Opinion ID: 2188563
Heading Depth: 1
Heading Rank: 1

Heading: Usurious Loan or Sale

Text: For their first contention on appeal, Mr. Carter and Commerce Alliance argue that the financial transactions between Commerce Alliance and Four Seasons were a subterfuge for usurious loans. Four Seasons, on the other hand, argues as it did before the circuit court that the transactions were factored sales of accounts receivable. We address, as an initial matter, our standard of review. The appellants correctly point out that Amendment 80 to the Arkansas Constitution did not disrupt this court's standard of review in chancery cases. As this court recently held: This court has traditionally reviewed matters that sounded in equity de novo on the record with respect to fact questions and legal questions. ConAgra, Inc. v. Tyson Foods, Inc., 342 Ark. 672, 30 S.W.3d 725 (2000); Ferguson v. Green, 266 Ark. 556, 587 S.W.2d 18 (1979). We have stated repeatedly that we would not reverse a finding by a trial court in an equity case unless it was clearly erroneous. ConAgra, Inc. v. Tyson Foods, Inc., supra . We have further stated that a finding of fact by a trial court sitting in an equity case is clearly erroneous when, despite supporting evidence in the record, the appellate court viewing all of the evidence is left with a definite and firm conviction that a mistake has been committed. Id. These common law principles continue to pertain after the adoption of Amendment 80 to the Arkansas Constitution, which was effective on July 1, 2001. Lewellyn v. Lewellyn, 351 Ark. 346, 93 S.W.3d 681 (2002). a. Usury Law Arkansas's usury law is set out in the Arkansas Constitution: The maximum lawful rate of interest on any contract ... shall not exceed five percent (5%) per annum above the Federal Reserve Discount Rate at the time of the contract. Ark. Const. art. 19 § 13(a)(i) (1987). Usurious contracts are void as to the amount of usurious interest, Ark. Const. art. 19 § 13(a)(ii), and a party who has been subjected to usurious interest is entitled to recover double the amount of such interest. Id. Courts in Arkansas are obligated to look beyond the four corners of the document in question to determine, considering all of the attendant facts and circumstances, if the contract is usurious in effect. State ex rel. Bryant v. R & A Inv. Co., Inc., 336 Ark. 289, 296, 985 S.W.2d 299, 303 (1999); see also McElroy v. Grisham, 306 Ark. 4, 8, 810 S.W.2d 933, 936 (1991) (The law shells the covering and extracts the kernel. Names amount to nothing when they fail to designate the facts. (quoting Sparks v. Robinson, 66 Ark. 460, 463-464, 51 S.W. 460, 462 (1899))); Standard Leasing Corp. v. Schmidt Aviation, 264 Ark. 851, 855, 576 S.W.2d 181, 184 (1979) (In determining if a contract is usurious we look to its substance, not to its form.). Accord General Electric Credit Corp. v. Robbins, 414 F.2d 208, 210 (8th Cir.1969) (The law will not tolerate any camouflage disguising a usurious transaction to make it seem innocent.) (applying Arkansas law) (internal citations and quotations omitted). Because the penalty for a usurious transaction is indeed heavy, the burden is on the plaintiff to show usury by clear and convincing evidence. Haley v. Greenhaw, 235 Ark. 481, 360 S.W.2d 753, 757 (1962). Clear and convincing evidence is that evidence which produces a firm conviction in the factfinder that the allegation at issue is true. Baker v. Arkansas Dept. of Human Servs., 340 Ark. 42, 8 S.W.3d 499 (2000). [W]hen the intention is not apparent, it is a question for the jury to determine whether it was a bona fide credit sale, or a device to cover usury. Haley, 235 Ark. at 488, 360 S.W.2d at 758 (quoting Hare v. General Contract Purchase Corp., 220 Ark. 601, 249 S.W.2d 973 (1952)). b. Usury Law and Factoring Contracts Four Seasons contends that it is engaged in the business of factoring accounts, not lending, and that the Purchase Agreement was a factoring contract. Factoring is defined as: The purchase of accounts receivable from a business by a factor who thereby assumes the risk of loss in return for some agreed discount. Webster's New Third International Dictionary (1961). A factor buys accounts receivable at a discount, the factor's seller obtains immediate operating cash, and the factor profits when the face value of the account is collected. See Irving Kellogg, The Lawyer's Use of Financial Statements 143 (Univ. of Calif. Press 1967). We had occasion to discuss the sale of a promissory note at a discount and whether that was usurious in Haley v. Greenhaw, supra . In Haley , the plaintiff had tried to set aside the assignment of certain mortgages by her ex-husband. The question was whether the sale of a promissory note at a discount, with a general endorsement, for a sum greater than the maximum rate of interest was usurious. The court considered the behavior of the parties important, and found that there was not one single shred of evidence that would indicate that the ... transaction was actually a loan, rather than a sale. Haley, 235 Ark. at 487, 360 S.W.2d at 757. The court also found it significant that none of the parties had tried to conceal the nature of the sale. Moreover, the language of the assignment was that of a sale, not a loan. Id. at 488, 360 S.W.2d at 757. (The language of the written assignment ... provides that [the sellers] `grant, bargain, sell, assign, transfer, set over, delivers, and convey ... all of their right, title, and interest in and to one certain mortgage together with the notes, debts, and claims secured by said mortgage.'). The court observed that these factors did not conclusively prove the absence of usury but noted that the burden was on the appellant to prove that issue to the jury by clear and convincing evidence if the intention was in doubt. This, she had not done, and the court affirmed the trial court. (i) Other Jurisdictions The issue of whether a factoring contract is, in fact, a disguised loan is an issue of first impression in Arkansas. Because of this, Mr. Carter and Commerce Alliance argue that there are a set of factors in general use by other courts that weigh in favor of classifying the factoring agreement in this case as a usurious loan rather than a sale. For the most part, we are persuaded that this issue turns principally on the intent of the parties as well as other attending factors. As one legal publication has concluded: examination of court decisions addressing the true sale question reveals the absence of any discernable rule of law or analytical approach in the courts, other than the vague standard that a transaction should be characterized according to the intent of the parties indicated by the surrounding facts and circumstances. Robert D. Aicher & William J. Fellerhoff, Characterization of a Transfer of Receivables as a Sale or a Secured Loan Upon Bankruptcy of the Transferor, 65 Am. Bankr.L.J. 181, 206 (1991). In short, the opinions in other jurisdictions turn on their facts. Here, the circuit court examined the surrounding facts and circumstances as well as the critical criteria discussed above and concluded that the transactions were bona fide sales, not loans. We will discuss each of the critical criteria gleaned from foreign jurisdictions seriatim. (ii) Control Mr. Carter and Commerce Alliance first argue that unlike a typical factoring agreement, they had no control over when the government agency would pay a purchase order on an account receivable that had been factored to Four Seasons. They urge that this fact, combined with the fact that the discount fee under the factoring agreement grew larger over time, makes the fees equivalent to interest, thus pointing toward the existence of a loan, not a sale. Four Seasons replies that Commerce Alliance had full control over when the purchase order would be paid. If Commerce Alliance performed its obligations to its customers in accordance with the contracts it negotiated with them, Four Seasons emphasizes, then the government agency would pay. The contracts that the government agencies made with Commerce Alliance's customers specified delivery times, and the contracts that Commerce Alliance negotiated with its customers stated that Commerce Alliance would send the invoice to the government agency leading to payment of the purchase orders. Thus, Four Seasons concludes, Commerce Alliance was in control of when the goods were delivered to the government agency and when the payment would be sent. The circuit court was persuaded by Four Seasons's argument, and we conclude that this conclusion was not clearly erroneous. Based on the structure of the transaction in question, it is clear that even if Commerce Alliance did not have absolute control over the timing of the payment from the government agency, it had more control than did Four Seasons. Under the arrangement, Four Seasons could not even notify the government agency that it was the owner of the account in question, much less dictate to the government agency when to pay. The control factor, in sum, does not weigh in the appellants' favor.