Court Opinion

ID: 9554007
Source: CourtListenerOpinion
Date Created: 2023-08-07 19:39:13.329511+00
Date Added: 2024-06-11T15:32:47.111411
License: Public Domain

Chief Justice VOLLACK
dissenting:
The majority holds that “the late charges in this case are properly characterized as ‘default interest’ and are reasonable as analyzed under the nonconsumer loan usury statute.” Maj. op. at 1287. Contrary to the majority’s conclusion, I believe that the late charges in this case do not constitute interest but instead constitute an unenforceable penalty. I therefore dissent.
I.
The majority holds that the late charges in the case before us constitute “interest” pursuant to section 5-12-103(2), 2 C.R.S. (1992). Section 5-12-103(2) defines the term “interest” as follows:
[T]he sum of all charges payable directly or indirectly by a debtor and imposed directly or indirectly by a lender as an incident to or as a condition of the extension of credit to the debtor, whether paid or payable by the debtor, the lender, or any other person on behalf of the debtor to the lender or to a third party.
Id. Although this court has not yet considered whether late charges constitute “interest” as defined by section 5-12-103(2), we have considered whether other types of charges constitute interest pursuant to this statutory definition. Concord Realty Co. v. Continental Funding Corp., 776 P.2d 1114 (Colo.1989). In Concord Realty,' we noted that section 5-12-103(2) uses a definition of “interest” in the non-consumer context which is identical to the definition of “loan finance charge” in the consumer context, found in section 5-3-109(1), 2 C.R.S. (1992). Concord Realty, 776 P.2d at 1121. Additionally, we noted in Concord Realty that section 5-3-*1296109(1) specifically excludes certain charges from its definition of “loan finance charge.” Due to the parallel definitions in both statutory provisions, we looked to the exclusions found in section 5-3-109(1) to determine whether certain charges constituted “interest” pursuant to section 5-12-103(2). Concord Realty, 776 P.2d at 1121.1
In accordance with our analysis in Concord Realty, it is appropriate to turn to section 5-3-109(1) in the present case to determine whether late charges constitute “interest” pursuant to section 5-12-103(2). Section 5-3-109(1) provides:
“Loan finance charge” means the sum of all charges payable directly or indirectly by the debtor and imposed directly or indirectly by the lender as an incident to or as a condition of the extension of credit, whether paid or payable by the debtor, the lender, or any other person on behalf of the debtor to the lender or to a third party_ The term does not include charges as a result of default, additional charges (section 5-3-202), delinquency charges (section 5-3-203), or deferral charges (section 5-3-204).
(Emphasis added.) As noted earlier, the definition of “loan finance charge” contained in section 5-3-109(1) is identical to the definition of “interest” contained in section 5-12-103(2). Furthermore, section 5-3-109(1) specifically states that default charges do not constitute “loan finance charges.” Because default charges are essentially the same as late charges, it follows that late charges therefore do not constitute “interest” pursuant to section 5-12-103(2).
The majority declines to follow the Concord Realty analysis because that case determined whether certain charges constituted interest or principal, whereas the current case requires us to determine whether a late charge constitutes interest or a penalty. In my view, this distinction between principal and penalty is irrelevant because the pivotal issue in both Concord Realty and the current case is whether certain charges constitute “interest” as defined by section 5-12-103(2).
The majority also states that “the distinct differences between the consumer loan and nonconsumer loan settings convince us that there is no policy benefit in applying the protections of the U.C.C.C. [section 5-3-109(1) ] to the usury statute section 5-12-103 with respect to late charges.” Maj. op. at 1293. Such a statement is directly contrary to this court’s holding in Concord Realty that the U.C.C.C. is to be used as a guide in nonconsumer transactions “because the history and language of the statutes make it apparent that the General Assembly intended to create a comprehensive scheme to regulate the extension of credit.” Concord Realty, 776 P.2d at 1121.
Additionally, the majority declines to follow Concord Realty because that case preceded the cases on which the majority relies, such as Copeland v. MBNA America Bank, N.A, 907 P.2d 87 (Colo.1995), cert. denied, — U.S. —, 116 S.Ct. 2496, 135 L.Ed.2d 189 (1996), and Stoorman v. Greenwood Trust Co., 908 P.2d 133 (Colo.1995), cert. denied, — U.S. —, 116 S.Ct. 2498, 135 L.Ed.2d 190 (1996). However, the cases on which the majority relies are inapplicable to the current ease because they address whether late charges constitute “interest” pursuant to entirely different federal statutes, such as the National Banking Act and the Depository Institutions Deregulation and Monetary Control Act. In contrast, Concord Realty is applicable because it addresses the identical issue as the one now before this court: whether certain charges constitute “interest” pursuant to section 5-12-103(2) of the Colorado statutes. Thus, I believe that our analysis in Concord Realty is dispositive, and as discussed above, that analysis leads me to conclude that late charges do not constitute “interest” pursuant to section 5-12-103(2).
II.
The majority also applies section 5-12-103(1), 2 C.R.S. (1992), to the late charges in *1297the current case and holds that the late charges are enforceable because they mathematically conform to the statutory limits. I disagree. In addition to my view that section 5-12-103(2) does not apply to late charges because such charges do not constitute interest, I also believe that section 5-12-103(1) does not apply to late charges because such charges cannot be determined to be usurious at the time an agreement is made.
Section 5-12-103(1) provides, in pertinent part:
The rate of interest shall be deemed to be excessive of the limit under this section only if it could have been determined at the time of the stipulation by mathematical computation that such rate would exceed an annual rate of forty-five percent when the rate of interest was calculated on the unpaid balances of the debt on the assumption that the debt is to be paid according to its terms and will not be paid before the end of the agreed term.
(Emphasis added.) As this section makes clear, the calculation for usury only applies to interest, and the usurious nature of the interest must be capable of being determined at the time the agreement is made. Id.
Late charges are applied only if a loan is not paid according to its terms. Consequently, it is not possible to determine whether late charges are enforceable at the inception of the loan as required by the usury statute. In my view, therefore, the usury statute’s mathematical limit on interest rates does not apply to late charges.
III.
Having concluded that late charges do not constitute “interest” and that section 5-12-103(1) does not apply to late charges because they cannot be determined as usurious at the inception of the loan agreement, it is now necessary to determine whether such late charges constitute an unenforceable penalty.
It has long been established in Colorado that an additional default charge is unenforceable if it constitutes a penalty imposed for the purpose of enforcing prompt payment. McKay v. Belknap Savings Bank, 27 Colo. 50, 54, 59 P. 745, 747 (1899). Late charges are usually imposed for failure to pay periodic smaller installments. A fixed daily late charge applies to any failure to pay an amount due in full; it is unrelated to any particular amount unpaid. As such, a fixed daily late charge can amount to an extremely high rate per annum even for minor delinquencies in time and amount, and it becomes even more oppressive when the principal balance is reduced by any scheduled or unscheduled payment.
In the current case, after the debtor made payments reducing the principal, the amount of the debt was $472,764.45. Consequently, the $700 daily late charge, when added to the interest rate of 13%, exceeded 67% per an-num. The creditor later unilaterally reduced the late charge fee to $413.33 per day. When the reduced late charge was added to the 13% interest rate, the total was 44.99% per annum. In my view, this extremely high late charge is unreasonable and punitive in character. Such a late charge is an attempt to coerce timely payment and is not reasonably calculated to merely compensate the injured lender. I therefore believe that the late charge in this case was a penalty and should not be enforceable.
IV.
I believe that late charges do not constitute “interest” pursuant to section 5-12-103(2). I also believe that, in this case, the late charges constituted an unenforceable penalty. I therefore dissent.
I am authorized to say that Justice LOHR joins in this dissent.

. This court concluded in Concord Realty that an origination fee constituted interest, but an appraisal fee, inspection fee, credit reports, Federal Express charges, and legal fees at closing did not constitute interest. Concord Realty, 776 P.2d at 1121-22.