McGalliard v. Liberty Leasing Co. of Alaska, Inc. ( 1975 )

OPINION

Before RABINOWITZ, C. J., and ERWIN, BOOCHEVER, and FITZGERALD, JJ.

FITZGERALD, Justice.

In this opinion we decide that a third-party loan cloaked in the form of a lease is within the purview of the usury laws, AS 45.45.010 et seq.¹ We hold that the transaction in the instant case was usurious.

During the summer of 1968 Joseph and Mickey McGalliard, d/b/a Import Palace, entered discussions with Robert Ryland² concerning relocation of their gift and novelty store. To make relocation of the store feasible, the McGalliards needed to finance the acquisition of trade fixtures. The financing was eventually arranged by Western Fixtures through Liberty Leasing Company of Alaska.

Following the negotiations, Liberty Leasing, Inc. paid the total price of the trade fixtures, amounting, to $17,836.88, to Western. The fixtures were delivered directly by Western to the McGalliards at the new location. To complete the transaction, the McGalliards then entered into a “lease” arrangement with Liberty. The written instrument called for 36 monthly payments of $686.72 for a total of $24,-721.92. It further provided for annual extensions thereafter in consideration of yearly payments of $1,783.68.

The McGalliards paid in $13,047.68 under the terms of the agreement and then defaulted in making further payments. Liberty brought suit in the superior court to recover the balance of payments due under the lease and demanded judgment for the value of the trade fixtures. The McGalliards answered setting up numerous defenses and counterclaims, only one of which has any significance in this appeal. The McGalliards claim that the “lease” was in substance a loan or forbearance of money at a usurious rate of interest in violation of AS 45.45.010 et seq.

The trial judge was uncertain in his characterization of the transaction. Although he concluded that the three-party arrangement was an integrated transaction with Liberty in the position of a financier, he also spoke of the Liberty/Mc-Galliard transaction as a conditional sale. Because he saw the Liberty/McGalliard transaction as a conditional sale, the trial judge felt compelled to honor, as he characterized it, a longstanding legal fiction holding conditional sales outside the reach of the usury statutes. Judgment was entered for Liberty in the amount of $11,-674.24, the remaining payments due under the agreement. The trade fixtures were ordered sold and the proceeds applied to the amount due with any excess awarded to the McGalliards. The McGalliards now. appeal from the judgment.

In its efforts to determine whether a purported lease or sale arrangement involves a usurious loan, the trial court must look to the essential relationship of the parties and the substance of the transaction, rather than to one isolated aspect of the transaction. We have noted that on other occasions courts have looked through the form of a transaction to its substance. In Metcalf v. Bartrand, 491 P.2d 747 (Alaska 1971), we held a repurchase contract to be nothing more than a cloak for a usurious loan. Other courts have found usurious loans in contracts of sale as well as in contracts where the primary purpose is to lend money.³ In determining whether a purported lease or sale arrangement involves a usurious loan, several indicia are frequently relied on by the courts. These include, but are not limited to, the following: (1) intention of any of the parties to create a loan or extension of credit;⁴ (2) discussion between the vendor and vendee of financing possibilities or efforts by the vendee to seek financing elsewhere;⁵ (3) existence of a close relationship between a vendor and a financier; ⁶ (4) proof of a normal business practice to assign paper shortly after a transaction is consummated;⁷ (5) relation of the price the vendor receives for his paper and his cash selling price;⁸ and (6) computation of the excess (time-price) charges in a manner in which loan interest is usually computed.⁹

The Supreme Court of Washington in National Bank of Commerce v. Thomsen, 80 Wash.2d 406, 495 P.2d 332 (1972), held the “time price differential” in the purchase of an automobile to be usurious interest on a loan. In reversing the trial court’s holding that the transaction was a bona fide conditional sale, the Washington Supreme Court posed the following question :

When a purchase is financed by a third party, is the relationship between the purchaser and the financier that of vendee and vendor or that of borrower and lender ?

We think the answer is obvious when the question is stated. The party who furnished the money with which the purchase is made and to whom the purchaser obligates himself to repay that money is a lender. It follows that the charge which is made for that loan is interest . . ..Id. at 337.

In McKeeman v. Commercial Credit Equipment Corp., 320 F.Supp. 938 (D.Neb.1970), the court found that a purported lease was in fact a usurious loan. Mc-Keeman purchased silos and other farm equipment from Norfolk Farm Equipment Co. (NFEC) for which he received a statement for the full purchase price of $42,819.66. After the equipment was delivered, NFEC sent Commercial Credit Equipment Corp. (CCEC) a statement for the same amount. CCEC paid the statement and entered a “lease” agreement with McKeeman for the equipment in the amount of $58,188.06. The lease assigned all manufacturer’s warranties to the user, required the user to pay all taxes, insurance and costs, and placed all risk of loss on the user. The court found that the lease included a purchase option of one dollar. The court concluded that the lease form was merely a device to avoid application of the penalties of the usury law on a usurious loan. 320 F.Supp. at 948. The situation in McKeeman is strikingly similar to that in the instant case.¹⁰

Applying the foregoing principles to the case at bar, we find the conclusions of the trial judge inconsistent. We agree that the three-party transaction was integrated and that the Liberty/McGalfiard arrangement was a loan. We cannot agree that the Liberty/McGalliard “lease” can be characterized as a conditional sale and that the interest component in the “lease” was a time-price differential.

The McGalliards purchased the trade fixtures from the supplier, Western. Financing was provided by Liberty, which secured the loan to the McGalliards by purportedly taking title from Western and making a “lease” with the McGalliards. Ryland testified that after the McGalliards had selected the equipment, they were given the choice of paying for the fixtures in cash, borrowing the amount of the purchase price, or arranging the transaction through a leasing company. Mrs. Mc-Galliard testified that the three options offered by Western were cash payment, bank loan, or “they [Western Fixtures] could handle it for us.” Mr. McGalliard’s testimony was substantially the same as Mrs. McGalliard’s testimony! Both of the Mc-Galliards testified that they agreed to rely on Western Fixtures to arrange financing. The transaction in this case evidences no motivation to use a lease form for tax considerations or other accounting considerations frequently moving sophisticated businessmen to employ lease rather than sale forms.

Liberty’s president, Sparks, was clear in his trial testimony that his company’s sole involvement in the McGalliard transaction and in equipment transactions generally is advancing cash to a lessee. He testified that once a lease is signed, the lessee is free to buy wherever and whatever it wants. The nature of Liberty’s business is summed up in Sparks’ statement that, “it’s certainly advancing in the line of credit of the leasing company.” Tt is of some importance to note that Liberty is not engaged in the retail sales business. Liberty has no showroom, no inventory, no catalogs, no salesmen, nor does it advertise the sale or lease of commercial fixtures. Rather, testimony adduced at trial shows that Liberty from time to time enters financing arrangements characteristic of commercial loans with retailers such as Western Fixtures, with whom Liberty had a close working relationship.

Liberty’s sole concern in the McGalliard transaction was financing. The fixtures were considered in one lump sum with no differentiation between costs and continued value of individual fixtures. The only contact between Liberty and the “Mc-Galliards was the sending” and receipt of monthly payments. All complaints and servicing were directed to and provided by the supplier, Western Fixtures. During the lease term the lessee was required to pay for insurance, taxes, and repairs and to bear the risk of loss from theft or damage.¹¹

It is urged by appellee that analysis of the lease terms under the provisions of the Uniform Commercial Code, especially AS 45.05.020(37), requires reversal of the trial judge.¹² Under the statute, however, it is clear that the question whether a lease is intended as security is to be determined by the facts of each case. The existence of an option in a lease is recognized by the statute as a factor to consider in determining the true nature of a lease. However, the use of an option clause in no way precludes consideration of the other indicia and factors we have noted.

Nor does consideration of the option in the Liberty/McGalliard lease under the Uniform Commercial Code change the result. The “lease” before the court does not contain an express option to purchase. The trial judge found, however, that the renewal option in the lease was in fact a purchase option. He characterized the option as minimal, allowing the purchaser to pick “the thing up” for “a certain little balloon payment.”

It is true there is some dispute in the testimony as to what was intended concerning renewal and the options under the lease. According to the McGalliards’ testimony, Ryland told them that the lease was a mere formality and that the property would become theirs upon completion of the lease term. Ryland denied that he told the McGalliards the property would become theirs upon termination of the lease. Nevertheless, both Ryland and Robert J. Sparks, the owner of Liberty Leasing Company, testified that the leasing company was not interested in reacquiring the equipment at the end of the 36 month term. Sparks admitted as well that it was the usual practice of Liberty Leasing to abandon leased items to the lessee after the first annual renewal payment following the original term. Liberty neither expected nor desired return of the leased fixtures at the end of the lease.

The Supreme Court of Oregon in Peco, Inc. v. Hartbauer Tool & Die Co., 262 Or. 573, 500 P.2d 708 (1972), recognized three alternative tests for determining if a purchase option is “nominal” within the meaning of the Uniform Commercial Code. Two have particular relevance to the McGalliard/Liberty “leasing” transaction. The first is an “economic compulsion” test, i. e., would completion of the purchase be the only sensible course open to the lessee. The second involves a comparison of the option price with the original purchase price.¹³

According to the evidence, at the end of the lease term the McGalliards would have paid almost $7,000 in excess of the original value of the fixtures.¹⁴ At that time the value of the fixtures to the McGalliards would have been significantly greater than the salvage value. Under such circumstances it would be unreasonable to expect a businessman to return the fixtures and commence a new acquisition scheme. See In re Oak Manufacturing, 6 U.C.C.Rep. Serv. 1273, 1277 (S.D.N.Y.1969) (rental payments of $1,309.08, $114.80 in excess of purchase price of $1,195.00) ; In re Vaillancourt, 7 U.C.C.Rep.Serv. 748, 762 (D. Me.1970) (choice of paying $147.25 to become the owner or $204.80 to lease for another year held no choice at all).

A comparison of the option price with the original purchase price leads to a similar conclusion. Several courts have focussed on 10% as an indicator of nominally of option price. In re Herold Radio & Electronics Corp., 218 F.Supp. 284 (S.D.N.Y.1963), aff’d, 327 F.2d 564 (2d Cir. 1964); In re Oak Manufacturing, 6 U.C. C.Rep.Serv. 1273 (S.D.N.Y.1969); cf. In re Alpha Creamery Co., Inc., 4 U.C.C.Rep. Serv. 794 (W.D.Mich.1967) (25%). The option in the McGalliard/Liberty transaction was 10% of the original purchase price and approximately 7.2% of the total rentals under the lease. The option thus appears to be minimal. The purported lease is not a true lease but is in fact- an installment loan.¹⁵

In State ex rel. Turner v. Younker Bros., Inc., 210 N.W.2d 550, 559 (Iowa 1973), the Iowa Supreme Court pointed out that Alaska, Iowa, and the Virgin Islands are the only U. S. jurisdictions in which the usury laws include the word “sale”. AS 45.45.020. The Alaska statute was apparently adopted from the pre-1900 Oregon code. Oregon subsequently amended its usury laws and removed sales from their purview. The Alaska legislature has not so amended the Alaska statutes. Because we conclude that the Liberty/McGalliard transaction was a third-party loan, it is not necessary to consider the applicability of the Alaska usury statutes to commercial or retail sales. Appellee’s policy arguments concerning the importance of commercial leases would more appropriately be addressed to the legislature.

The trial testimony discloses that the rate of interest charged by Liberty was between 12.8% (appellee’s testimony) and 25.5% (appellants’ testimony). Regardless of the figure used, it is clear that a usurious rate of interest was charged. AS 45.45.010 et seq. AS 45.45.030 provides that when usurious interest has been received or collected the person paying it may recover from the person receiving the payment double the amount of interest collected.¹⁶ As early as 1907 the Alaska courts acknowledged that the statute permits a debtor to recover under this provision only when he has paid a sum greater that the principal plus lawful interest.¹⁷ Since the total sum paid to Liberty by the McGalliards does not exceed the principal borrowed plus lawful interest, the requirements for recovery under AS 45.45.030 have not been met in this case. AS 45.45.-040 contains no such limitation. Under AS 45.45.040 the entire interest is forfeited and the court shall give judgment for the plaintiff for the amount due, without interest, and in favor of the defendants for costs of the action.¹⁸

We vacate the judgment of the trial court and remand with instructions to recompute the amount of the judgment consistent with AS 45.45.040 and this opinion.¹⁹

1 . At the time of the transaction AS 45.45.010 provided:

Legal rate of interest. (a) The rate of interest in the state is six per cent a year and no more on (1) money after it is due; (2) judgments and decrees for the payment of money, except that a judgment or decree founded on a contract in writing providing for the payment of interest until paid at a specified rate exceeding six per cent a year and not exceeding 10 per cent a year bears interest at the rate specified in the contract if the interest rate is set out in the judgment or decree; (3) money received to the use of another and retained beyond a reasonable time without the owner’s express or implied consent; (4) money due upon the settlement of matured accounts from the day the balance is ascertained; or (5) money clue or to become due where there is a contract to pay interest and no rate is specified.

(b) Interest at the rate of eight per cent may be charged by express agreement of the parties in a contract.

AS 45.45.020 provided then as it does now:

Higher rate of interest prohibited. No person may, directly or indirectly, receive in money, goods, or things in action, or in any other manner, a greater sum or value for the loan or use of money, or upon contract founded upon a bargain, sale, or loan of wares, merchandise, goods, chattels, lands, and tenements, than is prescribed in §§ 10-70 of this chapter.

2 . The McGalliards had previously purchased trade fixtures from Hyland.

3 . See Daniel v. First Nat’l, Bank, 227 F.2d 353 (5th Cir. 1955); Lloyd v. Gutgsell, 175 Neb. 775, 124 N.W.2d 198 (1963); Annot., 14 A.L.R.3d 1065 (1967). Contra, Steffenauer v. Mytelka & Rose, Inc., 87 N.J.Super. 506, 210 A.2d 88 (1965).

4 . Cf. Burr v. Capital Reserve Corp., 71 Cal.2d 983, 80 Cal.Rptr. 345, 458 P.2d 185 (1969).

5 . See C.I.T. Corp. v. Edwards, 418 P.2d 685, 688 (Okl.1966).

6 . The relationship can be evidenced by use of a finance company’s forms, by proof of an agency relationship, by contemporaneous assignments, and in various other ways. See Daniel v. First Nat’l Bank, 227 F.2d 353, 356 (5th Cir. 1955). See also Warren, Regulation of Finance Charges in Retail Instalment Sales, 68 Yale L.J. 839 (1959).

7 . See Warren, supra note 6, at 843.

8 . See National Bank of Commerce v. Thomsen, 80 Wash.2d 406, 495 P.2d 332, 338 (1972).

9 . See Daniel v. First Nat’l Bank, 227 F.2d 353, 356 (5th Cir. 1955) ; Lloyd v. Gutgsell, 175 Neb. 775, 124 N.W.2d 198, 204 (1963).

10 . Appellee’s reliance on Burr v. Capital Reserve Corp., 71 Cal.2d 983, 80 Cal.Rptr. 345, 458 P.2d 185 (1909), is misplaced since the trial court in Burr found that the transaction was not a loan.

11 . See Davis Brothers v. Misco Leasing, Inc., 508 S.W.2d 908, 913 (Tex.Ct.Civ.App.1974).

12 . AS 45.05.020(37) provides in pertinent part:

“security interest” means an interest in personal property or fixtures which secures payment or performance of an obligation . whether a lease is intended as security is to be determined by the facts of each case; however, (A) the inclusion of an option to purchase does not of itself make the lease one intended for security, and (B) an agreement that upon compliance with the terms of the lease the lessee shall become or has the option to become the owner of the property for no additional consideration or for a nominal consideration does make the lease one intended for security ....

The record clearly indicates that the trial judge considered the U.C.C.. standard. The transcript of proceedings on November 14, 1972, records Judge Singleton stating, “Very well, I think that the court has reviewed the Uniform Commercial Code, particularly the definition of the security ... . ” The judge then proceeded to paraphrase the relevant section of AS 45.05.020(37).

13 . The third alternative test for determining whether an option price is nominal is comparison of the option price with the value of the property at the time for exercising the option. 500 P.2d at 710. See also In re Oak Manufacturing, 6 U.C.C.Rep.Serv. 1273, 1276 (S.D.N.Y.1969).

14 . We calculate this to be approximately 138% of the original value of the fixtures.

15 . This is not a case involving a two-party credit sale or a retail charge account plan. While some jurisdictions have found a loan component in two-party transactions, we do not reach that issue in this case.

See State ex rel. Turner v. Younker Bros., Inc., 210 N.W.2d 650 (Iowa 1973) ; State v. J. C. Penney Co., 48 Wis.2d 125, 179 N.W. 2d 641 (1970). For a discussion of potential problems with extension of the usury laws to retail credit sales see Note, Interest Incognito —Usury Statute Applied to Revolving Charge Account Agreement, 34 U.Pitt.L.Rev. 54, 62 (1972).

16 . AS 45.45.030 provides :

Action for recovery of double amount of usurious interest paid. If interest greater than that prescribed in §§ 10 and 20 of this chapter is received or. collected, the person paying it may, by action brought within two years after the payment, recover from the person receiving the payment double the amount of the interest received or collected.

17 . See Werner v. Lorentzen, 3 Alaska 275 (Alaska 1907). Cf. Sparkman & McLean Income Fund v. Wald, 10 Wash.App. 765, 520 P.2d 173, 175 (Ct.App.1974).

18 . AS 45.45.040 provides :

Usurious rate as working forfeiture of entire interest. If in an action brought on a contract, the court determines that a rate of interest has been contracted for greater than is authorized by §§ 10-70 of this chapter, either directly or indirectly, in money, property, or other valuable thing, or that a gift or donation of money, property, or other-valuable thing has been made or promised to be made to a lender or creditor, or to a person for him, directly or indirectly, by the borrower or debtor, or a person for him, the design of which is to obtain for money so loaned, or for debts due or to become due, a rate of interest greater than that specified by §§ 10-70 of this chapter, the rate of interest is usurious and works a forfeiture of the entire interest on the debt. The court shall give judgment for the amount due, without interest, on the sum loaned or the debt contracted, against the defendant and in favor of the plaintiff and against the plaintiff for costs of action, whether the action is contested or not.

19 . We are in agreement with much of the dissenting opinion’s discussion of the difficulties in distinguishing leases from conditional sales under AS 45.05.020(37). But while our dissenting colleague would remand to the superior court, in light of the appropriate legal standard, for a finding of whether the purchase option was for a “nominal” amount, as we have previously noted we are of the opinion that the record discloses the trial court applied the correct standard and found that the option was for a “nominal” consideration. Since the superior court’s findings are not clearly erroneous, a remand would be improper.