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Docket Number

Docket No. 149988.

Attorney(S)

Smith, Haughey, Rice Roegge (by John D. Vander Ploeg), for the plaintiffs. Libner, Van Leuven, Kortering, Evans Portenga, P.C. (by Vernon D. Kortering), for the defendant.

Judges

William B. Murphy

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Smart Summary

Case Summary: Olsen v Porter, Docket No. 149988 (Mich. Ct. App. Aug. 22, 1995)

Factual and Procedural Background

On September 12, 1983, plaintiffs and defendant entered into a land contract for the sale of a house and certain real property for $15,000, payable at $165.16 per month for twenty years, with the contract providing for twelve percent annual interest. In 1990 defendant learned that MCL 438.31c(6); MSA 19.15(1c)(6) set the maximum permissible interest rate at eleven percent and began paying into escrow. On March 14, 1991, plaintiffs filed a complaint seeking reformation of the land contract to reflect an eleven percent interest rate. Defendant counterclaimed for a declaratory judgment seeking application of all interest paid to outstanding principal under MCL 438.32; MSA 19.15(2).

Plaintiffs moved for summary disposition of their reformation claim and for dismissal of defendant's counterclaim. The trial court held hearings and on December 19, 1991 entered orders granting plaintiffs' motion for summary disposition on reformation and dismissing the counterclaim. The trial court reformed the contract to eleven percent prospectively from October 14, 1991, reserved the issue of the applicable interest rate from September 12, 1983 to October 14, 1991 and whether a statutory penalty applied, and later entered judgment ordering a nine percent rate for the period from September 12, 1983 to October 14, 1991. The trial court declined to impose a penalty under MCL 438.32; MSA 19.15(2). The trial court also denied plaintiffs' postjudgment motion for costs and attorney fees. Both plaintiffs and defendant appealed as of right. The Court of Appeals affirmed in part and reversed in part.

Legal Issues Presented

Whether a trial court may properly order reformation of a land contract that charges a usurious rate of interest when the parties were mutually mistaken about the maximum legal interest rate under MCL 438.31c(6); MSA 19.15(1c)(6).
Whether a buyer/borrower may invoke MCL 438.32; MSA 19.15(2) (including application of prior interest to principal and imposition of penalties) when a seller/lender brings an action to reform a usurious contract rather than to enforce it.

Arguments of the Parties

The opinion does not contain a detailed account of the parties' legal arguments.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Webb v Smith (After Remand), 204 Mich. App. 564, 568; 516 N.W.2d 124 (1994)	Standard of review: de novo review of a trial court's decision to grant or deny equitable relief.	The Court applied a de novo standard in reviewing the trial court's grant of equitable relief (reformation).
Theophelis v Lansing General Hosp, 430 Mich. 473, 492; 424 N.W.2d 478 (1988)	Courts must proceed with utmost caution in exercising jurisdiction to reform written instruments.	The Court noted this cautionary principle when evaluating the propriety of reformation in this case.
Ross v Damm, 271 Mich. 474, 480-481; 260 N.W. 750 (1935)	Reformation is available to reflect parties' actual intent where there is clear evidence an agreement was reached but the instrument fails to express true intent due to mutual mistake or fraud.	The Court relied on this principle to state that reformation is proper only when the instrument does not reflect the parties' true intent; here the parties conceded the contract reflected their intent (twelve percent), so reformation was inappropriate.
Schmalzriedt v Titsworth, 305 Mich. 109, 119; 9 N.W.2d 24 (1943)	General rule that reformation will generally not be granted for a mistake of law.	Used to support the holding that reformation is improper when the parties' mutual mistake is a mistake of law regarding the legal maximum interest rate.
Emery v Clark, 303 Mich. 461, 471; 6 N.W.2d 746 (1942)	Reformation is generally not granted for mistake of law.	Applied as authority reinforcing that mistake of law does not ordinarily justify reformation.
Babcock v Berlin, 123 Misc.2d 1030; 475 N.Y.S.2d 212 (1984)	Example of an out-of-jurisdiction decision addressing reformation of a usurious contract on mutual mistake grounds.	Referenced as consistent authority from another jurisdiction supporting the Court's holding.
Freeman v Hernandez, 521 S.W.2d 108 (Tex Civ App, 1975)	Out-of-jurisdiction decision relevant to reformation of a usurious contract based on mutual mistake.	Cited as additional authority consistent with the Court's conclusion.
Hart v Piper Industries, Inc, 1994 Tenn App LEXIS 257 (May 10, 1994)	Out-of-jurisdiction decision addressing similar issues concerning reformation and usury.	Listed as further supporting authority from another jurisdiction.
Leon v Zlatkin, 265 Mich. 225, 229; 251 N.W. 377 (1933)	Interpretation that MCL 438.32; MSA 19.15(2) requires prior interest paid under a usurious contract be applied to extinguish outstanding principal debt.	The Court cited this principle in explaining the statute's substantive effect but then limited its applicability to enforcement actions as discussed below.
Osinski v Yowell, 135 Mich. App. 279, 287; 354 N.W.2d 318 (1984)	Authority that prior interest must be applied to principal under the statute.	Cited to explain the statute's required remedy where it applies.
Waldorf v Zinberg, 106 Mich. App. 159, 164; 307 N.W.2d 749 (1981)	Principle that a buyer/borrower may claim the statute's benefit only when a seller/lender brings an action to enforce a usurious contract; buyer cannot maintain an independent suit under the statute.	Applied to conclude that MCL 438.32; MSA 19.15(2) does not apply when the seller/lender brings an action to reform rather than enforce the contract.
McKenna v Wilson, 280 Mich. 227, 232; 273 N.W. 457 (1937)	Support for limiting the statute's benefit to enforcement actions by sellers/lenders.	Used to bolster the conclusion that the statutory penalty provision is triggered by enforcement actions, not reformation actions.
Michigan Mobile Homeowners Ass'n v Bank of the Commonwealth, 56 Mich. App. 206, 215; 223 N.W.2d 725 (1974)	The statute's focus is to "penaliz[e] the lender who attempts to enforce a usurious contract."	The Court relied on this articulation to distinguish enforcement from reformation and to support denial of statutory penalties in a reformation action.

Court's Reasoning and Analysis

The Court began by stating its standard of review: it reviews de novo a trial court's decision to grant or deny equitable relief. The Court observed the long-standing caution that courts must exercise care when reforming written instruments.

The Court found that plaintiffs and defendant were mutually mistaken as to the maximum legal interest rate—the parties believed twelve percent was lawful but the statute permitted only eleven percent—and that this mistake was a mistake of law. The Court explained that reformation is appropriate to reflect parties' actual intent when the written instrument fails to express that intent due to mutual mistake or fraud. However, here the parties did not dispute that the contract, as written, expressed their actual intent to charge twelve percent. Further, the Court emphasized the established principle that reformation will generally not be granted for a mistake of law. Allowing reformation in this context, the Court reasoned, would undermine the deterrent purpose of usury law by enabling lenders who charge usurious rates to retain interest if undiscovered but obtain reformation if discovered.

Accordingly, the Court concluded it was error for the trial court to reform the usurious contract on the basis of the parties' mutual mistake of law.

On the second issue, the Court analyzed MCL 438.32; MSA 19.15(2), which bars recovery of interest and related charges by a seller or lender who charges excessive interest and entitles the borrower to recover attorney fees and court costs, and provides that prior interest paid must be applied to outstanding principal. The Court recognized authorities holding that the statutory benefits (including application of interest to principal) attach when a seller/lender brings an action to enforce a usurious contract. The Court contrasted enforcement with reformation, citing a dictionary definition of "enforce" to show enforcement means making effective or compelling collection of a debt. Since plaintiffs brought an action to reform (seeking to reduce/eliminate the usurious interest) rather than to enforce the usurious interest, the Court concluded plaintiffs were not attempting to enforce the usurious rate and the penalty provisions of MCL 438.32; MSA 19.15(2) were therefore inapplicable. The Court noted that if plaintiffs later bring an action to enforce payment, defendant could raise the statute then.

Finally, the Court found no error in the trial court's denial of plaintiffs' motion for costs and attorney fees under the cited court rules and statute. Because of the above holdings, the Court deemed it unnecessary to address other issues raised on appeal.

Holding and Implications

HOLDING: The judgment of the trial court was Affirmed in part and Reversed in part.

Implications (direct effects stated in the opinion):

The Court held it was improper to reform a usurious land contract where the parties were mutually mistaken about the maximum legal interest rate (a mistake of law) and the written instrument reflected the parties' actual intent to charge twelve percent; the trial court's reformation on that basis was erroneous (reversed as to that relief).
The Court held that MCL 438.32; MSA 19.15(2) (including application of prior interest to principal and statutory penalties) is available to a buyer/borrower only when a seller/lender brings an action to enforce a usurious contract; because plaintiffs brought an action to reform rather than enforce, the trial court properly declined to penalize plaintiffs under that statute (that aspect was affirmed).
The trial court's denial of plaintiffs' motion for costs and attorney fees was affirmed.
The Court noted that if plaintiffs later pursue an action to enforce payment under the land contract, defendant would be able to raise the question of applicability of the penalty provision of MCL 438.32; MSA 19.15(2) at that time.

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OLSEN v PORTER

MURPHY, P.J.

Plaintiffs and defendant both appeal as of right a judgment ordering reformation of a usurious land contract. Plaintiffs also appeal an order denying their motion for costs and attorney fees. We affirm in part and reverse in part.

On September 12, 1983, plaintiffs and defendant entered into a land contract under which plaintiffs agreed to sell a house and certain real property to defendant for $15,000, to be paid at the rate of $165.16 a month for twenty years. The contract was drafted by an attorney retained by plaintiffs and provided for an interest rate of twelve percent per annum. In 1990, defendant learned that MCL 438.31c(6); MSA 19.15(1c)(6) provided for a maximum interest rate of eleven percent per annum and that the twelve percent interest rate in the land contract was therefore usurious. Defendant began making his land contract payments in escrow.

On March 14, 1991, plaintiffs filed a complaint seeking reformation of the land contract to reflect an annual interest rate of eleven percent, the maximum interest rate permitted under MCL 438.31c(6); MSA 19.15(1c)(6). Defendant's answer included a counterclaim for a declaratory judgment in which he sought to apply all the interest he had paid on the usurious contract to the outstanding principal debt on the land contract pursuant to MCL 438.32; MSA 19.15(2).

Plaintiffs moved for summary disposition of their claim for reformation of the contract pursuant to MCR 2.116(C)(10) and for summary disposition of defendant's counterclaim pursuant to MCR 2.116(C)(8). The trial court held a hearing on October 14, 1991, and entered an order on December 19, 1991, granting plaintiffs' motion for summary disposition of their reformation claim and dismissing defendant's counterclaim. In the order, the trial court reformed the contract to provide for an interest rate of eleven percent prospectively from October 14, 1991, but reserved the issue regarding the interest rate to be applied to the land contract from the date of the execution of the contract, September 12, 1983, to October 14, 1991, as well as the issue whether a penalty should be imposed on plaintiffs pursuant to MCL 438.32; MSA 19.15(2). The trial court held a second hearing on November 15, 1991, and entered a judgment on December 19, 1991, ordering the interest rate on the contract to be nine percent from September 12, 1983, to October 14, 1991. The trial court did not penalize plaintiffs pursuant to MCL 438.32; MSA 19.15(2). The trial court denied plaintiffs' postjudgment motion for costs and attorney fees pursuant to MCR 2.114(E), (F), 2.625(A)(2), and MCL 600.2591; MSA 27A.2591.

The first issue presented before this Court is whether it is proper for a trial court to order reformation of a land contract that charges a usurious rate of interest when the parties to the contract were mutually mistaken about the maximum interest rate allowable under MCL 438.31c(6); MSA 19.15(1c)(6). This is an issue of first impression in Michigan. We conclude that it is improper for a trial court to order reformation of a usurious contract when there was a mutual mistake about the maximum permissible interest rate.

This Court reviews de novo the trial court's decision to grant or deny equitable relief. Webb v Smith (After Remand), 204 Mich. App. 564, 568; 516 N.W.2d 124 (1994). In considering whether the trial court properly ordered reformation under the circumstances, we are mindful that courts are required to proceed with the utmost caution in exercising jurisdiction to reform written instruments. Theophelis v Lansing General Hosp, 430 Mich. 473, 492; 424 N.W.2d 478 (1988).

Plaintiffs and defendant entered into a land contract while mutually mistaken about the maximum rate of interest that could legally be charged. The parties mistakenly believed that the maximum permissible interest rate was twelve percent when the maximum interest rate was in fact only eleven percent. MCL 438.31c(6); MSA 19.15(1c)(6). The parties' mistake regarding the maximum interest rate permitted by statute was a mutual mistake of law. Courts will reform an instrument to reflect the parties' actual intent where there is clear evidence that both parties reached an agreement, but as the result of mutual mistake, or mistake on one side and fraud on the other, the instrument does not express the true intent of the parties. Ross v Damm, 271 Mich. 474, 480-481; 260 N.W. 750 (1935). Neither plaintiffs nor defendant contends that the land contract did not express their true intent. This Court will not reform a contract if the instrument is drawn as intended, and there is no dispute that the parties intended the land contract to have an interest rate of twelve percent. Moreover, reformation will generally not be granted for a mistake of law. Schmalzriedt v Titsworth, 305 Mich. 109, 119; 9 N.W.2d 24 (1943); Emery v Clark, 303 Mich. 461, 471; 6 N.W.2d 746 (1942). If we permitted lenders to reform contracts with usurious interest rates, an unscrupulous lender would not be deterred from charging a usurious interest rate because if the usurious interest rate was not discovered, the lender could retain the ill-gotten interest, and if the usurious interest rate was discovered, the lender could simply seek reformation of the contract. Accordingly, we hold that it was error for the trial court to reform the usurious contract on the basis of the parties' mutual mistake regarding the maximum legal interest rate.

Our holding is consistent with holdings in other jurisdictions that have considered whether to permit reformation of a usurious contract on the basis of mutual mistake regarding the maximum legal rate of interest. See Babcock v Berlin, 123 Misc.2d 1030; 475 N.Y.S.2d 212 (1984); Freeman v Hernandez, 521 S.W.2d 108 (Tex Civ App, 1975). See also Hart v Piper Industries, Inc, 1994 Tenn App LEXIS 257 (May 10, 1994).

The second issue presented by this appeal is whether a buyer/borrower can invoke MCL 438.32; MSA 19.15(2) when a seller/lender brings an action for reformation of a usurious contract. This is also an issue of first impression in Michigan. We conclude that a buyer/borrower cannot invoke MCL 438.32; MSA 19.15(2) when a seller/lender brings an action to reform a usurious contract.

MCL 438.32; MSA 19.15(2) provides:

Any seller or lender or his assigns who enters into any contract or agreement which does not comply with the provisions of this act or charges interest in excess of that allowed by this act is barred from the recovery of any interest, any official fees, delinquency or collection charge, attorney fees or court costs and the borrower or buyer shall be entitled to recover his attorney fees and court costs from the seller, lender or assigns.

MCL 438.32; MSA 19.15(2) requires that all prior interest paid under a usurious contract be applied to the extinguishment of any outstanding principal debt. Leon v Zlatkin, 265 Mich. 225, 229; 251 N.W. 377 (1933); Osinski v Yowell, 135 Mich. App. 279, 287; 354 N.W.2d 318 (1984). However, a buyer/borrower can claim the benefit of MCL 438.32; MSA 19.15(2) only when a seller/lender brings an action for enforcement of a usurious contract. Waldorf v Zinberg, 106 Mich. App. 159, 164; 307 N.W.2d 749 (1981). See also McKenna v Wilson, 280 Mich. 227, 232; 273 N.W. 457 (1937). A buyer/borrower cannot maintain an independent suit under MCL 438.32; MSA 19.15(2) to recover interest paid on a usurious contract. Waldorf, supra, 164.

The focus of the statute is to "penaliz[e] the lender who attempts to enforce a usurious contract." Michigan Mobile Homeowners Ass'n v Bank of the Commonwealth, 56 Mich. App. 206, 215; 223 N.W.2d 725 (1974). However, in this case, plaintiffs brought an action for reformation, not enforcement, of the usurious contract. "Enforce" is defined in Black's Law Dictionary (5th ed) as "to make effective; as, to enforce . . . the collection of a debt or fine; to compel obedience to." By seeking to reform the interest rate of the contract, plaintiffs were neither attempting to make effective the usurious interest rate nor attempting to compel defendant to abide by the terms of the usurious contract. To the contrary, by seeking reformation of the contract, plaintiffs sought to eliminate the usurious interest rate rather than force defendant to comply with the contract as written. Therefore, we conclude that plaintiffs' action for reformation was not an action for enforcement. Because plaintiffs did not bring an action to enforce the contract, the trial court properly did not penalize plaintiffs pursuant to MCL 438.32; MSA 19.15(2).

Presumably, if plaintiffs are required to bring an action to enforce payment under the land contract, defendant would be free to raise the issue regarding the applicability of the penalty provision of MCL 438.32; MSA 19.15(2).

We find no error in the trial court's denial of plaintiffs' motion for costs and attorney fees pursuant to MCR 2.114(E), (F), 2.625(A)(2), and MCL 600.2591; MSA 27A.2591.

In light of our holding, we find it unnecessary to address the remaining issues raised on appeal.

Affirmed in part and reversed in part.

OLSEN v. PORTER