no such authority. His au-
        thority extended no further than that of receivingand
        forwardingapplicationsfor loans, deliveringmoneys
        actually lent, and collectingand remitting install-
        ment payments from the borrower. He had no authority
        whatever to make loans, to :pass:upon~.risks,,or ap-
        praise se'curities for ..apuelleei.S.
                                          ~i.~
  t388 also: N ‘oelv.'Paahandle.~Building   and-LoanAssoclatlon, 85
  S.W.@. 733 hrit of error~refus8d);::.Sales     v. .Wrcantile:lVa-
 .tional.Dank,  89 S.W.(2!3.2+?7:.+rit of error~diSmiSS8d).'.-Pla.
                                                                 same
 rule with respectto .ganeraLagents;~would     apply:to Servants or     .'
 ~employeesof the lender::..Baltimore:Trust    CompanyV:Sanders, 105
  S.W.(2) 710&rritof .8rrordh~missad)~.~     Cost of..-preparation:
                                                                 ana
::examination'of.abstracts   mayLbech+rged to~the borrowers::e.
                                               :
             In all OS sh8se::caSes  where'the cou&~sanction8d'pap-
  ments by the borrower for.8xpenS8.6   &r.connection:withthelloan it
‘<isto be noted that in every instance the payments were:not mad8
  to the lender, but to $hir nartieg We beli8V8 this fact:clearly
  distinguishesthese caS8s ~rom~.the.&tuation~contemplated     by Set-
  tion 13-A~:.Ofthis Bill&,. W8;hav8  been unable to find a ~SingleT8XaS
  case which permits the lender.-to:collect   from.the borrower, in
  addition to interest in8xcesS of ,lO&for expenses incurred or
 ,servi.ces rendered:byhim in connectionwith the loan. See.Trinity
  Fire InsuranceCompany v. Kerrville~    Hotel .Comuany(Texas Supreme
  Court) 103~~S.W,~ (2) 121.                          -:

           Doubtless it may be'argued that the lender could.render
 services to the borrower in connectionwith.th8~,loan which serv-
 ices are not .ofthe.ty$e ordinarilyincidental.toa loan and which
 could be rendered by.the lender.moreeconomicallythan the.same
 service could be rendered by,a&hird party. .IIt may~be further
 argued that compensationfor such service is.not to be construed
 as interest if the slendercanrender an accurate.accounting.show-
 ing that such services represent out-of-pocket.expense,which can
 be isolated as chargeableto the particularloan and distinguish-
 able from the lender's general overhead.expenseor expenses,
 which are incidental tothe lender,'sgeneral business..
           The decisions of.ourvarious appellate courts negative
 this argument but if they did not, 'we think the bill attempts to
Hon. R. Emmett Morse, page 9   (O-726)

authorize interest of more than ten per cent in another respect.
Section 13(A)(b) attempts to authorize the,borrowerto contract at
the time of the making of the loan to pay not to exceed 13 per
cent per month of th8 monthly balance as a service charge presum-
ably to compensate the lender for the cost of collecting {he
amount of the note. It iS importantt0 not8 that th8 borrow8r's
obligationto pay for such potential services which have not been
rendered at the time of the creation of the .fY
                                            o ligation to pay there-
for is unconditionaland is not dependent upon the lender actually
rendering such services thereafter. The act would authorize the
borrower to obligate himself to pay an amount certain whether such
servicesmay be rendered or not. Since the validity of the con-
tract must be tested as of the date ~ofits execution, the fact
that such s8rvic86 are thereafteractually rendered by the lender
do86 not remove th8 vice that the borrower uncond&tionallycon-
tracts to pay an additional sum for such services regardless of
whether or not they may be rendered., It cannot be questioned
that the borrower's obligationto pay for servlcas that are never
readered is properly construed as .interest.-3y the 'samelogic
the borrower'sunconditionalpromise .to..pay:~forfuture services
which may ormay not be.renderedbyethe '~8nd8r;must~alsobe
construed as interest. .Siticethe bill.attemptsto authorize such
unconditionalobligationin addition:tolnt+rest,of10 per cent
per annum; it is clearly contrary to :theconstitutionalprohibi-
tion against usury.
          &ikeWi& clearly diSt,ing&.habi8ar8 ~thosecases wherein
the lender 1s.paid by the~?wrroy8r :for property or .s&-vic8s not
connectedwith the customary cr8.ditor-d8btOr   relationship.
          "Without violating the'usurylaw charges,maybe tide for
legitimatebenefits to a borrower;.~received  by him either .from
third persons who did not share them with th8 lender or from the
lender himself for some~distinctly separate and additional con-
sideration other than the simple loanof money" - 42 Texas Juris-
prudence 931 40. Thus a man may'properly'chargefor his services
in buying b&ding materials although he may be lending the money
to buy them with. ~Crrv. McLniei 5 S.W. (2) 175, 30 S.W.(2)
487, affirmed by Corn.of App. 33 ~S!Wi (2) 427.
          In Slaughterv. Eller (AmarilloCourt of Civil Appeals,
writ of error refused) 196 S.W. 704; the court held that the
lender might receive compensationfor his labor in supervisingthe
conduct of the borrower'sbusiness. The.court said:
     (IThecontract in this case provided the means by which
     Slaughter might keep informed of the condition of
     Eller's business and prevent a use of funds other than
     in the business which Slaughter,wasfinancing. The
                                                        .     .




Hon. FL Emmett Morse, page 10   (C-726)


     attention to the details by which this was to be ac-
     complishednecessarily imposed some labor. !lkebor-
     rower might legitimatelyagree'to compensate the
     lender for servicersof.such char& ter, although per-
     formed in the interest of the lender, providedal-
     ways that such charges are not made a mask behind
     which to conceal the true purpose of the parties."
     The court said further:
     "It is also stated generally that any advantage or
     benefit exacted which, added to the interest reserved,
     increases the compensationreceived for the loan to
     an amount in excess g&the lawful interest constitutes
     us@f.i;;)' ".      ',' ,;,

           Inthe~same~category may be placed the.casesrelating to
buildingaud ~ldan~associati'ons !whereinthencourtShave recognized
,theam    capacity,ofa&an as borrower atia StOCkhOld8r. Conti-
n8ntal 'Savingsa.ria l3ui1ding~~~Association
                                         v. w00a @astlana~~Courtof
civil' AppeCI~~).~3.'S.W;:,~~2).:770i'affimaed
,641;: ,-       .,: ;:;       ,: ,'~:. by com+pp. 56 S.w.(2)
           T&&g'n~'from     :the'qUestion~,of
                                            what is and what is
 not YnteresV' as d8fiXIed.by thecoUrts.of this state;let us con-
 Sid8r the more general question:. to what extent a-s  the Usury
  revision of the T8xaSCOnStitUtiOn circumscribethe authority of
%l 8 Legislatura~to.ex8rCise ,its'.discretion
                                            with'referenceto
 regulatingthe busiriess;of making loans?.~May the tigislatureig-
 nore'the constitutionalmandate to.npr'ovide'appropriate pains ma
 penalties to prevent" us,Uryas to a,specific cla~ssof lenders in
 the furtherance of what it .deems'tobe the public welfare?
          This question was squarely'beforethe Supreme Court of
Texas in Watson v. Alken,.   Tex.'536, wherein it consideredan
usurious loan made~after the adoption of the Constitutionof 1876
but prior to the enactment by the Legislatureof any statute pro-
viding "pains and penalties*'for usury. 'Chief Justice Gould in
that opinion said:      :~'

     “on I&y 27, 1876,~Watson~%&r$@Iedof Aiken $3,000 agree-
     ing to pay interestat the ranted
                                    of eighteen per cent
     Der annum. The constitutionwhich took effect in April
     of that year provided that in the absence of contract
     the rate of interest should not exceed eight per cent
     per annum, and authorised'partiesto contra.& to "agree
     upon any rate not~to exceed twelve per cent per annum.'
     It then proceeds thus: 'All interest'chargedabove
     this last named rate'shall be deemed u.su%=ious,
                                                    and the
     Legislature shall at its first session provide appro-,
     priate pains and penalties'toprevent and punish usury.'
-     .




    Hon. R. Emmett Morse, page 11   (O-726)


          Article 16, Section 11. . . .
          "In our opinion Aiken occupiesno more favorable
          position than if his loan had been made after the
          act of the Legislaturetook effect. When his loan
                                            tue of the cpn-
          bush
          sti t 0                               it was left
          to the Legislatureto 'nrescribe' rains and uenalties
          fl                         'I a contr ct for usur-
          ious interest was a contract in violation of law."
          @mphas,i~ours)
              Equally persuasive of the proper constructionof such
    a constitutionalprohibitionisthe, more recent case by the Texas
    .SupremeCourt, City of Wink v. Griffith.AmusementCompany 100
    S.W. (2) 695, wherein the court was required to construe&ticle
     III, Section 47, of the Stat8 Constitutionwhich prOVid86 that
    "the Iegislatureshall pass laws prohibitingthe establishment
    of lotteries and gift enterprisesin this state, as we1.las the
    sale of~ticketsin lotteries,giftenterprises or other evasions
    involving the,lottery~principle,  astablished~orexisting in other
    states." Chief Justice'Cureton.found   that "lotteries&have
    b88n prohibitedby the.,RenalCode inaccordance withthe consti-
    tutional mandate. 'Gift enterpriss# ana~,%therevasions involv-
    ing the lottery principleI neverthel' 's;remainand stand con-
                                        ~~.
    demned by the constitutionof'the sta as being against public
    policy....rfjefendant in Error's 'Rank.Night'plan was obviously
    an evasion "o?"thelottery laws~ by the-~avoidance.ofa direct charge
    for prize chances.... but neverth81ess.~r..manif8stlyan attempted
     'avoidance'o,fthe'lotterystatute ~:'by artifice' in accordance
    with the generally accepted definition of ~'.evasion'.Tnerefore
    defendant in error's 'Rank Night' plan stands condemned bv the
     Constitutionof Texas. Being condemn@ by the Constitution,it
     is against the 'publicpolicy of the'Statelt'. (Emphasisours)
              Chief Justice Cureton wasthere speaking of a constitu-
    tional provision which directea~the legislature to pass remedial
    legislation as does the usury provision;,theLegislaturehad
    there failed to provide a remedy for a part of the evil recited-
    by the Constitution,and ye,tthe Chief Justice declared that the
    defendant'sact "stands condemned by.the Constitutionof Texas."
    Applying this reasoning to our question, it follows that the
    usury provision of the Constitutionpermits of no discretion by
    the Legislatureto withhold as to any class the "pains and penal-
    ties" for usurywhich the Con,s.titution~prescribes.
              In view of the above,two clear pronouncementsby the
    Supreme Court ~ofTexas, we feel it unnecessary to burden this
    opinion with additional citation of authorities. Our conclusions
    as to the limitationsplaced upon the Legislaturewith reference
Hon. R. Emmett Morse, page.12 (O-726)


to loans which, under the d8fiXXitiOn of ~'inter8st1~
                                                    announced by
the tourts, are in fact usurious could not be better expressed
than in the language of Judge Laitimore,speaking for the Texas
Court of Criminal Appeals in Juhan v..:&ate, 216 S.W. 873:
    'We are not permitted to concern ourselves
                                           '. with the
    question as to whether the loan broker is necessary
    and useful in a community, to meet the wants of
    those~wholack ability to measure up to the financial
    standing required by the bankers, nor as to whether
    the loan shark is an evil that should be effectively
    banished from our midst. Evils must be met and
    abolish8d or minimized according to the wisdom of
    our ~&hl'8,       u within he limits fixed bv our
    $%mstitution.w &m$Lasis 0-A)
          We therefore,respectfullyadViS8 you that it is the
opinion of t&is department that th8 Committee amendment to House
Bill 420 exceeds the limitations of.ArticleXVI, Section 11, of
th8 Constitutionof -Texas in that Section 13-A thereof purports
to put the cloak of legis~tive sanction about a special class
of loans which may be usurious as a matter of law.
          We also believe that this bill is unconstitutionalfor
several additional reasons. We shall mention th8Se briefly with-
out attempting to discuss each one exhaustively.
          Section l3-C.of th8 bill seeks to give to,all charges
permitted by Section 13-A a presumptionof validity. This we
believe is contrary to the spirit.ofth8 constitutionali&bition
against usury. As said by the Texas Supreme Court in Hemphill v.
Watson, 60 Tex. 679:
     Vhe section of the Constitutionabove alluded to
     (Article16, Section 11, of Constitutionof 1876) made
     usury a quasi offense which the Legislaturewas
     charged with suppressLlg and punishing. It even de-
    fined what should amount to the offense of usury, ae-
     claring such offense to consist in charging interest
     at a greater rat8 than twelve per cent per annum.
     This provision is prohibitoryin its nature and self-
     executing so far as to render all contracts of the
    kind denounced immediatelyillegal; and it left to the
    .Legislaturethe only remaining duty of saying what
     penalties should be impo.seaupon offenders against
     this clause of the Constitution. Cooley on Constitu-
     tidnal Limitations,100 nOtej  Law v. People, 87 111.
     385.
     "'A3
     power to uass laws of a certain character is urohibitory
a    ,.,




    Hon. R. Emmett Worse, page l3    (O-726)

           of such acts as those laws would authorize.13t
              We believe.Section 13-C of,this bill is discriminatory
    as to certain features thereof and thereforeviolates the "equal
    protection"clause of the United States Constitutionand the
    following provisionsof the Constitutionof Texas:
           Article III, Section 56. "The Legislatureshall
           not, except as otherwise provided in th&Constitu-
           tion, pass any local or'special law authorizing.....
           fixing the rate of interest."
           Article I, Section 3. "All free men, when they form
           a social compact,have equal rights,.and.no man, or
           set of men, is entitled to exclusivesseparate public
           emoluments,or privil8ges,~~but in considerationof
           public services." :        ,.
           Article.I Saction~19: oivo.'kti&i of. this state
           shall.be'JrpriV8d:'of'~,lif8.;~
                                     liber.ty,..
                                              property, privi-
           leges or immunities;.orinanymanner disfranchised:,
           ~8XC8ptby Ch8 dUeCoUrS8,Of the +3W~Of th8.tind.w -1
              Section.l3C prOvid8S.that~if:a;loan.made~by a licensed
    lender in accorpance'withthe rate provisions-ofSection 13-A be
    found by a.court to.,beusurious, suchlender will be ~penalizea~
    only to the extent of lC$.Of the principalamount of the   lOan;

    whereas if.a'non-licensedlender (a!idhe;<may.be.in the 8Xempted
    categoriesand therefore:ineligible 'for.a license) should make
    the identical loan, h8 issubj8ct to the penalty of double the
    amount of usurious interestpaid, under Articla 5073 of the Re-
    vised Civil Statutes.
              The last paragraph of.Section3 of the bill requires
    every licensee to appointthe RankingCommissioner his attorney
    for process of service; No provision is made in the bill requir-
    ing the Ranking Commissionerto give notice of any service of?;
    process to the defendant...Such provisionswere held to invali-
    date the Loan Brokers statute of 1918. (Acts 34th Leg. 1915,
    C 28, Vernon's.AnnotatedCivil Statutes, Supplement1918, Arti-
    cles 6171-a-6171-1)as per the opinion of Lattimore,J in Juhan
    v. State (Tex.Ct.of Crim.App., 1919) 216 S.W.(2) 873 at page 877:
           n....and then to fU#her write in section 7 of said
           act (article617lg), as a.part of 'the law governing
           such business', that such private citizen shall file
           with the county clerk of each county where he does
           business a written, irrevocablepower of attorney,
           naming the county judge of such county as his duly
Hon. R. Emmett Morse, page 14   (O-726)


     authorizedagent and attorney in fact, for the pur-
     pose of accepting service for him or it or being
     served with citation in any suit brought against him
     or it, in any court of this state, 'and consenting
     that the service of any civil process upon such
     county judge as his or its attorney for such purpose,
     in any suit or proceeding,shall be taken and held
     to be valid, waiving all claim and right to object
     to such service or to any error by~reason of such
     service,'is to attempt to place such obligationin
     said bond as to make it unreasonableand.discrimina-
     tory. No citizen of this state can be compelledto
     relinquish or.waivehis right to his day in court'as
     a condition to engaging in any lawful business. Nor
     will a law requiringa bond seeking to impose such
     condition be upheld by us. We,are not surprised
     that the bonding companies and solvent citizens,as
     iS disclosed by this record, r8fUS8d t0 make for
     appellant the bona required by this act. uIId8rits
     conditions and th8 terms of this law, th8 county
     judge~mighi!accept service, or~b8 served with cita-
     tion in a suit against appellant in the most remote
     county in the state, and in a lawsuit wholly foreign
     to th8 loan brokeragebusiness, ma In such case,
     even without lnnniledgeon the part of appellant of
     Said Suit Or SeZTiC8, Or acC8pt8d 68IViC8, a-jUdg-
     ment m$ght be rendered against him and his bondsmen
     for any amount; ana,.8ven though the service be d8-
     fective, erroneous;and illegal, appellant andhis
     suretieswould be powerless,-forby the express
     provisions of the law such written appointmentof
     the county judge as his'attorney in fact must con-
     tain ~appellant'sconsent to,sUch service, and his
     waiver of any right to object..to:anyerror therein.
    'Notwithstandingthe fact that;'asto :the.ordinary
     citizan erroneousand defective service renders the
     judgment either void~or voidable, as the caSe may
     appear, for some reason effort.ishere mad8 to take
     from the man engaged in the business of loan broker
     such right, and he is thus penalized and denied the
     right of equal protection of the law, and deprived
     of his property and privileges~withoutdue coUrse
     of law. !Phereis no provision in this law requiring
     the county judge to notify, or in any other way ac-
     quaint, the loan broker with the fact that he has
     accepted service or been served with citation in any
     suit against him, which facts may result from the
     considerationthat it would do the loan broker no
     good, inasmuch as he could not take any steps to~re-
     lease himself by reason of any defect in the cita-
     tion....."
Hon. R. Emmett Morse, page 15       (0-726)

See also Hess v. Pawloski,274 U.S. 352, 47 Sup.Ct. 632, 71 L.&I.
1091, wherein the Massachusettsstatute providingfor substituted
service on non-residentmotorists was upheld because "it is re-
quired that he shall actually receive and receipt for notice of
the service and a copy of the process." We, therefore,believe.
this provision of Section 3 of the bill is a denial of due process.
         'Ihecommitteeamendment to House Bill No. 420 being un-
constitutionalfor the various reasons above enumerated,we shall
pretermitany more detailed considerationof its specificprovi-
sions.
                                    Yours very truly
                                    AT!CORNEYGENERAL OF TEXAS
                                    By/& Walter R. Koch
                                    Walter R. Koch~Assistant
                                    (s&Victor W. Bouldin
                                    Victor
                                       :   W.. Bouldin,Assistant

WFtK:FL/wb
          This opinionhas been consideredin conference,approved,
and ordered recorded.
                                    g;wCld&Mann
                                           ..
                                    Al!TORNEYGENERALGF!l!FXAS
APPROVED: tX'&NI;~CQJC.TEE
BY:          ,




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