Wilkins v. M & H FINANCIAL, INC., LR-C-78-406.

• Decision Date: 30 August 1979
• Docket Number: No. LR-C-78-406.,LR-C-78-406.
• Parties: Billie Wayne WILKINS, Tressia Wilkins, and Wilkins Big Star # 177, Inc. v. M & H FINANCIAL, INC. and Malone and Hyde, Inc.
• Court: U.S. District Court — Eastern District of Arkansas

476 F. Supp. 212

Billie Wayne WILKINS, Tressia Wilkins, and Wilkins Big Star # 177, Inc. v. M & H FINANCIAL, INC. and Malone and Hyde, Inc.

No. LR-C-78-406.

United States District Court, E. D. Arkansas, W. D.

August 30, 1979.

COPYRIGHT MATERIAL OMITTED

Robert J. Brown, Brown & Etter, P. A., Little Rock, Ark., for plaintiff.

Cyril Hollingsworth, Davidson, Plastiras, Horne, Hollingsworth & Arnold, Little Rock, Ark., John A. Stemmler and John R. McCarroll, Jr., Burch, Porter & Johnson, Memphis, Tenn., for defendant.

MEMORANDUM OPINION

ROY, District Judge.

This action for a declaratory judgment and damages was filed by the plaintiffs, Billy Wayne Wilkins, Tressia Wilkins, his wife, and Wilkins Big Star # 177, Inc., an Arkansas corporation wholly owned by the other plaintiffs and hereinafter referred to simply as Wilkins. The complaint alleges that they executed a note payable to the defendant, M & H Financial, Inc., a Mississippi corporation, and that the note is usurious and void. M & H Financial answered, alleging the note is not void because it is governed by the law of Mississippi, the state of incorporation of M & H Financial. It also stated a counterclaim for the balance of the note and foreclosure.

In an amendment to the complaint the plaintiffs alleged that M & H Financial is barred from equitable relief in Arkansas because it made the loan without being qualified to do business in Arkansas, a violation of the Wingo Act. Ark.Stat.Ann. § 64-1201 (Repl.1966). The complaint also stated claims against Malone & Hyde, Inc., a Tennessee corporation, that a sublease between plaintiffs and Malone & Hyde is usurious and void; that Malone & Hyde violated Arkansas and federal securities laws and anti-trust laws; and that it had dealt unfairly with the plaintiffs in several other respects which will be discussed later in this opinion.

During the trial the plaintiffs moved to amend the pleadings to conform to the proof. No objection having been made, the motion to amend is granted. The court deems waived any technical violations of the rules of procedure.

Billy Wayne Wilkins had worked in grocery stores from the time he was a teenager. When he was approached by Malone & Hyde, a wholesale grocer, Wilkins had an impressive background in grocery business management. However, he had never owned a store nor had a capital investment in one.

Malone & Hyde, a Tennessee corporation, began business in 1909 as a small commissary service for stores in the Delta. In 1947 it started a voluntary group for independent grocers. This enabled the independents to compete with chain stores by purchasing their groceries through one supplier, Malone & Hyde. The business grew and as it grew more services were offered to the grocers it dealt with, such as advertising and promotion groups, trade names, assistance in developing sites for grocery stores, and surveys of trade areas to determine expected profits. It provides insurance, purchases equipment for new stores and for remodeling existing stores; and is the parent corporation of the other defendant, M & H Financial, which lends money to customers of Malone & Hyde.

In 1975 Malone & Hyde began negotiations with Billy Wayne Wilkins concerning management and ownership of his own grocery under Malone & Hyde's "Big Star" trade name. Although nothing was put in writing at that time, Malone & Hyde offered all of its services. With the approval of Malone & Hyde, Wilkins selected a building site in North Little Rock. Malone & Hyde did a market survey, dated May 8, 1975, which indicated that the store should gross around $27,000 a week. After the survey was reviewed, the parties changed their plans to increase the size of the contemplated store from 8,000 square feet to 12,000 square feet.

Malone & Hyde leased the site on December 23, 1975. The lease provides for the landowner to erect a building to Malone & Hyde's specifications. On January 5, 1976 Malone & Hyde sublet to Wilkins, whose rental is stipulated as being 5% per month more than the Malone & Hyde rent. As the building neared completion, Malone & Hyde purchased the fixtures and equipment and had them installed. These were resold to Wilkins on an open account, charging a 5 to 11% markup. Malone & Hyde also stocked the store and advertised the grand opening. When Wilkins and Malone & Hyde discussed the capital financing of the store, Wilkins was told that he could either arrange his own loan or that Malone & Hyde would make arrangements for a loan through its subsidiary, M & H Financial. Wilkins went to his local Arkansas banker but the bank would not loan him the money and according to his own testimony he was unable to secure a loan in Arkansas. Wilkins then decided to finance through M & H Financial which agreed to loan the money for an interest rate of 10% simple interest or 3% over the prime rate of the Bank of New York, whichever is greater.

The loan application, executed on May 11, 1976, states, inter alia:

A. Loan can be made only to a Corporation, the charter of which was issued at least 60 days prior to date of the note.

B. On new store and major remodels, payments will begin thirty days after opening of store. Interest will begin immediately upon store's opening.

C. Payments to be collected on recap following first of each month.

The loan application was for $265,000. However, both parties knew that this amount was only an estimate; that the final loan amount would not be known until all the equipment and inventory was purchased and installed. The last item of equipment was invoiced on July 23, 1976. The total bill was dated August 5, 1976 and received by Wilkins on August 11, 1976.

The grand opening was held on June 15, 1976, and was advertised as planned, except that there was no television advertising. The incorporation papers, drafted by Wilkins' attorney, bear the same date. The opening was a disappointment. The store took in approximately $14,000 the first week and has never been as profitable as expected.

The documents evidencing the indebtedness of the Wilkins to M & H Financial were signed on September 7, 1976, nearly three months after the store opened and was incorporated. On September 7th the Wilkins drove to Malone & Hyde offices in Memphis, Tennessee and met with officers of Malone & Hyde, who were also officers of M & H Financial. After the Wilkins gave a $3,000 check to Malone & Hyde, they were driven in a Malone & Hyde automobile to the M & H Financial office in Southaven, Mississippi, which borders Memphis. There they signed six documents. One of these is a Settlement Sheet showing the total loan balance as $306,760.86. Loan disbursements are listed on that document under several classifications, but the summary is that the entire loan amount was to liquidate the account with Malone & Hyde, except for $783 closing costs to M & H Financial.

As time passed the store continued to suffer from lack of business. The Wilkins went deeper in debt. They borrowed from family members and refinanced their home. On March 9, 1977 it became necessary for plaintiffs to have the September 7, 1976 note refinanced. The amount of the note was increased to a total of $320,000.00 and plaintiffs were paying only the interest each month. Nevertheless, plaintiffs' financial condition continued to deteriorate and several checks to defendants bounced, so Malone & Hyde refused to continue to give them credit for groceries. The Wilkins then found other suppliers who were willing to carry their accounts and at the time of trial they were in debt to these suppliers for many thousands of dollars.

At this time, Wilkins consulted his local banker about his financial problems and discussed the loan with M & H Financial, and he was advised by the banker that if the loan were governed by Arkansas law, the interest rate was usurious. The Wilkins then filed this lawsuit asking for a declaratory judgment that the loan is void.

As the case developed, Wilkins' attorney learned that the interest charged on the account with Malone & Hyde was calculated for the term June 15 to September 30. Because the date of the note is September 7, plaintiffs contend that they were overcharged, that Malone & Hyde was not entitled to interest after the M & H Financial note was signed and the account was paid. Therefore, the court must examine the entire transaction to determine if it is usurious.

The Settlement Sheet shows loan expenses totaling $9,730.19. $783 of this amount was for closing fees, filing fees and title search. These are proper charges made by M & H Financial and are not hidden interest. The remainder, $8,947.19, was for finance charges on the account with Malone & Hyde. It is indicated on the bottom of the Settlement Sheet that the loan expenses were paid that day in cash; however, it was understood that the Wilkins did not have sufficient cash to pay all of this amount on that day. The check for $3,000 given to Malone & Hyde earlier that day took care of only part of it. Payments made to Malone & Hyde in September and October liquidated the balance due. No additional interest was charged.

The amount of interest due on the Malone & Hyde account was computed by the M & H Financial accountant. He selected the dates of June 15, 1976 to September 30, 1976 and figured 10% interest on the balance of $306,760.86 for that period of time. He stated that he did this so that Wilkins would pay a finance charge on the Malone & Hyde account to September 30 and the interest would begin on the promissory note on October 1. The first payment on the note was due on November 1. He also testified that to calculate the interest he merely used an average of three and one-half months on each of the items of the principal to be financed: "Just to make it simple, I used the time it opened until September 30th."

If we do not view the entire picture it might appear that the interest charged was in excess of 10%, but viewing all the transactions together, as...