Case Name: Universal CIT Credit Corp. v. Hudgens
Court: Arkansas Supreme Court
Jurisdiction: Arkansas
Decision Date: 1962-04-30
Citations: 234 Ark. 1127
Docket Number: 5-2603
Parties: Universal CIT Credit Corp. v. Hudgens.
Judges: Ward, J., concurs.
Reporter: Arkansas Reports
Volume: 234
Pages: 1127–1137

Head Matter:
Universal CIT Credit Corp. v. Hudgens.
5-2603
356 S. W. 2d 658
Opinion on rehearing delivered April 30, 1962.

Opinion:
George Rose Smith, J.,
on rehearing. This was originally an action in replevin. The appellant's complaint alleged the car to be worth $1,000. At the inception of the case the appellant obtained possession of the vehicle by executing a delivery bond.
The ease was later transferred to equity. In the final decree the chancellor canceled the contract for fraud and for usury and gave the appellees a judgment for $1,060, representing the value of the car and $60 damages for the wrongful repossession. We affirmed the decree upon the ground of fraud alone, without reaching the question of usury. 234 Ark. 668.
In a petition for rehearing the appellant correctly points out that the judgment is excessive if the sole issue is that of fraud. One who obtains rescission of a contract for fraud must return what he has received, the parties being placed in status quo. Johnson v. Walker, 25 Ark. 196; Kilgo v. Continental Cas. Co., 140 Ark. 336, 218 S. W. 171. Hence if the case is merely one of fraud the repossession of the car was not wrongful, for the purchasers were required to surrender it and could recover only their down payment of $245, with interest.
On the other hand, when a contract of sale is set aside for usury the purchaser is entitled to keep the property. Universal C. I. T. Credit Corp. v. Stanley, 225 Ark. 96, 279 S. W. 2d 556. If this contract was usurious the chancellor was right in awarding the appellees a judgment for the value of the car. It thus becomes necessary for us to pass upon the issue of usury, to fix the measure of damages.
The facts, as found by the chancellor, show that the seller represented the price of the car to be $1,095. The salesman induced the appellees to sign the contract in blank and later fraudulently filled in the price as being $1,395, an excessive charge of $300. The contract recites an interest charge of $133.42, which is within the legal limit of 10 per cent per annum if the price was really $1,395. If, however, the excessive charge of $300 is treated as interest the agreement is plainly usurious.
It is shown without dispute that before the seller would agree to the transaction he telephoned the appellant finance company for an investigation of the purchasers' credit, to be certain that the conditional sales contract could be transferred. The appellees' credit was found to be good. On the day after the sale the dealer assigned the contract to the appellant. The recited unpaid principal balance was $1,150, which the finance company paid by issuing a check for $943 and by. setting up a reserve of $207 which was to be paid to the dealer when all the monthly installments had been met by the purchasers. (Whether the practice of setting up such a reserve might involve usury as between the finance company and the dealer is not before us, for the dealer has not complained. The only issue here is whether the original transaction between the seller and the buyers was .usurious.)
Did the excessive charge of $300 amount either to usury in itself or to a scheme resorted to as a cloak for usury?
Where a lender induces the borrower to sign a note in blank and later fills in the principal in a sum greater than the amount actually lent it has been held (correctly, we think) that these facts support a finding of usury. Cortner v. Bennett, 230 Miss. 369, 92 So. 2d 559; Autocredit of Fort Worth v. Pritchett, Tex. Civ. App., 223 S. W. 2d 951; contra, Chambers v. Gilbert, 68 Minn. 183, 70 N. W. 1077.
Yet not every instance of fraud or trickery in connection with a loan or credit sale can properly be classified as usury. If a lender should knowingly give the borrower counterfeit money the transaction would be fraudulent and criminal, but it would obviously not be usurious, any more than the purchase of goods with counterfeit money constitutes usury. Again, if a thief should sell stolen property on credit the transaction would be subject to rescission, but not for usury.
To determine on which side of the line this case falls we must understand what is and what is not usury. ' ' The excess over the legal rate charged to a borrower for the use of money" is said to be usury. Bouvier's Law Dictionary (8th Ed.). An almost identical definition is given in Webster's Third International Dictionary.
The many definitions in our own cases are substantially to the same effect. "Usury is a corrupt agreement for more than the legal rate of interest on a loan of money, or for the forbearance of a debt." Ford v. Hancock, 36 Ark. 248. "It is essential, in order to establish the plea of usury, that there was a loan or forbearance of money, and that for such forbearance there was an intent or agreement to take unlawful interest, and that such unlawful interest was actually taken or reserved. The wrongful act of usury will never be imputed to the parties, and it will not be inferred when the opposite conclusion can be reasonably and fairly reached." Briggs v. Steele, 91 Ark. 458, 121 S. W. 754. A mutual agreement for unlawful interest is not necessary to constitute usury, but "there must have been an intention on the part of the lender to take or receive more than the legal rate of interest." Bauer v. Wade, 170 Ark. 1020, 282 S. W. 359. " 'Forbearance' . . . simply means that the person to whom the money is owed waits for all or part of the money after the consummation of the contract in which the money is involved." Sloan v. Sears, Roebuck & Co., 228 Ark. 464, 308 S. W. 2d 802.
It will be seen that the fundamental characteristic of usury is the exaction of an excessive charge for the loan or forbearance of money. In the case at bar if the dealer had intended to keep the contract himself and had inserted an increased principal amount as a device for obtaining a greater return as compensation for his extension of credit then a finding of usury might well be justified.
The actual case, however, is quite different. Here the seller could not have intended to make a charge for his forbearance of the unpaid purchase price, simply because he never meant to forbear — that is, as we said in the Sloan case, to wait for his money. This dealer would not even enter into the sale until he had first made sure that he could immediately transfer the contract to the finance company. That the seller's conduct amounted to fraud we have no doubt, but there is lacking the essential characteristic that is the earmark of usury.
It was the finance company that exercised the forbearance, but it did not receive an extra $300 for doing so. Instead, it paid the dealer in full for the recited principal of the debt and was to receive no more than legal interest upon its investment. In this respect the case is to be distinguished from Hare v. General Contract Purchase Corp., 220 Ark. 601, 249 S. W. 2d 973, and other recent cases in which we have found contracts of sale to be usurious. Here there is no indication that the appellant was aware of the dealer's excessive charge or acted collusively in the transaction. And it is plain enough that this dealer's method of operation, unlike the various cloaks for usury, could not be repeatedly used as a means of victimizing the public. The salient factor in this transaction was the seller's dishonesty rather than his attempt to take advantage of the buyers' need for credit. No dealer could long remain in business if he habitually defrauded his customers and subjected the finance company to many suits like this one.
In making a finding of usury the chancellor took the position that the recited interest charge of $133.42, although amounting to less than the legal rate upon the recited balance of $1,150, was usurious because it would have been an illegal charge upon a balance of $850, which was the sum orally agreed upon-by the parties. This position is not sound. Neither the dealer nor the finance company ever had any intention of charging $133.42 upon a principal balance of $850, nor did the purchasers ever have any intention of making such a payment. The fraudulent contract must stand or fall in its entirety. "We cannot make a new agreement for the parties by giving effect to the recited interest figure, which is favorable to the appellees' contention, and at the same time rejecting the recited principal figure, which is unfavorable to them.
What we have here is really a routine case of fraud, for which the principles of equity provide an adequate remedy. Our constitution, Art. 19, § 13, imposes a severe penalty for usury; but we are not at liberty to amend the constitution, in effect, by extending its language to reach a transaction that does not fall within the letter or the spirit of any definition of usury that we have been able to find in any authority in any jurisdiction. Had this contract been usurious in the beginning the appellant would have taken it subject to that infirmity. Clem v. Nelson, 230 Ark. 296, 322 S. W. 2d 448. But the contract, while fraudulent, was never usurious, because no excessive charge was made for the loan or forbearance of money.
The petition for rehearing is granted. The decree is reversed and the cause remanded for the entry of a decree rescinding the contract for fraud.
Ward, J., concurs.
McFaddin, Robinson, and Johnson, JJ., dissent.