Issues Re Calculation of Delinquent Interest on an Installment Note
rev. April 12, 2013
In determining the amount due under an installment note in default, the approach is to follow first the terms of the notes itself, including payment amounts and interest rates as agreed to in the note itself. The next step is to apply the actual payments, if any, received to the note payments, and using general rules of math, calculate the application of such payments, again based on the terms of the note itself. The rules of mathematics may be judicially noticed.
[C]ourts will take judicial notice of natural forces as well as the primary laws of physics, mechanics, and mathematics. Levlon v. Dallas Ry. & Terminal Co., 117 S.W.2d 876 (Tex.Civ.App.-Dallas 1938, writ ref’d).
Searcy v. Sellers, 470 S.W.2d 103, 110 (Tex.Civ.App. — Amarillo 1971, writ ref. n.r.e.). Also, interest rates are a matter of common knowledge, and do not strictly require an expert witness to support a calculation based on interest rates.
It is a well-settled rule in this jurisdiction that the jury has the power to consider as proven any matter that is of common knowledge in the community. 1 McCormick & Ray, Texas Law of Evidence (2nd ed.), Sec. 156. In our practice, while the jury must assess damages to accrue in the future on the basis of their amount if paid now in cash, still no evidence of the earning power of money must be introduced. No reason is perceived way, if evidence of the earning power of money is the jury must assess damages to accrue in should be required in cases arising under the Federal Employers’ Liability Act which are tried in our courts. Obviously, there is force in the argument that jurors may not have sufficient knowledge of interest rates to discount damages to their present value, but we cannot say that the average jury composed, as we must assume, of men and women of intelligence is not acquainted with interest rates. There is less force in petitioner’s argument now than formerly because of the present existence of many savings institutions and advertisement of bond issues by the Federal government.
Since our practice does not require the introduction of evidence of the earning power of money as a prerequisite to the submission of an issue requiring the jury to find present value of future damages, and since there is no clear mandate from the Supreme Court of the United States requiring the introduction of such evidence in Federal Employers’ Liability Act cases, we are unwilling to hold that such evidence is required and thereby place our decision in conflict with the decisions of other State courts above referred to.
Missouri Pacific Railroad Co. v. Kimbrell, 334 S.W.2d 283, 286–2873 (Tex. 1960). Kimbrell is still the law.
In personal-injury actions, the trier of fact must assess damages to accrue in the future on the basis of their dollar amount if they were presently paid in cash. SeeMo. Pac. R.R. Co. v. Kimbrell, 334 S.W.2d 283, 286 (Tex.1960). Texas law does not require specific evidence of the discount rate. SeeMarshall v. Telecomm. Specialists, Inc., 806 S.W.2d 904, 909 (Tex.App.-Houston [1st Dist.] 1991, no writ); Reliable Consultants, Inc. v. Jaquez, 25 S.W.3d 336, 347 (Tex.App.-Austin 2000, pet. denied) (citing In re Gonzalez, 993 S.W.2d 147, 160 (Tex.App.-San Antonio 1999) (original proceeding)). The trier of fact is qualified to make a discount calculation. Kimbrell, 334 S.W.2d at 286. The trier of fact has the power to consider as proven any matter that is of common knowledge. Kimbrell, 334 S.W.2d at 286 (stating, “[W]hile the jury must assess damages to accrue in the future on the basis of their amount if paid now in cash, still no evidence of the earning power of money must be introduced … that jurors may not have sufficient knowledge of interest rates to discount damages to their present value, but we cannot say that the average jury composed, as we must assume, of men and women of intelligence is not acquainted with interest rates.”); seeRendon v. Avance, 67 S.W.3d 303, 310 (Tex.App.-Fort Worth 2001, judgm’t vacated w.r.m .). A trial court may also determine the discount rate and perform the present-value calculations. SeeIn re Gonzalez, 993 S.W.2d at 160.
Rangel v. Robinson, 2007 WL 625042, *2 (Tex.App. — Houston 1st Dist.] 2007, pet. den.).
However, a CPA may still be used as an aid to the court (and trier of fact) by being a “human calculator” expert. His or her summary of the amounts owed can explain how the rules mathematic rule relating to interest rates apply in the case.
At bar, and much like the expert in Navistar, Kronrad was simply applying different data appearing of record into old methodology or formulas to voice an alternate opinion. That Koko had prior knowledge of the formulas or methodology being used is undisputed. Similarly beyond question is that Stedtler provided the trial court and jury with the new data without objection from Koko. Under these circumstances, and again much like the expert in Navistar, Kronrad merely functioned as a human calculator deriving sums from information already before the jury.
A litigant can hardly claim surprise when his opponent removes a calculator from his briefcase, inputs into it data already appearing of record, triggers the application of settled mathematical formulas to that data by pressing a button, obtains a result, and then presents the result to the jury. That is no less true when the calculator is a human being applying known mathematical formulas. In the latter situation, the expert is not materially changing his previous opinions but rather expanding on a subject already broached via discovery and the presentation of evidence through other witnesses. In short, Kronrad merely performed mathematical computations like the expert in Branham, and allowing him to do so at trial was not an abuse of discretion.
Koko Motel, Inc. v. Mayo, 91 S.W.3d 41, 51 (Tex.App. — Amarillo 2002, pet. den.).
Acceleration must be on remaining unpaid principal only. Acceleration of future payments can constitute usury, since unearned interest is being charged. Brookshire v. Longhorn Chevrolet, Co., 788 S.W.2d 209, 211–212 (Tex.App. — Ft. Worth 1990, no writ)(time price differential cases, but principle is the same); accord, Ciminelli v. Ford Motor Credit Co., 624 S.W.2d 903, 904 (Tex. 1981).
It has long been the rule in Texas that when each installment in a installment promissory note comes due, it will earn delinquent interest from the time it is past due, until paid.
The court has uniformly decided, and we think rightly on principle no less than on abundant authority, that interest which has already lawfully matured may, together with principal, thereafter bear interest at the highest lawful rate. Mills v. Johnston, 23 Tex. 330; Miner v. Paris Exchange Bank, 53 Tex. 561; Roane v. Ross, 84 Tex. 46, 19 S. W. 339. Chief Justice Gaines demonstrates the soundness of this rule in Crider v. San Antonio Loan Ass’n, 89 Tex. 598-600, 35 S. W. 1047, 1048, when he says: ‘When the debt falls due the creditor is as much entitled to his interest as to his principal, and if the parties have elected in good faith to provide for the default, and to agree that after maturity the interest shall bear interest, it is a contract for interest upon the forbearance of a new obligation which has accrued, and not a contract for additional interest upon the original principal. The principle is, in effect, recognized by this court in those cases in which we have held that an installment of interest past due becomes principal, and bears interest, without any express stipulation to that effect.’
Bothwell v. Farmers’ & Merchants’ State Bank & Trust Co. of Rusk, Tex., 30 S.W.2d 289, 291 (Tex. 1930). Bothwell is still good law.
“[I]nterest which has already lawfully matured, may, together with principal, thereafter bear interest at the highest lawful rate.” Bothwell v. Farmers’ & Merchs.’ State Bank & Trust Co., 120 Tex. 1, 30 S.W.2d 289, 291 (1930). When interest is compounded, “[p]ast due or ‘matured’ interest becomes a new and independent debt for which additional interest may be charged at the maximum lawful rate.” Pentico v. Mad–Wayler, Inc., 964 S.W.2d 708, 717 (Tex.App.-Corpus Christi 1998, pet. denied). Even when a debt bears the highest rate of interest allowed by law, a stipulation that both accrued interest and principal shall bear interest at the highest rate after maturity is not usurious. Crider v. San Antonio Real Estate Bldg. & Loan Ass’n, 89 Tex. 597, 35 S.W. 1047, 1048 (1896).
Bair Chase Property Co., LLC v. S & K Development Co., Inc., 260 S.W.3d 133, 141 (Tex.App. — 2008, pet. den.).
An installment payment on a promissory note that amortizes down the remaining principal balance itself consists of earned interest and a principal reduction. It is possible to have an installment note with interest only payments, or even with an increasing principal balance, that is, when the specified installment is not sufficient to pay the earned interest during each time period for which an installment payment is due (usually monthly).
The delinquent interest accrues on the entire payment, even though a component of the installment payment consists of earned interest. This is “not a contract for additional interest upon the original principal.” Bothwell, 30 S.W.2d at 291 (emphasis added). The right to charge and collect delinquent interest is not dependent on enabling language in the promissory note.
The delinquent interest rate can be specified in the note. If the note is silent about the delinquent rate, then the delinquent rate is the same as the specified rate of interest in the note.
This court early wrote that when a note specifies a rate of interest before maturity, but is silent about any rate after maturity, the law implies that the pre-maturity rate continues after maturity. Roberts v. Smith, 64 Tex. 94 (1885); Hopkins v. Crittendon, 10 Tex. 189 (1853); see also Linz v. Eastland County, 39 S.W.2d 599 (Tex.Comm’n App.1931, holding approved). Independent reviews of Texas law have stated this to be the Texas rule. Cromwell v. County of Sac, 96 U.S. 51, 61, 24 L.Ed. 681 (1878); 45 Am.Jur.2d Interest and Usury § 69, at 63–64 & n. 20 (1969); 47 C.J.S. Interest & Usury § 40(b), at 101 n. 92 (1982). Since the implication of interest after maturity is apparently the Texas rule, it is consistent with the Texas policy of giving a reasonable construction to a note that avoids usury, to hold that the pre-maturity rate is implied as the post-maturity rate. Cf. Wall v. East Texas Teachers Credit Union, 533 S.W.2d 918, 921 (Tex.1976). The present statutory scheme does not alter the acknowledged Texas rule. This court recently considered virtually the same question presented here. Fort Motor Credit Co. v. Long, 608 S.W.2d 293 (Tex.Civ.App.—Beaumont 1980, writ ref’d n.r.e.). In Long, by refusing the application for writ of error with the notation, “no reversible error,” we approved the court of appeals’ holding that the pre-maturity rate was implied after maturity, and necessarily rejected Long’s construction of the statute. We find no material distinction between the present case and Long.
Petroscience Corp. v. Diamond Geophysical, Inc., 684 S.W.2d 668, 668-669 (Tex. 1984)(per curiam).
If a note specifies a delinquent interest rate of 18% per annum, this is the current [April 12, 2013] highest legal rate in Texas for a commercial loan. Texas Finance Code § 306. 002(a), in accordance with Texas Finance Code Chapter 303. The Office of Consumer Credit Commissioner is to publish rate ceilings, Texas Finance Code § 303.011, which ceilings may be judicially noticed, Texas Finance Code § 303.012.
The current rate ceiling is 18%, http://www.occc.state.tx.us/pages/int_rates/Index.html.
Application of payments received. A typical note will state that “Payments will be applied first to accrued interest and the remainder to reduction of the Principal Amount.” Attorney’s fees and other costs are to be paid “on demand.” A typical deed of trust will state
4. Notwithstanding the terms of the Note to the contrary, and unless applicable law prohibits, all payments received by Lender from Grantor with respect to the Obligation or this deed of trust may, at Lender’s discretion, be applied first to amounts payable under this deed of trust and then to amounts due and payable to Lender with respect to the Obligation, to be applied to late charges, principal, or interest in the order Lender in its discretion determines.
The note and deed of trust are to be read together as one agreement. “[A]greements executed at the same time, with the same purpose, and as part of the same transaction, are construed together.” In re Prudential Ins. Co. of America, 148 S.W.3d 124, 135 (Tex. 2004). Under this type of language, any payments received would be applied first to delinquent interest, then to earned interest, and then to matured principal.
Agreement of parties controls application of payments. Keasler v. Wray, 171 S.W. 534 (Tex. Civ. App. Texarkana 1914). An agreement regarding the application of payments need not be an express agreement; a tacit understanding of the parties is sufficient, and their real intention, however manifested or determined, is controlling. Copes v. Perkins, 6 Tex. 150, 1851 WL 3946 (1851); Munday Trading Co. v. J.M. Radford Grocery Co., 190 S.W. 520 (Tex. Civ. App. Fort Worth 1916). Obligor’s failure to give directions as to the application of the payments at the time they are made does not affect a prior agreement. Merrick v. Rogers, 47 S.W. 801 (Tex. Civ. App. 1898). Absent agreement to the contrary, installment payments are applied first to earned interest and then to principal. Community Sav. & Loan Ass’n v. Fisher, 409 S.W.2d 546 (Tex. 1966). Obligor may not direct payment to principal only in an installment note. Tooke v. Bonds, 29 Tex. 419, 1867 WL 4541 (1867); Ormsby v. State Life Ins. Co., 133 S.W.2d 797 (Tex. Civ. App. Dallas 1939). Absent agreement, it is presumed payment to be applied to matured debt first, Davis v. Stamey, 350 S.W.2d 669 (Tex. Civ. App. Eastland 1961), writ refused n.r.e., (Jan. 31, 1962), and will be applied to the oldest debt, Anderson-Dunham, Inc. v. Lee Rubber & Tire Corp., 378 S.W.2d 99 (Tex. Civ. App. Dallas 1964), writ refused n.r.e., (July 8, 1964). Absent agreement, obligee must follow directions of obligor as to application of payments. Rugeley v. Smalley, 12 Tex. 238, 1854 WL 4397 (1854); Fuqua v. Moody & Clary Co., 462 S.W.2d 321 (Tex. Civ. App. Houston 14th Dist. 1970); Logan v. Founders Nat. Bank of Oklahoma City, Okl., 443 S.W.2d 610 (Tex. Civ. App. Austin 1969). Obligee may not change directions of obligor without consent of obligor. Bray v. Crain, 59 Tex. 649, 1883 WL 9245 (1883); Snow v. Gibraltar Life Ins. Co. of America, 326 S.W.2d 501 (Tex. Civ. App. Dallas 1959), writ refused n.r.e., (Oct. 7, 1959). Payment without directions from obligor cedes right to apply payment, so long as equitable and just. Mastin v. Mastin, 70 S.W.3d 148 (Tex. App. San Antonio 2001); Parrish v. Haynes, 62 F.2d 105 (C.C.A. 5th Cir. 1932); Hinkle v. Higgins, 83 Tex. 615, 19 S.W. 147 (1892); Graves v. Hallmark, 232 S.W.2d 130 (Tex. Civ. App. Amarillo 1950), writ refused n.r.e.; First Nat. Bank in Dallas v. Whirlpool Corp., 517 S.W.2d 262 (Tex. 1974). Obligor must have opportunity to direct application of payment. Oakley v. Armstrong Transfer & Storage Co., 378 S.W.2d 912 (Tex. Civ. App. Waco 1964). An obligee may apply undirected payment to debt for which limitations has run. Morgan v. Morgan, 406 S.W.2d 347 (Tex. Civ. App. San Antonio 1966). Once made, application cannot be changed except by agreement of the parties. Palm v. Johnson, 255 S.W. 1007 (Tex. Civ. App. San Antonio 1923). Payment may still be directed by obligee, even if not made when payment is made, so long as payment is made with reasonable time and there has been no change in condition by obligor. Compton v. Ahrens & Ott Mfg. Co., 151 S.W. 884 (Tex. Civ. App. Galveston 1912); Stone v. Pettus, 47 Tex. Civ. App. 14, 103 S.W. 413 (1907); Taylor v. Coleman, 20 Tex. 772, 1858 WL 5399 (1858); McKesson-Crowdus Drug Co. v. Newman, 86 S.W.2d 881 (Tex. Civ. App. Waco 1935); Brown v. Rice, 290 S.W. 784 (Tex. Civ. App. Eastland 1926), writ granted, (Mar. 30, 1927) and aff’d, 296 S.W. 495 (Tex. Comm’n App. 1927); Stone v. Pettus, 47 Tex. Civ. App. 14, 103 S.W. 413 (1907).
Attorney’s fees are typically provided in the note itself, but are also collectible under Texas Civil Practice and Remedies Code § 38.001. Demand for payment must be given more than 30 days prior to trial to permit the recovery of attorney’s fees under this Chapter. Texas Civil Practice and Remedies Code § 38.002(3).
Even if a note is more than six years old limitations may not be an issue. Normally, limitations commences running on each installment on the note as it comes due. Whittle v. MCorp Properties, 17 S.W.3d 718, 720 (Tex.App. – Amarillo 2000, no writ). Limitations on a promissory note is six years (for each installment, or upon acceleration of the note). Texas Business and Commerce Code § 3.118(a). But “this section,” that is Section 3.118 does not apply to an action involving a real property lien covered by Texas Civil Practice and Remedies Code § 16.035. Texas Business and Commerce Code § 3.118(h). Texas Civil Practice and Remedies Code § 16.035(e) provides
If a series of notes or obligations or a note or obligation payable in installments is secured by a real property lien, the four-year limitations period does not begin to run until the maturity date of the last note, obligation, or installment.
Moreover limitations under Texas Civil Practice and Remedies Code § 16.035 is “not affected” by Texas Business and Commerce Code § 3.118. Texas Civil Practice and Remedies Code § 16.035(f).