In re DEF Investments, Inc.

• Decision Date: 21 September 1995
• Docket Number: Bankruptcy No. 4-95-2137.
• Parties: In re DEF INVESTMENTS, INC., Debtor.
• Court: United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota

186 B.R. 671 (1995)

In re DEF INVESTMENTS, INC., Debtor.

Bankruptcy No. 4-95-2137.

United States Bankruptcy Court, D. Minnesota.

September 21, 1995.

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Jon C. Nuckles, James L. Baillie, Fredrikson & Byron, Minneapolis, MN, for debtor.

Thomas F. Miller, Lommen, Nelson, Cole & Stageberg, Minneapolis, MN, Daniel R. Kelly, Mansfield & Tanick, P.A., Minneapolis, MN, for petitioning creditors.

MEMORANDUM ORDER

NANCY C. DREHER, Bankruptcy Judge.

The above-entitled matter came on for hearing before the undersigned on July 20, 1995, on a motion by the Debtor, DEF Investments, Inc. ("DEF"), seeking to vacate the order for relief entered by this Court on June 9, 1995, and further requesting a dismissal of this involuntary Chapter 7 case. Alternatively, DEF requests that this Court amend the findings and conclusions it made in connection with the order for relief in a memorandum order entered on June 15, 1995 (the "prior Memorandum").¹ Appearances were noted in the record. The Court, having heard the arguments of counsel, studied the papers, and being duly advised in the premises, issues this Memorandum Order.

BACKGROUND FACTS

1. DEF, a Louisiana corporation, is the parent corporation of ABC TV and Stereo Rentals, Inc., Renter's Choice, and Renter's Choice Home Furnishings (DEF and its subsidiaries are collectively referred to herein as the "Defendants").

2. Colortyme, Inc. ("Colortyme") granted DEF exclusive franchise rights so that DEF, itself and/or through its wholly-owned subsidiaries, could do business in Minnesota using the trade name Colortyme. Sometime in 1990, Colortyme disenfranchised DEF and thereafter DEF, itself and/or through its wholly-owned subsidiaries, began doing business under the trade name "Renter's Choice."

3. Defendants are engaged in the "rent-to-own" business. As described by the Defendants:

Defendants are involved in the business of making available to the public various consumer goods through the use of rental agreements with an ownership option. Under these agreements, consumers pay a fixed rental rate for a specified term (usually by the week or month), with the contract being automatically renewed with each payment. After a specified number of payments have been made, the customer becomes the owner of the goods. At the end of each weekly or monthly renewal period, the customer can elect not to renew and the customer has no further obligations under the contract.

See Defendants' Informational Statement Form ¶ 3, Exhibit E, attached to Affidavit of Jay M. Quam.²

4. On April 4, 1992, Delilah Miller and Craig Stenzel (the "Plaintiffs") commenced a class action lawsuit in Hennepin County District Court against the Defendants and others. As amended, the multi-count complaint alleged, among other things, that DEF and its subsidiaries entered into rental purchase contracts with Minnesota customers, that those contracts constituted consumer credit sales, and that DEF and the other named defendants violated state and federal law in the course of negotiating and collecting payments under the contracts. As an independent cause of action, it was specifically alleged that the rent-to-own contracts were usurious, and therefore in violation of Minn. Stat. § 334.01, since the effective rate of interest collected and provided for under the contracts exceeded that which was allowable under state law. See Amended Complaint, Exhibit H. Accordingly, the Plaintiffs' prayer for relief included a request that the state court declare that the subject contracts were usurious and that the court enter judgment against the Defendants jointly and severally. Id. ¶ 7, at 17.

5. The Defendants answered the complaint collectively, generally denying the allegations of the complaint. The Defendants did, however, set forth a number of affirmative defenses which challenged both the factual and statutory basis for the Plaintiffs' usury claim.

6. The Plaintiffs propounded a series of interrogatories to the Defendants. On or about August 14, 1992, DEF and its subsidiaries collectively responded to the interrogatories. A number of interrogatories and their responses appear as follows:

INTERROGATORY NO. 8: Describe all services you claim to have provided in connection with the contracts described in the Complaint. State your estimate of the market value of each service you claim to have provided, and describe the method used by you to determine those values.

ANSWER:. . . . DEF states that a transaction involving its rental agreement with ownership option contracts offer prospective customers several benefits, including the repair and maintenance of the goods, delivery and pickup of the goods, the advantage of having the option to terminate the agreement at the end of any lease term, the availability of a consumer protection plan, the ability to enter a transaction without the extensive credit check or credit history commonly necessary to be able to enter transactions in other industries, and the availability of replacement goods. Due to the intangible nature of these benefits, DEF cannot assign an estimate for each specific item.

. . . .

INTERROGATORY NO. 11: For each year commencing January 1, 1986, state:

a. The number of contracts entered into by you with customers in Minnesota in which the contract granted the customer the opportunity or option to purchase or otherwise become the owner of any property identified or described in the contract; and

b. The number of customers signing said contracts.

RESPONSE:. . . . DEF believes that the following approximations are transactions responsive to this interrogatory:

                  1987        4900
                  1988        5700
                  1989        6100
                  1990        6500
                  1991        5500
                

DEF reserves the right to supplement or revise this response to reflect a more extensive analysis of its records.

See Defendants' Responses to Plaintiffs' First Set of Interrogatories, Exhibit C (emphasis added).

7. On or about August 3, 1992, the Plaintiffs filed a motion for partial summary judgment and sought a determination that the subject contracts were by operation of law consumer credit sales within the meaning of Minn.Stat. § 325G.15, rather than lease agreements, and therefore sales for all purposes under § 325G.16 in violation of the state's usury law. See Exhibit B. The Defendants filed a cross-motion for summary judgment on Plaintiffs' claim for usury, contending that the Plaintiffs could not, as a matter of law, satisfy all of the elements necessary to the establishment of a cause of action for usury.³ See Exhibit C. In response, the Plaintiffs' specifically asserted that each and every element of its claim for usury as set forth in its complaint had been established as a matter of law.⁴

8. On November 24, 1992, the case was certified as a class action pursuant to Rule 23 of the Minnesota Rules of Civil Procedure.⁵ In analyzing whether class certification was appropriate, the state court concluded that

all class members entered into substantially the same `rent-to-own\' agreement created by the defendants. . . . Miller and Stenzel both allege claims which parallel those of the proposed class members: that they have signed contracts with defendants which plaintiffs allege to be consumer credit sales and that they have been overcharged for their purchases.

Trial Court's Memorandum, Exhibit D, at 6-7 (emphasis added). The court designated two classes, each of which consisted of individuals who had entered into "`rent to own' contracts in Minnesota with the Defendants. . . ." Trial Court's Order for Class Certification, at 2, Exhibit D.

In connection with the memorandum opinion which designated the aforementioned classes, the trial court entered summary judgment in favor of the Plaintiffs and against the several Defendants. The court, in a detailed and thoughtfully analyzed opinion, made specific factual findings⁶ and set forth conclusions of law.⁷ In sum, the trial court ruled that the rent-to-own contracts were consumer sales contracts and violated Minnesota's usury laws. After thoroughly analyzing the state of the law as well as all of the arguments proffered by counsel, the trial court specifically concluded that: "There being no genuine question of fact barring entry of summary judgment in plaintiffs' favor on their usury claim, judgment shall be entered on that claim. . . ." Trial Court's Memorandum, at 23-24, Exhibit D.

9. Although the trial court's order might have otherwise been considered interlocutory in nature and subject to modification, see Minn.R.Civ.P. 54.02, the Defendants sought discretionary review in order to obtain an immediate review of the trial court's ruling and a final determination on the issue of the Defendants' "liability" under the usurious contracts.⁸See Minn.R.Civ.App.P. 105. See also Order of Minnesota Court of Appeals, Exhibit 6, at 2 (noting that at the request of the Defendants, "discretionary review . . . was extended as to the determination of liability."). On August 3, 1993, the Minnesota Court of Appeals reversed the determination of the trial court that the Defendants' contracts were usurious as a matter of law.⁹See Miller v. Colortyme, Inc., 504 N.W.2d 258 (Minn.Ct.App.1993). Upon further appellate review, the Minnesota Supreme Court reversed the decision of the Court of Appeals and thereby sustained in all respects the Trial Court's findings and conclusions.¹⁰See Miller v. Colortyme, Inc., 518 N.W.2d 544 (Minn.1994). In affirming the ruling of the trial court, the Minnesota Supreme Court indicated that: "The district court properly concluded that DEF charged an excessive amount of interest as a matter of law. . . . Because no genuine issue of material fact exists as to whether DEF intentionally charged an excessive rate of interest, the district court properly granted summary judgment for appellants on their usury claim." Id. at 550 (emphasis added). The case was...