Aros v. Beneficial Arizona, Inc.

• Decision Date: 20 April 1999
• Docket Number: No. CV-97-0502-PR,CV-97-0502-PR
• Citation: 977 P.2d 784,194 Ariz. 62
• Parties: 294 Ariz. Adv. Rep. 9 Leonard H. and Connie AROS, husband and wife; Ronald E. and Belle Wade, husband and wife; Arturo and Odine Espinoza, husband and wife; Johnnie and Jeanne Breckenridge, husband and wife; James E. and Suzanne Clark, husband and wife; John E. and Theresia Berry, husband and wife; individually and on behalf of others similarly situated, Plaintiffs-Appellants, v. BENEFICIAL ARIZONA, INC., formerly known as Beneficial Finance Company of Arizona, a Delaware corporation; Beneficial Mortgage Company of Arizona, a Delaware corporation; and Southwest Beneficial Finance, Inc., a Delaware corporation, Defendants-Appellees.
• Court: Arizona Supreme Court

Page 784

977 P.2d 784

294 Ariz. Adv. Rep. 9

Leonard H. and Connie AROS, husband and wife; Ronald E. and Belle Wade, husband and wife; Arturo and Odine Espinoza, husband and wife; Johnnie and Jeanne Breckenridge, husband and wife; James E. and Suzanne Clark, husband and wife; John E. and Theresia Berry, husband and wife; individually and on behalf of others similarly situated, Plaintiffs-Appellants, v. BENEFICIAL ARIZONA, INC., formerly known as Beneficial Finance Company of Arizona, a Delaware corporation; Beneficial Mortgage Company of Arizona, a Delaware corporation; and Southwest Beneficial Finance, Inc., a Delaware corporation, Defendants-Appellees.

No. CV-97-0502-PR.

Supreme Court of Arizona,

En Banc.

April 20, 1999.

Bruce A. Burke, Tucson, and Arizona Justice Institute By: William E. Morris, Tucson, Attorneys for Plaintiffs.

Meehan & Associates By: Michael J. Meehan Mark Dinell, and Slutes Sakrison Grant Hill & Rubin, P.C., By: Mark D. Rubin, Tucson, and Bryan Cave, L.L.P. By: Stephen M. Dichter Robert C. Van Voorhees, Phoenix, Attorneys for Defendants.

O P I N I O N

FELDMAN, Justice.

The court of appeals held that between 1980 and 1984, lenders licensed under the Consumer Loan Act (CLA) could make loans without being subject to the CLA's restrictions. Thus, the court of appeals affirmed the trial judge's dismissal of plaintiffs' lawsuit. Aros v. Beneficial Arizona, Inc. (Aros II ), No. 1 CA-CV 96-0393 (App. Oct. 9, 1997) (mem. dec.). We accepted review and now hold that during that four-year period, the non-interest restrictions of the CLA applied to licensed lenders. We have jurisdiction pursuant to Ariz. Const. art. VI, § 5(3) and A.R.S. § 12-120.24.

FACTS AND PROCEDURAL HISTORY

The detailed history of this thirteen-year litigation and the evolution of Arizona's usury and consumer loan laws have been well documented in earlier decisions. See Transamerica Financial Corp. v. Superior Court, 155 Ariz. 327, 746 P.2d 497 (App. 1987), vacated by Transamerica Financial Corp. v. Superior Court (Rascon I ), 158 Ariz. 115, 761 P.2d 1019 (1988); Rascon v. Transamerica Financial Corp. (Rascon II ), 168 Ariz. 201, 812 P.2d 1019 (App. 1990); Aros v. Beneficial Arizona, Inc. (Aros I ), Nos. 1 CA-CV 92-0204 and 1 CA-CV 92-0259 (consolidated) (App. Aug. 18, 1994) (mem. dec.); Aros II, No. 1 CA-CV 96-0393. We need not repeat the lengthy history here. The following brief summary is intended only to give background to our discussion.

Since before statehood, Arizona has had general usury laws that regulate the amount of interest a lender could charge. Historically, these statutes have set a maximum interest rate, which the legislature periodically altered in response to market conditions. Aros II, mem. dec. at 6; Rascon II, 168 Ariz. at 202, 812 P.2d at 1020. At the same time, Arizona has had a Small Loan Act that placed certain restrictions on licensed consumer lenders. Although licensed lenders were governed by more restrictions than unlicensed lenders, they nevertheless had an incentive to obtain a license because it allowed them to charge a higher interest rate than their unlicensed counterparts. Aros II, mem. dec. at 6-7; Rascon I, 158 Ariz. at 116-17, 761 P.2d at 1020-21.

The general usury laws and the small loan laws existed in harmony until 1980 when the legislature amended both acts. The legislature removed the ceiling on interest rates in the general usury statute and, at the same time, passed an amended version of the Small Loan Act, renaming it the Consumer Loan Act. Many of the CLA's provisions remained unchanged, including A.R.S. § 6-602, the "scope of article," which is the source of this confusion. ¹

Section 6-602(A) makes it unlawful to charge an interest rate greater than the rate allowed under the general usury statute unless the lender first obtained a license. Prior to 1980, this statute made sense because the general usury statute contained a limit on the amount of interest a lender could charge. Thus, small loan lenders who wanted to charge more than the general usury limit were first required to obtain a license. By doing so, they brought themselves within the scope of the Small Loan Act and subjected themselves to the Act's restrictions. In 1980, however, when the legislature removed the ceiling on interest rates in the general usury statute, this provision no longer made sense. With the ceiling removed, unlicensed lenders could now charge any interest rate agreed to in writing. See A.R.S. § 44-1201(A). Thus, there remained little incentive to submit to the regulation of the CLA by obtaining a license. See Rascon II, 168 Ariz. at 207, 812 P.2d at 1025; Transamerica, 155 Ariz. at 330, 746 P.2d at 500.

In 1986, a group of consumer borrowers (collectively "Aros") brought a class action against certain lenders (collectively "Beneficial") alleging violations of the CLA. Initially, Aros alleged that Beneficial made loans with interest rates exceeding those permitted by the CLA. ² The court of appeals, however, held that the version of A.R.S. § 6-602(A) that existed between 1980 and 1984 permitted licensed lenders to make consumer loans at interest rates allowed under the general usury statute. See A.R.S. § 44-1201(A); Rascon II, 168 Ariz. at 207, 812 P.2d at 1025. Because the legislature had amended the general usury statute in 1980 to allow any interest rate agreed to in writing, there was thus no limit on the interest Beneficial could charge. After the decision in Rascon II, Aros amended the complaint to focus on other alleged violations of the CLA, claiming that Beneficial sold unwanted and unnecessary insurance, made unexplained and unauthorized charges, and set up payment plans with prohibited balloon payments. Aros II, mem. dec. at 3. The trial judge dismissed Aros' complaint, concluding that the CLA "does not apply to the loans in question in this case." Id. at 5. The court of appeals agreed--with Judge Kleinschmidt dissenting--and held that licensed lenders could make consumer loans between 1980 and 1984 without being subject to any provision of the CLA. Id. at 13. Aros petitioned this court for review of that decision.

DISCUSSION

In essence, the court of appeals concluded that A.R.S. § 6-602 was a "true scope provision" and as such defined threshold requirements before the CLA would apply. When considering the 1980 amendments as a whole, the text of § 6-602 ³ is far from clear. It reads:

A. It is unlawful for a person to engage in the business of lending in amounts of ten thousand dollars or less and contract for, exact or receive, directly or indirectly, or in connection with any such loan, any charges, whether for interest, compensation, consideration or expenses, which in the aggregate are greater than the interest that the lender would be permitted by law to charge for a loan of money if he were not a licensee under this article, except as provided by this article, and without first having obtained a license from the superintendent....

A.R.S. § 6-602(A) (emphasis added); see also Rascon II, 168 Ariz. at 205, 812 P.2d at 1023 (noting that "the language of § 6-602(A) is far from plain"). Under the court of appeals' interpretation, the CLA applied only to licensed lenders who made loans with interest rates exceeding the general usury rate. Because Aros had not alleged the loans violated the general usury law--and in fact could not have alleged so because the amended usury statute contained no limit on interest rates--the loans were not governed by the CLA. This meant, of course, that lenders licensed under the CLA were not only free from the Act's interest limits but were also not subject to any of the Act's non-interest restrictions.

In Arizona, small loan legislation has long been construed as protecting the borrower's interests. Our court of appeals has identified one purpose of the legislation as protecting consumers from "unconscionable lending practices." Rascon II, 168 Ariz. at 207, 812 P.2d at 1025. Aros argues that nullifying the non-interest restrictions of the CLA cannot possibly benefit consumers. Moreover, the court of appeals' interpretation effectively repeals the entire CLA between 1980 and 1984. Because the CLA and the general usury statute's 1980 amendments were adopted in the same legislative session, it is highly doubtful that the legislature intended that the CLA was to have no effect. Aros contends that the less than clear scope provision should not be interpreted to nullify the Act's other clear, specific, substantive restrictions.

Beneficial, on the other hand, asserts that the purpose of consumer loan laws is to impose an extra layer of regulation only on those lenders who charge more than the general usury statute permits. If the total of all charges did not exceed the interest allowed by the general usury statute, the loan did not fall within the scope provision and was thus not governed by any of the CLA's provisions. See A.R.S. § 6-602(A). Aros' assertion that small loan laws must be construed to favor consumers begs the question of whether the CLA applies to the loan at all. Thus, Beneficial contends that the court of appeals was correct in holding that after removal of the general ceiling on interest rates, the CLA's non-interest provisions did not apply to licensed lenders.

Beneficial also insists that the court of appeals' decision does not effectively repeal the CLA. For example, the Act still applies to loans made prior to 1980. Likewise, provisions relating to annual examinations, investigations, annual reports, and advertising still apply to licensees. As an illustration, Beneficial cites § 6-605.01(A), which requires an annual review of each licensee's records that "pertain to the business licensed under this article or to loans made under any other provisions of law." Because the statute refers to "loans made under any other provisions," Beneficial claims this statute still has effect. But if § 6-602(A) is a true scope provision,...