S & N Equipment Co. v. Casa Grande Cotton Finance Co., No. 94-16303
| Decision Date | 26 September 1996 |
| Docket Number | No. 94-16303 |
| Citation | 97 F.3d 337 |
| Parties | 96 Cal. Daily Op. Serv. 7190, 96 Daily Journal D.A.R. 11,794 S & N EQUIPMENT COMPANY, an Arizona general partnership, Plaintiff-Appellant, v. CASA GRANDE COTTON FINANCE CO., an Arizona corporation; Chickasha Cotton Oil Company, a Delaware corporation, Defendants-Appellees. |
| Court | U.S. Court of Appeals — Ninth Circuit |
John A. Baade (on the briefs and argued) and Sally M. Darcy (on the briefs), Raven, Kirschner & Norell, Tucson, Arizona, for plaintiff-appellant.
Mark S. Sifferman, Norling, Perry, Pierson & Kolsrud, Phoenix, Arizona, for defendants-appellees.
Appeal from the United States District Court for the District of Arizona; Roger G. Strand, District Judge, Presiding.
Before: GOODWIN and REINHARDT, Circuit Judges, and KING, District Judge. *
Plaintiff, S & N Equipment Company (S & N), a general partnership, appeals the district court's denial of its motion for summary judgment and the grant of summary judgment in favor of the defendants, Casa Grande Cotton Finance Company (Casa Grande) and Chickasha Cotton Oil Company (Chickasha). S & N alleges that Casa Grande violated state and federal banking law by conditioning financing on the purchase of ginning services from gins owned by Chickasha. The district court concluded that the transactions were not illegal under Arizona's usury law or the Bank Holding Company Act. We affirm in part and reverse and remand in part for further proceedings.
From 1988 to 1991, Casa Grande, a wholly-owned subsidiary of Chickasha, made loans to S & N for cotton crop production. 1 The loans totalled more than $3 million, and the interest on the loans exceeded ten percent from January 1, 1988 to May 15, 1991. 2 Casa Grande expressly conditioned the loans on S & N's processing its cotton at cotton gins owned by Chickasha. 3 Casa Grande required its borrowers to pledge their crops as collateral, maintaining that the ginning requirement ensures proper monitoring of the crops. 4
S & N claims that it lost approximately $200,000 as a result of the ginning agreement. It calculates this figure by comparing the net cost of ginning at Chickasha with the net cost of ginning at competing cooperative gins. The charges for the actual ginning services performed by Chickasha and the cooperatives were roughly comparable during the period in question. S & N attributes the difference in the net cost to the manner in which Chickasha structures the transaction, in particular, the price it pays for cotton seed. Chickasha buys cotton seed directly from its ginning customers. 5 It sets a posted price at which it buys the seed, but allows its customers to sell to third parties instead (subject to Chickasha's right of first refusal), if they can obtain more than the posted price. The cooperative gins, by contrast, do not buy cotton seed but perform the service of selling it for their customers. Due to the volume of seed the cooperatives handle, they are able to market the seed more effectively than can the individual growers who gin at Chickasha. As a result, the cooperatives obtain a higher price for the seed than either Chickasha's posted price or the price that Chickasha's customers obtain when they make third-party sales.
On some occasions, S & N sold its seed to third parties, but generally the partnership sold it to Chickasha at the posted price, under the ginning agreement. From 1989 to 1991, Chickasha paid its customers $112, $130, and $80 per ton of cotton seed, respectively, while the cooperatives sold it for (and effectively paid their customers) $138, $138, and $120, respectively. The price paid by Chickasha, however, was consistent with the market rate for cotton seed during those years; those rates were $111, $136, and $82, respectively.
Casa Grande, in addition to making loans, accepted funds from its customers, which it placed in "credit accounts." 6 It deposited the funds in its general operating account--into which it placed its revenues and from which it paid its operating expenses and funded loans--and paid interest at Bank of America's prime rate. Casa Grande did not have any written agreement with its customers concerning when deposits were payable; however, its policy was to return funds to customers "as they needed it." 7 Casa Grande did not provide customers with checks or similar instruments that could be made payable to a third party as cash. Customers nonetheless could direct Casa Grande through "disbursement forms" to pay funds to third parties. When requested, Casa Grande wrote a check on its general operating account.
S & N contends that Casa Grande violated Arizona's usury statute by conditioning its loans on an agreement to gin at Chickasha. S & N argues that the net cost of ginning there was unreasonable, as compared to the net cost at the cooperative gins, and that the difference constituted interest that Casa Grande exacted in addition to that specified in the contract. While we assume for purposes of this decision that the transactions would be usurious if the ginning agreements were not fair and reasonable, we conclude that S & N has not raised a genuine issue of material fact as to the usury issue.
Arizona Revised Statute § 44-1202 provides, in relevant part, that no person shall "directly or indirectly take or receive in money, goods ..., or in any other way, any greater sum or any greater value for the loan ... than the maximum permitted by law." Interest on a loan is set at the rate of ten percent per year "unless a different rate is contracted for in writing, in which event any rate of interest may be agreed to." Ariz.Rev.Stat.Ann. § 44-1201A. The district court concluded that these provisions, taken together, establish that a lender who contracts in writing for a rate of interest exceeding ten percent may not receive any interest in addition to that which he has contracted for in writing, because that interest rate is the maximum permitted by law. Again, we assume, without deciding the issue, that this a proper interpretation of Arizona law. 8
Because the parties agreed to specific interest rates that exceeded ten percent, we must determine whether Casa Grande directly or indirectly received any additional interest through the ginning agreement. 9 There are two approaches that we may take in addressing this issue. We could look to cases involving agreements collateral to a loan, in which case we would determine whether the ginning agreement was supported by adequate and commensurate consideration, or we could look to cases involving services related to a loan, in which case we would determine whether the ginning agreement was reasonable. Because the defendants prevail whichever approach we apply, we need not decide which is applicable here.
The first approach, which appears to be more suitable under the facts of the case before us, is exemplified by Sulger v. Maslin, 90 Ariz. 70, 365 P.2d 1113, 1114 (1961), in which the Arizona Supreme Court addressed a claim that the lender had received additional benefit or interest from an agreement collateral to the loan. The parties had simultaneously executed a note in the sum of $15,000 secured by a realty mortgage and entered into an agreement by which ten percent of the rental income from the mortgaged property was paid to the lenders. The borrowers contended that the rental income was consideration for the loan in addition to the eight percent interest provided for in the note and therefore that the transaction was usurious. The Arizona Supreme Court rejected the contention. It noted that the consideration recited in the rental agreement was that one of the lenders should perform certain services and that the testimony of both parties indicated that the services were performed. Id. It expressly assumed that the trial court was satisfied that the services performed were "adequate and commensurate to the rental consideration to be received in return." Id.
Thus, Sulger suggests that in determining whether the loan agreement was usurious we should consider whether the consideration supporting the ginning agreement was adequate and commensurate. See Boyd v. Head, 92 Idaho 389, 443 P.2d 473, 481 (1968) (). 10
The second line of cases, the one that the district court looked to, involves charges for services rendered in connection with a loan. See Altherr v. Wilshire Mortgage Corp., 104 Ariz. 59, 448 P.2d 859, 863 (1969) (); Grady v. Price, 94 Ariz. 252, 383 P.2d 173, 175-76 (1963) (); Kamrath v. Great Southwestern Trust Corp., 27 Ariz.App. 102, 551 P.2d 92, 94 (1976) (). Fees charged for services rendered in connection with a loan are considered additional interest if they are unreasonable. See Altherr, 448 P.2d at 863. Such charges must be limited to the specific services rendered, "and may not be made a device through which additional interest or profit on the loan may be exacted." Grady, 383 P.2d at 176. If a charge for services is unreasonable, "and the borrower is forced to accept the lender's services at an unreasonable rate in order to get the loan, then it may be said, fairly, that the excess of the fees over what would be reasonable, is a charge for the loan, and hence is interest." Altherr, 448 P.2d at 863. Accordingly, under this approach, we must assess whether the lender charged an amount greater than that which would be reasonable for the loan-related services.
We conclude that under both the-adequacy-of-consideration and reasonableness-of-the-charge-for-services approaches, S & N failed to...
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