Industrial Credit Company v. Berg

• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)
• Citation: 388 F.2d 835
• Docket Number: No. 18788.,18788.
• Parties: INDUSTRIAL CREDIT COMPANY, a Corporation, Appellant, v. Maurice BERG, June Berg and Howard James, Appellees.
• Decision Date: 30 January 1968

388 F.2d 835 (1968)

INDUSTRIAL CREDIT COMPANY, a Corporation, Appellant, v. Maurice BERG, June Berg and Howard James, Appellees.

No. 18788.

United States Court of Appeals Eighth Circuit.

January 30, 1968.

Flavel A. Wright, of Cline, Williams, Wright, Johnson, Oldfather & Thompson, Lincoln, Neb., for appellant and filed brief.

Norman Krivosha, of Ginsburg, Rosenberg, Ginsburg & Krivosha, Lincoln, Neb., for appellee and filed brief.

Before VOGEL, Chief Judge, and MATTHES and BLACKMUN, Circuit Judges.

MATTHES, Circuit Judge.

Industrial Credit Company (Industrial), a Minnesota corporation, instituted this diversity action in two counts to replevin property and recover a balance due on a retail installment sales contract signed and delivered by appellees, Maurice Berg and June Berg, to Midwest Laundry Equipment Corporation (Midwest), who in turn for value paid assigned the contract to appellant.¹

The district court granted appellees' motion for summary judgment and dismissed the action on its merits with prejudice. Unfortunately, the court failed to articulate the premise for its action, but merely recited that "there is no genuine issue as to any material fact in this case and therefore * * * defendants are entitled to a judgment as a matter of law." This appeal followed.

The controlling facts are not in dispute. On or about February 18, 1960 Midwest sold to the Bergs certain laundry equipment in connection with their operation of a self-service laundry. This transaction was evidenced by a document styled a "Retail Installment Contract." On or about the same date Midwest assigned the contract, with recourse, to Industrial for a valuable consideration.

The questions presented for determination on this appeal are focused in part upon the scope and effect of a judgment rendered by the Supreme Court of Nebraska in Berg v. Midwest Laundry Equipment Corporation, 175 Neb. 423, 122 N.W.2d 250 (1963) (Berg I). In that case the Bergs brought an action to declare their retail installment contract void, and to recover the payments made under the contract. Plaintiffs' theory revolved around the fact that the financing charges specified in the contract were in excess of the maximum nine percent per annum statutory charge permitted by the Nebraska Installment Loan Act, Neb.Rev.Stat. § 45-138 (1943), and therefore the contract was void. In that action Industrial was named as a party defendant. Industrial unsuccessfully challenged the jurisdiction of the court over its person by means of a special appearance. Thereafter Industrial proceeded to defend the action on its merits, while at all times preserving its jurisdictional contention.

On appeal the Supreme Court of Nebraska ruled that the evidence failed to demonstrate that Industrial was doing business in Nebraska, and therefore the attempted service of process on it was ineffective to confer jurisdiction to determine the validity of the installment sales contract as to Industrial:

"* * * This disposes of the case so far as Industrial Credit Company is concerned.

"The remaining questions concern the right of the plaintiffs to recover the amounts paid to Midwest Laundry Equipment Corp. under the contract. That depends upon a determination as to the validity of the contract as between these parties. Since there is no jurisdiction over the person of Industrial Credit Company, no determination can be made as to the validity of the contract as between the plaintiffs and Industrial Credit Company in this action." 122 N.W.2d at 252. (Emphasis added.)

In deciding the controversy between Midwest and the Bergs in favor of the latter the Nebraska Supreme Court stated:

"The Installment Loan Act as amended prohibits any charge in excess of 9 percent per annum where the indebtedness is in excess of three thousand dollars. Section 45-138, R.R.S. 1943. The charge which was made is in excess of 9 percent per annum. The contract is, therefore, void." Id. at 254.

On a motion for rehearing Midwest contended that the downpayment made by the Bergs did not constitute part of the installment loan contract and therefore should not be refunded to them. Since this question had not been raised or argued the opinion in Berg I was modified and the cause was remanded to the district court for a determination of the amount of the payments made by the Bergs to Midwest, and whether the Bergs could recover these amounts from Midwest in view of the declared invalidity of the contract. Berg v. Midwest Laundry Equipment Corp., 175 Neb. 874, 124 N.W.2d 699 (1963) (Berg II).²

The basic question at issue — whether appellant is precluded from maintaining an action on the contract — can be brought into focus only by a consideration of the history of the law of Nebraska relating to installment sales.

The Nebraska Supreme Court in a long line of decisions had consistently held that a time sale of personal property made in good faith at a price in excess of the cash price was not in violation of the usury laws, even though the differential between the two prices exceeded the lawful interest for a loan.³ See, e. g., Elder v. Doerr, 175 Neb. 483, 122 N.W.2d 528, 532-533 (1963); Trailmobile, Inc. v. Hardesty, 173 Neb. 46, 112 N.W.2d 535, 539 (1961); Grand Island Finance Co. v. Fowler, 124 Neb. 514, 247 N.W. 429, 431 (1933). At the same time, however, the Supreme Court pierced the form of an installment sales transaction which, although ostensibly a valid time sale, was in substance an artifice designed to evade the usury laws. It was essentially a question of fact as to whether a particular transaction was a time sale made in good faith or a loan of the unpaid balance of a cash purchase price. Berg v. Midwest Laundry Equipment Corporation, 122 N.W.2d at 252; Trailmobile, Inc. v. Hardesty, supra, 112 N.W. 2d at 538. If a transaction characterized as an installment sales contract was in reality a loan, the transaction was void if the amount of interest and carrying charges exceeded the permissible rate of interest specified in the Nebraska Installment Loan Act.⁴ In addition, the lender incurred a total forfeiture of all principal, interest and other charges as a penalty for its violation.

In an apparent effort to mitigate the harshness of these forfeitures in installment transactions, the legislature enacted the Nebraska Installment Sales Act, effective September 27, 1959, which fixed the permissible rates of interest and other charges which could be used in computing the time price differential between a cash and credit sale.⁵ The life of this Act, however, was brief. In Elder v. Doerr, supra, the Nebraska Supreme Court declared the Act unconstitutional as special legislation, and again held that an installment sales contract, which was not a valid time sale, was void as an usurious loan, if the time price differential exceeded the maximum rate of interest permitted by the Installment Loan Act. A subsequent decision reached the same result with respect to the 1963 Installment Sales Act. Stanton v. Mattson, 175 Neb. 767, 123 N.W.2d 844 (1963).

In order to cope with the resulting commercial anxiety and frustration that accompanied the invalidation of installment sales transactions that had conformed to the Installment Sales Act, the Seventy-Fourth (Extraordinary) Session of the Nebraska Legislature enacted L.B. 17.⁶ This law became effective November 15, 1963 and amended the Installment Loan Act to provide that a loan made in violation of the Act would not on that account be void, but that the lender would have no right to collect or receive any interest or charges, and any interest or other charges which had been collected would be forfeited and refunded to the borrower. In addition, L.B. 17 also provided that its provisions would apply retroactively to all transactions executed prior to the effective date of the Act except where an action on the transaction had been reduced to a final judgment on the effective date of the Act.

The constitutionality of L.B. 17, particularly its retroactive provisions, was upheld in Davis v. General Motors Acceptance Corporation, 176 Neb. 865, 127 N.W.2d 907 (1964). See also Sones v. Spiegal, 179 Neb. 838, 140 N.W.2d 799 (1966); White Motor Co. v. Reynolds, 179 Neb. 91, 136 N.W.2d 437 (1965); Dailey v. A. C. Nelsen Company, 178 Neb. 881, 136 N.W.2d 186 (1965); Kometscher v. Wade, 177 Neb. 299, 128 N. W.2d 781 (1964).

In capsule form this case comes before us in this posture.

1. In 1959 the legislature enacted the Nebraska Installment Sales Act.

2. The Midwest-Berg retail installment contract, executed in conformity with the provisions of the Installment Sales Act, was consummated on or about February 18, 1960 and assigned for value on that date to Industrial.

3. In 1963 the Nebraska Supreme Court declared the Installment Sales Act unconstitutional and held that installment sales contracts, which were not valid time sales, were void if made in violation of the Nebraska Installment Loan Act.

4. On June 14, 1963 the Nebraska Supreme Court in Berg I held that the retail installment contract actually evidenced a loan for the unpaid balance of the purchase price, and being usurious under the provisions of the Installment Loan Act, was void as between Midwest and the Bergs. The Court, however, made no determination as to the status of the contract between the Bergs and Industrial for the reason that the Court lacked jurisdiction over Industrial.

5. L.B. 17, effective November 15, 1963, validated such installment transactions executed prior to that date, except where an action on the transaction had been reduced to final judgment on or prior to the effective date.

In this factual setting three basic questions are presented for our determination:

I.

Was the Midwest-Berg installment sales contract wholly void from its inception so that Industrial is deprived of the right to obtain an adjudication of the interest, if any, which it acquired in the contract?

II.

Is...