George Rose Smith, Justice.
This case is similar to Bell v. Itek Leasing Corporation, 262 Ark. 22, 555 S.W. 2d 1 (1977), where we held, in a chancery case, that an instrument which purported to be a lease of printing equipment was in fact a financing transaction that was void for usury. In the present case the circuit judge, sitting as a jury, found as a fact that the “lease” sued upon in this case is usurious and void. Several points for reversal are urged, but the validity of the contract is the essential issue.
We state the facts most favorably to the trial court’s judgment. Standard Leasing brought this suit to recover all future installments under the lease, which it had declared immediately due and payable. Standard Leasing is engaged in what its principal witness, John Coppedge, described as the leasing of all types of general equipment. Standard Leasing does not have possession of the property that it leases. Instead, it supplies sellers of equipment with its forms and instructs the vendors how to fill out a form when equipment is sold. The form, with the purchaser’s credit references, is then submitted to Standard Leasing for approval. If Standard Leasing approved the transaction, it pays the seller for the equipment and executes the “lease.” The trial judge could have found that the papers are then transferred to a bank or other lender. That is, Coppedge testified that its business was “funded through certain banks and funding associates that we have.” He also said that the original documents in this case were in the possession of the DeKalb County Bank. The lease itself contains detailed provisions for its assignment and ironclad restrictions against the possibility that either Standard Leasing or its assignee can be held liable for breach of warranty or for other claims that might be asserted by the purchaser of the equipment.
In this case two representatives of Grimes Oil Company, of Memphis, Tennessee, came to Jonesboro, Arkansas, in 1976 and sold an air compressor to the appellee Schmidt Aviation. The purchaser was offered the option of buying the compressor for cash or leasing it. The purchaser elected, for tax purposes, to lease rather than to buy. One of the sales representatives stated that at the expiration of the lease Schmidt Aviation could buy the compressor for 10% of the price.
The sellers used a Standard Leasing form in writing up the transaction. In most respects it is similar to the lease in Bell, supra. That is, the document sets forth a “price” of $2,-895.00, plus sales tax (at the Arkansas rate) of $86.85, making a total of $2,981.85. The instrument then provides for 36 monthly rental payments of $107.65, with the first and last to be paid in advance — apparently as a down payment. The monthly payments seem, mathematically, to have been arrived at by adding 30% to the total purchase price, which of course would amount to about 15% interest upon a transaction payable in 36 monthly installments.
The document, as in Bell, puts all the risk upon the lessee and provides the same remedies upon the lessee’s default that would be available to a conditional seller or mortgagee upon a similar delinquency. The lessee also waives trial by jury and the right to interpose any counterclaim or offset against the lessor in litigation with respect to the lease or the repossession of the property. The lessee authorizes the lessor to file a financing statement where necessary to perfect a security interest in the equipment.
In Bell the lease was silent with regard to the purchase of the property at the expiration of the lease, but there was oral testimony that it could be bought for 10% of the price. Here the lease, contrary to the salesmen’s representations, recites that there is no option to purchase. Coppedge testified, however, that in a number of cases Standard Leasing does not get the property back, from which the trial judge could infer that in those instances the purchaser becomes the owner of the equipment when all payments have been made. To say the least, after the defendants below had made a prima facie showing that the lease was a sham, Standard Leasing made no effort to go forward with the proof by showing that it is actually engaged in good faith in the leasing of the equipment, not as acting as a broker or middleman in financing its sale.
The situation presented by this case is evidently parallel to that in Hare v. General Contract Purchase Corp., 220 Ark. 601, 249 S.W. 2d 973 (1952). There finance companies, through the device of a pretended credit sale price, were actually financing the sale of automobiles and other products at an interest rate in excess of 10% annually. We left unimpaired the doctrine that a true credit price may be resorted to by the parties, just as we now leave unimpaired the right of the owners of equipment or other property to make bona fide leases. But we call attention to this language in the Hare case:
(2) If the seller, whether he has quoted two prices to the purchaser or not, subsequently transfers the title documents to an individual or company which is engaged in the business of purchasing such documents, at a price which permits the transferee to obtain more than a return of 10% on its investment, then a question of fact arises as to whether the seller increased his cash price with the reasonable assurance that he could so discount the paper to such individual or finance company. If that reasonable assurance existed, then the transaction is in substance a loan, and may be attacked for usury.
(3) When finance companies or purchasers of title paper supply dealers with a set of forms and a schedule for credit price increases, such will tend to show that the dealer had reasonable assurance that such finance company or purchaser of the paper would take the paper at such discount.
More than 10 years ago we gave explicit warning that agreements purporting to be leases would be examined closely to be certain that they were not being used as a cloak for usurious charges. Sawyer v. Pioneer Leasing Corp., 244 Ark. 943, 428 S.W. 2d 46 (1968). In the case at bar we hold that the testimony presented an issue of fact about whether the transaction was in truth an instance of financing rather than of leasing. We refuse to take the view that the entire transaction was purged of the possibility of usury by the insertion of a sentence declaring that the lessee had no option to purchase the property. It goes without saying that, despite that sentence, the lessor could simply permit the lessee to retain the property after he had paid the 36 monthly installments on the price. Coppedge’s testimony may be taken to imply that that is what actually happens.
At the trial Standard Leasing objected, under the parol evidence rule, to the testimony of one of the salesmen that he represented to Schmidt Aviation that the property could be bought at the end of the lease for 10% of the price. It is true, of course, that the parol evidence rule would exclude that testimony if Schmidt Aviation were now seeking specific performance of the oral option to purchase. But that is not the situation. Here the issue is the true nature of the contract, and upon that issue the parties cannot convert a mortgage into a lease simply by denominating it as such. In determining whether a contract is usurious we look to its substance, not to its form. Sparks v. Robinson, 66 Ark. 460, 51 S.W. 460 (1899).
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George Rose Smith, Justice.
This case is similar to Bell v. Itek Leasing Corporation, 262 Ark. 22, 555 S.W. 2d 1 (1977), where we held, in a chancery case, that an instrument which purported to be a lease of printing equipment was in fact a financing transaction that was void for usury. In the present case the circuit judge, sitting as a jury, found as a fact that the “lease” sued upon in this case is usurious and void. Several points for reversal are urged, but the validity of the contract is the essential issue.
We state the facts most favorably to the trial court’s judgment. Standard Leasing brought this suit to recover all future installments under the lease, which it had declared immediately due and payable. Standard Leasing is engaged in what its principal witness, John Coppedge, described as the leasing of all types of general equipment. Standard Leasing does not have possession of the property that it leases. Instead, it supplies sellers of equipment with its forms and instructs the vendors how to fill out a form when equipment is sold. The form, with the purchaser’s credit references, is then submitted to Standard Leasing for approval. If Standard Leasing approved the transaction, it pays the seller for the equipment and executes the “lease.” The trial judge could have found that the papers are then transferred to a bank or other lender. That is, Coppedge testified that its business was “funded through certain banks and funding associates that we have.” He also said that the original documents in this case were in the possession of the DeKalb County Bank. The lease itself contains detailed provisions for its assignment and ironclad restrictions against the possibility that either Standard Leasing or its assignee can be held liable for breach of warranty or for other claims that might be asserted by the purchaser of the equipment.
In this case two representatives of Grimes Oil Company, of Memphis, Tennessee, came to Jonesboro, Arkansas, in 1976 and sold an air compressor to the appellee Schmidt Aviation. The purchaser was offered the option of buying the compressor for cash or leasing it. The purchaser elected, for tax purposes, to lease rather than to buy. One of the sales representatives stated that at the expiration of the lease Schmidt Aviation could buy the compressor for 10% of the price.
The sellers used a Standard Leasing form in writing up the transaction. In most respects it is similar to the lease in Bell, supra. That is, the document sets forth a “price” of $2,-895.00, plus sales tax (at the Arkansas rate) of $86.85, making a total of $2,981.85. The instrument then provides for 36 monthly rental payments of $107.65, with the first and last to be paid in advance — apparently as a down payment. The monthly payments seem, mathematically, to have been arrived at by adding 30% to the total purchase price, which of course would amount to about 15% interest upon a transaction payable in 36 monthly installments.
The document, as in Bell, puts all the risk upon the lessee and provides the same remedies upon the lessee’s default that would be available to a conditional seller or mortgagee upon a similar delinquency. The lessee also waives trial by jury and the right to interpose any counterclaim or offset against the lessor in litigation with respect to the lease or the repossession of the property. The lessee authorizes the lessor to file a financing statement where necessary to perfect a security interest in the equipment.
In Bell the lease was silent with regard to the purchase of the property at the expiration of the lease, but there was oral testimony that it could be bought for 10% of the price. Here the lease, contrary to the salesmen’s representations, recites that there is no option to purchase. Coppedge testified, however, that in a number of cases Standard Leasing does not get the property back, from which the trial judge could infer that in those instances the purchaser becomes the owner of the equipment when all payments have been made. To say the least, after the defendants below had made a prima facie showing that the lease was a sham, Standard Leasing made no effort to go forward with the proof by showing that it is actually engaged in good faith in the leasing of the equipment, not as acting as a broker or middleman in financing its sale.
The situation presented by this case is evidently parallel to that in Hare v. General Contract Purchase Corp., 220 Ark. 601, 249 S.W. 2d 973 (1952). There finance companies, through the device of a pretended credit sale price, were actually financing the sale of automobiles and other products at an interest rate in excess of 10% annually. We left unimpaired the doctrine that a true credit price may be resorted to by the parties, just as we now leave unimpaired the right of the owners of equipment or other property to make bona fide leases. But we call attention to this language in the Hare case:
(2) If the seller, whether he has quoted two prices to the purchaser or not, subsequently transfers the title documents to an individual or company which is engaged in the business of purchasing such documents, at a price which permits the transferee to obtain more than a return of 10% on its investment, then a question of fact arises as to whether the seller increased his cash price with the reasonable assurance that he could so discount the paper to such individual or finance company. If that reasonable assurance existed, then the transaction is in substance a loan, and may be attacked for usury.
(3) When finance companies or purchasers of title paper supply dealers with a set of forms and a schedule for credit price increases, such will tend to show that the dealer had reasonable assurance that such finance company or purchaser of the paper would take the paper at such discount.
More than 10 years ago we gave explicit warning that agreements purporting to be leases would be examined closely to be certain that they were not being used as a cloak for usurious charges. Sawyer v. Pioneer Leasing Corp., 244 Ark. 943, 428 S.W. 2d 46 (1968). In the case at bar we hold that the testimony presented an issue of fact about whether the transaction was in truth an instance of financing rather than of leasing. We refuse to take the view that the entire transaction was purged of the possibility of usury by the insertion of a sentence declaring that the lessee had no option to purchase the property. It goes without saying that, despite that sentence, the lessor could simply permit the lessee to retain the property after he had paid the 36 monthly installments on the price. Coppedge’s testimony may be taken to imply that that is what actually happens.
At the trial Standard Leasing objected, under the parol evidence rule, to the testimony of one of the salesmen that he represented to Schmidt Aviation that the property could be bought at the end of the lease for 10% of the price. It is true, of course, that the parol evidence rule would exclude that testimony if Schmidt Aviation were now seeking specific performance of the oral option to purchase. But that is not the situation. Here the issue is the true nature of the contract, and upon that issue the parties cannot convert a mortgage into a lease simply by denominating it as such. In determining whether a contract is usurious we look to its substance, not to its form. Sparks v. Robinson, 66 Ark. 460, 51 S.W. 460 (1899). For a ruling upon the precise issue now before us, holding the parol evidence to be admissible, see McKeeman v. Commercial Credit Equipment Corp., 320 F. Supp. 938 (D.C. Neb., 1970).
Finally, we cannot sustain the argument that the contract is governed by the law of Tennessee, as the instrument recites, rather than by the law of Arkanuas. To begin with, counsel have not cited any authority holding that this transaction would be recognized as a genuine lease in Tennessee. But, apart from that, the principal significant contracts occurred in Arkansas. See Leflar, American Conflicts Law, § 147 (1968). The seller sent its representatives to Arkansas, where the actual sale occurred. The Arkansas sales tax was paid. The air compressor was delivered and installed by the seller in Arkansas. Efforts by the seller to repair it were made in Arkansas. The original written contract was prepared and signed by Schmidt in Arkansas. It may have been accepted and approved in Memphis, where Standard Leasing has an office, although the testimony is not positive on this point. Schmidt, however, made the mistake of signing the original instrument both as lessor and as lessee. Standard Leasing then retyped the contract and returned it to Schmidt for re-execution. Thus the contract was finally consummated in Arkansas, though we do not regard that fortuitous fact as being of controlling importance. Essentially it was an Arkansas contract, governed by Arkansas Law.
Affirmed.
Harris, C.J., and Fogleman, J., dissent.