Burnhisel v. Firman - 89 U.S. 170 (1874)
U.S. Supreme Court
Burnhisel v. Firman, 89 U.S. 22 Wall. 170 170 (1874)
Burnhisel v. Firman
89 U.S. (22 Wall.) 170
1. Where a party agrees by note to pay a certain sum at the expiration of a year with interest on it at a rate named, the rate being higher than the customary one of the state or territory where he lives, and does not pay the note at the expiration of the year, it bears interest not at the old rate, but at the customary or statute rate.
2. If, however, the parties calculate interest and make a settlement upon the basis of the old rate, and the debtor gives new notes and a mortgage for the whole on that basis, the notes and mortgage are, independently of the Bankrupt Act and of any statute making such securities void in toto as usurious, valid securities for the amount which would be due on a calculation properly made. They are bad only for the excess above proper interest.
3. Where a person owing money, principal and interest, for some time overdue but secured by mortgage, accounts with his creditor and on computation a sum is found as due for the principal and interest added together, any new mortgage given for the whole and on the same property on which the former mortgage was given is not, upon satisfaction's being entered on the old mortgage, to be considered as a new security, and so open to attack under the Bankrupt Law if made within four months before a decree in bankruptcy against the debtor. If the old security was not a preference, neither will the new one be so. They are to be considered as being for the same debt.
Firman, assignee of Wright, a bankrupt, filed a bill in the court below against Burnhisel to set aside a mortgage given by the said Wright before his bankruptcy to the said Burnhisel, the bill alleging that the mortgage was void under the Bankrupt Act.
The case was thus:
Wright executed three promissory notes, each payable "in one year from date with interest at 25 percent."
The first, dated March 26, 1866, was to Burnhisel, and for $2,450.
The second, dated May 9, 1866, was to Pond, and for $951.
The third, dated May 26, 1867, was to Burnhisel, and for $950.
All three notes were secured by mortgages on the same property. It did not appear from anything in the case what rate of interest prevailed in Utah Territory when the notes were given, but on the 14th of February, 1868 (by which time all three of the notes had become due), a statute of the territory enacted that it should be lawful to take 10 percent interest per annum when the rate had not been agreed upon by the parties, and by an act passed in 1869, it was enacted directly that parties might agree on any rate of interest, but that when none had been agreed on, the rate should be 10 percent.
In this state of things, nothing having been paid on either of the notes to Burnhisel, he and Wright on the 1st of August, 1871 -- that is to say, three years and more after statute had fixed the rate of interest in Utah at 10 percent, where the parties had not agreed upon a different rate -- made a settlement of the interest due on the two notes to Burnhisel. They computed it at 25 percent per annum during the whole time from the date of the notes down to the time of the settlement, and so made it amount to $4,440. And for this sum, as arrears of interest, Wright gave to Burnhisel another note payable in one year with interest at 10 percent.
On the 26th of April, 1872, Burnhisel having bought for what appeared due as principal ($951) the note to Pond, he (Burnhisel) and Wright made another settlement, making the sum due by Wright to be $9,622, and Wright gave to Burnhisel two new notes secured by mortgage upon the same estate on which the three former notes had been secured. One note was for $4,220, payable June 1st following (1872), with interest from 1st May at the rate of 25 percent payable monthly till the principal was paid. The other note was for $5,402, payable at the same time as the other, with interest at the rate of 10 percent; this too payable monthly till the principal was paid. Satisfaction was entered on all the old mortgages, and the notes were surrendered to Wright the words "Settled by new arrangement and notes, April 26, 1872," being written upon them.
Burnhisel was himself examined as witness, when this question was asked and this answer given:
"Question. At what rate of interest was the computation made to meet the amount of the two notes of April 26, 1872?"
"Answer. The principal at 25 percent per annum and the interest which had accrued up to the 1st of August, 1871, at the rate of 10 percent per annum, up to the date of the said two notes. There was no interest computed on the Pond note in the settlement of 1872, the same being put in at $951, just what I actually paid."
Wright having been decreed a bankrupt within less than four months after the last two notes, and the mortgage to secure them was given, Firman, the assignee, filed a bill alleging that the mortgage was void under the thirty-fifth section of the Bankrupt Act. The bill set out fully all the notes and mortgages.
That section enacts that
"If any person, being insolvent, within four months before the filing of the petition against him, with a view to give preference to any creditor or person having a claim against him, makes any pledge or conveyance of any part of his property, the person receiving such pledge or conveyance or to be benefited thereby having reasonable cause to believe such person insolvent, and such pledge or conveyance is made in fraud of the provisions of this act, the same shall be void and the assignee may recover the property or the value of it from the person receiving it or so to be benefited."
By consent of parties, the mortgaged property was sold, and the proceeds ($7,300) being in court, the question was to whom they should be awarded. The counsel of the assignee alleged that there had been a preference made by the last mortgage:
1st. In that interest, in being calculated for more than one year at 25 percent, had been calculated on a basis that created a debt voluntarily, and that this debt -- the interest, namely, for several years at 25 percent -- had now, in April, 1872, and in contemplation of bankruptcy, been first secured by the mortgage then made.
2d. That the old debt, both principal and interest, at 25 percent for one year, and all other lawful interest, had been satisfied, and that the mortgage of April, 1872, was a new security.
The court below held the case fraudulent within the above-quoted section of the Bankrupt Act and awarded the money to the assignee in bankruptcy. From that decree Burnhisel appealed.