Bell v. Itek Leasing Corp.
| Decision Date | 11 July 1977 |
| Docket Number | No. 77-84,77-84 |
| Citation | 262 Ark. 22,555 S.W.2d 1 |
| Parties | , 22 UCC Rep.Serv. 774 Jerry Mike BELL, Appellant, v. ITEK LEASING CORPORATION, Appellee. |
| Court | Arkansas Supreme Court |
Robert S. Blatt, Fort Smith, for appellant.
Bruce H. Bethell of Bethell, Callaway & Robertson, Fort Smith, for appellee.
In this case, essentially one of first impression in Arkansas, the single issue is whether a contract by which Itek Leasing Corporation purported to lease certain printing equipment to Jerry Mike Bell for a term of five years was in actuality an installment-sale contract carrying such an excessive interest rate as to be void for usury under Arkansas law. We are unanimously of the opinion, contrary to the trial court's conclusion, that the overwhelming preponderance of the proof shows the purported lease to have been in fact a credit sale that is void for usury. We therefore reverse the decree on direct appeal and do not reach the cross appeal.
In 1968 we examined in detail a transaction that was argued on the one hand to be a sale and on the other to be a lease. Sawyer v. Pioneer Leasing Corp., 244 Ark. 943, 428 S.W.2d 46 (1968). There the distinction was important only with regard to the existence of an implied warranty; the issue of usury was not presented. Nevertheless, in language that we adhere to, we made prophetic observations that have proved to be peculiarly pertinent to the present case:
(W)e think it well to point out that agreements of this nature will be examined closely by this court. It is possible that similar agreements could be used to cloak usurious charges, i. e., a transaction which was actually a sale could be set up as a lease in order to enable charges to be made that would, under a credit sale, constitute usury.
Our prediction in that case has come true.
In 1973, five years after the Sawyer decision, the plaintiff Bell and a salesman for Micro-Graphics (a North Little Rock company) completed at Bell's home in Fort Smith the controverted contract for the "leasing" by Bell of certain printing equipment. The salesman filled out the printed form, and Bell signed it. Apparently the contract was next signed about six weeks later by the defendant, Itek Leasing Corporation, whose mailing address is Rochester, New York. The contract recites that it is to be governed by New York law, but there is no contention that Arkansas law is not controlling under Ark.Stat.Ann. § 27-2504 (Supp.1975), as construed in Deposit Guaranty Nat. Bk. v. River Valley Co., 247 Ark. 226, 444 S.W.2d 880 (1969).
The contract recites that the equipment's price (an odd word to use in a lease) is $12,670. The "lessee" makes an "initial payment" of $1,498.05 and agrees to make 60 additional monthly payments of $299.61 each. Itek made no effort to explain how the amount of the monthly payments was arrived at, but if they are actually remittances upon a credit sale of the equipment for the recited price less the down payment, then the contract provides an interest return to the seller at the rate of 19.31% a year. Under our Constitution such a contract is void.
We do not discuss at length either the facts or the controlling rule of law, for in this case both are beyond dispute. A "lease" is a security interest under the Uniform Commercial Code () if "the deal is in every respect a secured installment sale except that the parties clothe it in lease terminology." White & Summers, Uniform Commercial Code, § 22-3 (1972); Burroughs Adding Mach. Co. v. Bogdon, 9 F.2d 54 (8th Cir. 1925); McKeeman v. Commercial Credit Equipment Corp., 320 F.Supp. 938 (E.D.Neb. 1970); McGalliard v. Liberty Leasing Co. of Alaska, 534 P.2d 528 (Alaska, 1975).
Upon the facts, five important points are plainly established by the proof or plainly to be inferred from the proof:
First: The defendant, Itek Leasing Corporation, is in fact a finance company. Although the main items that were covered by the contract were an "Itek Mark IV Platemaster" and an "Itek Duplicator," the leasing company does not, in the words of its own witness, manufacture any equipment of any nature. It is a service company that has outstanding about 1,300 leases representing (an investment of) about eighteen million dollars. It is fair to infer that Itek Leasing Corporation finances the sale of Itek products.
Second: The printed form of lease puts all the risk upon the lessee, not upon the lessor. The lessee must pay the taxes and insurance upon the leased property and incurs, in the most detailed language, every risk of loss or damage to the leased property.
Third: The contract provides the same remedies upon the lessee's default in the payment of rent, even at the end of the first month, that would be available to a conditional seller or to a mortgagee upon a similar delinquency. That is, the lessor can declare all the remaining payments to be due, can repossess the property, can sell it, and can hold the lessee personally liable for any deficiency. Thus the lessee may be held responsible for rent not even due for another four years or more if the property does not sell for enough to pay all future rents. We can recall having seen no bona fide lease containing such a remedy.
Fourth: The contract expressly provides that the lessee will, upon the lessor's request, join the lessor "in executing financing statements pursuant to the Uniform Commercial Code and in the execution of such other instruments or assurances as Lessor deems necessary or advisable for . . . the protection of . . . the interest of the Lessor in the Equipment." The Uniform Commercial Code, which the contract itself cites, provides that a lease is not a security interest and therefore not within the purview of the Code unless it is intended as a security. Ark.Stat.Ann. §§ 85-1-201(37) and 85-9-102(2) (...
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