when the proper definition of the class was at issue, defendant should not be permitted to raise it two and one-half years after certification of the class. Class members with actual notice of this certified class action may have refrained from filing individual suits in the interim, believing that their interests were being represented by the Torosians. A second reason for treating NCB's prematurity argument as waived is that final payment on the third Torosian loan was made on April 7, 1971, and presumably most of the other personal unsecured installment loans that were outstanding on July 28, 1969, have also been repaid since this suit was filed. Causes of action for statutory damages having accrued with the final payments on these loans, NCB should not be permitted to raise the prematurity argument for the first time now when the limitations period for filing suit on those claims has passed.
Finally, the prematurity argument must be rejected as inapplicable to the claim of the named plaintiffs and the class for a declaratory judgment.
This Court is empowered by 28 U.S.C. § 2201 to declare the legality or illegality of the methods used to compute interest in this case and the usuriousness or legality of the rates of interest prescribed in the loan agreements. Although NCB cites several cases to support the contention that a suit for damages is the exclusive remedy available to plaintiffs,
those cases do not in fact prohibit suits for purely declaratory relief, even though no cause of action for damages may yet have accrued. The authorities cited by defendant merely justified the dismissal of claims for alternative types of monetary relief. In some of those cases the borrowers sued to invalidate the contract and to recover statutory damages before an amount equal to principal plus legal interest had been repaid,
and in the other cases the borrowers attempted to exercise a common law right to offset payments of usurious interest against the lenders' claims for the amounts due on the loan.
Although these cases would have provided ample support for NCB's argument that plaintiffs' damage claim was prematurely filed, if that argument had been timely raised, those cases do not preclude plaintiffs' claim for declaratory relief. Accordingly, the Court will not redefine the class to exclude those borrowers who had not paid more than principal plus legal interest on outstanding loans by the date of suit.
MERITS OF THE CROSS-MOTIONS FOR SUMMARY JUDGMENT
At issue on these cross-motions for summary judgment is the usuriousness vel non of the interest rates charged on three personal unsecured installment loans that the plaintiffs, Luke and Peggy Torosian, obtained from NCB in 1966, 1968, and 1969, respectively.
The loan agreements specified the amount of the interest charge, but did not specify either the interest rate or the allocation of payments between principal and interest. The parties agree, however, that the interest rates on all three loans, as originally contracted for, exceeded the lawful 8% if computed according to the residuary method.
Defendant's computations, on the other hand, demonstrate that the interest rate on only one of plaintiffs' loans exceeded 8%, and then by only.04%, if computed according to the U.S. Rule.
The primary issue for decision, therefore, is whether an interest rate of 8% or less when computed according to the U.S. Rule satisfies the D.C. usury statute.
UNITED STATES RULE VS. RESIDUARY METHOD
In ruling that the declining balance of principal must be taken into account in computing interest rates in the District of Columbia, this Court recognized and described various methods of computing interest rates, including the residuary method
and the U.S. Rule.
The Court's opinion noted that the residuary method allocates all installment payments to principal before allocating any of the payments to interest,
while the U.S. Rule allocates each installment payment first to the interest due, and, if the payment exceeds the interest due, the remainder of the payment is applied to diminish the balance of principal outstanding at the time of payment.
The residuary method of allocating payments results in the highest interest rate figure of all the computational methods, because it minimizes the period during which any balance of principal remains outstanding.
Therefore, the dollar amount of interest that can be charged without violating the usury laws is less if the residuary method is applied than if any other method is used.
The prior ruling on the usuriousness of the loans made by D.C. National Bank did not necessitate any ruling on the acceptability of the various methods of computing interest rates. The demonstrated facts, and D.C. National's admissions, established at the time of the prior rulings that the interest rates on the loans made by D.C. National exceeded 8% no matter which method was used to compute the interest rate on the declining balances of principal. Indeed, the Bank admitted that it did not take the declining balances of principal into account in computing the interest charge.
Thus the only issue decided was whether the declining balances of principal had to be taken into account in computing the interest rate for purposes of demonstrating compliance with 28 D.C. Code § 3301.
To support the present contention that the residuary method must be used in computing interest rates for purposes of 28 D.C. Code §§ 3301 and 3303, plaintiffs rely on the District of Columbia cases that have construed 28 D.C. Code §§ 3304 and 3305. Section 3304 creates a cause of action to recover usury paid and establishes a one year statute of limitations applicable to such suits. Section 3305 gives debtors a right to offset usurious interest in suits brought by creditors seeking to recover on usurious contracts. Plaintiffs argue that §§ 3304 and 3305 apply the residuary method, and that consistency demands application of that method for purposes of §§ 3301 and 3303 as well. In so arguing, plaintiffs admit that no District of Columbia cases have held that the residuary method must be used to compute interest for purposes of §§ 3301 and 3303.
Plaintiffs' position lacks merit for several reasons. As noted in this Court's prior opinion,
the United States Supreme Court endorsed the U.S. Rule in Story v. Livingston,31 in 1839. In Story, the Court referred to the U.S. Rule as "the correct rule, in general,"
and that rule has remained since 1839 the general rule governing the application to principal and interest of undesignated payments upon a debt, in the absence of a statute or agreement to the contrary.
The U.S. Rule is a proper method for determining the "Annual Percentage Rate" for disclosure purposes under the Federal Truth in Lending Act,
and, since the filing of this suit, the District of Columbia has adopted the U.S. Rule by statute as a proper method for computing interest on unsecured installment loans.
Plaintiffs in this case do not dispute the averments of Robert C. Collett to the effect that all interest bearing bonds and federal mortgage loans and home improvement loans are based on the U.S. Rule.
Moreover, during oral argument on the instant motions, plaintiffs' attorney conceded that, to his knowledge, the only banks in the District of Columbia that employ the residuary method in computing interest are the former defendants in this case who agreed to use the residuary method as a condition of settlement. Thus the U.S. Rule has for many years enjoyed the approval of courts and legislatures alike throughout the country. Plaintiffs bear a heavy burden in this case, therefore, as they attempt to persuade this Court to invalidate computations of interest according to the U.S. Rule in the District of Columbia.
That the residuary method is used for purposes of 28 D.C. Code § 3305 does not persuade the Court to engraft that method onto §§ 3301 and 3303 to the exclusion of the U.S. Rule and in the absence of any indication that Congress or the courts of the District of Columbia intend that result. Section 3305 by its terms applies only after the contract sued upon has been held usurious. Indeed the general rule throughout the country is to apply the residuary method in applying payments for purposes of allowing a setoff of interest after a contract has been held usurious.
Moreover, in the situation provided for by § 3305, i.e., where a defendant seeks to offset interest against a creditor's suit upon a usurious contract, the residuary method is the only method that can accomplish the purpose of the D.C. usury statute as a whole
to limit the creditor's recovery to the principal amount, thereby penalizing the creditor in the amount of the interest charged.
If in a suit to recover the balance due on a loan contract, the payments were not allocated solely to principal as long as any principal remained outstanding, the creditor's recovery on the contract would exceed the amount of principal lent by the amount that had been credited to interest prior to suit.
By using the residuary method for offsetting interest in § 3305 situations, § 3305 imposes the same penalty as that imposed by §§ 3303 and 3304 in debtors' suits for damages. The use of the residuary method, of necessity, to achieve this result under § 3305 by no means implies that the interest rate on the loan contract sued upon must initially be computed according to the residuary method.
The District of Columbia cases that have applied 28 D.C. Code § 3304 likewise lend no support to plaintiffs' position here. Plaintiffs contend that the District of Columbia courts have used a residuary method in determining when the one year statute of limitations embodied in § 3304 begins to run. The cases plaintiffs cite, however, seem to the Court to prescribe a rule for measuring the limitations period that is totally independent of the method used in computing the interest rate. In Brown v. Slocum,41 the principal case cited by plaintiffs, the Supreme Court of the District of Columbia had to determine whether, when interest is deducted in advance, or "discounted,"
from the face amount of a usurious loan, the limitations period begins to run at the time of the discount or at some later time. The Court did not compute the interest rate or indicate which method should be used in computing the interest rate, for the defendant admitted that the loan was usurious.
In ruling that the statute began to run when the last payment was made, the Court made this statement:
Here the appellee paid the full face [sic] of the note, and has adopted the only remedy offered by the law to recover usury by bringing suit for the amount of the interest paid. We think her cause of action did not accrue until the last payment was made. Until that time the full amount of the deduction had not been paid by her. There could be no usurious interest collected until the appellee had paid the full amount she received, together with legal interest. This time did not occur until within less than a year of the bringing of this suit.