SAL Leasing, Inc. v. State ex rel. Napolitano

• Decision Date: 03 October 2000
• Docket Number: No. 1 CA-CV 99-0631.,1 CA-CV 99-0631.
• Citation: 10 P.3d 1221,198 Ariz. 434
• Parties: SAL LEASING, INC., an Arizona corporation; Boris Baich, an unmarried man; James Markakis and Michelle Markakis, his wife; Jeffrey Boas, Plaintiffs-Counterdefendants-Appellees, v. STATE of Arizona, ex rel. Janet NAPOLITANO, Attorney General, and Richard Houseworth, Superintendent of Banks, Defendants-Counterclaimants-Appellants.
• Court: Arizona Court of Appeals

10 P.3d 1221

198 Ariz. 434

SAL LEASING, INC., an Arizona corporation; Boris Baich, an unmarried man; James Markakis and Michelle Markakis, his wife; Jeffrey Boas, Plaintiffs-Counterdefendants-Appellees, v. STATE of Arizona, ex rel. Janet NAPOLITANO, Attorney General, and Richard Houseworth, Superintendent of Banks, Defendants-Counterclaimants-Appellants.

No. -0631.

Court of Appeals of Arizona, Division 1, Department A.

October 3, 2000.

Law Offices of Ronald W. Meyer, by Ronald W. Meyer, Phoenix, for Plaintiffs-Counterdefendants-Appellees.

Janet A. Napolitano, Attorney General, by Hugh E. Hegyi, Assistant Attorney General, Phoenix, for Defendants-Counterclaimants-Appellants.

OPINION

GARBARINO, Judge.

¶ 1 The State of Arizona appeals from a declaratory judgment holding that the Consumer Lenders Act, Arizona Revised Statutes Annotated (A.R.S.) section 6-601 to -638 (1999), does not apply to SAL Leasing, Inc., an Arizona corporation which operated a business that purchased customers' vehicles at a reduced price and leased them back to the customers with an option to repurchase. In addition, the State appeals the trial court's dismissal of its counterclaim and denial of its request for injunctive relief. We have jurisdiction pursuant to A.R.S. sections 12-2101(B) and (F)(2) (1994), and we affirm in part, reverse in part, and remand.

FACTUAL AND PROCEDURAL BACKGROUND

¶ 2 From 1993 until approximately January 1999, SAL engaged ostensibly in the purchase and lease of motor vehicles. Appellees Boris Baich and James Markakis served as the president and vice-president of SAL at various times, and also served on the board of directors while the company was in business. Appellee Jeffrey Boas managed the company's Tucson office, while Baich operated its Phoenix office. Markakis located investors for the business. None of the appellees were licensed as a consumer lender or pawnbroker.

¶ 3 SAL obtained customers by advertising in daily and weekly newspapers in both Phoenix and Tucson, and in the Yellow Pages in Phoenix. Until 1998, SAL's Republic and Gazette advertisements read:

A A A A AARON ACC.

NEED CASH? GET CASH!

4 Your car/keep to Drive

Quick Cash * 277-7720

SAL also obtained customers through referrals.

¶ 4 Although customers came to SAL for many reasons, most needed money immediately because they wanted to avoid eviction and needed to pay utilities and rent. SAL provided the money in the form of a sale and lease-back transaction. This transaction required a customer to transfer his or her vehicle to SAL. SAL would then obtain a new vehicle title in its name. Simultaneously, SAL and the customer would enter into a lease agreement which allowed the customer to lease the vehicle for one year. During the term of the lease, customers were responsible for maintaining liability, collision, and comprehensive insurance on the vehicle and keeping it in good repair. If the customer defaulted on making lease payments, SAL could repossess the vehicle and sell it.

¶ 5 The trial court found that the typical lease payment was $5 to $12 per day. The customer and appellees determined the lease rate with particular regard to the rate charged by other used vehicle leasing businesses such as "Rent-A-Wreck." The trial court further found that "[t]he lease payment had no correlation or relationship to an interest rate."

¶ 6 The trial court did not make any findings concerning the relationship between the lease fees and the sale proceeds. The State submitted evidence, which was undisputed, that appellees' lease fees amounted to 218% of the sale proceeds received by appellees' customers. Moreover, the lease contracts provided for, and appellees sometimes imposed, a fee if a customer's payment was late. The fee was an added charge of $5 per day for the rest of the lease, together with a one-time charge of $25. According to the State, these additional daily late charges brought appellees an annual return of $1825, or 365% on transactions in which customers received $500.

¶ 7 Appellees repossessed about 18% of the cars they leased following purchase. They were not in the business to accumulate vehicles and did not maintain a rental fleet for third parties to lease. Repossessed vehicles were either redeemed by the original owners or sold at auction. Out of 775 sale and leaseback transactions, only one resulted in proceeds exceeding $10,000.

¶ 8 In 1993, an attorney for another sale and lease-back company wrote a letter to the Arizona Banking Department requesting a refund of fees submitted in order to become licensed under the Motor Vehicle Time Sales Disclosure Act, A.R.S. sections 44-281 to -295 (1987 & Supp.1992). The State Banking Department responded by letter enclosing the fee refund and opining that the inquiring company, Secure Leasing, did not need a motor vehicle dealer license or a sales finance license. The letter also provided that "this activity may, under a slightly different fact scenario be subject to the provisions of the Consumer Loan statute."

¶ 9 In 1995, appellees filed a declaratory judgment action seeking to establish that SAL's transactions did not require a pawnbroker license. The State moved to dismiss the complaint, contending that it knew virtually nothing about SAL and that there was no impending prosecution as required for Arizona's Uniform Declaratory Judgments Act, A.R.S. sections 12-1831 to -1846 (1994). In addition, the State urged dismissal because the pawnbroker statute might be only one of several statutes applicable to SAL. SAL stipulated to a dismissal of the complaint with prejudice.

¶ 10 In late 1996, the State began investigating appellees. The investigation involved repeated contact between the State and appellees. During the summer of 1998, the State proposed a settlement, but the parties were never able to reach an agreement.

¶ 11 On November 18, 1998, appellees filed a complaint against the State seeking a declaratory judgment establishing that the business transactions in which they were engaged did not violate the Consumer Lenders Act. The State counterclaimed alleging that the transactions were usurious under the Consumer Lenders Act and that appellees had also violated the Arizona Consumer Fraud Act, A.R.S. sections 44-1521 to-1534 (1994), and the Organized Crime and Fraud Act, A.R.S. sections 13-2301 to -2318 (1989 & Supp.1998), in connection with the loans. The State requested injunctive relief to enjoin appellees from violating these statutes. In addition, it requested that all money or property obtained from customers through any practice violating the Consumer Lenders Act and the Arizona Consumer Fraud Act be restored to them, as well as a payment of treble damages to all persons injured by violations of the Organized Crime and Fraud Act. The counterclaim further requested a civil penalty of up to $10,000 for violation of the Arizona Consumer Fraud Act, an order to any relevant person or enterprise to restore and forfeit property illegally obtained, and reimbursement for the costs of investigation, reasonable attorneys' fees, and court costs. The trial court found that appellees had effectively shut down all operations approximately two and one-half months after the counterclaim was filed.

¶ 12 Following a hearing on the State's request for an injunction, the trial court made findings of fact and conclusions of law and entered an order denying the State's request for injunctive relief, dismissing the counterclaim, and granting appellees' request for declaratory relief, attorneys' fees, and costs. This appeal followed.

DISCUSSION

I. Standards of Review

¶ 13 This Court is bound by the trial court's findings of fact unless they are clearly contrary to the evidence. See Polk v. Koerner, 111 Ariz. 493, 494, 533 P.2d 660, 661 (1975). We "examine the record only to determine whether substantial evidence exists to support the trial court's action. Substantial evidence is evidence which would permit a reasonable person to reach the trial court's result." In re Estate of Pouser, 193 Ariz. 574, 579, ¶ 13, 975 P.2d 704, 709 (1999) (citations omitted). However, we are not bound by the trial court's conclusions of law, which are subject to de novo review. We may draw our own legal conclusions from any undisputed facts. See Zellerbach Paper Co. v. Valley Nat'l Bank, 13 Ariz.App. 431, 433, 477 P.2d 550, 552 (1970). A statute's constitutionality is also a matter of law. See Martin v. Reinstein, 195 Ariz. 293, 301, ¶ 16, 987 P.2d 779, 787 (App.), review denied (1999).

II. Status of Appellees' Sale and Lease-Back Transactions

¶ 14 The Consumer Lenders Act defines commercial loans and commercial lenders as follows:

5. "Consumer lender" means a person that advertises to make or procure, solicits or holds itself out to make or procure, or makes or procures consumer lender loans to consumers in this state.

....

7. "Consumer loan" means the direct closed end loan of money in an amount of ten thousand dollars or less that is subject to a finance charge. For the purpose of determining whether a consumer loan is ten thousand dollars or less only the principal amount of the loan shall be considered and not any finance charges or other fees allowed pursuant to § 6-635.

A.R.S. § 6-601 (1999).

¶ 15 "Unless exempt under section 6-602 [inapplicable here], a person shall not engage in the business of a consumer lender without first being licensed as a consumer lender by the superintendent." A.R.S. § 6-603(A) (1999). Only licensed consumer lenders may charge up to 36% in finance charges on the first $500 of the loan and up to 24% on any amount of the loan exceeding $500. See A.R.S. § 6-632(A)(2)(a) (1999). This statute applies "to any person who seeks to avoid its application by any device, subterfuge or pretense." A.R.S. § 6-603(B) (1999).

¶ 16 The crux of the dispute is whether appellees' sale and lease-back transactions were actually disguised consumer loans and not sales. The trial...