                                           No. 02-433

               IN THE SUPREME COURT OF THE STATE OF MONTANA

                                          2004 MT 140


THE CONFEDERATED TRIBES OF THE
GRAND RONDE COMMUNITY OF OREGON,

              Plaintiff and Respondent,

         v.

QUANTUM FIVE, INC., a Montana corporation;
DELAYED EXCHANGE CORPORATION, a
Washington corporation; INK INVESTMENT, LLC;
RAYMOND G. GEHLEN, JR; JACOBSON DRILLING
INC.; BERNARD PATRICK,

              Defendants and Appellants.



APPEAL FROM:         District Court of the Twelfth Judicial District,
                     In and for the County of Hill, Cause No. DV-99-108
                     The Honorable John Warner, Judge presiding.



COUNSEL OF RECORD:

              For Appellants:

                     Shawn M. Glen, Deschenes Law Office, Great Falls, Montana

              For Respondent:

                     Stephen R. Brown, Garlington, Lohn & Robinson, PLLP, Missoula, Montana



                                                         Submitted on Briefs: June 12, 2003

                                                                     Decided: June 7, 2004

Filed:


                     __________________________________________
                                       Clerk
Justice Patricia O. Cotter delivered the Opinion of the Court.

¶1     Quantum Five (Quantum) defaulted on a loan resulting in the lender foreclosing

against it. Quantum claimed that the loan terms included a usurious interest rate. The

Twelfth Judicial District Court, Hill County, agreed and imposed a usury penalty against the

lender. Quantum appeals the District Court’s calculation of the usury penalty from the date

the note was executed until its maturity date, claiming that the usury penalty should have

been imposed through the date of the trial. Additionally, Quantum seeks an award of

attorney’s fees and costs. We affirm the District Court’s Order on the usury penalty

calculation and decline to reach Quantum’s request for attorney’s fees.

                                           ISSUE

¶2     A restatement of the dispositive issue in this case is whether the District Court

correctly concluded that the usury penalty should be calculated from the date the note was

executed until the date the note matured, rather than through the date of trial.

                  FACTUAL AND PROCEDURAL BACKGROUND

¶3     On October 30, 1996, Quantum borrowed $900,000 to purchase real property in Hill

County, Montana. The original lender promptly sold the note to The Confederated Tribes

of the Grand Ronde Community of Oregon (Tribes). The note carried an interest rate of

15%, with a default rate of 18%. The parties agreed that Montana law would control in the

event of a dispute. Under the statutes in effect in Montana at the time, the maximum interest

rate the parties could have utilized under either current or default circumstances was 15%.

Section 31-1-107, MCA. The note matured on November 15, 1997, at which time Quantum

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was to have repaid all principal and accrued interest. During the term of the loan, Quantum

was required to make quarterly interest payments.

¶4     Quantum defaulted on the note on February 15, 1997, when it failed to make its first

quarterly interest payment. Tribes began charging 18% default interest on February 26,

1997, and charged 18% until August 4, 1997, at which time a $3,661 principal payment and

a $120,751 interest payment was made, bringing the note current until February 28, 1998.

Another smaller payment of $33,655 was made in November 1997, and applied to interest

due. Having received no additional payments, Tribes again began charging 18% interest on

March 1, 1998. No further payments were made against the note.

¶5     On July 26, 1999, Tribes filed a foreclosure action against multiple defendants,

including Quantum. Issues associated with the other defendants were disposed of during the

course of the litigation and are not pertinent to this proceeding. From the record it appears

that sometime in 1999, Tribes received notification from counsel that the 18% default

interest rate violated the usury statute. Therefore, in their foreclosure complaint, Tribes

averred 15% interest in an effort to avoid any demand for a usurious interest penalty.

¶6     Quantum filed an Answer in which it argued that the promissory note’s 10% loan fee

in combination with the 15% interest rate on current debt created a usurious loan. In April

2002, the District Court issued its Order declaring that the loan fee and interest rate on

current debt was not usurious but concluding that the 18% default interest rate was. It then

calculated the statutorily-authorized usury penalty for a term commencing with the inception

date of the note and concluding on the note’s maturity date.

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¶7     The District Court also concluded that reasonable attorneys fees sought by both

parties should cancel each other out, based on Quantum’s success in establishing a usury

claim and Tribes’ success in their claims on the note and foreclosure of the mortgage. Tribes

ultimately received a net judgment in their favor. Quantum appeals both the calculation of

the usury penalty and the court’s decision regarding attorney’s fees.

                            STANDARD OF REVIEW

¶8     The District Court’s calculation of the usury penalty and its conclusion offsetting the

parties’ attorneys’ fees are conclusions of law. We review a district court’s conclusion of

law for correctness. MacKay v. State, 2003 MT 274, ¶ 14, 317 Mont. 467, ¶ 14, 79 P.3d

236, ¶ 14 (citation omitted).

                                      DISCUSSION

¶9     It is undisputed that 1) Quantum’s loan document contained an 18% default interest;

2) Quantum defaulted on the note; and 3) Tribes sent letters to Quantum demanding payment

at the usurious 18% rate. While Tribes proffered arguments that the interest rates charged

were not usurious, the District Court held otherwise, and under §§ 31-1-107 and -108, MCA,

assessed a usury penalty.

¶10    Section 31-1-107(1), MCA, establishes the legal interest rate that is allowed by

agreement. It states:

       (1) Parties may agree in writing for the payment of any rate of interest that
       does not exceed the greater of 15% or an amount that is 6 percentage points
       per annum above the prime rate of major New York banks, as published in the
       Wall Street Journal edition dated 3 business days prior to the execution of the
       agreement. Interest must be allowed according to the terms of the agreement.

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At the time Quantum entered into this note, the prime rate was 8.25%.

¶11    Section 31-1-108, MCA, authorizes the assessment of a penalty for usury and an

action to recover excessive interest. It provides:

       (1) The taking, receiving, reserving, or charging a rate of interest greater than
       is allowed by 31-1-107 shall be deemed a forfeiture of a sum double the
       amount of interest which the note, bill, or other evidence of debt carries or
       which has been agreed to be paid thereon.

       (2) When a greater rate of interest has been paid, the person by whom it has
       been paid, his heirs, assigns, executors, or administrators may recover from the
       person, firm, or corporation taking, receiving, reserving, or charging same a
       sum double the amount of interest so paid, provided that such action shall be
       brought within 2 years after the payment of said interest, and provided that,
       before any suit may be brought to recover such usurious interest, the party
       bringing suit must make written demand for return of said interest so paid.

¶12    Quantum maintains that the usury penalty should have been assessed from the date

of the note’s inception through the date of trial--October 24, 2001--rather than simply

through the maturity date of the loan, November 15, 1997. The reason for this argument is

obvious: the longer the term of the penalty, the greater the offset against the balance due on

the loan by Quantum. The District Court considered calculating the authorized penalty from

the date of the note, October 30, 1996, until the trial date based on E.C.A. Environ.

Management v. Toenyes (1984), 208 Mont. 336, 679 P.2d 213, but concluded that our

decision in Rustics of Lindbergh Lake, Inc. v. Lease (1984), 213 Mont. 246, 690 P.2d 440,

was controlling.

¶13    In Toenyes, the district court was presented with a suit filed by MMI against Toenyes

for recovery on a demand promissory note, and a counterclaim for damages for breach of


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contract. Among other things, the District Court concluded that the promissory note’s

interest rate was usurious, and assessed a usury penalty against MMI for a term commencing

with the date of the note’s execution until the trial date. Toenyes, 208 Mont. at 343, 679

P.2d at 217. Citing Bermes v. Sylling (1978), 179 Mont. 448, 587 P.2d 377, this Court

affirmed the calculation, explaining:

       The note was payable on demand and such demand was made prior to the
       initiation of this action. [MMI] assert[s] that upon demand the note matured
       and [it] cannot be penalized for usurious interest after that date.

       Obligations on the note . . . continued after demand was made for payment.
       The lender, MMI, did not cancel the rights it had under the note after demand.
       The note, usurious on its face, is usurious as long as its original existence
       continues. . . .

       . . . The fact that the lender in Bermes, like MMI, had made a prior demand
       for payment was not dispositive. Where the indebtedness on a usurious loan
       remains uncanceled up to the time of trial, assessment of the usury penalty up
       to that date is proper under Section 31-1-108, MCA.

Toenyes, 208 Mont. at 343-44, 679 P.2d at 217.

¶14    Approximately nine months after Toenyes was decided, this Court decided Rustics.

In Rustics, the parties entered into an oral agreement under which the borrower, Lease,

would purchase logs from Rustics and pay Rustics 17% interest on the unpaid balance of the

account.   Having fallen behind in his payments five months after reaching the oral

agreement, Lease signed a promissory note to Rustics reflecting a balance, with interest, of

approximately $15,000. The promissory note carried a 20% interest rate and was due in full

in sixty days. Rustics, 213 Mont. at 247, 690 P.2d at 441.



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¶15    Lease managed to pay approximately one-half of the balance by mid-August 1980,

two full months past the due date. Rustics sued to collect the remaining balance. Lease

counterclaimed that the note was usurious. Rustics, 213 Mont. at 247, 690 P.2d at 441. The

District Court ultimately entered a judgment for Rustics, the amount of which was partially

offset by a usury penalty. The court concluded that the statutorily-allowed maximum interest

Rustics could have charged under the law in effect at the time was 17%; therefore, the 20%

demanded under the promissory note was usurious. Unlike in Toenyes, however, the court

calculated the usury penalty based on the two-month term of the promissory note, rather than

through the trial date. Rustics, 213 Mont. at 248, 690 P.2d at 442. Despite Lease’s

protestations that the usury penalty should be based upon the interest paid both before and

after the term of the promissory note, the District Court determined that 1) the 17% charged

under the oral agreement before the written promissory agreement was executed was not

usurious, and 2) Lease failed to file the required counterclaim seeking affirmative relief

under § 31-1-108, MCA. Rustics, 213 Mont. at 248, 690 P.2d at 442.

¶16    On appeal, Lease argued for the first time, based on the recent Toenyes decision, that

the penalty should have been applied from the date the promissory note was executed until

the time of trial. This Court, without elaboration, ruled:

       We decline the opportunity to extend the rulings of Toenyes and Bermes to the
       case at bar which concerns a note due on a specified date. In any event, we
       note that the issue was not raised nor argued before the trial court. As such,
       [Lease] cannot fault the lower court for failing to reach the question. We hold
       that issues not raised in the pleadings or otherwise at trial will not be
       considered on appeal. [Citation omitted.]


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Rustics, 213 Mont. at 250, 690 P.2d at 442.

¶17    Quantum maintains there are significant factual distinctions between Rustics and the

case before us. We agree. We also agree that there are significant similarities between this

case and Toenyes and Bermes. However, as we did in Rustics, we again decline to extend

the Toenyes and Bermes rulings to the case at bar. We do so based on deference to the

District Court’s analysis and conclusions and the specific and unique facts in this case.

¶18    As stated above, § 31-1-108(1), MCA, authorizes the forfeiture of a sum double the

amount of a usurious interest rate which a note carries or which has been agreed upon by the

parties. To calculate this forfeiture, or usury penalty, it is necessary to ascertain the inclusive

dates during which the usurious interest rate applied. Montana case law has identified two

dates that can be used in this calculation--the maturity date of a term loan or the trial date on

a demand loan.

¶19    Quantum argues that the District Court erred when it calculated the usury penalty

using the maturity date of the note rather than the trial date. However, as noted by Tribes,

there is no precedent to support Quantum’s position. In Bermes and Toenyes, the Court

calculated a demand loan usury penalty based on the trial date. In Montana National Bank

of Bozeman v. Kolokotrones (1975), 167 Mont. 92, 535 P.2d 1017, and Rustics, the Court

was presented with term contracts with specific maturity dates and calculated the usury

penalty based on the life of the loans. The District Court in this case was faced with a term

loan. Citing “unique facts,” the court relied on Rustics and calculated the usury penalty

using the final maturity date of the loan.

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¶20       The court found it significant that: 1) Quantum borrowed money but never made a

payment1, 2) the loan carried a legal interest rate for current debt--it was only the default rate

that was usurious, and 3) when Tribes discovered the usurious default interest rate, they

retroactively re-calculated the loan to eliminate application of the usurious rate. This

retroactive application of the legal interest rate resulted in an assessment of a 15% interest

rate over the entire life of the loan, including all times Quantum was in default. Therefore,

Quantum never paid 18% interest during the life of this note or after it matured. Had the

District Court calculated the usury penalty through the trial date of October 24, 2001, Tribes,

unfairly, would have ended up owing Quantum a substantial amount of money, a clearly

inequitable result under the circumstances.

¶21       We have held that courts may consider equitable principles when deciding usury

cases. Hanson v. Bonner (1983), 202 Mont. 505, 513, 661 P.2d 421, 425. Under these

circumstances, we agree with the District Court’s conclusion that “[t]he Rustics rule is far

more appropriate,” and equitable.

¶22       Quantum also challenges the District Court’s decision regarding attorney’s fees, and

seeks fees and costs on appeal. Having ruled in favor of Tribes, we need not address this

claim.




          1
              The two payments made to Tribes were made by other defendants not a party to this
appeal.

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                                   CONCLUSION

¶23   For the foregoing reasons, we affirm the District Court’s calculation of the usury

penalty.


                                                     /S/ PATRICIA O. COTTER
We Concur:

/S/ KARLA M. GRAY
/S/ W. WILLIAM LEAPHART
/S/ JAMES C. NELSON
/S/ JIM REGNIER




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