State ex rel. Cooper v. Nccs Loans, Inc.

• Decision Date: 06 December 2005
• Docket Number: No. COA04-1660.,COA04-1660.
• Citation: 624 S.E.2d 371
• Court: North Carolina Supreme Court
• Parties: STATE of North Carolina ex rel. Roy COOPER, Attorney General, and Joseph A. Smith, Jr., Commissioner of Banks, Plaintiff, v. NCCS LOANS, INC.; JAGJRTX, LLC; JAG NC, LLC d/b/a "Advance Internet" and "Advance Til Payday;" and John A. Gill, Defendants.

Page 371

624 S.E.2d 371

STATE of North Carolina ex rel. Roy COOPER, Attorney General, and Joseph A. Smith, Jr., Commissioner of Banks, Plaintiff, v. NCCS LOANS, INC.; JAGJRTX, LLC; JAG NC, LLC d/b/a "Advance Internet" and "Advance Til Payday;" and John A. Gill, Defendants.

No. COA04-1660.

Court of Appeals of North Carolina.

December 6, 2005.

COPYRIGHT MATERIAL OMITTED

Appeal by defendants from judgment entered 9 September 2004 by Judge W. Osmond Smith, III in Wake County Superior Court. Heard in the Court of Appeals 13 September 2005.

Attorney General Roy Cooper, by Special Deputy Attorney General L. McNeil Chestnut, Assistant Attorney General Philip A. Lehman, and Assistant Attorney General M. Lynne Weaver, for the State.

Ellis and Winters LLP, by Matthew W. Sawchak, Thomas D. Blue, Jr., and George F. Sanderson, III, Raleigh, for defendants-appellants.

LEVINSON, Judge.

Defendants (NCCS Loans, Inc.; JAGJRTX, LLC; JAG N.C., LLC, d/b/a "Advance Internet" and "Advance Til Payday"; and John Gill), appeal from summary judgment entered in favor of plaintiff (State of North Carolina). We affirm.

"The question before us, which appears to be one of first impression, requires us to determine whether a company's policy of extending to its customers an immediate cash `rebate,' as well as [use of its office computers for a few hours a week, by appointment, to access the internet], in exchange for a one-year commitment to make bi-weekly payments in an amount equal to five times the amount of the rebate, is tantamount to the operation of a small loan business in violation of [North Carolina's] usury laws." Short on Cash.Net v. Dep't of Finan., 811 N.E.2d 819, 824 (Ind.Ct.App.2004). The Defendant NCCS Loans is a corporation which until 31 August 2001 did business in North Carolina through its "Advance Til Payday" check-cashing stores, where it offered deferred deposit loans. On 1 September 2001 defendant closed Advance Til Payday, and reopened its stores under the name "Advance Internet." Corporate defendant JAGJRTX, LLC succeeded NCCS as owner of Advance Internet. On 12 February 2002 plaintiff filed suit against defendants NCCS Loans, Inc., and JAGJRTX, LLC, d/b/a "Advance Internet" and "Advance Til Payday." Plaintiff sought injunctive and other relief for (1) usury, in violation of N.C. Gen.Stat. § Chapter 24; (2) violation of the North Carolina Consumer Finance Act, N.C. Gen.Stat. § 53-166; and (3) unfair and deceptive trade practices, in violation of N.C. Gen.Stat. § 75-1.1. In March 2003 plaintiff moved to amend its complaint to add two additional defendants, JAG N.C., LLC d/b/a "Advance Internet" and "Advance Til Payday"; and John Gill. Defendants consented to the addition of JAG N.C., LLC. Gill was added by court order entered in June 2003. Plaintiff also filed a motion for summary judgment, which was heard by the trial court in June 2004. On 9 September 2004 the court entered an order granting summary judgment in favor of plaintiff on all claims. Defendants have appealed the summary judgment order. "Summary judgment is an appropriate disposition only `if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that any party is entitled to a judgment as a matter of law.'" Liberty Mut. Ins. Co. v. Pennington, 356 N.C. 571, 578-79, 573 S.E.2d 118, 123 (2002) (quoting N.C. Gen.Stat. § 1A-1, Rule 56(c) (2001)). Defendants herein argue that the trial court erred by granting summary judgment for plaintiff, on the grounds that the evidence raised genuine issues of material fact as to whether they violated the Consumer Finance Act, made usurious loans, or engaged in unfair or deceptive trade practices. We disagree.

"Interest is the premium allowed by law for the use of money, while usury is the taking of more for its use than the law allows. It is an illegal profit." Yarborough v. Hughes, 139 N.C. 199, 207, 51 S.E. 904, 907 (1905). "The elements of usury are [1] a loan or forbearance of the collection of money, [2] an understanding that the money owed will be paid, [3] payment or an agreement to pay interest at a rate greater than allowed by law, and [4] the lender's corrupt intent to receive more in interest than the legal rate permits for use of the money loaned." Swindell v. National Mortgage Ass'n, 330 N.C. 153, 159, 409 S.E.2d 892, 895-96 (1991) (citations omitted). "Usury statutes are designed to protect the borrower whose necessity and importunity may place him at a disadvantage with respect to the exactions of the lender[.]" Mortgage Co. v. Zion Church, 219 N.C. 395, 397, 14 S.E.2d 37, 38 (1941) (quoting Hill v. Lindsay, 210 N.C. 694, 699, 188 S.E. 406, 409 (1936)).

Regulation of consumer loans is addressed in Chapter 24 of the General Statutes, N.C. Gen.Stat. § 24-1.1, and the North Carolina Consumer Finance Act, N.C. Gen.Stat. § 53-164, et seq. (2003). The maximum allowable rate of interest on consumer loans of $25,000 or less is set forth in N.C. Gen.Stat. § 24-1.1(c). Under the Consumer Finance Act, a consumer lender may not charge interest "greater than permitted by Chapter 24" on loans of $10,000 or less without first obtaining a license from the North Carolina Commissioner of Banks. N.C. Gen.Stat. §§ 53-166 and 53-168 (2003). In sum, for an unlicensed lender to charge a rate of interest on a small loan greater than the rates permitted is a violation both of the Consumer Finance Act, and of Chapter 24's prohibitions on usury. In the instant case, it is undisputed that defendants are not licensed by the Commissioner of Banks.

However, usury laws apply only to loans, not to sales. Auto Supply v. Vick, 303 N.C. 30, 47-48, 277 S.E.2d 360, 372 (1981) ("If there is a bona fide purchase of property as opposed to a subterfuge to conceal a loan at a usurious rate, then the usury laws have no application whatsoever, even though the sale is made at an exorbitant price."). A loan is "made upon `the delivery by one party and the receipt by the other party of a given sum of money, an agreement, express or implied, to repay the sum lent, with or without interest.'" Kessing v. Mortgage Corp., 278 N.C. 523, 529, 180 S.E.2d 823, 827 (1971) (quoting 54 C.J.S. LOANS, p. 654) (other citations omitted). Significantly, N.C. Gen.Stat. § 53-166(b) (2003) expressly states that its provisions "apply to any person who seeks to avoid its application by any device, subterfuge or pretense whatsoever." Thus:

The courts of this state regard the substance of a transaction, rather than its outward appearance, as controlling. Specifically when there is an allegation that the usury laws have been violated by a particular act or course of conduct, the courts of North Carolina will not hesitate to look beneath the formality of the activity to determine whether such an incident is, in fact, usurious.

Auto Supply, 303 N.C. at 37, 277 S.E.2d at 366 (citing Ripple v. Mortgage Corp., 193 N.C. 422, 137 S.E. 156 (1927)) (other citations omitted).

Defendants previously offered deferred deposit loans, commonly known as "payday loans", through their "Advance Til Payday" check-cashing stores in North Carolina. To obtain such a loan, the customer would write a check payable to the payday lender after providing proof of employment and a checking account. The lender then gave the customer 85% of the face value of the check in cash, and agreed not to present the check to the bank for two weeks, or until the customer's next paycheck. In return for the delay in presenting the check, the lender would retain 15% of the check's face value. If, at the time he received his next paycheck, a customer still did not have enough money to cover the check, he could renew the loan by making another payment of 15% of the amount of the original loan. The customer continued to make these 15% payments until the check was cashed.

The annual interest rate on payday loans generally exceeds 400%; therefore, absent statutory authorization, such loans are usurious. Payday loans were authorized by former N.C. Gen.Stat. § 53-281, which expired on 31 August 2001. The next day, 1 September 2001, defendant "Advance Til Payday" reopened as defendant "Advance Internet." The key issue raised by plaintiff's summary judgment motion was whether the evidence established, as a matter of law, that defendants offered loans at usurious interest rates after 31 August 2001.

Advance Internet transactions share many substantive features of the deferred deposit loans offered by Advance Till Payday. As with payday loans, the Advance Internet customer (1) shows proof of employment and of a checking account; (2) receives an immediate cash payment; and (3) is obligated to repay both the cash advance and periodic accrued payments. The Advance Internet customer is liable for this debt until he either makes payments of 20% of the original cash advance every two weeks for a year;¹ or repays the cash advance and all accrued periodic payments. In these respects, the new contract is essentially the same as a payday loan, except that the fees are 20% rather than 15%.

The only difference between check-cashing loans offered by Advance Til Payday and the Advance Internet transactions is that Advance Internet customers now execute documents purporting to be for internet service. To obtain an immediate cash advance, an Advance Internet customer must sign a contract stating that he is subscribing to a year of "internet access," and another document stating that the cash payment is not a loan. This contract, in addition to obligating the customer to repay the cash advance and periodic fees, also allows him to use defendants' office computers for a few hours a week, and to make limited use of other office equipment to fax or scan documents.

On the basis of these additional features of the new contracts, defendants contend that they are now "internet service providers" offering...