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Fleming v. Tanner - 12/10/2019

Court of Appeals Division One holds that the statutory interest rate in A.R.S. § 44-1201(A) does not apply to an oral loan that did not anticipate interest.

An ex-son-in-law and borrower was sued by his former in-laws (lenders) for breach of contract, for failing to pay $50,000 in principal and $184,721.92 in accumulated interest on an oral loan.  The trial court awarded the lenders $50,000, but denied the lenders’ claim for interest under A.R.S. § 44-1201(A). 

The Court of Appeals affirmed the denial of interest but vacated the award of $50,000 to the lenders.  The Court of Appeals acknowledged that A.R.S. § 44-1201(A) facially provides “[i]nterest on any loan, indebtedness or other obligation . . . at the rate of ten per cent per annum, unless a different rate is contracted for in writing . . . .”  But the Court of Appeals held that, where the parties did not discuss any accrual of interest at the time of the agreement and where there was no suggestion that any interest was required under the terms of the oral agreement, A.R.S. § 44-1201(A) did not apply.  The Court of Appeals reasoned that to hold otherwise would rewrite the parties’ oral agreement and essentially forbid interest-free oral loan agreements in Arizona. 

The Court of Appeals did hold that the lenders were entitled to prejudgment interest from the time they asserted a demand for a liquidated claim, but also held that the amount of prejudgment interest and the $50,000 in principal were already paid by the borrower’s former spouse.  The former spouse had paid her share of the debt and interest, with the interest payment subject to a court’s determination that interest was appropriate.  Applying community property principles, the Court of Appeals held that the former spouse was jointly liable for the debt, and her payment covered the entire amount owing.  The Court of Appeals noted that the former spouse may have a contribution claim against the borrower, but the lenders had no claim because they had already been made whole. 

Judge Cattani authored the opinion; Judges McMurdie and Thumma joined.

Posted by: Travis Hunt

Posted On: 1/3/2020