Arkansas Supreme Court Rules Without Addressing Usury Law

The Arkansas Supreme Court recently decided an unusual usury lawsuit from Washington County, but the court didn’t rule on the issue of usury. Instead, its ruling was based on a legal defense of estoppel.

The case involved two promissory notes that were used to finance the purchase of a Fayetteville photography business in 1992. James and Patricia Fox bought the business, Color Mate Photo Inc., from Jack Bedford, who agreed to finance the purchase for the couple. The purchase involved two notes, one for $245,000 and another for $30,000, both to be repaid with 10 percent interest.

According to court documents, the parties agreed to the sale and financing in November 1991 but the deal didn’t close until March 1992. During that four-month interval, the Federal Reserve discount rate had fallen from 5 percent to 3.5 percent. That’s significant because Arkansas law ties the legal interest rate to the discount rate. Specifically, Amendment 60 to the Arkansas Constitution allows lenders to charge borrowers the discount rate plus 5 percent.

While 10 percent interest on a note was legal when the discount rate stood at 5 percent, it clearly was usurious by the time the discount rate fell to 3.5 percent, a point Bedford apparently understood at the time of the closing. He suggested raising the amount of principal in the note and lowering the interest rate, according to court records.

The buyers demurred and the deal commenced. Five years later, the Foxes filed suit, contending the interest rate on the notes was usurious and therefore illegal. They sought damages, which, under the law, can be twice the amount of interest paid and with the remaining interest declared null and void.

Bedford, represented by Springdale attorney Chris Lisle, contended that the interest rate was set at the time of the original deal, when 10 percent was legal. Furthermore, Lisle argued, the Foxes were repeatedly advised by their legal counsel and by bankers that the rate was illegal, yet they waited to file suit until the interest paid was sufficient that a damage award would give them the business for free.

Washington County Chancellor John Lineberger agreed with the plaintiffs in a trial last summer and awarded the Foxes $231,009.96 on the larger note, $28,896.96 on the smaller note, 10 percent interest on both until the judgment was paid, and court costs of $110.

Bedford appealed and, on June 11, the Arkansas Supreme Court reversed the lower court ruling but without addressing the question of usury. The court said that wasn’t necessary because it accepted Bedford’s defense of estoppel.

Estoppel, Lisle explains, is closely related to another legal doctrine, that of “unclean hands.”

In the case of the unclean hands doctrine, Lisle says, the higher court has said “We’re not going to spend our time and resources listening to people complain about a problem they helped create. That’s essentially what estoppel says.”

Howard Brill, a University of Arkansas law professor who teaches a course in legal remedies, says the case was unusual because it involved a change in the usury limit and because of the way attorneys for both sides attempted to deal with that change.

“The usury limit changed between the time [the contract] was negotiated and when [the parties] signed [the agreement]. When they reached the point of signing the contract, they had to decide whether the new or the old limit would be controlling. Everybody was aware of that and they tried to resolve it at the time they signed.

“Factually, the case is interesting,” Brill says.