Empire Sav., Bldg. and Loan Ass'n v. Otero Sav. and Loan Ass'n

• Citation: 640 P.2d 1151
• Decision Date: 16 February 1982
• Docket Number: No. 81SA30,81SA30
• Parties: The EMPIRE SAVINGS, BUILDING AND LOAN ASSOCIATION, Plaintiff-Appellee, v. OTERO SAVINGS AND LOAN ASSOCIATION, Defendant-Appellant, and The State of Colorado, Intervenor.
• Court: Supreme Court of Colorado

Page 1151

640 P.2d 1151

The EMPIRE SAVINGS, BUILDING AND LOAN ASSOCIATION, Plaintiff-Appellee, v. OTERO SAVINGS AND LOAN ASSOCIATION, Defendant-Appellant and The State of Colorado, Intervenor.

No. 81SA30.

Supreme Court of Colorado, En Banc.

Feb. 16, 1982.

Calkins, Kramer, Grimshaw & Harring, James S. Bailey, Denver, for plaintiff-appellee.

Law, Scheid & Farabee, Jeffrey L. Beattie, Denver, for defendant-appellant.

J. D. MacFarlane, Atty. Gen., Richard F. Hennessey, Deputy Atty. Gen., Mary J. Mullarkey, Sol. Gen., Deanna E. Hickman, Asst. Atty. Gen., Denver, for intervenor.

LOHR, Justice.

The sole issue raised by this appeal is whether Colo.Sess.Laws 1980 ch. 52, 5-3-105 at 444 (Senate Bill 20) is unconstitutional because it was not encompassed by the Governor's call to the legislature as required by Colo.Const. Art. V, § 7. In this declaratory judgment action, the trial court determined that Senate Bill 20 met that constitutional requirement and granted summary judgment for the plaintiff, The Empire Savings, Building and Loan Association (Empire). The defendant, Otero Savings and Loan Association (Otero), then brought this appeal. ¹ We affirm.

I.

The facts underlying the present suit are not disputed by the parties. On June 25, 1980, Empire sold Otero a number of first mortgage home loans pursuant to a "Whole Loan Sales and Service Agreement." ² This agreement contained a warranty by Empire that the mortgages complied with applicable state and federal law in all respects. Otero's remedy for breach of this warranty was limited to the right to require Empire to repurchase any non-conforming loans.

On August 8, 1980, Otero demanded that Empire repurchase the loans. Each mortgage sold by Empire to Otero contained provisions which allow the lender to assess a penalty if installments are not timely paid or if the loan is paid before the due date. Otero contended that the prepayment penalty and the late fee provision violated sections 5-3-202, 209, C.R.S.1973 (1981 Supp.) of the Uniform Consumer Credit Code (UCCC). Although Otero acknowledged that Senate Bill 20 exempts these mortgages from the coverage of the UCCC, it maintained that the bill was void because it was outside the scope of the Governor's call to the General Assembly.

Empire rejected Otero's demand to repurchase the loans, and brought a C.R.C.P. 57 action in district court seeking a declaratory judgment that Senate Bill 20 is constitutional. The parties filed cross-motions for summary judgment, contending that there were no genuine issues of material fact and that the only question to be resolved was the constitutionality of Senate Bill 20. The trial court determined that a resolution by summary judgment was appropriate, and concluded that Senate Bill 20 was within the scope of the Governor's call. It consequently granted Empire's motion for summary judgment and denied the cross-motion of Otero. This appeal followed.

II.

As an aid to understanding the arguments of the parties in this case, it is helpful at the outset to review the relevant provisions of the UCCC and the background of Senate Bill 20.

The UCCC applies only to "consumer loans." At the time relevant to this case, consumer loans were defined in section 5-3-104 of the UCCC as follows:

(1) Except as provided in subsection (2) of this section and except with respect to a loan primarily secured by an interest in land (section 5-3-105), "consumer loan" is a loan made or arranged by a person regularly engaged in the business of making loans in which:

(a) The debtor is a person other than an organization;

(b) The debt is incurred primarily for a personal, family, household, or agricultural purpose;

(c) Either the debt is payable in instalments or a loan finance charge is made; and

(d) Either the principal does not exceed twenty-five thousand dollars or the debt is secured by an interest in land. (Emphasis added.) ³

It is uncontested that the loans sold by Empire to Otero meet the requirements of this definition unless they are excluded by the exception for loans "primarily secured by an interest in land." This exception is defined in section 5-3-105 of the UCCC.

Prior to 1979, section 5-3-105 prescribed a two-part test to determine if a loan was excepted from the UCCC definition of consumer loan because that loan was primarily secured by an interest in land. In order to qualify for the exception, the test required that, at the time the loan was made: (1) the value of the land used as collateral be substantial in relation to the amount of the loan, and (2) that the loan finance charge ⁴ not exceed 12% per year when calculated by the method prescribed in the statute. When first adopted, the effect of this exception was to exclude most first mortgage loans on dwellings from the provisions of the UCCC.

However, rising interest rates caused the exception to become increasingly limited in application. Apparently in response to this trend, the legislature amended section 5-3-105 in 1979 by increasing the permissible loan finance charge ceiling from 12% to 13% for loans executed on or after July 1, 1979, but no later than July 1, 1981. Colo.Sess.Laws 1979, ch. 52, 5-3-105 at 310.

In 1980 the legislature again turned its attention to section 5-3-105. Recognizing that an approach based on a fixed ceiling for loan finance charges was inappropriate because of the volatile condition of the financial markets, the legislature adopted Senate Bill 20. Rather than again adjusting the maximum permissible loan finance charge, it provided that, regardless of the rate of the loan finance charge, a loan secured by a first mortgage or deed of trust lien against a dwelling to finance the acquisition of that dwelling or to refinance an existing loan made for that purpose is excluded from the UCCC. Colo.Sess.Laws 1980, ch. 52, 5-3-105 at 444. ⁵

Otero agrees that if Senate Bill 20 is valid the trial court's summary judgment in favor of Empire was proper. It argues, however, that Senate Bill 20 is void because it was not encompassed by the Governor's call. It is to this argument we now turn.

III.

As relevant here, Colo.Const. Art. V, § 7 restricts the subject matter which may be considered by the Colorado General Assembly in even-numbered years to those matters submitted by the Governor in writing during the first ten days of the session. ⁶ At the 1980 session, the Governor submitted two items for legislative consideration relevant to the subject matter of Senate Bill 20:

Item 5. "Concerning housing."

Item 40. "Concerning the exclusion from the definition of 'consumer loan' in Colorado Revised Statutes 1973, 5-3-105, as amended, of any first mortgage loan made by a 'supervised financial organization,' as defined in Colorado Revised Statutes 1973, 5-1-301(17), to finance or refinance the construction or acquisition of a dwelling." ⁷

Item 5 was part of a list of 31 items submitted to the General Assembly by the Governor's written message of January 4, 1980. Item 40 was contained in a second message to the General Assembly, submitted by the Governor on January 11, 1980, listing 132 independently numbered call items. The district court concluded that Item 5 and Item 40 each provided an independent basis for passage of Senate Bill 20 in compliance with the requirement of Art. V, § 7 of the Colorado Constitution. We agree.

In determining whether legislation meets the requirements of Colo.Const. Art. V, § 7, the test is whether the challenged legislation bears a "rational nexus" to an item specified in the Governor's call. People v. Larkin, 183 Colo. 363, 517 P.2d 389 (1973). In People v. Larkin, we considered the constitutionality of a statute making it a felony for a person to possess an explosive device and to use, intend to use, or cause the use of such a device for an unlawful purpose. This legislation was passed in response to the Governor's call for "legislation concerning safety inspection by the Division of Labor of the Department of Labor and Employment." The same act containing the challenged provision charged the Division of Labor with monitoring the manufacture, sale, transportation, storage, and use of explosives. We found that there was no rational nexus between the challenged criminal statute and the safety inspections designated by the Governor and consequently held that the criminal statute was void. We noted, however, that the legislature acted within the scope of the Governor's designation when it provided for the issuance of permits by the Department of Labor for the manufacture, sale, transportation, storage, and use of explosives, and when it created criminal sanctions for the failure to obtain such a permit before engaging in those activities. While the latter provisions contained a rational nexus to the Governor's call, the felony statute lacked that link.

Thus, under Larkin, the General Assembly is not limited to a narrow, technical interpretation of the subject matter comprised in the Governor's call, but a speculative, indirect, and tangential relationship between legislation and the call item on which it is based will be insufficient. It is between these extremes, by use of the "rational nexus" construct, that the line defining the limits of permissible legislative action is to be drawn.

A.

Turning to the present controversy, we conclude that Senate Bill 20 has a "rational nexus" to the Governor's request for legislation, Item 5, "concerning housing." Otero's arguments to the contrary are unpersuasive.

Otero first contends that Senate Bill 20 and the Governor's designation "concerning housing" have the indirect and tangential relationship condemned in Larkin. It contends that, if Senate Bill 20 is upheld on this basis, legislation concerning the manufacture of bricks, the forced purchase of water meters, and the busing of school children could be similarly sustained. Without expressing any view on whether Otero's hypothetical examples would meet the "rational nexus" requ...