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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)



STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL


Opinion No. 5740

July 17, 1980

CORPORATIONS:

Interest on loans to corporations

CRIMINAL LAW:

Prosecution for criminal usury

MORTGAGES:

Maximum interest rate on first lien mortgages

USURY:

Maxium interest rate on first lien mortgages

Percentage of profits of borrower as part of interest cost

A lender who makes a loan to a corporation and charges more than 25 percent annual interest may be prosecuted for criminal usury.

If a lender, in addition to full payment of principal and interest, also receives a percentage of profits from a business as consideration for making a mortgage loan to such business, the percentage of profits from the business constitutes additional interest on the loan.

A lender making a loan in the amount of $100,000 or more prior to December 31, 1981 secured by a lien against real property other than a single family residence may agree in writing for the payment of any rate of interest and such a loan is not subject to the criminal usury penalty.

The Honorable Gary G. Corbin

State Senate

State Capitol

Lansing, Michigan 48909

You have raised a number of legal issues concerning permissible interest rates. The following specific questions have been formulated based upon your correspondence:

1. Whether a lender who makes a loan to a corporation pursuant to the Business Corporation Act, 1972 PA 284; MCLA 450.1101 et seq; MSA 21.200(101) et seq, Sec. 275, is subject to penalties for criminal usury pursuant to 1968 PA 259; MCLA 438.41 et seq; MSA 19.15(51) et seq.

2. Whether, in addition to full payment of principal and interest, receipt by a lender of a percentage of profits from a business as consideration for making a mortgage loan to such business constitutes interest on the loan so as to make the loan usurious, assuming the legal rate of interest is exceeded.

3. Whether a loan made pursuant to 1966 PA 326; MCLA 438.31 et seq; MSA 19.15(1) et seq, Sec. 1c(9), is subject to penalties for criminal usury pursuant to 1968 PA 259, supra, and to the limitation on interest calculation specified in 1966 PA 326, supra, Sec. 1c(7)

1966 PA 326, supra, Sec. 1 sets forth the general interest rate limitation as follows:

'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 rate 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, . . .'

That statute sets forth the general rule on interest rates for purposes of civil law. Whether the charging of a higher interest rate is a crime is determined by reference to 1968 PA 259, supra.

1968 PA 259, Sec. 1, supra, prohibits as criminal usury the charging of an annual rate of interest of more than 25 percent unless some other law authorizes the lender to charge more than 25 percent:

'A person is guilty of criminal usury when, not being authorized or permitted by law to do so, he knowingly charges, takes or receives any money or other property as interest on the loan or forbearance of any money or other property, at a rate exceeding 25% at a simple interest per annum or the equivalent rate for a longer or shorter period. Any person guilty of criminal usury may be imprisoned for a term not to exceed 5 years or fined not more than $10,000.00, or both.' (Emphasis added.)

It is well established that when a statute is subject to such limitation or exception, the function of the proviso qualifying the statute is to:

'. . . limit, modify or explain the main part of the section to which it is appended . . . a proviso is to be accepted according to its natural, common, and obvious meaning. . . .' Saginaw County Township Officers Association, Inc. v City of Saginaw, 373 Mich 477, 482; 130 NW2d 30 (1964).

Therefore, given the plain meaning of the proviso set forth in 1968 PA 259, supra, a lender may not charge a rate of interest in excess of 25 percent per annum unless a law can be found which authorizes the lender to do so.

You ask whether the Business Corporation Act, 1972 PA 284, supra, Sec. 275, is such a law authorizing a lender to charge a corporation more than 25 percent annual interest.

1972 PA 284, Sec. 275, supra, provides as follows:

'A domestic or foreign corporation, whether or not formed at the request of a lender, may by agreement in writing, and not otherwise, agree to pay a rate of interest in excess of the legal rate and in such case the defense of usury is prohibited.' (Emphasis added.)

As the plain language of the statute discloses, its purpose is to deny corporations use of the usury defense in a proceeding on a written agreement. Bob v Holmes, 78 Mich App 205; 259 NW2d 427 (1977). Even though a corporation may otherwise be able to assert that an interest rate exceeds the lawful limits and should not be enforced, 1972 PA 284, Sec. 275, supra, prevents a corporation from raising that defense. The language of the statute assumes that the defense of usury would otherwise be available. It should also be noted that while 1972 PA 284, Sec. 275, supra, prevents a corporation from asserting the defense of usury in a proceeding on a written agreement, a corporation would not be a party to a prosecution brought against a lender under the criminal usury statute. Such a prosecution would be brought by the Prosecuting Attorney or the Attorney General and the charge would be that the people of the State of Michigan are aggrieved by the illegal acts of a lender. The offense would be against public policy rather than against the contractual rights of a corporation.

Finally, 1972 PA 284, Sec. 275, supra, does not contain any language stating that a lender may charge any rate of interest whatsoever. Rather than setting forth the rate of interest which a lender may charge, the statute is addressed to the legal rights of a corporation.

Based on the above, it is my opinion that 1972 PA 284, Sec. 275, supra, does not authorize a lender to charge more than 25 percent annual interest, and a lender who does so in a loan to a corporation is subject to prosecution pursuant to 1968 PA 259, supra.

You next ask whether requiring payment of a percentage of profits from a business, in addition to specified interest and principal, as consideration for making a mortgage loan to such business constitutes additional interest on the loan so as to make the loan usurious if the legal rate of interest is exceeded.

Interest has been defined as:

'. . . compensation paid for the use of money . . .' OAG, 1975-1976, No 5085, p 717 (December 16, 1976).

In accord, Balch v Detroit Trust Co., 312 Mich 146, 152; 20 NW2d 138 (1945); Coon v Schlimme Dairy Co., 294 Mich 51, 56; 292 NW 560 (1940); Marion v City of Detroit, 284 Mich 476, 484; 280 NW 26 (1938). Consequently:

'[a]ny fee imposed upon the borrower, other than the reasonable and necessary charges, such as recording fees, title insurance, deed preparation and credit reports recognized in section 1(a) of the Usury Statute, supra, in exchange for the lending of money must be taken into consideration in determining the rate of interest being charged.' OAG, 1975-1976, No 5085, supra, p 717.

In the transaction described in your question, the fee imposed by the lender as consideration for making the loan would consist, in part, of a share in profits of the borrower's business. Being part and parcel of the loan agreement, therefore, it is clear that such compensation constitutes interest on the loan. A similar matter was considered in Brown v Cardoza, 67 Cal App 2d 187, 192; 153 P2d 767 (1944), wherein the Court stated:

'. . . The law is well settled in most jurisdictions, . . . that where there is a loan of money to be compensated for by a share in earnings, income or profits, in lieu of or in addition to interest, in determining whether the transaction is usurious the share of earnings, income or profits must be considered as interest. . . .'

Thus, in a transaction wherein a lender receives a percentage of profits of the business in addition to payment of principal and a specified interest rate as consideration for making the loan, the amount of those profits must be added to the specified interest rate to determine the actual interest rate charged as consideration for the loan. If the loan is to a corporation and the actual rate of interest exceeds 25 percent, the lender would be subject to prosecution pursuant to 1968 PA 259, supra.

Note should also be taken of a related statute which authorizes certain lenders to charge a 'business entity' a higher rate of interest than would otherwise be permissible under the general civil interest rate statute, 1966 PA 326, supra. Thus, 1970 PA 52; MCLA 438.61; MSA 19.15(71), provides as follows:

'(1) As used in this act 'business entity' means: (a) A corporation, trust, estate, partnership, cooperative, or association; or (b) A natural person who furnishes to the extender of the credit a sworn statement in writing specifying the type of business and business purpose for which the proceeds of the loan will be used, but the exemption provided by this act does not apply if the extender of credit has notice that the person signing the sworn statement was not engaged in the business indicated.

'(2) Notwithstanding the provisions of Act No. 326 of the Public Acts of 1966, as amended, being sections 438.31 to 438.33 of the Michigan Compiled Laws, but subject to any other applicable law of this state or of the United States which regulates the rate of interest, it is lawful in connection with the extension of credit to a business entity by a state or national chartered bank, insurance carrier, or finance subsidiary of a manufacturing corporation for the parties to agree in writing to any rate of interest.' (Emphasis added)

That provision represents an exemption from the general civil interest rate statute. However, as the underlined language indicates, such a loan is subject to other applicable laws. The criminal usury statute is such another applicable law so that 1970 PA 52, supra, does not authorize the charging of interest in excess of 25 percent per annum. (1)

Your third question concerns whether a transaction made pursuant to 1966 PA 326, supra, Sec. 1c(9), is subject to the application of the criminal usury statute, 1968 PA 259, supra, and to the limitation on interest calculation specified in 1966 PA 326, supra, Sec. 1c(7).

1966 PA 326, Sec. 1c(9), supra, provides an exception to the general limitation on interest rates for a note, bond, or other indebtedness of $100,000.00 or more:

'For the period ending on December 31, 1981, the parties to a note, bond, or other indebtedness of $100,000.00 or more, the bona fide primary security for which is a lien against real property other than a single family residence, or the parties to a land contract of such amount and nature, may agree in writing for the payment of a rate of interest.' (2)

No limit is placed by that statute on the rate of interest to which the parties may agree. Another subsection of that statute appears to set forth a similar exemption. 1966 PA 326, supra, Sec. 1c(2), provides that with regard to a loan made by a regulated lender secured, e.g., by a first lien on real property, the parties may agree to payment of 'any rate of interest':

'For the period ending on December 31, 1981, it is lawful for the parties to a note, bond, or other evidence of indebtedness, executed after August 11, 1969, the bona fide primary security for which is a first lien against real property, or a land lease if the tenant owns a majority interest in the improvements thereon, or the parties to a land contract, to agree in writing for the payment of any rate of interest, . . .' (Emphasis added.)

However, 1966 PA 326, supra, Sec. 1c(4), specifically makes the criminal usury statute applicable to such loans by regulated lenders:

'Nothing contained in subsection (2) shall authorize or permit a rate of interest in excess of the rate set forth in Act No. 259 of the Public Acts of 1968, being sections 438.41 and 438.42 of the Michigan Compiled Laws.' (3)

The fact that the legislature enacted 1966 PA 326, Sec. 1c(4), supra, to make such loans subject to the 25 percent interest ceiling is indicative of a legislative understanding that otherwise the authority to charge 'any rate of interest' would not be subject to the 25 percent limitation. Had the legislature intended to also apply the criminal usury rate to loans made pursuant to 1966 PA 326, Sec. 1c(9), supra, it could have cited subsection (9) as well as subsection (2) in 1966 PA 326, Sec. 1c(4), supra. The legislature chose not to do so.

Based upon the foregoing, it is my opinion that loans made pursuant to 1966 PA 326, Sec. 1c(9), supra, may bear any rate of interest and are not subject to the 25 percent criminal usury ceiling.

With respect to the limitation on interest calculation provided for in 1966 PA 326, Sec. 1c(7), supra, that statute regulates the method of interest computation regardless of the particular rate charged if the loan obligation consists of a mortgage or land contract made pursuant to 1966 PA 326, supra.

'A mortgage loan or land contract made under this act shall not provide for a rate of interest added or deducted in advance and interest on the mortgage loan or land contract shall be computed from time to time only on the basis of unpaid balances.'

Pursuant to 1966 PA 326, Sec. 1c(9), supra, until December 31, 1981, the parties may agree to a loan obligation of $100,000.00 or more in the form of a mortgage or land contract so long as the loan is secured by real property other than a single family residence. Since the loan instrument would consist of a mortgage or land contract, interest on the loan would be subject to the required computation scheme of 1966 PA 326, Sec. 1c(7), supra.

In summary, it is my opinion that the sanctions for criminal usury are applicable to a lender who enters into a loan agreement with a corporation pursuant to 1972 PA 284, Sec. 275, supra, if the agreement requires payment of an annual interest rate in excess of 25 percent. In contrast, a loan of $100,000.00 or more, the primary security for which is a lien against real property other than a single family residence in accordance with 1966 PA 326, Sec. 1c(9), supra, is not subject to the criminal usury statute and the parties may agree to payment of any rate of interest. Further, where a loan of money is repaid through a percentage of business profits as consideration for making the loan in addition to full payment of principal and interest, the amount of such profits must be included in the calculation of the actual interest rate for purposes of statutory limitations. Finally, a loan made pursuant to 1966 PA 326, Sec. 1c(9), supra, must comply with the interest calculation requirements provided for in 1966 PA 326, Sec. 1c(7), supra.

The foregoing are the general rules applicable to your questions. However, it is important to bear in mind that the maximum rate of interest for any particular transaction may vary, depending upon the nature of: the lender, the borrower, the security and various other factors as they are set forth in specific state and federal interest rate laws. To avoid charging an unlawful interest rate a person should assume that a loan is subject to the general interest rate limitation unless specific authority can be found to authorize a higher rate of interest.

Frank J. Kelley

Attorney General

(1) Note that the Depository Institution Deregulation and Monetary Control Act of 1980, Public Law 96-221, Sec. 511, ---- USC ----; ---- Stat ----, preempts state law for certain business and agricultural loans in the amount of $25,000.00 or more to the extent necessary to allow charging a rate of not more than 5 percent in excess of the discount rate, including any surcharge thereon, on 90-day commercial paper in effect at the Federal Reserve Band in the Federal Reserve District where the person is located.

(2) Prior to a housekeeping amendment by 1978 PA 440, 1966 PA 326, Sec. 1c(9), supra, ended with the words 'any rate of interest' instead of 'a rate of interest.' That change from 'any' to 'a' did not alter the fact that the subsection provides an exception to the otherwise applicable interest rate limitation. Any other interpretation would result in the subsection having no meaning. Moreover, the words 'any' and 'a' are frequently synonymous. People v One 1940 Buick Sedan, 71 CA 2d 160; 162 P2d 318 (1945); State ex rel Roberts v Snyder, 140 Ohio St 333; 78 NE2d 716 (1948).

(3) It should be noted that the Depository Institution Deregulation and Monetary Control Act of 1980, Public Law 96-221, Sec. 501, ---- USC ----; ---- Stat ----, preempts the application of any state limitation on the rate of interest for such loans by regulated lenders secured by a first lien on residential real property made after March 31, 1980.

 


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