Klein v. Wolf Run Resort

Annotate this Case

KLEIN_V_WOLF_RUN_RESORT.93-365; 163 Vt 506; 659 A.2d 1153

[Filed 14-Apr-1995]

NOTICE: This opinion is subject to motions for reargument under V.R.A.P. 40
as well as formal revision before publication in the Vermont Reports.
Readers are requested to notify the Reporter of Decisions, Vermont Supreme
Court, 109 State Street, Montpelier, Vermont 05609-0801 of any errors in
order that corrections may be made before this opinion goes to press.

No. 93-365

John A. Klein Supreme Court

On Appeal from
v. Franklin Superior Court

Wolf Run Resort, Inc., et al. September Term, 1994

Merideth Wright, J.

Jesse D. Bugbee of Kissane, Yarnell & Cronin, St. Albans, for plaintiff-appellee

W. Owen Jenkins, Essex Junction, for defendant-appellant

PRESENT: Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.

JOHNSON, J. Defendant Wolf Run Resort, Inc. defaulted on an agreement
with plaintiff lender and appeals from a decision of the Franklin Superior
Court declaring that plaintiff could recover the principal amount of the
loan, despite plaintiff's noncompliance with Vermont's Licensed Lender Law (8
V.S.A. 2201). We affirm.

Plaintiff lent defendant $120,000 for two years, secured by two parcels
of land in Bakersfield and a security interest in certain personal property.
Only interest was due until maturity, but early in 1989 defendant defaulted,
after paying $4,789.04 in interest, as well as a $2,400 commitment fee.
Plaintiff commenced a foreclosure action, and defendant raised as an
affirmative defense plaintiff's failure to obtain a lender's license from the
Vermont Commissioner of Banking and Insurance pursuant to 8 V.S.A.
2201 (FN1) before making the loan,

subjecting plaintiff to the penalty provisions of 8 V.S.A. 2233. At the
time of the loan and the commencement of the suit, 2233 stated as follows:

(a) Any person, partnership, association or corporation and the
several members, officers, directors, agents and employees
thereof, who shall violate or participate in the violation of any of
the provisions of this chapter shall be imprisoned not more than
two years or fined not more than $500.00, or both.

(b) Any contract of loan not invalid for any other reason, in the
making or collection of which any act shall have been done which
constitutes an offense under this section, shall be void and the
lender shall have no right to collect or receive any principal,
interest, or charges whatsoever; provided, however, in the case of
any loan or extension of credit described in 9 V.S.A. 46(1), (2)
or (4) and made for the purpose of financing inventory acquired or
held for resale by a dealer in goods, the making or collection of
which shall involve any violation of the provisions of this chapter,
the lender shall have no right to collect or receive any interest or
charges whatsoever, but shall have a right to collect and receive
principal.

(Emphasis supplied.) Plaintiff conceded that this provision precludes
recovery of any portion of the loan, principal or interest, but had two
responses: first, that he was not "engag[ed] in the business of making
loans," and second, even if he had been, 2233(b) was amended in 1990 to
include the subject loan within the provision allowing recovery of the
principal.

In 1990, the Legislature replaced the phrase "in the case of any loan or
extension of credit described in 9 V.S.A. 46(1), (2) or (4) and made for
the purpose of financing inventory acquired or held for resale by a dealer in
goods" with the phrase "in the case of commercial loans," leaving the balance
of the subsection unaltered. There is no dispute that the amended language,
if applicable, would allow plaintiff recovery of the loan principal.

The court ruled that the outcome was controlled by 1 V.S.A. 214(c),
which states:

If the penalty or punishment for any offense is reduced by the
amendment of an act or statutory provision, the same shall be
imposed in accordance with the act or provision as amended unless

imposed prior to the date of amendment.

The court reasoned that 214(c) was not by its terms limited to criminal
penalties or punishments, and that the "forfeiture imposed by 8 V.S.A.
2233 is a penalty, albeit civil." On cross-motions for summary judgment, the
court entered judgment in plaintiff's favor in the principal amount of the
loan, less interest and other charges already paid. Defendant appeals
arguing that the amended provision does not apply retroactively, leaving the
bar to recovery of principal or interest in place.

The main issue is whether the 1990 amendment to 2233 applies
retroactively. In general, absent specific legislative intent to the
contrary, "a statute affecting legally existing rights should not be
construed to operate retrospectively." Curran v. Marcille, 152 Vt. 247, 250,
565 A.2d 1362, 1364 (1989); 1 V.S.A 214(b). Many jurisdictions, however,
have recognized an exception to this general rule when a usury statute is
amended or repealed. Orden v. Crawshaw Mortgage & Investment Co., 109 Cal. App. 3d 141, 144-146 (Cal. Ct. App. 1980) ("statutes which repeal or modify
usury laws are to be given retrospective effect to determine the scope of
liability with respect to transactions entered into prior to such repeal or
modification"); Paul v. United States Mutual Fin. Corp., 389 N.W.2d 487, 492
(Mich. Ct. App. 1986) (usury is a statutory penalty and "is ineffective if
removed before judgment"); First Fed. Savings & Loan Ass'n v. Guildner, 295 N.W.2d 501, 503 (Minn. 1980) ("usury laws [are] penal in nature, and . . . an
amendment or repeal of such a usury law, removing the penalty under certain
situations, should be presumed retroactive in the absence of a legislative
indication to the contrary"); Vaughan v. Kalyvas, 342 S.E.2d 617, 619 (S.C.
Ct. App. 1986) ("repeal of usury laws, absent a savings clause, operates
retrospectively to cut off the defense of usury"); see also Ewell v. Daggs,
108 U.S. 143, 150-51 (1883) (repeal of usury law operates retrospectively
because statutory right to avoid contract can be taken away by legislature as
long as transaction not yet completed); 6A A.L. Corbin, Corbin on Contracts
1532, at 803 (1962) ("Under most usury statutes, . . . it is held that the
repealing statute validates, expressly or by implication, an

antecedently unenforceable bargain."). These courts consider the forfeiture
provisions of usury statutes a penalty to the lender. See, e.g., Orden, 109 Cal. App. 3d at 146 (remedies are in nature of a penalty); see also Allied
Chemical Corp. v. MacKay, 695 F.2d 854, 857 (5th Cir. 1983) (usury statute is
"highly penal," especially when calling for forfeiture of both principal and
interest). Arguing that a borrower's right to forfeiture is not a vested
interest, these courts have opted to apply amendments to usury statutes
retroactively as long as the dispute has not reached final judgment. See
Krause v. Griffis, 443 N.W.2d 444, 445 (Mich. Ct. App. 1989) ("defense of
usury is not a vested right [and] may be extinguished by subsequent
legislative action").

We agree with the reasoning of these cases. The Vermont Licensed Lender
Law is a special type of usury statute, requiring non-exempted lenders to
obtain a license when lending money at an interest rate above twelve percent.
The penalty for violating this requirement has undergone numerous recent
revisions by the Legislature. Before 1988, 2233, entitled "Penalties,"
provided for both criminal and civil penalties against lenders not complying
with the licensing requirement, including the complete forfeiture of
principal and interest. In 1988, an amendment to this section ameliorated
the penalty provision of the Licensed Lender Law to limit forfeiture to only
interest payments for specific type of loans. 1988, No. 142, 2. In 1990,
the Legislature broadened the application of this ameliorative provision to
include all commercial loans. 1990, No. 244, 8. The amendments
implicitly recognize that the Legislature considered the penalty of complete
forfeiture too extreme.

Vermont law specifically recognizes that when the Legislature reduces a
penalty provision in a statute, the lighter penalty will be imposed for any
action that has not reached final judgment. 1 V.S.A. 214(c). Based on
214 and the sound reasoning of other jurisdictions, we conclude that the 1990
amendment to 2233 was properly applied retroactively by the trial court.

Finally, defendant argues that even if the 1990 amendment to 2233 is
retroactively

applied, the loan at issue remains void and cannot be revived. While we
recognize that the statute makes the contract "void," we think the better
interpretation of the statute is that the Legislature intended making the
contract "voidable." See Black's Law Dictionary 1573 (6th ed. 1990) ("The
word `void' is used in statutes in the sense of utterly void so as to be
incapable of ratification, and also in the sense of voidable and resort must
be had to the rules of construction in many cases to determine in which sense
the Legislature intended to use it."); see also Becker v. Becker, 138 Vt.
372, 380, 416 A.2d 156, 162 (1980) ("void" in fraudulent conveyance statute
is construed to mean voidable only); Irish v. Clayes, 10 Vt. 81, 85 (1838)
("Contracts are frequently called void, which are only voidable. . . . A
usurious contract is called void; but it is only so, when it is avoided by
the party, on whom the usury is practised.") (emphasis in original); see In
re Kelton Motors, Inc., 130 B.R. 170, 180 (Bankr. D. Vt. 1991) (word "void"
in 9 V.S.A. 2281 means "voidable"). The penalty provision states that an
invalid loan "shall be void and the lender shall have no right to collect or
receive any principal, interest, or charges whatsoever." 8 V.S.A.
2233(b). Reading the provision as a whole, we conclude that the penalty
provision of the Vermont Licensed Lender Law grants the borrower the remedy
of voiding the contract. Having granted such a remedy, the Legislature is
also free to remove the remedy. See Krause, 443 N.W.2d at 445 ("defense of
usury is not a vested right [and] may be extinguished by subsequent
legislative action"). Before final judgment in this action, the Legislature
removed the remedy of voiding the contract from the transaction at issue;
therefore, the loan was not void.

Affirmed.

BY THE COURT:

Denise R. Johnson, Associate Justice

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Footnotes

FN1. 8 V.S.A. 2201(a) states:

(a) No person, partnership, association, or corporation other than a
bank, savings and loan association, credit union, pawnbroker, insurance
company or seller of the merchandise or service financed shall engage in the
business of making loans of money, credit, goods or things in action and
charge, contract for or receive on any such loan a rate of interest, finance
charge, discount or consideration therefor greater than twelve percent per
annum without first obtaining a license under this section, section 7002 of
this title, or sections 2352 and 2402 of Title 9 from the commissioner.
(Emphasis supplied.)

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Dissenting

No. 93-365

John A. Klein Supreme Court

On Appeal from
v. Franklin Superior Court

Wolf Run Resort, Inc., et al. September Term, 1994

Merideth Wright, J.

Jesse D. Bugbee of Kissane, Yarnell & Cronin, St. Albans, for plaintiff-appellee

W. Owen Jenkins, Essex Junction, for defendant-appellant

PRESENT: Allen, C.J., Gibson, Dooley, Morse and Johnson, JJ.

DOOLEY, J., dissenting. It is undisputed that on February 1, 1989, the
date that defendant ceased paying on the loan made by plaintiff, defendant
did not owe plaintiff any money. This is true because plaintiff failed to
obtain a license as a lender and charged interest at the usurious rate of
20%. At the time the loan in this case was made, the remedy provision of the
Licensed Lenders law specifically stated that any loans made in violation of
the statute "shall be void and the lender shall have no right to collect or
receive any principal, interest, or charges whatsoever." 8 V.S.A. 2233
(amended 1989) (emphasis added). The language could not be clearer that this
loan was void and uncollectible from the day it was made.

The majority now holds that on July 1, 1990, as a result of legislation
that says nothing about the issue before us, the dead loan miraculously
sprang back to life. Although the statute on which the majority relies can
reduce penalties, I find it inconceivable that the Legislature intended that
it could create new loan obligations, where none existed before, in essence
inflicting a penalty on defendant. I dissent.

When the meaning of a statute is plain on its face, the statute must be
enforced according to its terms. Vermont Dev. Credit Corp. v. Kitchell, 149
Vt. 421, 424, 544 A.2d 1165, 1166 (1988). The meaning of the pre-amended
version of 2233 could not be any clearer: any violation of the Licensed
Lenders statute results in an immediate voiding of the underlying
transaction. By the terms of the unamended statute, the consequence of
failing to obtain a lender's license is imposed at the very moment of the
loan's inception. Accordingly, 1 V.S.A. 214(c) offers this loan
agreement no salvation because it provides that reduced penalties will be
applied retroactively "unless [the initial penalties are] imposed prior to
the date of amendment." 1 V.S.A. 214(c). Here, the "penalty" was imposed
on October 19, 1988, the day the parties entered into the loan agreement --
almost two years before the effective date of the amendment. See Klipping v.
McCauley, 354 P.2d 167, 169 (Colo. 1960) (statutory amendment reducing
penalties "extends its bounty only to such loan transactions as were lawfully
entered into prior to its effective date," and transaction at issue void
under original act). We have not been reluctant to enforce the statute in
just this manner. See Kitchell, 149 Vt. at 427, 544 A.2d at 1168 (voiding a
$175,000 loan executed by nonprofit corporation for failing to procure
license under Licensed Lenders statute). Indeed, a variety of jurisdictions
provide that loans or contracts that directly contravene a licensing
requirement are null, void, and unenforceable. See, e.g., Derico v. Duncan,
410 So. 2d 27, 31 (Ala. 1982); Currier v. Tuck, 287 A.2d 625, 627-28 (N.H.
1972); Gottesfeld v. Kaminski, 524 A.2d 872, 875 (N.J. Super. Ct. App. Div.
1987).

The Court is applying here an extreme example of retroactivity. Imagine
how the Court's application of 214(c) would work in the criminal context.
If the Legislature lowered the maximum penalty for armed robbery, we could
agree that the effect of 214(c) would be to apply the reduced maximum to a
defendant who committed the crime prior to the amendment but was sentenced
after the Legislature's action. The new penalty would apply to a preexisting
crime but not to reduce an existing sentence.

The majority's interpretation of 214(c) would go much further.
Prisoners who have already been sentenced for armed robbery would have their
sentences reduced if they were at or near the old maximum. I suspect that
the Legislature would be amazed that its action would have an effect on
existing sentences, even though it had said nothing about them.

The Court appears to have two answers to the fact that it has recreated
a debt obligation that no longer exists: (1) "void" means "voidable;" and (2)
extreme retroactivity for usury penalty reductions is the norm. The former
answer is at variance with the statutory wording. A void contract is one that
does not exist at law; it is null from the beginning. Black's Law Dictionary
1574 (6th ed. 1990). As the majority shows, this Court has occasionally
decided that in the context involved, the term "void" actually means
"voidable." Thus, in describing the common law of illegal contracts in Irish
v. Clayes, 10 Vt. 81, 85 (1838), the Court noted that contracts are often
described as "void" when they are merely voidable. In Becker v. Becker, 138
Vt. 372, 380, 416 A.2d 156, 162 (1980), we construed the term "void" in the
Fraudulent Conveyance Act as "voidable" because the fraudulent transaction is
valid between the parties who enter it. The sole effect of the act is to
make it invalid when challenged by a creditor who was defrauded by the
transfer. See Jones v. Williams, 94 Vt. 175, 185, 109 A. 803, 807 (1920);
Tudor v. Tudor, 80 Vt. 220, 223, 67 A. 539, 540 (1907).

The decisions on violations of licensed lending laws have been directly
contrary to the Court's holding here. The rule and rationale was explained
by the Supreme Judicial Court of Massachusetts:

The purpose of the Small Loan Act was to prohibit the
unlicensed business of making small loans and to prevent an
excessive rate of interest on such loans. The statute was passed as
a protection to the borrower; it was intended to make the statute
effective and to prevent its evasion by indorsing notes given for
such loans to third parties. It would afford little protection to the
borrower if the notes given contrary to the statute would be valid
in the hands of a holder in due course. In our opinion the word
"void" was used in its technical sense; the notes were void at their
inception and of no validity in the hands of [the holder].

Cuneo v. Bornstein, 168 N.E. 810, 811 (Mass. 1929).(FN1) Other Courts have
found the loan to be void and have gone beyond the remedies that would be
allowed if the loan were only voidable. For example, consistent with the
view that the loan was void ab initio, the decisions allow the debtor to
recover any payments made on the loan. See Credit Finance Service, Inc. v.
Able, 127 A.2d 396, 400 (D.C. Ct. App. 1956)(Maryland law); Hardman v. New
Fin. Co., 259 S.W.2d 431, 432 (Ky. Ct. App. 1953); Robb v. Central Credit
Corp., 100 N.W.2d 57, 64 (Neb. 1959); Smashed Ice v. Lee, 200 N.W.2d 236, 238
(S.D. 1972).

There is no reason in law and policy to hold that the meaning of "void"
in 2233 is other than that which is plain. The ruling of the majority
recreates a loan that was a nullity, as if it never existed, at the time of
the court's action.

The Court's holding that 2233 makes the loan voidable, not void,
creates additional difficulties with the majority decision. It is clear that
the purpose of small loan laws, like Vermont's Licensed Lender law, was
rooted in strong public policy concerns, namely, to protect the public from
loan-sharking.(FN2) See generally National Consumer Law Center, Usury and
Consumer Credit Regulation 2.2.3.1, at 21 (1987); see also 8 V.S.A. 1
(purpose of statute is "to protect the public against unfair and
unconscionable lending . . . policies"). The original statutes created a
licensed class of small lenders who, in exchange for state regulation of
their business, were permitted to charge interest rates higher than most
usury ceilings, but were nevertheless vastly lower than rates charged by loan
sharks. Usury and Consumer Credit Regulation, supra, at 22. The statutes
employed a variety of safeguards that protected debtors

from "the greed and the rapacity of unscrupulous persons who might exploit
[the debtor's] necessities and misfortunes to his loss and their profit."
Valley Acceptance Corp. v. Glasby, 337 S.E.2d 291, 295 (Va. 1985). This
case involves a lender who charged usurious rates of interest, exactly the
concern that gives rise to the debtor protections in the statute.

Given this history and legislative purpose, the consequences provided
for violation of the act cannot be characterized solely, or even primarily,
as punitive measures; they are also remedial. See Usury and Consumer Credit
Regulation, supra, 9.2.1., at 215; see also Glasby, 337 S.E.2d at 295
(small loans act is remedial in nature and must be liberally construed to
advance remedy for which it was promulgated). Indeed, we recognized the
remedial nature of forfeitures in Chittenden Trust Co. v. Andre Noel Sports,
159 Vt. 387, 621 A.2d 215 (1992). In that case, a secured party asked this
court to abandon its earlier holding that failure to abide by the procedural
requirements for disposition of the collateral on the debtor's default
prevents the secured party from recovering a deficiency judgment. We noted
that some courts have rejected this "absolute bar" rule because they view it
as "punitive in nature, involv[ing] a forfeiture, and creat[ing] a penalty."
Id. at 394, 621 A.2d at 219. We rejected this reasoning, however, and
retained the absolute-bar rule because it "does not punish, but rather
precludes the secured party from invoking the operation of the remedial
statutory provisions." Id. at 395, 621 A.2d at 220 (emphasis added).

The majority's conclusion that the loan is voidable, not void, may be an
answer to defendant's vested rights claim, but it makes the creditor's remedy
indistinguishable from that in Andre Noel Sports. The creditor is left in
the position at the commencement of the litigation, unable to collect more,
but able to keep whatever proceeds were received before the litigation. This
result is remedial, and 1 V.S.A. 214(c), which applies only to penalties
and punishments, cannot act retroactively to take away defendant's remedy.
Instead, retroactivity is governed by 1 V.S.A. 214(b)(4) which prohibits
retroactive application that would "[a]ffect any suit, remedy or proceeding
to enforce . . . any right . . . or liability . . . accrued under the amended

or repealed provision . . . ." (Emphasis added.) Cf. Stewart v. Darrow, 141
Vt. 248, 252, 448 A.2d 788, 790 (1982) (interest in freedom from previously
barred claim cannot be eliminated by retroactive application of statute of
limitations).

The Court's second answer is that reductions in usury penalties are
applied retroactively. This proposition may be true as a general rule, but
none of the majority's cases are on point to the circumstances here. In none
of the cases did the applicable statute make the loan void ab initio because
of the violation of the usury law. See Minn. Stat. Ann. 334.011 subd. 2
(if loan usurious, interest on debt "forfeited"); Miss. Code Ann.
75-17-1(9) cited in Allied Chemical, 695 F.2d 854, 856 (1983) (same);
California Constitution art. XV 1(2) (no person shall recover more than
interest authorized by law) Mich. Comp. Laws Ann. 438.32 (lender who
violates provisions of statute "barred" from recovery of interest). Although
these statutes provide specific "penalties" for violations, retroactive
application of amendments or revocations is possible because the language
employed in these statutes, unlike 8 V.S.A. 2233, did not make the
violations nullities from the beginning. See Black's Law Dictionary 650 (6th
ed. 1990) (defining "forfeiture" as a divestiture of specific property
without compensation; defining verb "to bar" as "impediment, obstacle or
preventative barrier").

Since 214(c) cannot apply in this case, I would follow the
well-settled principle of statutory construction that absent the most clear
and unequivocal language, a statute affecting legally existing rights should
not be construed to operate retroactively. Curran v. Marcille, 152 Vt. 247,
250, 565 A.2d 1362, 1364 (1989). We have held on several occasions that
unless a statute's language is so clear as to permit no other construction,
the presumption is that the Legislature intended the statute to act
prospectively only. See, e.g., Northwood AMC Corp. v. American Motors Corp.,
139 Vt. 145, 148, 423 A.2d 846, 849 (1980); see also Hockley County Seed &
Delinting Co. v. Southwestern Investment Co., 476 S.W.2d 38, 40 (Tex. Ct.
App. 1972) (in absence of express statutory language, amendment of usury
statute decreasing penalties applied prospectively). See also Davis v.
General Motors Acceptance Corp., 127 N.W.2d 907, 911 (Neb. 1964) (statute amending forfeiture provisions
specifically provided for retroactive application).

Here, the amended version of 2233 is silent as to whether the
amendment is to have retroactive application. We must presume, therefore,
that the Legislature intended the amendment to operate prospectively.
Northwood, 139 Vt. at 149, 423 A.2d at 849. Moreover, the language of
2233 infers a prospective application by using words like "shall have" and
the "making of which." See id. (no indication of intent to apply statute
retroactively where amendment used prospective language like "shall mean" and
"shall be compensated"). Accordingly, no intent to apply 2233
retroactively can be discerned.

The effect of the majority's decision is to create a new loan obligation
and to require defendant to pay it. Nothing in the relevant statutes
suggests that the Legislature intended this extreme result.

I dissent.

_________________________________
John A. Dooley, Associate Justice

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Footnotes

FN1. As in this case, Cuneo involved the failure to obtain a license. Cuneo
was reaffirmed and distinguished in Begelfer v. Najarian, 409 N.E.2d 167,
174-75 (Mass. 1980) where the Court considered the usury provisions of the
Small Loans Act which stated that the loan "may be declared void." Because
the provision authorized the court to find the loan was void, but did not
command it, the provision made the loan voidable in the discretion of the
court.

FN2. Prior to April 30, 1980, 2201 of the Licensed Lenders Act applied
only to loans of $1500 or less, and the entire chapter was entitled "Small
Loans."

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