Opinion ID: 2136057
Heading Depth: 1
Heading Rank: 2

Heading: Existence of the Elements of Usury

Text: II. The four essential elements of usury, each of which must exist in a transaction before it can be labeled usurious, have already been set out in this opinion. Usury, which originally meant simply interest for the use of money, has now come to mean excessive interest. 14 Williston on Contracts, Third Ed., section 1682. There is no argument as to the existence of the second elementan understanding between the parties that the principal shall be repayable absolutely. Therefore, we turn to the third element the exaction of a greater profit than is allowed by law. In this equitable proceeding our review is de novo. Rule 334, Rules of Civil Procedure. Plaintiffs would have the court reject any effort to justify either the 18 percent or 16.25 percent annual interest rates as merely a service charge by Younkers to recover its reasonable credit costs. The evidence established the cost of providing Younkers' customers with credit service exceeded the income derived from the finance charges under both credit plans. Accordingly, the trial court noted in its findings of fact that the evidence supports the argument of Younkers that the `finance charge' is not all excess profit, but goes to cover expenses incurred in connection with the revolving charge account. There is no indication the court considered this finding in arriving at its decision. Nevertheless, plaintiffs assert, the court found that one of the elements of usury, namely, receipt of a greater profit than allowed by law, was lacking. Plaintiffs argue the finance charges assessed by Younkers on both the revolving charge plan and the retail installment contract are not specific charges for specific services rendered its customers in making, arranging, servicing and collecting for the sale of goods on credit but constitutes interest in its entirety. Younkers on the other hand maintains it is entitled to recover its reasonable costs of providing credit services; even if a portion of the finance charge is considered interest such portion does not exceed nine percent per annum. Younkers offered evidence of a study made of its credit activities which disclosed its cost of providing credit service exceeded its finance charge revenue by $574,000.00 per year. In response to a question on cross-examination as to why Younkers continued to extend credit if the two types of credit arrangements cost the company such an amount, one witness expressed the view the additional merchandising profit which is contributed because credit is afforded has to offset this deficiency. No study had been made of any benefits which might have been derived from the credit operation. This court has recognized that a lender in addition to the highest rate of interest could charge a reasonable fee for services rendered such as for title examinations, recording fees, travel and commission expenses and credit reports provided such charges are for specific services and are in a reasonable amount. Ordinarily, these sums are not retained by the lender but are paid to others. Smith v. Wolf, 55 Iowa 555, 8 N.W. 429; Iowa Savings & Loan Assn. v. Heidt, 107 Iowa 297, 77 N. W. 1050; Annot., 21 A.L.R. 797, 871, supplemented in 53 A.L.R. 743; 63 A.L.R. 823; 105 A.L.R. 795. However, Younkers' expenses incident to operation of its credit plans bear no relation to the computation of or amount of the alleged service charge. The finance charges do not vary, but the revolving account and the retail installment account always remain 18 percent and 16.25 percent respectively. No matter what the unpaid balance of a revolving charge account or retail installment contract, the finance charge is based on the balance, not the costs of the services. The cost of servicing a large unpaid balance should not be significantly greater than the cost of servicing a much smaller account and thus a fixed rate should cover the store's cost in both instances. In other words, if the alleged service charge (since Truth-in-Lending designated finance charge) assessed were in fact a true charge only for the servicing of the account, one would expect such charges to be approximately the same regardless of the balance remaining. The only variable which would tend to make costs rise for a larger account relates to the fact the retailer must build a reserve for bad debts and subsequent losses. To sustain Younkers' contention would require this court to approve a procedure whereby the seller of property on credit adds as a finance charge a set percentage of the amount of the sale as a blanket fee to cover indefinite expenses, some of which are certainly a part of the retailer's normal overhead, where that fee plus the rate of interest exacted exceeds the maximum interest permitted by statute. This we decline to do. Our de novo review compels the conclusion that Younkers did exact a greater profit for its credit plans than the nine percent permitted by section 535.2, The Code. The third essential for usury is present here. III. A loan or forbearance of a debt, the first enumerated essential element, must also be shown to exist in order to prove a transaction usurious. Therefore, our next problem is to determine whether there was forbearance of a debt in the credit plans offered by Younkers; and, if so, whether the Iowa usury law covers forbearance of a debt. Forbearance, in this sense, has been defined as, an act by which creditor waits for payment of debt due him by debtor after it becomes due.    Within usury law, term signifies contractual obligation of lender or creditor to refrain, during given period of time, from requiring borrower or debtor to repay loan or debt then due and payable. Black's Law Dictionary 773 (rev. 4th ed. 1968). Citing Hafer v. Spaeth, 22 Wash.2d 378, 156 P.2d 408, 411. It has also been said that forbearance, as used in usury statute, simply means that the person to whom money is owed waits for all or part of the money after the consummation of the contract in which the money is involved, or that the seller foregoes payment in cash and waits for all or part of his money. Sloan v. Sears, Roebuck and Co., 228 Ark. 464, 308 S.W.2d 802, 804. However, Younkers contends a sales agreement can never constitute a forbearance. We do not agree. Certainly, the purchase of property creates an obligation to pay for it. A close analysis of the definition of `forbearance' reveals that the term can be made to apply to a credit sale. Did not the buyer incur a money debt by his purchase? Did not the seller-creditor refrain from collecting the money debt for a specified time? Therefore, the courts could have categorized a credit sale as a forbearance by the seller to collect the cash-price from the buyer. Note, the Penney Decision and Revolving Charge Accounts, 54 Marq.L.Rev., 223, 224. The author of the note, Service Charges for Revolving Charge Accounts: A Time-Price Exemption or Usury?, 71 Colum. L.Rev. 905, 908-909, tells us: It should be noted that a debt incurred in the purchase of goods may become subject to usury statutes, if, for example, by its terms the debt or final payment becomes due and the seller agrees to forbear collection in return for additional consideration. Indeed, this possibility was considered in Hogg v. Ruffner [66 U.S. (1 Black) at 118]: `The original contract by which a debt is created may be for the purchase and sale of land, and it will be, nevertheless, contrary to the [usury] statute for the vendor to demand or receive more than legal interest for the forbearance of such debt   .' In the revolving charge account, Younkers' exhibit A, it is provided that the purchaser agrees to pay in full within 30 days after the billing date on my/our account for all purchases made during the preceding billing cycle without a finance charge. The agreement then provides for additional charges for payments made after 30 days. The retail installment contract, as noted, provides for a cash price of the property purchased and an agreement to pay the unpaid portion of the cash price plus an additional finance charge within a specified time. Under both plans a sale is made on a cash price basis. When time is given to pay the same and an amount is assumed to be paid which is greater than the cash price with legal interest, the result is an agreement for forbearance from demanding payment of an existing debt. Hare v. General Contract Purchase Corp., 220 Ark. 601, 249 S.W.2d 973, 977. Forbearance does not necessarily require an actual loan of money. It generally signifies the giving of time for the payment of a debt. In any transaction in which there is a delay until final payment there is forbearance as that term is used in the requirement for a finding of usury. Note, UsuryRevolving Charge Accounts and the Legality or a 1½% Monthly Charge, 2 Seton Hall L.Rev. 573, 574-575; Interest IncognitoUsury Statute Applied to Revolving Charge Account Agreement, 34 U.Pitt.L.Rev. 55, 59. We conclude that forbearance as used in usury law is present in both credit plans offered by Younkers. The forbearance occurs when the purchaser does not pay in full within 30 days after billing date the cash price of the property or in the case of the installment plan when the buyer does not pay in full at time of purchase. In both instances, the seller refrains from requiring the debtor to pay a debt then due in consideration of the buyer paying a finance charge. State v. J. C. Penney Co., 48 Wis.2d at 134, 179 N.W.2d at 646. IV. The trial court distinguished the present case from State v. J. C. Penney Co., supra, Rollinger v. J. C. Penney Company, 192 N.W.2d 699 (S.D.1971) and other credit sale usury cases on the ground the Iowa usury law does not cover the element of forbearance for a debt. Plaintiffs cite Mallett v. Stone, 17 Iowa 64 (1864) in challenging this ruling. Mallett was an action to collect a promissory note of $1000 and foreclose a deed of trust which had been given as security for the note. After the note had become due on July 1, 1857, the promisor and the promisee had entered into a special contract whereby the holder of the note agreed to forbear payment during July for a consideration of $30 which was paid; a similar contract was made for the following month. This court affirmed the trial court's holding that there could not be foreclosure on the two special contracts of July and August. These special contracts which were usurious did not taint the original note however. These special contracts were in fact forbearance from the original note and it was this that was held usurious; the forbearing was the promisee's agreement not to collect the original note which was due on July 1, 1857. Mallett has not been cited by the courts other than for the principle that the original obligation is not tainted by a subsequent usurious contract. Although Mallett does not answer the question as to whether the factual situation in Younkers constitutes forbearance, it stands for the principle that forbearance is within the Iowa usury law. We hold the Iowa usury law covers the element of forbearance for a debt. V. The trial court held plaintiffs failed to prove the essential element of intent in their effort to establish a usurious transaction. The court reasoned that Younkers did not have the requisite intent, impliedly or otherwise, because the time-price doctrine has been part of Iowa's usury statute since Gilmore, supra. The court further relied on Partch v. Krogman, 202 Iowa 524, 210 N.W. 612. These statements concerning the element of intent as a prerequisite to the application of chapter 535, The Code, are found in 45 Am.Jur.2d, Interest & Usury, section 160:    Some cases hold that mutuality of a wrongful intent is not essential, and that it is sufficient if the lender had an intent to receive more than the lawful rate of interest, but others require an intent on one side to lend, and a corresponding intent on the other to borrow, under conditions violating the usury law. Some authorities stress the necessity of a corrupt intent to violate the usury law, but others state that the required intent is not necessarily a consciousness of the illegality of the transaction, or a specific intent to violate the statute, but only an intent to exact payments in excess of the amount of interest allowed by law. In Partch, 202 Iowa at 527-528, 210 N. W. at 614, there is this statement: In the early case of Dickerman v. Day, 31 Iowa 444, we quoted with approval from the Supreme Court of Wisconsin in Otto v. Durege, 14 Wis. 571, as follows: `Usury is a matter of intention, and to render a contract usurious, both parties must be cognizant of the facts constituting usury, and have a common purpose in evading the law.    The law against usury is penal in its nature, and reason and justice dictate that the forfeitures imposed by it ought not to be visited upon those who are innocent of any intentional violation of its provisions.' It is true that usury often hides its head, and is frequently difficult to discover; and it is the policy of the law that, when there is an agreement, whatever its form, whereby the lender secures a profit or advantage in excess of that permitted by the statute, the transaction is tainted with usury. Lombard v. Gregory, 81 Iowa 569, 47 N.W. 298. `It is the essence of a usurious transaction that there shall be an unlawful and corrupt intent, on the part of the lender, to take illegal interest, and so we must find before we can pronounce the transaction to be usurious.' Condit v. Baldwin, 21 N.Y. 219, 221 (78 Am.Dec. 137). On the other hand, the Wisconsin court itself in J. C. Penney, supra, inferentially discarded the language quoted by the Partch court from the earlier Wisconsin case in favor of the principle that the necessary intent may be implied if the contract is not in fact a true time-price sale.