Rollinger v. J. C. Penney Co.

• Decision Date: 15 December 1971
• Docket Number: No. 10929,10929
• Citation: 192 N.W.2d 699,86 S.D. 154
• Parties: Stanley ROLLINGER, for Himself and all Others Similarly Situated, Plaintiff and Respondent, v. J. C. PENNEY COMPANY, Inc., a corporation, Defendant and Appellant.
• Court: South Dakota Supreme Court

Page 699

192 N.W.2d 699

86 S.D. 154

Stanley ROLLINGER, for Himself and all Others Similarly Situated, Plaintiff and Respondent, v. J. C. PENNEY COMPANY, Inc., a corporation, Defendant and Appellant.

No. 10929.

Supreme Court of South Dakota.

Dec. 15, 1971.

Rehearing Denied Feb. 3, 1972.

Woods, Fuller, Shultz & Smith, Timothy J. Nimick, and J. B. Shultz, Sioux Falls, for defendant and appellant.

May, Boe, Johnson & Burke, and Gale E. Fisher, Sioux Falls, for plaintiff and respondent.

PER CURIAM.

I

The important question involved in this appeal is whether a revolving charge account agreement between the parties results in usury prohibited by our statutes. ¹ By summary judgment in a suit to recover the interest paid ² the trial court so concluded and we agree. In so doing we join another midwestern jurisdiction, Wisconsin, which recently held 'charges' above the cash price for merchandise purchased under a revolving charge account agreement that exceed maximum legal interest permitted by statute are usurious. State of Wisconsin v. J. C. Penney Co., 48 Wis.2d 125, 179 N.W.2d 641.

The revolving charge account agreement in the instant case is identical in form to the one involved in the Wisconsin case and the factual situation is substantially the same.

In brief, Penneys allowed its customers such as plaintiff to purchase merchandise on credit under a revolving charge account agreement. In a typical case a customer who wished to open a revolving charge account completed a credit application form which contained, on the back side, the terms of the charge account agreement. The customer would also sign the agreement. After investigation, the customer generally was approved for a limited amount of credit. The agreement operated for an indefinite period of time and a customer could make numerous purchases on his account up to the credit limit. When the customer purchased merchandise, he was given the option of paying cash or charging the purchase. If he decided to charge, he presented his charge card or charge plate and the sales check would be stamped with his name and account number, and he would sign it. The sales check stated the purchase was to be charged to the customer's account, and he agreed to pay for the merchandise in accordance with the terms of Penney's Charge Account Agreement which he had previously signed.

Under the agreement the customer had the privilege of paying the cash price of the purchases on his account without paying any monthly charges until the second biling date following the purchase. If not paid by that time he was charged a one and a half percent monthly rate on the unpaid balance of the account. Each month, the customer was required to pay a minimum amount dependent on the unpaid balance as set forth in the charge account agreement. Payments made on the account and credits for returned merchandise would be deducted and purchases made during the current billing period would be excluded in arriving at the next balance. Purchases made during the current billing period, if unaid as of the next billing date, would be merged into the account to derive the new unpaid balance for the succeeding bill. That the one and one-half percent monthly charge frequently exceeded the eight percent per annum maximum interest rate allowed in South Dakota is undisputed.

SDCL 54--3--1 defines interest as 'compensation allowed for the use, or forbearance, or detention of money or its equivalent.'

Usury is the wilful exaction of an interest rate exceeding the statutory legal rate and consists of four essential elements as noted by the Wisconsin court. These are: (1) a loan or a forbearance, either express or implied, of money or its equivalent; (2) an understanding between the parties that the principal shall be repayable absolutely; (3) the exaction of a greater profit than is allowed by law; and (4) an intention to violate the law. If all four elements exist, they infallibly indicate usury, irrespective of the form in which the parties have put the transaction, but the absence of any one of them conclusively refutes a claim of usury. 45 Am.Jur.2d, Interest and Usury, § 111, p. 97. Here as in Wisconsin, there is no serious dispute on requirements (2) and (3) but Penneys vigorously denies (1) and (4) are present. It maintains in a revolving charge account sale there is no loan or forbearance and the company had no intention of violating the law. These arguments were rejected by the Wisconsin court and we do likewise.

Although traditionally usury prohibited excess interest on a loan, the concept has been expanded to include forbearance as a potentially usurious transaction. Forbearance signifies a contractual obligation of a lender or creditor to refain, during any given period of time, from requiring the borrower or debtor to repay a loan or debt. Hafer v. Spaeth, 22 Wash.2d 378, 156 P.2d 408, 411; see also Sloan v. Sears, Roebuck and Co., 228 Ark. 464, 308 S.W.2d 802, 804. In other words, the forbearance permits the debtor to keep the use of his money. The purchase of goods creates an obligation to pay the cash price, and, until the full purchase price is paid, the buyer remains indebted to the seller.

The forbearance need not appear at the inception of the contract. The fact that the buyer enjoys a free period, usually 30 days or one billing period, in which he may postpone payment without charge or penalty does not alter the transaction. During this period the forbearance merely remains dormant and manifests itself automatically when the buyer does not pay the full purchase price before the second billing.

In our opinion forbearance that results in an interest charge above the statutory maximum is prohibited whether it comes into being simultaneously with the purchase or spontaneously with the expiration of the charge-free billing period. State of Wisconsin v. J. C. Penney Co., supra; Ulvilden v. Sorken, 58 S.D. 466, 237 N.W. 565.

As the Nebraska court said in Lloyd v. Gutgsell, 175 Neb. 775, 124 N.W.2d 198, 204:

'When we look through the form, can we come to any other conclusion but the one that the difference between the price and what the buyer finally pays is the cost of carrying the balance of the cash price? To put it another way, the charge is for the forbearance to collect the full cash price, or for the use of money. A rose is still a rose though we may label it a violet. This charge, regardless of its label, is interest.'

With respect to the requirement of intent to violate, the trial court was of the opinion 'a purpose in use of the agreement to circumvent the usury statute (may be) implied from the circumstances of the case.' Essentially this is what the trial court found in the Wisconsin case. An intent to violate may be inferred if the contract is usurious on its face. See Ulvilden v. Sorken, supra; Sloan v. Sears, Roebuck & Co., supra; Plastics Development Corp. v. Flexible Products Co., 112 Ga.App. 460, 145 S.E.2d 655. In our opinion the trial court did not err in its determination of this issue upon the record.

In an early case involving our usury statutes, the court said they were enacted 'in the interest of the borrower' and the statute regards 'only the lender as guilty of a wrong'. Wilson v. Selbie, 7 S.D. 494, 64 N.W. 537. We keep this principle in mind in the disposition of this appeal.

We are aware some courts have held revolving charge accounts are not subject to the usury statutes. Dennis v. Sears, Roebuck & Co., 1969, 223 Tenn. 410, 446 S.W.2d 260; Uni-Serv Corp. of Mass. v. Commissioner of Banks, 349 Mass. 283, 207 N.E.2d 906. ³ Neither of these cases is precisely in point; nevertheless we choose not to follow their reasoning and prefer the Wisconsin decision as the foundation for our holding. We briefly mention these cases.

Tennessee has a constitutional provision which prohibits interest rates in excess of 10% Per annum. The legislature permitted a maximum rate of 1 1/2% Monthly to be charged on revolving charge accounts. The Tennessee court refused to hold the statute unconstitutional on the basis that a revolving charge account sale was a bona fide credit sale and it was not usurious to charge and pay a higher price for a credit sale than for a cash sale.

Massachusetts has no usury statute, but it licenses certain lenders of money. In determining whether the issuer of credit cards came within the terms of the statute requiring a license, the court held the arrangement was essentially a time-sales financing arrangement in which credit is extended to purchase merchandise and a card holder could in no way use the plan to receive a cash loan; hence, it was not required to have a license.

Rather strangely, this court has not heretofore had occasion to consider the time-price doctrine or its scope. Nevertheless, this court will take judicial notice that merchants in South Dakota as elsewhere for many years have sold merchandise and property under a time-price financial arrangment believing such sales if bona fide credit sales are free from usury. The Wisconsin court did not accept Penney's argument that revolving charge account sales were genuine time-price or credit sales and thus exempt from usury statutes. We likewise reject this argument.

As we have mentioned, Massachusetts and Tennessee have held revolving charge account sales are not covered by usury statutes. Nebraska and Arkansas, along with Wisconsin, appear to be contrary and they may currently represent a minority view. Nonetheless, we believe the minority view to be the more realistic under present economic conditions. In our opinion Penney's so-called service charge is interest incognito.

Courts have no hesitated to look behind the form of a transaction and to its substance to ascertain if in fact it is usurious. There are various factors to which the courts will look the various indicia to which they point in determining whether a particular transaction is not a true time-price sale....