Ford Motor Credit Co. LLC v BlackAnnotate this Case
Decided on April 14, 2010
Civil Court of the City of New York, Richmond County
Ford Motor Credit Company LLC, Petitioner(s), Plaintiff(s),
Tabatha Black, Respondent(s), Defendant(s).
Philip S. Straniere, J.
Plaintiff, Ford Motor Credit Company, LLC, commenced this action against the defendant, Tabatha Black, alleging that the defendant owed the balance of the purchase price of an automobile purchased from Island Ford and financed by the plaintiff. During the pendency of this action, the court permitted the defendant to commence a third party action against Island Ford Co., Inc. After initially appearing and answering, Island Ford defaulted at the time of trial. As a result defendant/third-party plaintiff Black obtained a judgment against Island Ford in the amount of $10,400.00, the amount defendant allegedly owed plaintiff in this action. Unfortunately for defendant, Island Ford has ceased operations and filed for bankruptcy. The Ford dealership on Staten Island has been transferred to another automobile dealer at a different location.
Defendant had entered into a written "so ordered" stipulation of settlement with plaintiff on June 30, 2009 in which she acknowledged owing the plaintiff $10,400.00 in full satisfaction of the original balance due which plaintiff claimed exceeded $13,000.00 at that time. Defendant agreed to pay $125.00 a month until the $10,400.00 was paid in full. Currently before the court is defendant's application to either vacate the prior stipulation and dismiss the action on the grounds that the vehicle sold by Island Ford was defective or in the alternative to reduce the amount due and owing and the monthly payment on that basis. After some negotiation, the parties entered into a new stipulation reducing the amount due and owing to $7,500.00 and permitting the defendant to make payments of $100.00 for seventy-five months. As part of the negotiation defendant submitted to the court copies of the documents she signed at the time of the original purchase. In reviewing those papers as part of the allocution of the defendant, the court noted several issues which called into question the viability of plaintiff's cause of action. [*2]
The contract, on a form bearing the heading "New York Simple Interest Vehicle Retail Instalment Contract," was dated March 24, 2006 and listed Island Ford as the original creditor and provided for the immediate assignment of the loan to Ford Motor Credit. It also set forth at paragraph P, "Applicable Law," that, "You agree that this contract will be governed by the laws of the state of New York." The section of the agreement entitled "Federal Truth-In-Lending Disclosures" lists the annual percentage rate as "24%."
The New York General Obligations Law §5-501 provides:
Rate of interest; usury forbidden. 1. The rate of interest, as computed pursuant to this title, upon the loan or forbearance of any money, goods or things in action, except as provided in subdivisions five and six of this section or as otherwise provided by law, shall be six per centum per annum unless a different rate is prescribed in section fourteen-a of the banking law.
Banking Law §14-a provides:
Rate of interest; banking board to adopt regulations.
1. The maximum rate of interest provided for in section 5-501 of the general
obligations law shall be sixteen per centum per
General Obligations Law §5-511 provides:
Usurious contracts void. 1. All bonds, bills, notes,...all other contracts...whereupon or whereby there shall be reserved or taken or secured, or agreed or be reserved or taken, any greater sum, or greater value, for the loan of forbearance of any money, goods or other things in action, than is prescribed in section 5-501, shall be void....
General Obligations Law §5-513 provides:
Recovery of excess.
Every person who, for any such loan or forbearance, shall pay or deliver any
greater sum or value that is allowed to be received pursuant to section 5-501,...may recover in an
action against the person who shall have taken or received the same,...the amount of money so
paid or value delivered above the rate aforesaid.
Applying the above cited statutes to the facts of the case, the court questioned whether or not this transaction violated the New York State usury laws from its inception. The court further speculated if that is the case, then pursuant to those statutes, the original loan is void and the stipulation of settlement would have to be vacated and the action dismissed. Pending a determination of this issue the defendants were directed not to make any more payments to the plaintiff but the defendant's judgment against Island Ford is to remain in full force and effect. [*3]
In January 2010 the court held a hearing on the issue of whether or not the loan is usurious and if the defendant may recover all payments made to plaintiff to date or, whether the applicable law is, that because the defendant has made payments, the defendant is liable on the debt but the interest rate is to be reduced to the legal rate of interest. Counsel for plaintiff presented a brief in support of its position that the transaction is valid. Defendant appeared without counsel and asserted that the interest rate was excessive.
Plaintiff argues that the court has misunderstood the underlying nature of the transaction in that it is not a loan to purchase the vehicle but is "sale of goods on credit." Plaintiff alleges that this is a merely a deferred payment plan pursuant to a motor vehicle retail installment contract so it is not a "forbearance" or "loan" subject to the usury law. Plaintiff asserts that the transaction is governed by New York State's Motor Vehicle Retail Instalment Sales Act [FN1] (Personal Property Law Article 9) and is not a loan, but the "finance charges" are in reality "time-price equalization" costs. The theory behind this category of financing arrangement being that because the consumer has not paid the entire purchase price in one lump sum at the time of sale, the seller is entitled to be reimbursed for having lost the use of all of the money to which it was entitled at the moment of sale. Historically, there was sound reasoning behind that categorization of these types of transactions. The seller was not getting paid in full while the purchaser was timely receiving the goods. Because the seller lost the use of his or her money the transaction was not labeled a "loan" which might then be subject to usury.
Personal Property Law §301 sets forth certain definitions in regard to motor vehicle retail instalment sales contracts. These sections provide: 8. "Credit service charge" means that part of the time sale price by which it exceeds the aggregate cash sale price and the amount, if any, included in a retail instalment sale for insurance or official fees.9. "Financing agency" means a person engaged, in whole or in part, in the business of purchasing retail installment contracts from one or more retail sellers. The term includes but is not limited to a bank, trust company, savings bank, savings and loan association, private banker or investment company, if so engaged. The term also [*4]includes a retail seller engaged, in whole or in part, in the business of holding retail instalment contracts acquired from a retail buyer.
However, often in these transactions, the seller would be in need of money so he or she would "sell the paper" to a third party so as to recoup the cash immediately some times for the cash sale price while on other occasions at an amount less than the value the seller would have received had the purchaser made payments over the entire term of the plan. The debt buyer would then "step into the shoes" of the seller, collect the payments due as per the contract of sale and enforce all the seller's rights against the purchaser in the event there was a default.
In this case, it means that because the defendant was unable to tender the purchase price $19,734.54 on the date of sale, she agreed to pay an additional $14,442.06 as a "time-price equalization" charge over a period of sixty-months so that this $19,734.54 "used" 2002 automobile cost her $34,176.60. The transaction is subject to Personal Property Law §303(1) which provides: "A retail seller may contract for in a retail instalment contract and charge, receive and collect the credit service charge authorized by this article at the rate or rates agreed to by the retail seller and the buyer." This current statute was effective July 27, 1984. Yet, Personal Property Law §303, which is labeled "Credit service charge limitation," also at one time contained the following language which set maximum rates to be charged: [Eff. June 30, 1993....] A retail seller may contract for in a retail instalment contract and charge, receive and collect the credit service charge authorized by this article at not exceeding the following rates: (a)...Class 3. Any used motor vehicle not in Class 2-not more than thirteen dollars per one hundred dollars per annum.
Thereafter the statute was amended again to remove the language fixing the interest rate that could be charged and returning to the language in the original statute which fixed the interest rate as it would be agreed to by the parties. It must be questioned as to why the section would be labeled "credit service charge limitation" if in fact there was no ceiling on what rate could be charged. Also why did the legislature want to limit the interest rate if it really intended to let the rate be set at whatever rate the parties agreed to. Perhaps that is because the Personal Property Law is subject to the Banking Law as pointed out below.
The words "at the rate or rates agreed to" seems to have become the "Pirelli's Magical Elixir"[FN2] of the consumer credit industry and used as a way to avoid state usury laws by asserting the consumer "consented" to the rate so courts should not inquiry into their validity. As this court has pointed out on more than one occasion, carrying these words to their illogical conclusion, the person offering the financing could charge per diem interest of one hundred percent and because it is "agreed to," a court would presumably [*5]hold the agreement as being valid and enforceable. Clearly, this cannot be the law. At some point a court must be able to step in and find, even though there exists a written agreement, the terms are so unconscionable that they are beyond being just unfair, they are unenforceable. The only interpretation which makes sense is that "at the rate or rates agreed to" means provided those rates are not in violation of law (See McKinney's Statutes, §§143, 145, 146, & 148).
Assuming that the "time-price equalization" standard is applicable and a justifiable economic theory which allows the seller to not be put at a disadvantage because the purchaser cannot pay the entire purchase price in one lump sum, there still is an element of fairness which must be applied to the transaction. At a time when savings accounts and certificates of deposit are generally paying less than 2% interest (often less than 1%) and mortgage loans are generating less than an 8% return for those lenders, a 24% return on a consumer loan is far outside the scope of reasonableness. Is there anyone who would not be ecstatic with a 24% return on an investment? Other than in consumer debt situations the court is at a loss as to where an investor could generate such a return on an investment. Ironically, Island Ford, was unable to continue to operate as a viable business and filed for bankruptcy in spite of charging financing of 24%.
Also the idea that because there is a written "contract," the parties actually knowingly "agreed" to the terms leads to the application of the words of Porgy, that "It Ain't Necessarily So."[FN3] The "New York Simple Interest Vehicle Retail Instalment Contract" is a preprinted form with additional, primarily numerical, terms included by the seller. There is no indication that the buyer had any input into the terms and conditions or made additions or alterations to the contract which would indicate that there was anything approaching the type of negotiations expected to be included so as to qualify as "an arm's length" agreement. Other than perhaps some sort of negotiations as to the purchase price, what input does a consumer have in negotiating such an agreement? [*6]
Analysis of the transaction leads to the
conclusion that rather than being an agreement subject to a "time-price equalization" standard
which forms the basis of the Personal Property Law, it is in fact a "sham" financial arrangement
designed to avoid New York's usury laws. If the defendant had gone to a bank to borrow the
money for the purchase of the car, that transaction would be subject to the usury statute set forth
above because the source of the funds would be a third party. This conclusion is supported by
statute. Banking Law §108 provides:
(N)o bank or trust company shall take, receive, reserve
or charge on any loan or discount made,...interest,...at a rate greater than the rate prescribed by
the banking board pursuant to section fourteen-a of this chapter, or, if no rate has been
prescribed, six per centum per annum,...
Presumably plaintiff will argue that this statute is not applicable to it because it is not a bank or trust company but is in fact the financial services arm of Ford Motor and that the original financing was provided by the dealer a separate entity who was entitled to apply Personal Property Law §303.
This motor vehicle sale is supposed to be exempt from application of usury statute because rather than receiving the entire sale price at the time of the closing of the transaction, the seller is permitting the buyer to spread out the amount due by making payment over a period of time. In fact, on the very day of the sale to defendant, the "financing" was assigned to the plaintiff herein, Ford Motor Credit, a different entity from Island Ford the business that sold the vehicle. Such a simultaneous transaction leads to the conclusion that Ford Motor Credit was an integral part of the entire process and had "approved" the defendant's credit in advance so that the sale could take place. There does not appear to have been any real "time-price equalization" in this transaction. It was from day-one structured as a method for Ford Motor Credit to loan money at a 24% rate, far in excess of New York's usury law. There is no evidence that Island Ford even tried to place the financing with any other lender or why they could not keep the transaction in house if it was truly an installment sale subject to "time-price equalization" and not a subterfuge for Ford Motor Credit to loan money in excess of the usury rate.
Analysis of the document reveals that it is a form produced by "Ford Credit" containing the Ford Motor logo and includes a link to a website for "fordcredit.com." A visit to that website indicates Ford Motor Credit is a wholly owned subsidiary of Ford Motor.
Further in support of the conclusion that this transaction is subject to the usury law is that the document is labeled "New York Simple Interest Retail Instalment Contract." If the "finance charge" is a service charge imposed to achieve "time-price equalization," then why is it called "interest" in the document? The answer is because it is "interest," and as such it is subject to the usury laws. This supports the conclusion that when the statute [*7]permits the parties to "agree" on a rate the legislature intended that "agreement" to be at the figure that was within the state usury law so as not to make it "illegal" and unenforceable.
There is also no indication that the defendant was a credit risk at the time the vehicle was purchased which would warrant charging an interest rate far in excess of the rate she would have incurred had she sought a personal loan from an institutional lender. Defendant asserts that she stopped making payments because of mechanical difficulties with the vehicle and was unable to obtain redress against Island Ford because it ceased doing business and filed for bankruptcy. This transaction is subject to 16CFR §433.1 and it makes the plaintiff herein subject to any defenses she may have had against Island Ford. Unfortunately, because Island Ford has ceased doing business and the car was either surrendered or repossessed, it is impossible to determine the nature and the extent of the mechanical problems with the vehicle, if any.
The retail instalment sale contract by its terms gave the seller and any successor in interest a security interest in the vehicle. The transaction was subject to Uniform Commercial Code Article 9. UCC §9-610 permits the sale of the collateral while UCC §9-611 to §9-615 sets forth certain procedures which must be followed in order for the creditor to dispose of the collateral. The plaintiff has the burden of proving that the sale of the collateral was made in a "commercially reasonable manner" (Dime Savings Bank of New York, FSB v Harpal, 4 Misc 3d 134(A),). UCC §9-616 requires that a written explanation of the calculation of either the surplus or deficiency be provided the debtor. Although plaintiff has submitted a statement calculating the amount due from the defendant after the sale of the vehicle, there is no evidence that there was complete compliance with the UCC provisions prior to the sale. Such calculations are also required by Personal Property Law §315.
Because the transaction is usurious under New York State law, GOL §5-511 permits the court to void the entire transaction. On the other hand, Personal Property Law §307 (2) provides: "A wilful violation of section three hundred two or three hundred three by any person shall bar his recovery of any credit service charge, delinquency or collection charge or refinancing charge on the retail instalment contract involved." This appears to allow the lender to recover the principal loaned with the forfeiture of the credit service charge as being the only penalty. Personal Property Law §307(3) gives the lender an opportunity to correct any violation of the statute. It provides: Notwithstanding the provisions of this section any failure to comply with any provision of this article may be corrected within ten business days after the holder is notified thereof in writing by the buyer, or in the absence of such notice, the seller or holder may voluntarily correct any such failure to comply and, if so corrected, neither the seller nor the holder shall be subject to any penalty under subdivision [*8]two of this section.
In view of the fact that plaintiff was apparently unaware of any problems with this transaction until the issue was raised by the court, the plaintiff should be given the opportunity to restructure the transaction so as to make it comply with the law.
In an effort to resolve this matter without further litigation, the court would suggest that the transaction be recalculated as a loan at a 16% interest rate as set forth in the Banking Law. From the total purchase price, plaintiff is to deduct the downpayment of $1,165.00, all of the payments made by the defendant, and the net proceeds received at the auction sale, $7,228.66. On that balance, the plaintiff is to offer settlement at $100.00 a month until the balance is paid off. If in fact, this totals more than the $7,500.00 at $100.00 previously agreed to in the stipulation, then the terms of the stipulation will be enforceable. The first payment in either case would be on June 1, 2010. Or in the alternative, if this was truly an "arm's length" transaction, perhaps plaintiff would be willing to take an assignment of the defendant's judgment against Island Ford in full settlement of its claim.
The above being said, there is another problem with this transaction. The plaintiff is Ford
Motor Credit Company LLC, an entity which either did not come into existence, or be
authorized to do business in New York until May 1, 2007 according to New York State Division
of Corporations records. The contract for sale of the motor vehicle is dated March 24, 2006 over
a year before the plaintiff became a legal entity in New York. The prior authorized entity in New
York was known as Ford Motor Credit Company, which was declared "inactive" by the Division
of Corporations when a "termination" statement was filed on May 1, 2007. Plaintiff has not
established that it is either the assignee of this installment contract or that it acquired this asset
by some other means. The complaint fails to plead the assignment of the debt. This failure of
proof requires the court to dismiss this action without prejudice to renew if proof of such
evidence is available.
1. The annual percentage rate of 24% being charged is usurious under New York law.
2. The suit is dismissed without prejudice to renew based on the fact that there is no assignment of the debt from Ford Motor Credit Company to Ford Motor Credit Company LLC.
The foregoing constitutes the decision and order of the court.
Dated: April 14, 2010
Staten Island, NYPHILIP S. STRANIEREJudge, Civil Court
Taking a cue from Lerner and Lowe's "My Fair Lady" where Henry Higgins remarks in "Why Can't the English" "See them down in Soho Square dropping "H" s everywhere," The court notes that the legislature in the statute uses the word "instalment" with one "l" and not the preferred dictionary spelling of "installment" with two "l"'s. Kudos to the New York State Legislature, just think of all the money saved by this bold action. Perhaps they should consider dropping all of the silent letters in the English language, for instance the "p" in psychiatrist and pneumonia, and really make an impact.
From the song of the same name, in Stephen Sondheim's "Sweeney Todd."
Footnote 3: From "Porgy and Bess" music and lyrics by George Gershwin, DuBoss Heyward and Ira Gershwin.
(Plaintiff)Rubin & Rothmam
1787 Veterans Highway, Suite 32
Islandia, New York 11749
115 Campbell Avenue
Staten Island, NY 10310