No. 91-388 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

1992 

CESSNA FINANCE CORPORATION, 

Plaintiff and Respondent, 

v. 

ROBERT E. CHAMBERS; JOHN S. PARKER, 

Defendants and Appellants. 

APPEAL FROM: District Court of the Eighth Judicial District, 

In and for the County of Cascade, 

The Honorable Thomas M. McKittrick, Judge presiding. 

COUNSEL OF RECORD: 

For Appellant: 

Robert J. Emmons, Emmons & Sullivan, 

Great Falls, Montana 

For Respondent: 

G. Curtis Drake, Keller, Reynolds, Drake, 

Sternhagen & Johnson, Helena, Montana 

Filed: 

Submitted on Briefs: January 16, 1992 

Decided: March 31, 1992 
Justice Terry N. Trieweiler delivered the opinion of the Court. 

On September 16, 1982, Cessna Finance Corporation filed a 

complaint against Robert E. Chambers and John S. Parker in the 

Eighth ~udicial District Court in Cascade County. In this 

complaint, Cessna sought a deficiency judgment following the sale 

of an airplane it had repossessed from Chambers and Parker. Cessna 

obtained a default judgment against Parker, but Chambers contested 

the action. On May 21, 1991, the District Court entered Findings 

of Fact, Conclusions of Law, and a Judgment in which it found 

Chambers liable for the deficiency. The court denied a subsequent 

motion by Chambers to amend the Findings, Conclusions, and 

Judgment. Chambers appeals. We affirm. 

The issues are: 

1. Did the District Court err when it concluded that the 

contract authorized a late-payment penalty in the amount of 

12 percent of the outstanding balance? 

2. Did the District Court err when it found that Cessnars 

denomination of late-payment penalties as "finance charges" did not 

violate the Montana Retail Installment Sales Act? 

On August 10, 1978, Chambers and Parker bought a Cessna 206 

airplane from Skymart Aviation in Great Falls. They financed this 

purchase by entering into an installment contract with Skymart, 

which subsequently assigned the contract to Cessna Finance 

Corporation, an entity that assists buyers in financing purchases 

of airplanes manufactured by the Cessna Aircraft Company. After 
the downpayment, $62,250 remained to be paid in six annual 

installments. The agreement between Cessna, Chambers, and Parker 

called for an "annual percentage rate" of 12 percent. 

Before long, a dispute arose between Chambers and Parker 

regarding the use of the airplane. They agreed that Parker would 

assume the sole obligation to make payments in exchange for sole 

use of the airplane. Cessna, however, did not release chambers 

from his liability on the purchase contract. Parker actually made 

the 1979 and 1980 payments, but defaulted on the 1981 payment. 

Neither Parker nor Chambers made any payments on the airplane 

after 1980. 

Cessna then accelerated the remaining balance, repossessed the 

airplane, and sold it to a third party. At the time Cessna 

repossessed the airplane, $53,060.59 remained outstanding on the 

purchase contract itself. To this amount, Cessna added $152.88 for 

storage, $44.00 for storage insurance, and $2,452.12 in 

repossession expenses. The sale yielded $35,501.00, which left a 

deficiency of $20,208.60. 

Cessna obtained a default judgment against Parker and 

proceeded against Chambers alone for the deficiency. Chambers 

raised the affirmative defenses of failure to pursue a guarantor 

and failure to mitigate damages. The court, sitting without a 

jury, conducted a trial of the matter on January 3, 1990. 

Subsequently, the court issued its Findings of Fact, Conclusions of 
Law, and Judgment in which it found Chambers liable for the 

deficiency and rejected his affirmative defenses. 

On June 7, 1991, Chambers moved to amend the Findings, 

Conclusions, and Judgment. Chambers argued that the purchase 

contract violated the Montana Retail Installment Sales Act by 

denominating late-payment penalties as "finance charges" rather 

than "interest." The court denied this motion on July 10, 1991. 

Chambers appeals. 

Did the District Court err when it concluded that the contract 

authorized a late-payment penalty in the amount of 12 percent of 

the outstanding balance? 

The relevant contract provisions read as follows: 

*6. CREDIT SERVICE CHARGE, FINANCE 

CHARGE, TIME PRICE DIFFERENTIAL $28.594.80 

ANNUAL PERCENTAGE RATE 12. % 

.... 

Buyer and Seller further agree that (i) should Buyer 

make any payment after its due date the FINANCE CHARGE 

(CREDIT SERVICE CHARGE, TIME PRICE DIFFERENTIAL) will be 

increased proportionately since the FINANCE CHARGE 

(CREDIT SERVICE CHARGE, TIME PRICE DIFFERENTIAL) is 

computed on a daily basis . . . . 

DEFAULT CHARGES--Seller has the option to declare the 

unpaid balance of the PRINCIPAL (UNPAID BALANCE, BASE 

TIME PRICE) to be immediately due if Buyer defaults in 

making payments according to the above PAYMENT SCHEDULE 

or otherwise defaults. . . . If any payment is not made 

by the due date the unpaid PRINCIPAL (UNPAID BALANCE 

BASE, TIME PRICE) shall continue to accrue FINANCE CHARGE 
(CREDIT SERVICE CHARGE, TIME PRICE DIFFERENTIAL) at the 

above ANNUAL PERCENTAGE RATE. 

*The amounts shown above in Item 6 (FINANCE CHARGE, 

CREDIT SERVICE CHARGE, TIME PRICE DIFFERENTIAL) . . . are 

estimates as authorized by Regulation Z 5226.6(f) 

computed on the assumption that all installment payments 

will be made on the scheduled dates. As the FINANCE 

CHARGE (CREDIT SERVICE CHARGE, TIME PRICE DIFFERENTIAL) . . . is computed on a daily basis, if Buyer fails to 

make any installment payment on or before the due date, 

Buyer will be obligated to pay additional amounts by 

reason of the FINANCE CHARGE (CREDIT SERVICE CHARGE, TIME 

PRICE DIFFERENTIAL) . . . . 

Chambers argues that Cessna cannot collect interest on the 

judgment because the contract provisions quoted above do not use 

the word "interest." He asserts that "finance chargesn are 

calculated differently than "interest" and that, therefore, when he 

agreed to pay a "finance charge" he did not necessarily agree to 

pay "interest." We reject this argument because we conclude that 

Chambers did in fact agree to a late-payment penalty expressed as 

a percentage of the outstanding principal. 

The contract's discussion of the "finance chargew refers to 

Regulation Z, which was promulgated by the Federal Reserve Board 

under the authority of the Federal Truth in Lending Act, 15 U.S.C. 

5 1601-1667(e). It is clear that the Truth in Lending Act and 

Regulation Z do not control or preempt state law in regard to this 

$62,250 transaction because they do not apply to transactions that 

exceed $25,000. 15 U.S.C. 5 1603; 12 C.F.R. S 226.3(b). However, 

in light of the contract's reference to Regulation Z in its 
discussion of the "finance charge,'I we turn to that regulation for 

assistance in defining terms. 

A "finance charge" is the expression of the cost of the credit 

as a dollar amount. It includes, but is not limited to, interest. 

15 U.S.C. 5 1604; 12 C.F.R. 5 226.4(a). 

An "annual percentage rate" is "a measure of the cost of 

credit, expressed as a yearly rate, that relates the amount and 

timing of value received by the consumer to the amount and timing 

of payments made." 12 C.F.R. 5 226.22(a) (1). 

The contract addresses the problem of late payments by 

providing that in the event of default the "finance charge" 

continues to accrue at the "annual percentage rate." It is 

significant that the contract refers to the "annual percentage 

rate" in this manner. Under Regulation Z, an "annual percentage 

rate" is merely a rough decimal approximation of the "finance 

charge." The Truth in Lending Act requires the creditor to 

disclose this rough estimate in addition to the "finance charge," 

12 C.F.R. 5 226.18, in order to assist buyers in making fully 

informed decisions, see 15 U.S.C. 5 16Ol(a) ; 12 C. F.R. 5 226.1 (b) . 

The contract, however, provides that in the event of a 

default, the "finance chargetf will continue to accrue at the 

"annual percentage rate. When Chambers signed the contract, he 

agreed to a fixed late-payment penalty of 12 percent on the 

outstanding balance. This is the provision the District Court 
relied upon when it found that Chambers had agreed to a 

late-payment penalty at the annual rate of 12 percent. 

We hold that the District Court did not err when it concluded 

that the contract authorized a late-payment penalty in the amount 

of 12 percent of the outstanding balance. 

I I 

Did the District Court err when it found that Cessna's 

denomination of late-payment penalties as "finance charges" did not 

violate the Montana Retail Installment Sales Act? 

Chambers cites § 31-1-235, MCA, in support of his argument 

that Cessna's denomination of late-payment penalties as "finance 

charges" violated the Montana Retail Installment Sales Act (MRISA) . 

That statute provides that: 

The holder may collect a delinquency charge on each 

installment in default for a period of not less than 10 

days in an amount not in excess of 5% of each installment 

or $5, whichever is less, or in lieu thereof, interest 

after maturitv on each such installment not exceedina the 

hishest lawful contract rate. [Emphasis added.] 

Chambers contends that 3 31-1-235, MCA, does not authorize lenders 

to denominate late-payment penalties as "finance charges" and that 

Cessna violated the MRISA by doing so. 

Cessna, on the other hand, argues that Chambers is attempting 

to construe the MRISA too strictly and that substance should 

prevail over form. In support of this argument, Cessna cites Bright 

v. Ball Memorial Hospital Association, Inc. (7th Cir . 19 8 0) , 6 16 F. 2d 3 2 8 . The 

plaintiffs in that case were former patients who sued the hospital 
for failure to make certain disclosures required by the Truth in 

Lending Act. In order to determine whether the Act applied, the 

Seventh Circuit had to decide whether charges denominated in the 

hospital's bills as "finance chargesn were really finance charges 

or whether they were actually late-payment penalties. This 

distinction was critical, because the Act's definition of "finance 

charge" specifically excludes late-payment penalties. Brigizt, 616 

F.2d at 336 (quoting 12 C.F.R. 5 226.4(c)) 

The plaintiffs in Bright argued that the hospital had assessed 

"finance chargesu because it had expressly denominated its 

late-payment penalties as "finance charges" in its billing 

statements. Essentially they argued, just as Chambers argues in 

this case, that "finance charge" means "finance charge." 

The Seventh Circuit held substance to prevail over form. 

Specifically, the court said: 

Finally, appellants argue that the Hospital's use of the 

label "finance chargeu on its printed materials indicates 

that the charges are, in fact, "finance charges" under 

the Act. While we agree with appellants that this 

terminology is relevant to our determination, see FRB 

Unofficial Staff Interpretation No. 1172, supra, it is by 

no means determinative. See FRB unofficial staff 

Interpretation No. 414, supra. In this regard, we agree 

with the district court that "the substance of the 

billing system controls, not its labels." We conclude, 

therefore, that the monthly charges assessed against 

Bright's and Barber's accounts were bona fide "late 

payment" charges under Regulation 2, 12 C.F.R. 

5 226.4(c). 

Bright, 616 F.2d at 338. 
We agree with the Seventh Circuit's analysis of the problem. 

Chambers agreed to a late-payment penalty of 12 percent on the 

outstanding principal. His attempt to limit Cessna to the 

terminology contained in § 31-1-235, MCA, is an unduly restrictive 

attempt to exalt form over substance. 

We hold that the District Court did not err in treating this 

late-payment structure as equivalent to a simple rate of interest. 

Af f irmed. 

We concur: 
March 31, 1992 

CERTIFICATE OF SERVICE 

I hereby certify that the following order was sent by United States mail, prepaid, to the following 

named: 

Robert J. Emmons 

Emmons & Sullivan 

608 Strain Bldg. 

Great Falls, MT 59401 

G. Curtis Drake 

Keller, Reynolds, Drake, Sternhagen & Johnson 

38 S. Last Chance Gulch 

Helena, MT 59601 

ED SMITH 

CLERK OF THE SUPREME COURT 

STATE OF MONTANA