National Bank of Commerce v. Thomsen

495 P.2d 332, 80 Wash. 2d 406, 1972 Wash. LEXIS 596

• Court: Washington Supreme Court
• Decided: March 30, 1972
• Docket: 40942
• Status: Published

Opinions

Rosellini, J.

This is a suit to recover the balance due upon the purchase price of an automobile, including “time price differential,” plus interest after the date of default, and a collection fee and attorney’s fees provided in the contract of purchase. The defendant’s answer sets up affirmative defenses of lack of capacity to sue and usury.

The evidence¹ showed that the defendant had gone to Carter Motors, Inc., on a Saturday and had signed an order for the purchase of a new, 1965 Volkswagen automobile. This order showed that the price would be paid as follows: a downpayment of $1,000, a trade-in allowance of $25 and the balance to be financed. The total amount to be paid exceeded the stated price of the vehicle, $1,999.29, in the amount of $242.15.

Later the same day, the defendant paid the $1,000 down-payment and signed a “conditional sales contract,” which showed the “time price differential” to be $242.15. This document provided that payments should be made to the National Bank of Commerce of Seattle, the plaintiff herein, and further provided that payment to anyone other than the National Bank of Commerce should not constitute payment thereunder. This instrument bore the seal of the plaintiff and was admittedly furnished to the dealer by the plaintiff. Charts for determining the amount of “time price differential” were also furnished the dealer by the bank.

On the following Monday, the contract was assigned to the plaintiff, which paid the dealer the amount of the purchase price. This assignment was effected in accordance with the terms of a contract between the dealer and the plaintiff, which provided that the dealer would sell to the plaintiff such “notes” as might be acceptable to the plaintiff and that the dealer guaranteed all such “notes.” Conditional sale contracts were expressly included within the definition of “notes.”

The defendant testified, without contradiction, that he had told the dealer that he intended to apply for a loan from a bank which had advertised an interest rate of $4.50 per $100 per year on new car loans. The dealer advised him, he said, that he preferred that the financing be done by the plaintiff bank and that the interest rates were “pretty much normal” throughout the city. Taking the dealer’s word for this, the defendant signed the contract furnished by the plaintiff. The “time price differential” provided in the contract was actually 14.61 per cent per annum. At that time, a new car loan could have been obtained by the purchaser direct from the bank at a rate of about 8 per cent. Such a loan would be made, an employee of the plaintiff testified, if the purchaser would make an initial payment of at least a third of the total price.²

The following week the defendant received, by mail, a payment book from the plaintiff. He made 11 of the 36 payments called for in the contract and then refused to make further payments, upon advice of counsel. Fruitless attempts to obtain further payments and to repossess the automobile culminated in this lawsuit.

Holding in favor of the plaintiff’s view of the transaction, the trial court ruled that it was a bona fide conditional sale contract and that, under this court’s decision in Hafer v. Spaeth, 22 Wn.2d 378, 156 P.2d 408 (1945), the usury statute (RCW 19.52) did not apply. The defendant’s additional defense, that the plaintiff was not licensed under the Small Loan Act (RCW 31.08) and therefor could not bring suit, was ignored by the court. Judgment was entered for the plaintiff in the amount of the contract balance, plus attorney’s fees of $100. No judgment was awarded for interest after default or collection fee, and since the plaintiff has not taken a cross-appeal or assigned error to the court’s action in this regard, we deem any claim for such interest or fee to have been waived.

The theory that the Small Loan Act applies to the plaintiff in this transaction is urged again on appeal. The plaintiff has not seen fit to answer the contention, but it is apparent upon a reading of the statute that the act was not intended to apply to national banks, such as the plaintiff. RCW 31.08.220 excepts from the operation of the chapter any person doing business under and as permitted by any law of this state or the United States relating to banks. The defendant makes no attempt to show that the plaintiff is not authorized under state or federal law to finance purchases of automobiles. Consequently, we hold that the trial court did not err in refusing to accept the defendant’s theory that under the Small Loan Act, the plaintiff lacked capacity to sue.

Upon the remaining contention of the defendant, that the transaction is usurious, we are of the opinion that the trial court must be reversed. The case relied upon by that court, Hafer v. Spaeth, supra, did not dispose of the question presented by the circumstances of this case and is therefore not controlling.

In that case, the defendant’s assignor had purchased a piano for the sum of $175, from a dealer in pianos. He had paid $30 in cash, and agreed to pay the balance at the rate of $5 per month, “with $3.50 handling charge per month or a fraction thereof.” During the period between August 4, 1936, and January 19,1939, the purchaser paid the total sum of $160 on the stated purchase price, leaving an unpaid balance of $15. He then sold his interest in the piano to the defendant. The dealer, before the commencement of the action, assigned his claim to the plaintiff for collection. When suit was brought, the defendant contended that the $3.50 per month handling charge represented interest and that the contract violated the usury statute in force at that time. (RCW 19.52.020.)

This court discussed that statute, which provided:

Any rate of interest not exceeding twelve (12) per centum per annum agreed to in writing by the parties to the contract, shall be legal, and no person shall directly or indirectly take or receive in money, goods, or thing in action, or in any other way, any greater interest, sum or value for the loan or forbearance of any money, goods or thing in action than twelve (12) per centum per annum.

The essential elements of usury, this court said, are (1) a loan or forbearance, express or implied; (2) money or its equivalent constituting the subject matter of the loan or forbearance; (3) an understanding between the parties that the principal shall be repayable absolutely; (4) the exaction of something in excess of what is allowed by law for the use of the money loaned or for the benefit of the forbearance; and, in some jurisdictions, (5) an intent to exact more than the legal maximum for the loan or forbearance.

To determine whether all these essential elements are present, the courts will look through the form of the transaction and consider its substance. If all the requisites are found to be present, the transaction will be condemned as usurious, but, if any one or more of them are lacking, the parties cannot be charged with a usurious practice.

22 Wn.2d at 382.

The word “loan,” this court said,

imports an advancement of money or other personal property to a person, under a contract or stipulation, express or implied, whereby the person to whom the advancement is made binds himself to repay it at some future time, together with such other sum as may be agreed upon for the use of the money or thing advanced.

22 Wn.2d at 384.

It was stated that if usury does not exist at the inception of the contract, the contract is not usurious.

We also recognized there that we had held in Lyon v. Nourse, 104 Wash. 309, 176 P. 359 (1918), and in Hughbanks Inc. v. Gourley, 12 Wn.2d 44, 120 P.2d 523, 138 A.L.R. 658 (1941), that it is not the office of a conditional bill of sale to secure a loan of money, but rather, only to permit an owner of personal property to make a bona fide sale on credit, reserving title in himself for security until the purchase price is paid.

It was stated in that opinion that the “vast majority” of cases dealing with transactions of the kind before the court in that instance had held that such sales do not constitute loans or come within the ban of the law against usury unless it is evident that the transaction, though in outward form a sale and purchase, was but a cloak to hide a usurious loan.

While it is perhaps still true that the majority of courts adhere to the view that a conditional sale is not a “loan or forbearance,” there is now respectable authority to the contrary. See Annot., 14 A.L.R.Sd 1065, 1069 (1967). Also, the rationale which was commonly used to distinguish sales on credit from loans and which was set forth in Hafer v. Spaeth, supra, has been subjected to some rather severe criticism. See, for examples, W. Warren, Regulation of Finance Charges in Retail Instalment Sales, 68 Yale L. Rev. 839 (1959) and J. Bernstein, Background of a Gray Area in Law: The Checkered Career of Usury, 51 A.B.A.J. 846 (1965).

The author of the latter article says, quoting William D. Warren, professor of law at the University of Illinois, “ ‘Today, the belief that one borrows money from need but purchases on credit by choice is manifestly anachronistic.’ ” If it is true that persons who purchase on installment terms automobiles and other items of merchandise which they feel they need are under economic pressure as severe as that which influences borrowers of money to accept oppressive terms, then there is no logical reason to make a distinction between the exacting of excessive charges for deferring payments and the exacting of such charges for loaning money.

However, we are not confronted in this case with a question which makes it necessary for the court to either affirm or overrule Hafer v. Spaeth, supra. That case did not involve a purchase which had been financed by the plaintiff. It is true that there was an assignment of the conditional sale contract, but that assignment was made only for collection purposes and after the purchaser had defaulted.

Before turning to the question before the court, however, we think it should be noted that this court did not approve the contract under consideration there. The trial court had entered judgment for the defendant, finding that the contract was usurious. While this court held that the usury-statute did not apply to the particular transaction, which was a bona fide conditional sale, where the seller retained title as security for his receipt of the balance of the payments, it did not order judgment entered for the plaintiff. Instead, it remanded the case and strongly suggested that the trial court might find either that the handling charge had been waived or that it was unconscionable, calling attention to the principle that forfeitures are not favored. Thus the case does not stand for the proposition that in a conditional sale contract, the “sky is the limit.”

The legislature of this state has since seen fit to regulate retail installment sales of goods and services, in RCW 63.14, the first statute being passed in 1963. Under the first legislation on this subject, there was no restriction on the amount of service charge. In 1967, a maximum of 18 per cent per annum was set, and in 1969, by initiative measure No. 245, section 3, the maximum was set at 12 per cent per annum. RCW 63.14.130.

At the time of the transaction involved in this suit, there was no statutory limit placed upon the amount of service charge to be exacted in installment sales. Since the act does not purport to regulate third-party financing of purchases of goods or services, it does not cover the question presented in this case. That question is: 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, and the usury statute prohibits the exacting of such interest at a rate greater than 12 per cent per annum.

All of the facts of this case are consistent with the theory of a loan and inconsistent with a theory of credit sale, except, of course, the form of the transaction.

The purchase order showed that the balance of the purchase price (after the cash payment of $1,000, and the trade-in allowance of $25) was to be financed. This means that the dealer was not to extend credit to the defendant, but rather was to be paid in full at the time of the sale. It is true that the dealer did not receive the money until the following Monday, but that was only because the lending institution was closed for the weekend. The dealer was certain that it would be paid — so certain that it exacted from the purchaser a promise to make all his time payments to the plaintiff.

The plaintiff’s employees, in attempting to collect delinquent payments from the defendant, referred to the transaction as a loan. They referred to it as a loan in their testimony and also testified to the effect that there is no practical difference between “time price differential” and “interest.”

The plaintiff attaches much significance to the fact that there was no direct contact between it and the defendant prior to the signing of the contract. We do not find this fact controlling. Even if the plaintiff had not authorized the dealer to represent to purchasers that it would finance their purchases of new cars, the representation was made and it was ratified by the plaintiff when it accepted the contract, which showed on its face that all payments were to be made to the plaintiff.

Ratification is the affirmance by a person of a prior act which did not bind him but which was done or professedly done on his account, whereby the act, as to some or all persons, is given effect as if originally authorized by him. Restatement (Second) of Agency § 82 (1958). As stated in section 83 of this chapter, affirmance is either (a) a manifestation of an election by one on whose account an unauthorized act has been done to treat the act as authorized, or (b) conduct by him justifiable only if there were such an election.

The conduct of the plaintiff in this instance falls within these principles. The true nature of the transaction was that plaintiff placed in the hands of the dealer indicia of authority to represent that it would finance new car purchases, that the representation was in fact made to the defendant, and that the purchase was in fact financed by the plaintiff. Thus, at the moment the contract was signed, the defendant became indebted, not to the dealer, but, in accordance with the terms of the contract, to the plaintiff. The plaintiff loaned him the money with which to purchase the car. The fact that the dealer guaranteed the loan does not change the nature of the basic transaction.

This court has recently held, in State ex rel. O’Connell v. PUD 1, 79 Wn.2d 237, 484 P.2d 393 (1971), that the purchase of a conditional sale contract is a loan of money. While the opinion does not specify that the loan is made to the vendee, it is obvious that this is the case. The vendor receives no loan; he receives the purchase price for the sale of his interest. At the same time, the vendee’s debt to the vendor is paid, and he is thereafter indebted to the purchaser of the contract for the balance owed.

It is correct that one who sells goods or services on credit is not a lender of money. But a third party who pays the seller on behalf of the purchaser is, insofar as his relations with the purchaser are concerned, a lender of money. In a case such as this, where the purchase is financed from the beginning, there is never a true conditional sale. The sale is complete as far as the vendor is concerned. He does not extend credit to the purchaser; rather, he is paid in full at the time of purchase. The “conditional sale contract” is then but a security device to protect the party who finances the purchase.

We have said that it is not the office of a conditional sale contract to secure a loan of money. Hughbanks Inc. v. Gourley, supra; Lyon v. Nourse, supra; Hafer v. Spaeth, supra.

In the Hughbanks case; this court said:

This particular security device [conditional sale], with its severe remedial incidents, is not favored in the law, and its use has been restricted to situations where persons standing in the actual relation of vendor and vendee have desired to effect a credit sale. It is in such cases that it finds its only legitimate use.

12 Wn.2d at 49.

It was not for such a purpose that the conditional sale device was used in this case. Rather, a cash sale was effected and the conditional sale was used as a security device to protect the institution which loaned the defendant the money to purchase the automobile.

We bear in mind that usury must exist, if it exists at all, at the inception of the contract. Here, it was never contemplated that the dealer would extend credit to the defendant. Rather, the agreement was that the full purchase price would be paid, and that a portion of the purchase price which the defendant was not prepared to pay would be loaned to him by a financing institution. It was represented to him that the plaintiff would make the loan, and the plaintiff did so.

Since the transaction, as between the plaintiff and the defendant, was a loan of money, the time price differential represented interest, and the interest charged was greater than that permitted under RCW 19.52.020. The United States Court of Appeals for the Fifth Circuit reached the same conclusion about the nature of such a transaction. Daniel v. First Nat’l Bank, 227 F.2d 353, 239 F.2d 801 (5th Cir. 1955-1956). See also Sloan v. Sears, Roebuck & Co., 228 Ark. 464, 308 S.W.2d 802 (1957), and cases cited therein; and see cases cited in 14 A.L.R.3d 1065, 1072 (1967).

The plaintiff does not contend that it was unaware that the charges for the loan exceeded 12 per cent per annum, or that the amount was charged through mistake or mad-^ vertence. On the contrary, its theory is that it had the right to collect the full amount provided in the contract.

. The contract was usurious. Consequently, the plaintiff cannot recover the full amount of the balance under the terms of the contract, but only the principal amount owed, less the interest accrued and unpaid, and less twice the amount of interest paid.

The defendant has not challenged the award of attorney’s fees. That portion of the judgment is affirmed.

The judgment is otherwise reversed and the cause remanded with directions to enter judgment in accord with the law as set forth herein.

Hamilton, C.J., Finley, Hunter, Hale, and Wright, JJ., concur.

1 Parol or extrinsic evidence is admissible to show usury in a written contract. Ostiguy v. A. F. Franke Constr., Inc., 55 Wn.2d 350, 347 P.2d 1049, 81 A.L.R.2d 1271 (1959).

2 The defendant would appear qualified for such a loan, since he made a downpayment of more than half the purchase price.