Opinion ID: 1838702
Heading Depth: 1
Heading Rank: 3

Heading: Are credit or time-price sales covered by usury statutes?

Text: Respondent strongly urges that the usury statute does not apply to the Penney Agreement because it is in form and substance a credit or time-price sale, and that such sales are, and historically have been, excluded from the coverage of usury statutes. The trial court concluded: ... Nor does the case at bar come within the concept that one price for cash and a much higher price for a sale in which the purchase price will be paid in the future does not involve the issue of usury, as in Ruffner v. Hagg [sic], 66 U. S. 115. In Hogg v. Ruffner, [21] the court declared what it considered to be the established rule: But it is manifest that if A propose to sell to B a tract of land for $10,000 in cash, or for $20,000 payable in ten annual instalments, and if B prefers to pay the larger sum to gain time, the contract cannot be called usurious. A vendor may prefer $100 in hand to double the sum in expectancy, and a purchaser may prefer the greater price with the longer credit .... Such a contract has none of the characteristics of usury; it is not for the loan of money, or forbearance of a debt. [22] It is clear, as many authorities have noted, that the traditional time-price or credit sale has been consistently excluded from the coverage of the typical usury statutes, [23] and this time-price doctrine has been accepted by this court. [24] However, even in 1861 the court stated that there was a limitation upon this doctrine: The only limitation upon this principle, if it may be properly so called, is that made necessary for the purpose of giving effect to the spirit and intent of the law against usury, by preventing the parties from resorting to the form of a sale as a cloak or cover for what is in reality a usurious loan. In such cases the law looks behind the shifts and devices of the parties, and, according to the fact, declares the transaction to be a loan and not a sale. [25] The court will always look behind the form of the transaction to determine if in substance it is a device to avoid the usury statute. Respondent argues that there was a concerted attempt to include time-price sales within the ambit of the usury statute adopted in 1851. However, it was the true, traditional time-price sale that was contemplated at the time. The example of the time-price sale presented in Hogg v. Ruffner [26] (if A propose to sell to B a tract of land for $10,000 in cash, or for $20,000 payable in ten annual instalments) is precisely the situation considered by the legislature in 1851, as indicated by respondent's quotation from the majority report: `I have a horse worth $100, you have $100 in money shall I be permitted to sell my horse for $125, and you be prohibited from loaning your money at 25 percent interest?' The rationale for the distinction between the two transactions is essentially that set forth in Dry Dock. [27] Respondent's conclusion, then, that the majority and the legislature clearly intended that the statute would not apply to sales transactions is an overstatement. The legislature intended the statute not to apply to the true time-price sale as it was conceived of by the courts at that time, and in no way did it consider it not to apply to any sales transaction, least of all a transaction of the type presented in this case. The modern credit card transaction could hardly have been within the view of the legislature. Further, it is this concept of the time-price sale which this court had in view when it decided Otto v. Durege , [28] in which case the court stated exactly what respondent notes: ... The penalties and prohibitions of the statute are aimed at the receiving or contracting to receive a greater rate of interest than that prescribed by it upon the loan or forbearance of money, or other things, and do not apply to the sale of a note or any other vendible commodity, which when in good faith intended as such, may be sold and transferred for such price as may be fixed by the agreement of the parties. [29] Similarly, all other early cases which excluded timeprice sales must be viewed in light of the existing concept of a time-price sale, and the particular questions presented to the court. Respondent's argument that subsequent attempts by the legislature to include credit sales indicate that such are not included within the ambit of the statute, has little merit. It could be correctly argued on the other hand that had a statute been passed to specifically regulate revolving charge accounts, such measure would amount to nothing more than a codification of the existing common law, and that the failure to do so was just that, a failure to codify existing common law, not a failure to include a transaction that had been specifically excluded by the courts. While the time-price doctrine has consistently been given effect by courts throughout the country, the willingness of the courts to look behind the form of the transaction to its substance has been manifested. There are various factors to which courts look to determine the substance of the transaction in question, and there are various indicia which courts point to in determining that a particular transaction is not a true time-price sale. [30] These include insufficient disclosure of two prices (cash price and credit price) to both parties; close relations between seller and transferee of negotiable paper; ambiguous charges in the sale contract; seller's specific agreement to finance the purchase; credit price calculated in terms of interest or percentage; sales tax computed on cash price; etc. [31] These and other factors are also noted with respect to this particular case in the trial court's excellent opinion. We repeat the trial court's detailed analysis of factors here because it points out so well why it considered this revolving charge account to be a forbearance of money and not a time sale. The following facts gleaned from the contract and the stipulation of facts may lead to the inference that the charge of one and one-half percent per month is a mere addition to the purchase price in the nature of an increase in price for time sales: 1. There is no loan as such. Everything promised is but a charge or consideration for the sale. Uniserve Corp. v. Commissioner of Banks, 207 NE 2d 906 (Mass.). However, the statement of the Dry Dock court that a loan will be presumed in certain situations, supra, is applicable. 2. The contract by its terms permits the purchaser to pay cash and to lower the cost of the merchandise by payment even after the services charges have been begun. The election is that of the customer. See Randall v. Home Loan & Improvement Co., 244 Wis. 623. The customer has the option of lowering the price of the merchandise by payment even after the services have begun to run. However, in the classic example posed by the United States Supreme Court in Hogg v. Ruffner, [32] the purchaser does not have this option. Hence it is arguable that this factor tends to show that the Penney Agreement is not a traditional time-price sale. This is true of factor 3 as well. 3. There is a cash sales price quoted and by the contract a formula is stated for calculating the additions to the sales price, so that the purchaser may, by his own will, determine the length of time he will take to pay and the extra charges that he will be compelled to pay. The purchaser is informed and has an opportunity to choose between a cash price and a higher cost over a period of time. See McNish v. Grand Island Finance Co., 83 NW 2d 13 (Neb.). The following facts would indicate that the `service charge' is in fact interest, that is, a consideration for a forbearance: 1. The contract was not entered into in connection with a sale, but in contemplation of a sale or sales in the future. 2. The investigation and approval of the account indicates an intent by the defendant to extend credit on a basis of the purchaser's ability to pay. 3. There is an absolute sale of goods, with transfer of title on delivery and the creation of a debt as a consideration for the sale. See Bell v. Idaho Finance Co., 255 P 2d 715 (Utah). It appears impossible to distinguish this from the identical factors present in the bank charge card situation discussed earlier. 4. There may be multiple sales with debits to the account of the customer and also credits for payments. The account is a running account, open for additional debits as sales are made, and open for credit of payments made. The account is in effect an open charge account for goods purchased. While it may consist of but one sale in many instances, it is open and in many cases used for additional charges for multiple sales at different times, as well as credits for payments on account. See Hannan v. Engelmann, 49 Wis. 278; Meyer v. Selover, 225 Wis. 389. There are many similarities between the Agreement and a typical open account. Respondent argues that an open account is distinguishable on the ground that the amount due is payable on demand. While the amount due here is not payable on demand per se, it is clear that the entire amount of all purchases or the total unpaid balance is payable under the Agreement upon default of the purchaser, i.e., failure to make the required monthly minimum payment. Respondent's distinction seems slight in light of the following description of an open account: Properly speaking, the term `open account' means only an account the balance on which has not been ascertained; an account based upon running or concurrent dealing between the parties which has not been closed, settled, or stated, and which is kept unclosed with the expectation of further transactions. . . . An open account results where the parties intend that the individual items of the account shall not be considered independently, but as a connected series of transactions, and that the account shall be kept open and subject to a shifting balance as additional related entries of debits and credits are made, until it shall suit the convenience of either party to settle and close the account, and where, pursuant to the original express or implied intention, there is but one single and indivisible liability arising from such series of related and reciprocal debits and credits. This single liability is to be fixed on the one part or the other, as the balance shall indicate at the time of settlement, or following the last pertinent entry.... [33] If the Penney Agreement does not fall precisely within this definition, it is clear that it has a considerable number of the characteristics detailed. Even the method of applying the payments, i.e., to the earlier purchases first, is consistent with the application of payments made by courts when there is no method agreed to by the parties. [34] 5. The `service charge' is not a fixed amount, independent of the amount owed, as in Hafner v. Spaeth, 156 P 2d 408 (Wash.). Rather it is a percentage of a balance of indebtedness and is computed monthly. As was said in Lloyd v. Gutgsell, 124 NW 2d 198, 126 NW 2d 224 (Neb.), `... the charge is for the forbearance to collect the cash price or for the use of money.' Lloyd v. Gutgsell [35] further states: There seems to be an impression that if a cash price is quoted and the buyer is unable to pay cash, it is then possible to apply a certain schedule of rates or charges to the cash price in order to determine the time sale price, the difference being denominated a time price differential. It is possible to do so if the resulting charge does not exceed 9 percent simple interest. If it does, we have a usurious transaction. Where a time sale price is determined by applying a certain schedule of rates or charges to the cash price, the resulting product is interest. This is merely a sale for a cash price, with the difference between the money the buyer has and what he needs being financed. [36] This description is accurate for the method employed in the Penney Agreement. 6. It has been held that the absence of a quotation to the customer of a time sale price as well as a cash price, with a computation of the cost of credit by a formula is an indicia that it is not a bona fide time sale price, and the addition to the cash price is an extension of credit in the nature of a loan. Daniel v. First National Bank, 227 F 2d 353; State v. Associates Discount Corp. 77 NW 2d 215 (Neb.); Mossler Acceptance Co. v. McNeal, 252 SW 2d 593 (Tex. Civ. App.). 7. There is no evidence that the cost of the service necessary, or expense incident to the operation of the account, such as bookkeeping, billing, etc., bears any relation to the `service charge.' It would seem that it does not cost any more monthly to service a $500 balance in an account than it does a $50 balance, and yet the `service charge' is based on the balance, not the cost. Cf. Friedman v. Wis. Acc. Corp., 192 Wis. 58. 8. The contract in the case at bar is made prior to any sale and is not part of the sale, except as it becomes a part by reference if the customer elects not to make a cash payment of the purchase price before the service charge is imposed. The only price at which the goods are offered at the time of sale is the cash price and the actual total time sale price is neither calculated or quoted at the time of sale. The difference is well illustrated by the difference in the transactions in McNish v. Grand Island Finance Co., 83 NW 2d 13 (Neb.). The Nebraska Supreme Court, consistent with the general view of those courts who hold that a valid time-price agreement depends on the presentation of two prices to the purchaser, [37] has stated: An essential of a valid time sale price is a price agreed upon between the parties where the buyer is actually informed of and has at the time the sale is made an opportunity to choose between a cash and a time sale price. (Emphasis added.) [38] And the Arkansas court has stated that even the timesale price itself may be a device to avoid the usury statute. [39] 9. The contract does not differ in form from one customer to the next nor does it differ in substance. It is a standardized form applicable to all customers with the same `service charge' to all, based upon the amount of the debt and it requires a monthly calculation. The contract does not contemplate a single sale only. We have found no cases which have held that a contract covering more than a single sale is a true time credit sale. Nor have we. Indeed even all of respondent's examples in attempting to show the difference between a timeprice sale and a sale for cash use the example of one purchase. 10. The `service charge' is not a penalty for failure to pay on time installments as they come due. It is not exacted to compel prompt payment when due as in Randall v. Home Loan & Improvement Co., 244 Wis. 623. Rather it is a charge for the privilege of not paying the cash price promptly, and the failure to pay the cash price before the `service charge' is imposed has the blessing of and is encouraged by the defendant. 11. The sales tax is computed on the cash price. [40] Respondent notes that the tax is computed on the cash price pursuant to sec. 77.54 (8), Stats. This statute, however, provides: 77.54 General exemptions. There are exempted from the taxes imposed by this subchapter: . . . (8) Charges for interest, financing or insurance where such charges are separately set forth upon the invoice given by the seller to the purchaser. In the traditional time-price sale, however, there are only two prices: The cash price and the time price. The extra amount for credit is not separately stated, although it can be easily arrived at by simple subtraction (which is not true with the Penney Agreement). Further, the statement of the Nebraska Supreme Court seems appropriate: ... Where a time sale price is determined by applying a certain schedule of rates or charges to the cash price, the resulting product is interest. [41] If this is true, then the Penney Agreement complies with the statute's mandate in terms of charges for interest. However, if the rate of interest is computed by applying a percentage of one and one-half percent to the unpaid monthly balance, it is difficult to see how the seller could ever compute the tax on a total of the cash price plus the time price differential. An interesting question is whether the phrase invoice given by the seller to the purchaser means the sales slip (where there obviously is no separate statement of a time price differential because it is not computable at the time of purchase since (1) the purchaser may avoid any service charge by paying within thirty days of the billing date; and (2) the service charge is determined on the basis of the total purchases, i.e., the unpaid monthly balance), or the monthly statement. In any event, compliance with the statute at most indicates that there is in reality only one price, the cash price, and that there is no time-sale price as such. It certainly does not restrict the import above of this factor in determining whether a purchase under the Penney Agreement is in fact a time-price sale.