Scientific Products v. Cyto Medical Laboratory, Inc.

• Decision Date: 16 October 1978
• Docket Number: Civ. No. H-76-476.
• Citation: 457 F. Supp. 1373
• Court: U.S. District Court — District of Connecticut
• Parties: SCIENTIFIC PRODUCTS, a Division of American Hospital Supply Corporation v. CYTO MEDICAL LABORATORY, INC.

457 F. Supp. 1373

SCIENTIFIC PRODUCTS, a Division of American Hospital Supply Corporation v. CYTO MEDICAL LABORATORY, INC.

Civ. No. H-76-476.

United States District Court, D. Connecticut.

October 16, 1978.

Thomas F. Parker, Gross, Hyde & Williams, William A. Taylor, Hartford, Conn., for plaintiff.

Jackson T. King, Jr., Juri E. Taalman, Norwich, Conn., John F. Scully, Cooney, Scully & Dowling, Hartford, Conn., for defendant.

RULING ON MOTIONS FOR SUMMARY JUDGMENT ON THE DEFENSE OF USURY

BLUMENFELD, District Judge.

In this diversity suit the plaintiff seeks to recover a balance due from the defendant for goods and supplies sold to the defendant. In response to Requests for Admission the defendant admits that it received goods and supplies ordered from the plaintiff and that it has not paid for them in full. In addition to the dispute about the amount which is properly due and owing to the plaintiff,¹ the defendant also raises the special defense of usury. Both parties have moved for summary judgment to test the applicability of that defense. It is to those motions I now turn.

The Usury Defense

As a special defense to the plaintiff's claim, the defendant pleads that the practice by the plaintiff of imposing a monthly one and one-half per cent (1½%) charge on balances in arrears for more than 30 days constitutes usury and that consequently the defendant's debt to the plaintiff is unenforceable.

The statute upon which the defendant relies is Conn.Gen.Stat. § 37-4:

"Loans at greater rate than twelve per cent prohibited. No person and no firm or corporation or agent thereof, other than a pawnbroker as provided in section 21-44, shall, as guarantor or otherwise, directly or indirectly, loan money to any person and, directly or indirectly, charge, demand, accept or make any agreement to receive therefor interest at a rate greater than twelve per cent per annum."

The plaintiff contends that this usury statute has no application to the transactions between it and the defendant because in no instance out of which the defendant's indebtedness to plaintiff arose did the plaintiff "loan money" to it.

On the other hand, the defendant points out that since the plaintiff is seeking interest in excess of 12% per annum on the amount owed to it on the sales price for goods sold and delivered which was unpaid for more than 30 days after delivery, the interest being sought is "for the forbearance of the debt created by their delivery and acceptance." The defendant contends that the usury statute is applicable to such a transaction. Since this case is in a federal court solely because of diversity of citizenship, the court sits, in effect, only as another court of the state and must follow its law. Guaranty Trust Co. v. York, 326 U.S. 99, 108-09, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945).

There is no doubt that the defendant's indebtedness to the plaintiff arose out of credit sales transactions, and not out of the loan of money to the defendant. This the defendant does not dispute. Nor is it disputed that the terms on which the goods were sold required the defendant to pay for them in 30 days. If not paid for in 30 days, the plaintiff imposed a "service charge" thereafter of 1½% per month until paid. Title to the goods passed to the defendant on delivery. The question presented is whether Connecticut's usury statute should be construed to apply to interest charged after default in payment of a debt which arose out of a credit sale.

It should be noted at the outset that the prohibition against usury is purely a matter of statutory law. There is no common law of usury.²

Before proceeding directly to consider whether interest received "for the forbearance of the debt created by" the delivery and acceptance of goods is included within the statutory prohibition, it is useful to consider the source of this phrase which the defendant argues should be read into the statutory definition of usury so as to make the statute applicable to a debt created by a sale on credit. Defendant has called the court's attention to Bridgeport L.A.W. Corp. v. Levy, 110 Conn. 255 (1929), at 260, 147 A. 841, at 844, where the court observed:

"Usury is the taking of more interest for the use of money or forbearance of a debt than the law allows. 3 Parsons on Contracts (6th Ed.) p. 107. And `an usurious contract, is one which stipulates for the payment of more than lawful interest, for the use of money, or forbearance of a debt.' 39 Cyc. p. 889."³

That this was only dictum is revealed by what the court said simultaneously:

"In an early case in this State it was said: `It appears, that the plaintiff claimed to be a purchaser of the note. No facts are disclosed to show it was a pretended sale, and in substance a loan. . . . These principles will not be denied; that to constitute usury, there must be a loan, directly or indirectly; that a real sale, without any intent to loan, though it may be oppressive, cannot be usurious.' Lloyd v. Keach, 2 Conn. 175, 177, 178. To the same effect is the language of a Massachusetts opinion: `While in a broad sense of the word the credit given for the price of goods sold may be called a loan, it is not a loan in the ordinary and usual sense of the word, and we think it is not a loan within the meaning of the statute. The language here used has reference primarily to money furnished to another to be repaid, and it is not intended to include credits given for goods sold upon which a mortgage is taken back by way of security.' Day v. Cohen, 165 Mass. 304, 305, 43 N.E. 109.

"The parties, however, must act in good faith, and where a contract appears as a sale but is in fact a mere cloak for an usurious loan, it will not be free from the taint of usury."

Id. at 260-61, 147 A. at 844 (citations omitted). In quoting the pointed explication of "a loan" in the Massachusetts case cited, the Connecticut court clearly indicated that for usury to apply the interest must be on a debt which arises from a loan of money.

There is sufficient logic to the contention of the defendant that interest for the forbearance of a debt created by the delivery and acceptance of goods stands on the same footing within the usury statute as interest on a loan of money to deserve serious consideration. While the syllogism has a certain surface seductiveness, it will not withstand analysis. As discussed below, Connecticut has indicated that such a debt would not support a charge of usury.

The Time-Price Doctrine

The plaintiff invites the court to consider this case as involving a time-price sale. In Zazzaro v. Colonial Acceptance Corp., 117 Conn. 251, 254, 167 A. 734, 735 (1933), Connecticut followed the general rule that "when property is sold on credit at an advance over the cash price, in good faith, and with no intention to defeat the usury laws, the transaction will not be held usurious though the difference between the cash price and the credit price, if considered as interest, would amount to more than the legal rate.⁴ In Zazzaro the listed cash price of the car was $1,050, to that was added a "finance charge" of $106. The plaintiff paid $200 down, received an allowance of $250 for an old car, and gave a note for the balance of the purchase price payable in 12 monthly installments of $59 each. The seller then assigned all its rights under the sales contract to the finance company and endorsed the note to it without recourse. The contention that the note was usurious was rejected by the trial court. Five justices of the Connecticut Supreme Court affirmed saying: "The credit company assumes the risk of the collection of the installment payments, and its so-called `finance charge' is generally held to represent the increased charge made to the conditional vendee because the sale is of that character." 117 Conn. at 254, 167 A. at 735.⁵

Although the larger amount charged for a time-price sale is not considered to be interest, what may seem less clear is whether the debt upon which excessive interest is charged must arise from a loan of money in order to be usurious. The statute prohibits one who shall "loan money to . . . demand or accept . . . therefor interest at a rate of greater than twelve per cent per annum." It can be argued that a loan of money and the extension of credit on the sale of goods amount to the same thing. But the hypothesis that Connecticut's legislature intended a sale on credit as a variant expression of a loan of money for purposes of the usury statute is unsupported. The time to interpret the language of the statute is at hand.

The Statute

I. Judicial Interpretation

In the first place, it would be quite clear to any lay person who went to a dictionary for a definition of usury that it had a specific meaning when the legislature enacted the usury statute. It is there defined:

"usury, 1. Originally, the act or practise of lending money at interest, or of taking interest for money so lent: now archaic except in the sense of exorbitant or extortionate interest; specif. (Law), the demanding and taking, or contracting to receive, for the use of money as a loan, a rate of interest beyond what is allowed by law. . . . 2. A premium paid, or stipulated to be paid, for the use of money borrowed or returned, beyond the rate of interest established by law. 3. Figuratively, large increase added to anything returned. . . ."

Funk & Wagnalls New Standard Dictionary (rev. ed. 1958). The courts of Connecticut have stressed the concept that its usury statute prohibits excessive interest only for the loan of money. While Connecticut courts have sometimes used general language that a contract for payment of interest in excess of the statutory limitations for the use of money or forbearance of a debt constitutes usury, no Connecticut case cited to me by the parties has held that the difference between the cash price and a time price is interest for the forbearance of a debt created by the delivery and acceptance of goods sold which is...