Daily Development for Thursday, November 9, 2006
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri

MORTGAGES; INTEREST; USURY: Mississippi courts define “highest rate of interest then in effect” in terms of local restrictions.  Dunlap v. Intervest Development Corp., Miss. Court of Appeals No. 2005-CA-01271-COA, 2006 WL 2474318 (August 29, 2006). 

A promissory note provided in relevant part as follows: “The whole of the principal sum and, to the extent permitted by law, any accrued interest, shall bear after default, interest at the highest lawful rate then in effect pursuant [to] the laws of the State of Mississippi or of the United States of America.” 

The maker of the note defaulted, and the borrower brought an action against the maker and guarantors.  The only issue addressed in the opinion was the amount of interest after default.   The maker of the note argued that since the parties did not specify a rate, the highest lawful rate was the legal rate of 8%, as provided in Mississippi Code Ann. § 75-17-1(1).  The holder of the note argued that Section 75-17-1(3), which provides that a corporation may contract for a legal rate of up to 15%. 

The chancellor held that under the quoted language, the highest lawful rate was the legal rate of 8%.  The holder of the note appealed.  The Mississippi Court of Appeals, in a 5-4 decision, affirmed.   The majority, in an opinion by Justice Irving, focused on the words “rate then in effect.”  The only rate in effect in Mississippi at the time, reasoned the majority, was the legal rate of 8%.  While Section 75-17-1(1) permitted the parties to contract for payment of a higher rate, no higher rate was “in effect” under Mississippi law at the time of the default. 

The dissent, written by Justice Griffis, reasoned that the “highest lawful rate” was the 15% rate permitted by Section 75-17-1(3).

Reporter’s Comment 1:   A quick primer on Mississippi interest rates: while there are special statutes for loans regulated by the Small Loan Regulatory Act, loans secured by manufactured house, credit cards and other special types of loans, the general interest rate statute is Section 75-17-1 of the Mississippi Code.  Subsection (1) provides that the legal rate of interest on notes and contracts is 8%, but the parties can agree on a different rate if permitted by law.  Subsection (2) provides that any borrower or lender can agree on a rate of 10%.  Subsection (3) provides that a corporation can agree on a rate of 15%.  Subsection (4) provides that a borrower can agree on a rate of 10% if the loan is secured by residential real estate.  Subsection (5) provides that, nothwithstanding any other provision of law, a borrower can agree to pay any interest agreed to in writing by the parties if the principal amount of the loan exceeds $2000.  So for most loans, Subsection (5) will apply,

 and there is no usury limit. 

Reporter’s Comment 2:  The majority distinguished the language in the note—“the highest lawful rate then in effect”—from another phrase commonly found in promissory notes, “the maximum amount allowed by law”.  The Reporter usually sees the phrase “the maximum amount allowed by law” in provisions avoiding usury.  For example, “the interest rate shall the lesser of 6% or the maximum amount allowed by law,” or “Borrower shall pay a late payment charge of the lesser of (a) 5%  or (b) the maximum amount permitted by law.” 

The majority noted the if the note in that case had said that interest would be at the maximum amount allowed by law, the parties could agree on an astronomical rate, since Section 75-17-1(5) seems to allow this.  So suppose you’re looking at note that provides that interest will be “the lesser amount of  (a) ten percent or (b) the maximum amount allowed by law.”  Does the holding of the Dunlap case mean the use of the phrase “the maximum amount allowed by law” will be deemed to limit the interest rate to the legal rate of 8% in Section 75-17-1(a)?  The Reporter’s reading of Dunlap is that as long as the loan is in excess of $2000, the maximum amount allowed by law is whatever the parties agree.  Whether a truly astronomical rate would be enforceable is another matter.

Reporter’s Comment 3:  The decision in this case is a close call, as evidenced by the 5-4 decision.  The editor would not be surprised to see the Mississippi Supreme Court take this case up for consideration.

Editor’s Comment: In fact, the editor selected this case for distribution precisely because of the fact that the language “highest legal rate” often results in a fatally ambiguous provision, since there is no rate limit.  What the editor finds interesting is that, for many loans and many lenders, federal law preempts local usury law and imposes no maximum rate.  Again, we have a fatally ambiguous term.

The court here, in the editor’s view, was quite generous to the lender in seeking out a rate that arguably did provide a cap, and granting that rate to the lender.  In general, it is stupid and possible malpractice to insert this kind of language where the parties are serious about establishing a high default rate.  Set a fixed reasonable rate and be prepared to defend it.  Even if you get away with a very high rate in state court, you won’t cut it in bankruptcy court.  And, increasingly, state courts are subjecting default interest to a penalty analysis. 

The Reporter for this item was Rod Clement of the Jackson, Mississippi, bar.

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