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LEXSTAT 1-6 DEBTOR-CREDITOR LAW § 6.08
Debtor-Creditor Law
Copyright 2009, Matthew Bender & Company, Inc., a member of the LexisNexis Group.
PART I Consumer Credit
CHAPTER 6 The Cost of Credit
1-6 Debtor-Creditor Law § 6.08
§ 6.08 The Trial: The Right to a Jury Trial; Elements of a Prima Facie Case; Creditor Defenses and
Borrowers' Remedies
[1] Right to Jury Trial
The right to a trial by jury in a state court is not addressed by the Seventh Amendment to the United States
Constitution and is, therefore, a matter of state law, at least in civil cases.n1
The right to a jury in usury cases is seldom litigated because in the average usury case the presence of the
right is obvious. Usury is usually raised as a debtor defense or counterclaim in the creditor's action on a
debt.n2 Such a creditor action is a suit seeking the recovery of money damages for breach of contract, which
is the epitome of an action recognized at common law.n3 The debtor can thus request a jury by right as the
defendant in the creditor's suit.
Obtaining a jury is similarly seldom a problem in affirmative usury actions. The one circumstance in which a
debtor may have trouble obtaining a jury to hear a usury claim exists when the creditor is attempting to foreclose on property given as security for the debt and the debtor is raising usury as a defense to the foreclosure.n4 Even when there is a right to a jury trial, some issues may be questions of law. For example, a
Washington court has held that it is for the jury to decide what the borrower told the lender about the purpose
of a loan, but whether these facts make it a business loan is a question of law for the court.n5
[2] Elements of a Prima Facie Case
[a] Loan or Forbearance
The first element of almost all usury violations is the existence of a "loan" or "forbearance" of money. Although the definition of these terms may vary from statute to statute, a loan may generally be thought of as a
temporary transfer of money or its equivalent from a creditor to a debtor or to a third party on the debtor's
behalf.n6 A forbearance, on the other hand, is an agreement between an existing debtor and creditor under
which the debtor gives consideration (i.e., pays interest) in return for the creditor's agreement to refrain from
demanding immediate payment of a pre-existing debt which has come due.n7
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Most usury statutes treat loans and forbearances interchangeably.n8 The fact that most usury statutes cover
forbearances means that many transactions which are not normally considered extensions of credit may become subject to usury limitations.
Absent specific statutory guidance, the chief uncertainty about the definition of a loan is whether this term
includes credit extended in connection with the installment sale of goods or services. This is called the time
price differential. Some courts have held that it does not.n9 Other courts have deemed credit sales to be
within the general coverage of the usury laws but subject to an exception.
In jurisdictions where the time price doctrine remains in force, a buyer's attorney should closely examine any
credit sale transaction to be certain that the exception actually applies. However, this exception no longer
applies to consumer credit transactions in most jurisdictions. In Arkansas, where the usury ceiling is found in
the state constitution, the courts have the role of determining whether a transaction is a loan; the legislature
does not have the authority to define a type of transaction as a non-loan.n10 A payment plan for delinquent
taxes and water and sewer charges is a forbearance.n11
[b] Obligation to Repay Principal
The second element of a traditional usury case is the debtor's absolute obligation to repay the principal
amount of the money transferred to him or her.
In the average consumer credit case, proving the existence of an absolute obligation to repay principal is not
a problem as the obligation is stated on the face of the note or credit contract and can be established by the
introduction of these documents into evidence. In the occasional cases where creditors attempt to evade laws
regulating credit and credit charges by constructing a transaction in a way in which this element appears to
be missing, courts typically will look behind the facade to determine the true nature of the agreement.
Some makers of refund anticipation loans like to characterize the transaction as the sale of a chose in action
rather than a loan. These businesses claim that they are relying for payment upon the right to receive the refund, and the borrower/seller is only liable if the IRS refuses to pay the refund in the requested amount. The
Colorado Supreme Court has rejected this argument, holding that the taxpayer's obligation to repay the lender
if the tax refund did not come through as anticipated was sufficient to make the transaction a loan under the
UCCC.n12 While the court stressed the differences between the UCCC and other states' definitions of "loan,"
its reasoning should be persuasive in other states, as the court debunked the claim that the transaction was
merely the sale of a chose in action.n13
Terming the obligation to repay a refund anticipation loan contingent is unjustified in any event. There is no
uncertainty in the amount of the payment. Neither repayment itself nor the amount of the repayment is contingent upon a future event. Similarly, other courts have followed the maxim that substance prevails over
form and have seen through alleged contingencies to recognize the underlying absolute obligation of the
borrower to repay.n14 Some courts have held that purchase of a stake in litigation does not involve usury
where there is no repayment obligation if the suit is unsuccessful.n15 A loan will not be considered contingent unless the lender, by the terms of the loan, is subjected to some greater hazard than that the borrower
will fail to repay the loan or that the security will depreciate in value.n16
[c] Interest Overcharge
The heart of every usury case is an overcharge of interest. Logically, this element of proof can be divided
into three parts:
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a) The creditor exacted or attempted to exact payments from the debtor.
b) The payments were "interest" under the relevant usury statute.
c) The total of payments exceeded the statutory limit.n17
The precise wording of usury statutes varies,n18 but generally creditors may not "contract for," "collect,"
"exact," "receive," or "charge" payments in excess of those specifically permitted by statute.
Usurious payments may not always be revealed by the contract itself. For example, the lender might require
the borrower to pay fees not mentioned by the contract.n19
Once the payments charged or received by a creditor have been identified, the next question is which of those
payments constitute "interest" or an excess charge under the relevant statute. Most obviously, the creditor
may simply calculate the interest erroneously.n20
But beyond the obvious charge for the use of money, the definition of "interest" sometimes is a complicated
issue which varies from statute to statute. Nevertheless, most statutes classify all payments made by a borrower as either principal, interest, or non-interest fees in the following manner.
First, non-interest fees are charges, such as insurance premiums or late fees, which are most often expressly
excluded from interest by statute.n21 However, such charges are often subject to separate regulation by consumer credit regulatory statutes,n22 and may be among the types of charges for which statutory liability may
attach if limits are exceeded.n23 Next, "principal" generally includes loan proceeds given to the borrower or
paid on the borrower's behalf and often may include any non-interest fees which the lender pays on the borrower's behalf.n24 Finally, "interest" is any payment not attributable to the repayment of principal or to
non-interest fees.n25
Once the amount of interest charged or collected in connection with a contract has been determined, the last
step to proving an interest overcharge is to show that the interest assessed by the creditor is excessive. Since
most usury ceilings are expressed as rates, the easiest way to demonstrate an overcharge is normally to calculate the highest permissible interest charge under the controlling statutory rate formula, given the principal
amount properly determinedn26 and the length of time the loan or credit has been outstandingn27 or was
scheduled to be outstanding.n28
Keep in mind that it is necessary to make the interest overcharge determination by establishing the maximum
that the particular creditor in question can charge for that particular kind of transaction,n29 and that no
preemption questions are involved.n30
[d] Intent
Some statutes, particularly those regulating charges in consumer credit transactions, may have no intent requirement.n31 Apart from those statutes, typically the final element of a usury claim is the usurious intent of
the lender.
In almost all states,n32 if usury appears on the face of a credit contract, the requisite usurious intent is merely
the intent of the lender to charge the interest rate which, in fact, was contracted for. This intent may be presumed from the contract.n33
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A lender's only defense to usury on the face of the contract is to rebut the presumption of usurious intent by
demonstrating that a bona fide error occurred in the preparation of the contract and that the lender, therefore,
did not intend to charge the stated rate. The defense of mistake or bona fide error is a narrow one which must
be proven by the lender.n34
In situations where a contract is not usurious on its face, the courts apply a broad spectrum of approaches to
determine the existence of usurious intent. Three overall approaches seem to exist.
First, in at least one state, the courts draw no distinction between facially usurious contracts and other forms
of usury, and look only at the lender's objective intent to make the loan.n35 A second, and most common
approach to cases where usury is not facially apparent is to deny the borrower the presumption of intent otherwise granted, and to regard the existence of intent as a question of fact.n36
The third approach to usury which is not apparent on the face of the contract, taken by only a small minority
of courts, is to require proof that the lender subjectively intended to evade the usury laws by structuring the
contract as it did.n37
[3] Burden of Proof
Courts generally presume the validity of contracts, and a party which claims that a contract is usurious
therefore carries the burden of proving the usury, whether the claim is being asserted as an independent cause
of action or as an affirmative defense.n38 The major exception to this rule is that once a facially usurious
interest rate has been demonstrated by the debtor, the burden may shift to the creditor to rebut the allegation
of usury.n39
The precise standard of proof by which usury must be demonstrated varies significantly from jurisdiction to
jurisdiction.n40
[4] Contract Construction
Construction of a credit contract only becomes an issue if the contract is ambiguous on some relevant point.
A contract which unambiguously calls for usurious payments cannot be cured by a forgiving "interpretation."n41 Indeed even if the contract was usurious due to mutual mistake, a creditor may not be able to salvage it by seeking reformation.n42
There are essentially two ways for debtors to combat the tendency of courts to construe contracts in favor of
creditors, both of which depend on a recognition of the fact that creditors write consumer credit contracts.
First, because of this fact, a consumer's attorney should not rely on the contract alone to prove a usury case if
there is any conceivable ambiguity in the contract terms. Instead, remembering that a court should consider
all the facts and circumstances around a transaction when considering usury, a debtor's attorney should attempt to build a record showing the intent of the parties at the time the transaction was consummated and, if
a form contract is at issue, the manner in which the creditor has applied the disputed contract provision in
other transactions.
The second method of dealing with unfavorable rules of contract construction is to attack them head-on, at
least insofar as they apply to consumer credit contracts. It is widely recognized that contracts should be construed against their drafter,n43 and consumer credit contracts are not only written by creditors, they are almost uniformly contracts of adhesion which are offered to the consumer on a take-it-or-leave-it basis.n44
Recognizing the one-sidedness of this situation, some courts have held that a presumption of legality does
not apply to consumer credit contracts.n45 Other courts, observing that ambiguous contract language can
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mislead consumers about their rights and dissuade them from asserting their rights, have suggested that consumer credit contracts should be construed as the average consumer would interpret them.n46
[5] Creditor Defenses
[a] Defenses of Assignees and Holders in Due Course
The holder in due course doctrine permits those who purchase "negotiable instruments"n47 to protect themselves from claims of any other parties, and to free themselves from many, but not all, defenses to payment
on the instrument.n48
Holder doctrine, however, is not absolute, and not all assignees can successfully assert it in response to a
consumer's claims and defenses. Most importantly for consumer advocates, the holder rule has been severely
restricted for many common consumer transactions, as the uneven bargaining power and unequal sophistication in these transactions meant the operation of the rule unfairly inflicted great hardships.n49 Thus, many
state consumer credit statutes limit its impact, as does the FTC Preservation of Claims and Defenses Rule in
the context of consumer retail sales. State legislatures and case law may also protect consumers.
The meaning of "holder" takes on a new dimension as electronic transactions increase. The UETAn50 envisions electronic promissory notes, termed "transferrable records," the rights to which could be transferred
just as paper notes are assigned. In addition, Congress included provisions for electronic promissory notes in
the Electronic Signatures in Global and National Commerce Act "E-Sign"),n51 although only for promissory
notes secured by real property. Revised Article 9 of the Uniform Commercial Code, which all states have
adopted, also allows electronic "chattel paper," a term that includes the typical motor vehicle installment
sales contract or lease.n52 The development of transferrable electronic promissory notes faces a number of
technological hurdles, however.n53 There must be a way to identify the original, so that electronic copies
cannot be passed as originals. Second, the technology must allow the holder of the electronic document to
record an assignment of the document, but must prevent non-holders from doing so. Third, there must be a
way to transfer control over the electronic document to an assignee. The drafters' comments to UETA indicate that this technology had not been developed at the time UETA was drafted.n54 Nonetheless, Congress
included UETA's provisions for electronic promissory notes in the Electronic Signatures in Global and National Commerce Act,n55 although only for promissory notes secured by real property. The advent of electronic promissory notes may introduce new uncertainty for debtors and courts about who actually is the
holder of a note,n56 but otherwise the holder in due course analysis will be unaffected.n57
Most importantly, in 1975 the FTC issued a Trade Regulation Rule, pursuant to the Federal Trade Commission Act, which declared that it was an "unfair or deceptive act or practice" under the Act for a seller to enter
a consumer credit contract which failed to contain the following language:
"NOTICE
"Any holder of this consumer credit contract is subject to all claims and defenses which the
debtor could assert against the seller of goods or services obtained pursuant hereto or with the
proceeds hereof. Recovery hereunder by the debtor shall not exceed amounts paid by the debtor
hereunder."n58
The Rule requires sellers to include this language in all instruments created in consumer credit sales financed
directly by a seller of goods or services. The Rule also requires sellers to arrange for the language to be included in instruments embodying a debt that arises from a "purchase money loan" with a third party creditor.
The Rule defines "purchase money loan" as any loan used to purchase goods or services if the seller either
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refers the consumer to the lender or is affiliated with the lender by "common control, contract, or business
arrangement."n59
The effect of the FTC Rule is quite dramatic. The Rule eliminates contract clauses which waived a consumer's right to assert defenses against an assignee, and which had previously been permitted by the UCC.n60
The insertion of the FTC notice provision in an "instrument," such as a credit contract or a note, has a second
effect which is both more subtle and more far-reaching; it removes the instrument from the definition of a
"negotiable instrument" under the UCC because negotiable instruments must contain an unconditional promise to pay, and the FTC notice imposes conditions on payment.n61 Consequently, no holder of an instrument
containing the FTC notice can become a holder in due course, regardless of the manner in which it takes the
instrument, because only a holder of a negotiable instrument can be a holder in due course.n62
Assignees and holders in due course may nonetheless continue to give consumers problems in some credit
transactions. First, some contracts, particularly purchase money loans which purport to be independent
third-party loans, do not include the FTC notice. Holders of such instruments may potentially gain holder in
due course status even while the seller is liable for unfair or deceptive practices under the FTC Act or state
UDAP statutes.n63 The revised version of UCC Article 9, now in effect in all states, addresses this problem
by reading the FTC Holder Notice into any consumer contract that should have included it.n64 This provision does not apply to negotiable instruments such as promissory notes, but the National Conference of
Commissioners on Uniform State Laws has approved revisions to Article 3 that imply the Holder Notice into
any promissory note whenever that notice should have been inserted into the note.n65 This provision, if
adopted by the states, will apply to direct loans where the seller refers the consumer to the lender and the
consumer then signs a note with the lender. Even without these UCC amendments, a number of courts have
found grounds to read the Holder Notice into contracts and notes that should have included it.n66 Second,
the FTC rule only applies to sales-related consumer contracts, and not to traditional straight loans.n67 The
UCC rules of assignment and negotiability therefore remain relevant in a significant number of consumer
credit transactions.n68
If a note or other writing evincing the obligation does not qualify as a negotiable instrument, or if its holder
for some reason does not qualify as a holder in due course, the holder takes the obligation subject to all
claims and defenses to which the original payee was subject.n69 Consequently, if the transaction is not subject to one of the consumer exceptions, advocates facing a claim of holder in due course must examine the
transaction carefully to determine whether all UCC prerequisites are met.
One of the preconditions is that the assignee be a "holder" of a "negotiable instrument." That is, it must have
in its possession an "instrument ... drawn, issued or indorsed to him or to his order or to bearer or in
blank."n70
The requirements for negotiability of the instrument are set out in UCC section 3-104(1): (a) it must be
"signed by the maker or drawer; (b) contain an unconditional promise or order to pay a sum certain in money
and no other promise ... (c) be payable on demand or at a definite time; and (d) be payable to order or to
bearer." Checks and promissory notes are typical examples of a negotiable instrument. Negotiability must be
determinable from the face of the documents.n71
Assuming these prerequisites are met, the assignee still must establish that it qualifies for holder in due
course status, i.e., a person who acquires a negotiable instrument for value, in good faith, and without notice
that it is overdue, that it has been dishonored, that any defense exists to payment on the instrument, or that
any other party has a claim to it.n72 Often negotiable instruments are transferred more than once. For example, the original payee may negotiate the instrument to an entity that qualifies as a holder in due course, and
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then the holder may transfer that instrument to a second entity. Under the UCC, the second entity acquires
the rights of a holder in due course even if it would not qualify as a holder in due course on its own.n73 For
example, if the second entity knew of a defense to the instrument before it acquired it, it would still acquire
the rights of a holder in due course.n74 There is an important exception, however, if the second entity engaged in fraud or illegality affecting the instrument.n75 "A person who is party to fraud or illegality affecting
the instrument is not permitted to wash the instrument clean by passing it into the hands of a holder in due
course and then repurchasing it."n76 Achieving holder-in-due-course status protects the holder against many,
but not all, of the obligor's defenses. Defenses which can be asserted against a holder in due course include
infancy, the lack of the maker's capacity to execute the instrument, duress, the illegality of the transaction,
misrepresentation of the essential character or terms of the contract, "fraud that induced the obligor to sign
the instrument with neither knowledge nor reasonable opportunity to learn of its character or its essential
terms," and bankruptcy. Usury can be a defense to a holder in due course in some cases.
If the payee transfers the instrument to a holder who does not qualify as a holder in due course, that does not
shield the next transferee unless that transferee independently qualifies as a holder in due course. In other
words, that transferee becomes a holder in due course only if it takes the instrument in good faith, for value,
and without notice, and the form of the instrument and the manner of its transfer meet the requirements of
Article 3. There are also certain defenses which can be raised, even against holders in due course, including
usury in some cases and fraud in the factum.n77
Common law theories of participation, ratification, and acceptance of benefits with knowledge of the fraud
can also make a lender liable for the acts of the originator.n78 To the extent that these theories require proof
of intent and knowledge, it is sufficient to show willful blindness, i.e. that the defendant had limited information but failed to inquire further because of fear of what the inquiry would show.n79
Discovery may reveal irregularities in the loan file that should have put the holder on notice of the potential
defenses.n79.1 In addition, the history of dealings between the loan originator and the current holder may be
sufficient to establish notice. For example, the holder may have forced the loan originator to repurchase previous loans or may have received complaints from other consumers.
Conversely, there is another situation in which the UCC limits the liability even of third party holders who
may not qualify for holder in due course status. The assignee of a credit sale contract or lease which does not
qualify as a "negotiable instrument" may nevertheless acquire the same rights as a holder in due course if the
contract contains a provision waiving the right of the buyer or lessee to assert defenses against assignees, and
if the assignee takes the contract for value, in good faith, and without notice of any claims or defenses.n80
However, this waiver provision applies only to defenses which could not be asserted against a holder in due
course, and it is expressly subject to any special rules regarding waivers that may apply to consumer transactions under other provisions of state law.
If a debtor does sign a note which qualifies as a negotiable instrument under the UCC, or a credit contract
which contains a waiver of assignee liability and state law allows such waivers, there are two ways in which
claims relating to credit overcharges may nevertheless be asserted against an assignee under UCC law. First,
if an assignee takes an instrument in bad faith or with notice of defenses to the instrument, then that assignee
cannot either qualify as a holder in due course under UCC section 3-302 or otherwise obtain the rights of a
holder in due course under section 9-206, and is subject to any claim or defense.
Another way usury or fraud can be asserted against an assignee is under UCC section 3-305, which defines
the rights of a holder in due course and which specifies that even a holder in due course is subject to the defense of the "illegality of the transaction, as renders the obligation of the [debtor] a nullity ... ."n81
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Although there is some questionable authority to the contrary,n82 and although a few states have special
rules,n83 it seems clear that a usury violation or a fraud which renders an obligation void under state law is
an "illegality" which renders the obligation a "nullity" under the UCC and may thus be asserted as a defense
against a holder in due course of the obligation.n84
[b] Standing to Assert Usury
Noting that usury statutes are designed to protect needy borrowers rather than to penalize lenders, courts
have widely viewed usury as a claim that is personal to the borrower.n85 It is fairly clear that any maker or
obligor on a note has standing to assert usury. Thus, a co-signer can plead usury.n86 Furthermore, a person
whose interest in the litigation derives from the borrower may be able to assert usury on the borrower's behalf, but the extent to which such derivative rights exist can vary significantly with the plaintiff and the
state.n87
Most cases where creditors dispute a plaintiff's standing to assert usury involve guarantors or sureties to a
debt, and while a few opinions to the contrary exist,n88 the large majority of courts hold that guarantors and
sureties do not have standing to assert usury.n89 However, some statutes absolutely bar the lender from recovering any interest if the loan is usurious. Even if a guarantor does not have standing to assert an affirmative claim for usury remedies, this language may allow the guarantor to prevent the lender from recovering
the usurious interest.n89.1
A last party whose standing to assert usury may be questioned is the assignee of a credit buyer--i.e., the person who purchases used goods and who, in so doing, assumes the original buyer's rights and obligations under the original credit contract. Several courts have held that usury claims may not be assigned.n90 Other
courts, however, have developed somewhat more even-handed rules.n91
[c] Estoppel and Waiver
Estoppel is a loosely defined equitable doctrine under which a party may be barred from asserting legal or
factual claims in court for any one of numerous reasons, including fraud, misrepresentation, previous judicial
rulings (i.e. "collateral estoppel"), or waiver. In what is probably the most common application of the doctrine in usury cases, a party may be estopped from denying the truth of facts that it previously asserted if the
party seeking the estoppel reasonably relied, to its detriment, on the earlier assertion.n92 However, a review
of the relevant decisions demonstrates that the doctrine is inapplicable to most consumer usury cases.n93
A borrower who has already made payments on a usurious loan may have to contend with an ancient, sporadically-recognized defense, the voluntary payment doctrine. The doctrine developed in tax cases, and was
created to prevent those who had paid illegally imposed taxes from recouping their payments from the tax
collector.n94 The basis for the doctrine lies in the fiscal concerns of a government that may need to be certain of the amount of funds available for disbursement. The doctrine protects it from having to refund collected taxes that it may have already spent in a previous year.n95 To justify the doctrine, courts have employed the fiction that every person is supposed to know and understand the law and the limits it places on
taxing authorities, and therefore a person who voluntarily makes a demanded but unauthorized payment may
not later use ignorance of the law to justify a refund.n96
Though lenders have asserted the voluntary payment defense in usury cases, the majority of jurisdictions addressing the issue have refused to apply it in those circumstances.n97 Even where the voluntary payment
doctrine is accepted in other contexts, courts have recognized that strong policy reasons argue against applying it in usury cases. First of all, allowing the defendant to retain the usurious interest would thoroughly undermine the purpose of usury laws, which seek to protect borrowers from overreaching lenders.n98 By allowing borrowers to recover the illegal interest they have paid, the state encourages the enforcement of the
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usury laws and the development of the policies under girding them. Second, the voluntary payment rule fails
to recognize the imbalance of power between most lenders and their borrowers. In rejecting the doctrine, one
Georgia court noted that the usurer is an "oppressor" and the debtor a "victim," thus payment of the usury
was by definition involuntary.n99 In a few states, statutes have abrogated the common law doctrine.n100 In
addition, the doctrine does not apply where there is a statutory right to recover.n101 Some courts may also
distinguish between criminal usury, with its stiffer penalties, and civil usury.n102
Nonetheless, a number of jurisdictions have applied the voluntary payment doctrine to bar a consumer from
recovering usurious interest paid to a lender.n103 Even where accepted, however, the defense has nuances
that may help an overcharged borrower defeat its use by a lender. For example, while a payment made under
a mistake of law is considered voluntary, one made under a mistake of fact is considered involuntary.n104
Under this reasoning, a borrower may recover an overpayment of interest made due to a mistaken calculation, but may not recover a payment of usury.n105 Other courts have distinguished cases where the loan has
been only partially paid from those where the loan has been completely paid, allowing a borrower to recover
usurious interest in the former, but not the latter.n106 However, payments considered involuntary, such as a
payment made only after judgment was rendered against a borrower, may be recovered.n107 As with the tax
version, compulsion precludes application of the doctrine.n108
[d] Res Judicata
Closely related to the defense of equitable estoppel is the doctrine of res judicata, which prohibits the relitigation of issues previously decided by the courts.
Direct attack upon a judgment often occurs in the case of default judgments where the borrower never appeared and, therefore, asserted no defenses at all. Borrowers who have acquiescedn109 in the entry of default
judgments on their debt, only to realize later that they might have asserted a usury defense, occasionally attempt to have the default judgments set aside. The success of such efforts varies significantly from state to
state depending on the grounds recognized as sufficient for setting aside judgments.n110 In addition, a direct
attack upon creditor conduct in charging interest or fees in excess of that allowed by contract or state law can
be successful. Consumers may seek injunctive relief to stop such behavior, as well as money damages, without disturbing the judgments themselves.n111
The second situation in which res judicata affects usury claims arises from the ability of a borrower in most
states to assert usury either as a defense to the lender's action or as an independent cause of action for statutory penalties.
As a general rule, a defendant who could raise a claim as a counterclaim, but who fails to do so, is precluded
from raising that claim subsequently in two situations: (1) The counterclaim is required to be imposed by a
compulsory counterclaim statute or rule of court; or (2) the relationship between the counterclaim and the
plaintiff's claim is such that the successful prosecution of the second action would nullify the initial judgment
or would impair rights established in the initial action.n112 Compulsory counterclaim statutes, to the extent
that they exist, vary significantly from state to state and are not thoroughly treated here.
In the absence of a controlling compulsory counterclaim statute, most decisions hold that a judgment for a
creditor in a foreclosure action or an action on a note necessarily affirms the validity of a debt and would be
undermined if subsequent usury claims were permitted. Consequently, usury is generally viewed as a "common law compulsory counterclaim" which is barred by res judicata if not asserted when a creditor's action on
a debt is litigated.n113
However, note that a judgment operates as res judicata only on issues actually or necessarily decided by the
court,n114 and when a debtor and creditor have executed a series of notes, several courts have held that a
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judgment on one note need not preclude the assertion of usury against the remaining notes,n115 even if they
are only extensions of the note on which judgment had been given.n116
[e] Statutes of Limitations
Usury, like other causes of action, is subject to statutes of limitations. The length of time allotted varies from
state to state, but typically ranges from one to three years after the usury action accrues.n117
[f] De Minimis Violations
The de minimis defense to usury is the argument that penalties should not be assessed for trivial usury violations. This defense is rejected in some states on the ground that its recognition by the courts in the face of
mandatory statutory penalties would constitute judicial legislation beyond the courts' authority.n118 Nevertheless, the de minimis defense is recognized in other states.n119
[g] Industry Custom and Usage
A less commonly raised usury defense is the argument that long-standing and widely accepted financial industry practices should not be deemed usurious or otherwise illegal. However, courts have universally held
that industry practice is no defense to usury.n120
[h] Usury Saving Clauses
Many credit contracts contain boilerplate "saving clauses" which, in one form or another, recite that the parties to the contract intend to comply with applicable usury laws, and that the contract should not be interpreted as providing for usurious interest rates. Saving clauses frequently specify that any charge above the
usury ceiling should be deemed a mistake, and that the overcharge should either be refunded to the borrower
or be credited against the outstanding principal balance.
Because of the potential which saving clauses hold for undermining usury laws, courts have given them only
limited effect.n121 Creditors cannot rebut usurious intent or otherwise avoid usury statutes simply by rebating excessive charges that the debtor has already paid.n122 The one situation in which saving clauses may
carry some weight is in ambiguous contracts which can plausibly be interpreted as either usurious or
non-usurious.
[i] Correction of Error as a Defense
Allowing a creditor a period of time after notice to avoid liability by correcting the error is a common feature
of usury statutes.n123
Texas provides a lender a statutory defense if it corrects the violation, including paying interest on the overcharge at the contract rate, within sixty days after discovering it and gives written notice of the violation to
the obligor before the obligor gives written notice of the violation or files an action alleging the violation.n124 Sending a demand letter asking only for the non-usurious portion of the obligation, without explicitly releasing the usurious portion, is probably insufficient.n125 In addition, the creditor's notice to the obligor must acknowledge the specific usury violation.n126 Another Texas provision allows a lender another 60
days to correct the error after receiving notice of the violation.n127 Responding to the obligor's notice by
arguing that there was no usury violation is insufficient.n128 The Minnesota MVRISA was amended in 1996
to allow dealers a 120-day period to cure violations of the requirement to provide the buyer with a signed
copy of the contract. Sending the buyer a letter stating that the buyer can request a copy is insufficient.n129
One bankruptcy court declined to dismiss a usury claim on the grounds that the borrower failed to send a
statutorily required pre-suit notice where the parties had already been through pre-trial mediation that served
the same purpose.n129.1
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[j] The Enforceability of Arbitration Agreements
[i] General
An increasingly common occurrence is for a loan agreement to include a binding arbitration agreement,
which the lender hopes will protect it from class actions, claims for punitive damages, intrusive discovery
requests, and juries. This section considers several issues of special relevance to a consumer challenging a
requirement that a usury or related claim go to arbitration.n130
The general rule is that the Federal Arbitration Act ("FAA")n131 supports the enforceability of an agreement
to arbitrate disputes. State law limiting the enforceability of such agreements is preempted,n132 with certain
exceptions.n133 But the FAA does not favor arbitration of disputes where there is no agreement to arbitrate.
The consumer need not arbitrate a matter if the arbitration agreement does not apply to the lender or to the
promissory note, if the arbitration clause is found in a void agreement, if the arbitration clause is unconscionable, if the arbitration clause was never agreed to, or if the lender has waived that clause.
[ii] Usurious, Illegal and Unlicensed Loan Agreements
If the contract containing the arbitration clause is found to be void, the arbitration clause is void as well.n134
A contract can be void either because a state usury or other statute specifies that violation of the statute
makes the contract void, or because state law generally holds that illegal contracts are void.
If a contract is illegal or criminal in nature, courts will not enforce an agreement to arbitrate disputes under
that contract.n135
A usurious contract thus can be void on two different bases. One is that the state usury statute specifically so
states. If a usurious contract is void, the agreement and the arbitration clause therein cannot be enforced.n136
The other is that it is illegal and/or criminal and is thus void. Courts have decided that the issue of whether a
contract is usurious, and the arbitration agreement thus void, is to be determined by the court, not the arbitrator.n137
The Sixth Circuit appears to distinguish between void ab initio and contracts later declared void. While a
consumer cannot be bound by a contract that never really existed, that is void ab initio, a consumer can be
bound by a contract that he intended to enter, but later discovered that certain terms of the contact may violate state usury law, thus voiding the contract.n138 More is required to void an arbitration clause than an allegation of statutory violation. There must be a failure to assent to the documents or a failure of signatory
power.n139
While the Sixth Circuit view may not be accepted by most courts, most courts will distinguish between void
and voidable. If a contract is void by operation of law, the arbitration agreement is void. But if the law allows
the consumer to seek to rescind a contract on certain grounds, then the contract is voidable, but not void, and
the arbitrator must make that determination.n140 Nevertheless, a number of recent decisions have even sent
an arbitrator cases where the consumer argued that the usury violation made the contract void ab initio.n141
In addition, states often require merchants or lenders to become licensed, and find that operation of that
business without a license makes any resulting contracts void.n142 If a contract is void for this reason, the
arbitration clause is also void.n143 The determination as to whether a lender or other merchant's contracts
are void for want of a license is to be determined by the court, not an arbitrator.n144
[iii] Cancellation: Spot Delivery and Rescission
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A common situation in consumer sales where an agreement is void involves a "yo-yo" or "spot delivery"
sale, where a car is sold conditioned on the dealer being able to obtain financing for the purchase. If the deal
falls through and the dealer cancels the retail installment sales agreement, then no part of the agreement remains effective, including the binding arbitration agreement contained therein. The consumer can bring a
claim against the dealer who has backed out of the deal, and the consumer is not bound by the arbitration
clause.n145
If a consumer contract can be cancelled under a three-day cooling-off period provision, then cancellation of
the contract cancels the arbitration provision. Cancellation does not involve legal action or a dispute under
the contract. The consumer has the absolute right to send a notice, and the contract is thus automatically
cancelled. If state law finds a contract in violation of the cooling-off period provision is void, then violation
of the provision also voids the arbitration agreement.n146
Similarly, Truth in Lending provides a right to rescind certain credit agreements.n147 The consumer sends a
notice to the creditor, and the transaction is thus cancelled. If the transaction is cancelled, then the arbitration
agreement is void. Any litigation as to the consumer's right to rescind or the creditor's failure to follow steps
after rescission is not governed by the arbitration agreement because the transaction including the agreement
has already been cancelled. A number of courts rule otherwise, that the arbitrator and not the court must consider whether a transaction has been rescinded under Truth in Lending.n148 But these courts confuse common law claims for rescission, where the court is asked to rescind a transaction, with statutory entitlements
under Truth in Lending and state cooling-off statutes where the transaction is never fully consummated by
operation of the consumer's letter, and the action before the court involves a contract that was never effective. For example, several of the courts that rule otherwisen149 rely on a court of appeals decision that involves a common law rescission claim.n150
[A] Does Agreement Apply to Lender, Co-Signer, and to Promissory Note?
"Arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which
he has not agreed so to submit."n151 If the parties did not agree to arbitrate certain claims, then the consumer
cannot be forced to arbitrate those claims, even if it would be more efficient to do so.
Consumers are not bound by arbitration agreements they did not sign, even if their spouse or other related
party signed the agreement.n152 Nothing in the FAA authorizes a court to compel arbitration of parties not
covered by the agreement.n153 "It goes without saying that a contract cannot bind a nonparty."n154
Nevertheless, courts may find an arbitration provision enforceable when the plaintiffs are third party beneficiaries of consumers who did in fact sign the arbitration agreement.n155 To find a third party beneficiary
status, at a minimum, the consumer's claim must seek the benefit of the agreement that contains the arbitration clause.n156 Thus, where a consumer that has not signed the agreement brings a tort claim that does not
rely on the agreement, no third party beneficiary status is created, and the consumer is not bound by the arbitration agreement.n157
Likewise, consumers should be able to avoid arbitrating a dispute with a lender, broker, insurer or other entity where that entity is not a party to the arbitration clause or is not listed in the arbitration clause as a party to
the agreement.n158 Arbitration is a matter of contract and a consumer is entitled to know, by looking at the
terms of the arbitration agreement, what potential parties are covered by the agreement.
Nevertheless, there are situations where a court will find that consumers are bound to arbitrate claims against
certain individuals or entities who were not explicitly listed in the original arbitration agreement. Courts
sometimes find that a party not mentioned in the arbitration agreement can still enforce the agreement based
on equitable estoppel.n159 Equitable estoppel may be found to apply only where the consumer sues a party
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not enumerated in the arbitration clause, and the consumer is relying on the terms of the agreement containing the arbitration clause in asserting claims against that party.n160 Even then, finding equitable estoppel is
in the court's discretion.n161
In general, assigneesn162 and individual employees of the corporate signatoryn163 may be able to enforce
an arbitration agreement. On the other hand, a credit insurer,n164 forced-placed insurern165 or service contract companyn166 will have difficulty piggy-backing on the dealer's arbitration clause.
Issues of coverage may arise where an arbitration clause is contained in only one, or some, but not all, of a
series of documents. For example, motor vehicle sales finance statutes and retail installment sales acts often
require that the installment sale be evidenced by a writing that contains all the agreements of the parties with
reference to the subject matter of the sale.n167 If a car dealer places the arbitration agreement in the sales
order or other preliminary document, but not in the installment sales agreement, then the arbitration agreement is not part of the final transaction, and is not binding on the consumer.n168
This is even the case where the arbitration clause in the sales order explicitly states it applies to the installment sales agreement. State installment sales acts typically either explicitly or implicitly require that the parties execute a single, comprehensive installment agreement, without side agreements or riders.n169
[B] Unconscionability
Unconscionability is one of the most important challenges to an arbitration agreement. There are literally
over a hundred cases each year discussing whether an arbitration clause is unconscionable, and these cases
are collected in NCLC's Consumer Arbitration Agreements § 4.3 (4th ed. 2004 and Supp.). This subsection
lays out the broad parameters of an unconscionability challenge, without specific case citations.
While there are exceptions, in general, state courts are more open to an unconscionability challenge than
federal courts. Unconscionability is a matter of state law, and courts should look at that state's general standards as to unconscionability. They should then look at the facts of the particular case before them to see if
those facts lead to an unconscionability finding. This is more important than whether a court in another state
found an arbitration agreement unconscionable or not based on the different facts of that case.
Nevertheless, it appears quite often that courts will look for evidence of both procedural and substantive unconscionability. It is thus important to introduce evidence of both types of unconscionability. For example,
procedural unconscionability could be shown by the fact that other similar lenders require arbitration (showing lack of choice), the lender's unwillingness to negotiate this clause, the small print and confusing language
of the arbitration clause, and other factors that show this requirement was not negotiated among equals, in
good faith.
A number of factors might lead to a finding of substantive unconscionability:
That the consumer's action must be arbitrated, while actions the lender might initiate need
not be arbitrated;
The arbitration clause limiting the consumer's causes of action or remedies, such as limits
on multiple, consequential, or punitive damages or attorney fees;
The arbitration clause prohibiting class arbitration;
The arbitration clause shortening the statute of limitations;
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The arbitration clause prohibiting public dissemination of information about the dispute;
The arbitration process requiring unaffordable payments from the consumer to pay the arbitrator or for other fees; and
Bias in the arbitration service provider.
Although any one of these might be enough for a court to find substantive unconscionability, the consumer
should allege all aspects of the clause that make it unconscionable. The court can either throw out the whole
arbitration requirement or reform it to delete the offending provisions. The more provisions that are found
unconscionable, the more likely the court will throw out the whole arbitration agreement.
[C] Special Rules for Insurance Transactions
While the FAA preempts state law that limits the enforceability of arbitration agreements, there is an important exception for insurance transactions. The federal McCarran-Ferguson Act prohibits federal regulation
of insurance practices to the extent that they would invalidate, impair or supersede state law enacted for the
purpose of regulating the business of insurance, unless the federal law explicitly relates to the business of
insurance.n170 The FAA does not explicitly relate to the business of insurance.n171 Consequently, if a state
statute regulating insurance limits the enforceability of an arbitration provision, the FAA conflicts with the
state statute, and therefore state law, not the FAA, determines whether the arbitration provision is enforceable.n172
In order for this exception to apply, first the state law must be enacted for the purpose of regulating insurance. A number of state statutes limit the enforceability of arbitration, but do not mention insurance specifically. Instead, these are laws of general application that apply to insurance and most other forms of commerce. For example, Alabama law states that agreements to submit controversies to arbitration cannot be enforced, but does not mention insurance.n173 The Alabama courts find that the statute is not one regulating
the business of insurance, so as to supersede the FAA under McCarran-Ferguson.n174 On the other hand, a
statute need not be enacted solely for the purpose of regulating insurance. For example, a number of states
have enacted the Uniform Arbitration Act, but have explicitly stated that the provision concerning the enforceability of arbitration agreements does not apply to insurance or certain lines of insurance.n175 Such an
exemption is a state enactment for the purpose of regulating insurance.n176
It is not enough, however, that a state enact statutes regulating the business of insurance. These statutes must
also restrict the enforceability of arbitration agreements. If they do not, there is no conflict with the FAA, and
the FAA continues to apply.n177 State insurance law does not preempt the field, but only supersedes federal
law that is inconsistent with it.n178 A number of states clearly restrict the enforceability of arbitration
agreements concerning certain lines of insurance. For example, a number of states have amended their enactment of the Uniform Arbitration Act to specify that arbitration agreements are enforceable except as to
insurance claims.n179
[iv] Bill Stuffers and Unilateral Change in Terms
In quite a few cases, the fine print that contains an arbitration clause is not sent to consumers until well after
a contract is consummated. This must be distinguished from the situation where the product is delivered to
the consumer, contingent on the consumer accepting the terms sent with the product, one of which is the arbitration agreement.
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An arbitration clause is not enforceable where it is unilaterally presented to the consumer after the agreement
has been reached. An arbitration clause is a material term that cannot be unilaterally added by one party after
two parties have agreed upon terms for a binding contract.n180
In the last few years, a great many credit card issuers have attempted to create a binding arbitration agreement by inserting a notice to that effect in a monthly billing statement, stating either that this is a change of
terms, as authorized in the master agreement, or that the fact that the consumer continues to use the credit
card is evidence the consumer agrees to the change in terms. Some of these arbitration clauses, by their very
terms, only apply to consumers who do use the credit card after that date.
The more common question is whether a consumer who does not really pay attention to all the material and
fine print stuffed in with the billing statement, and who continues to use the card is bound by an arbitration
clause created through a bill stuffer. Some courts have enforced arbitration clauses that were sent out to consumers as bill stuffers,n181 but the current trend appears to be otherwise.n182
To evade the recent holdings that bill-stuffers may not be effective to add an arbitration clause, some credit
card issuers have re-written their change of terms provisions to purportedly authorize the lender to add any
new term to the contract as well as change any existing terms. There is a serious question, however, as to
whether a bank can enforce a contract against a consumer that essentially says "we can change our agreement
or add terms to it in the future without any limitation whatsoever and you agree at the outset of those changes
without knowing what they will be."n183 The credit card industry has also pushed for protective state legislation to legalize bill stuffers arbitration agreements.n184
There are other issues to explore when a creditor attempts to add an arbitration clause by bill stuffer. For
example, did the company follow its own procedure in changing the terms? If a credit card agreement specifies a procedure for the card issuer to change terms, it must follow that procedure for the change to be effective. In at least one case, the court found that insufficient evidence was submitted to show that the contract
had been properly amended.n185
The company must reasonably inform the consumer of the change in terms. If a jurisdiction embraces a
standard along the lines of the voluntary, knowing and intelligent requirement, consumers who did not notice
or know about an arbitration clause may be able to argue powerfully that they did not agree to arbitrate their
claims. At least one court refused to enforce the change where the company could not establish that the notice was actually mailed.n186
Even if the bill stuffer was actually received, very few consumers may ever detect the notice of the arbitration clause (particularly if is buried among a number of advertisements, or if they are written in impenetrable
legalese). The preeminent example of this is Ting v. AT&T, where the effect of AT&T's arbitration agreement was enjoined, where the consumers conducted extensive discovery, hired experts, and presented a
compelling case that AT&T's bill stuffer was intended by AT&T not to be read and was not in fact read or
understood by the overwhelming percentage of customers.n187
[v] Lender's Collection Action as Waiver
A lender's right to compel arbitration may be waived, where the lender has taken actions that are inconsistent
with the right to arbitrate and where these actions have caused prejudice to the consumer.n188 A creditor
who sues a consumer on a contract may waive its right to compel arbitration of the consumer's claims.n189
[vi] Non-Mutual Remedies as Unconscionable
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Lenders often insert non-mutual arbitration clauses: the consumer must arbitrate claims, but the lender can
resort to judicial or non-judicial remedies. For example, the arbitration provision may require the consumer's
disputes to go to binding arbitration, but reserve the right for the creditor to engage in self-help repossession
or foreclosure without first submitting the dispute to binding arbitration. Other provisions allow the creditor
to file a judicial collection action even though consumers must arbitrate their disputes.
A number of cases find unconscionable arbitration agreements that contain such one-sided clauses, coupled
with the typical procedural aspects of a consumer negotiation.n190 A number of courts, on the other hand,
particularly in Alabama, have found this not to be enough to make an arbitration clause unconscionable.n191
In response to case law finding lack of mutuality to be unconscionable, creditors may draft their arbitration
provisions to give the appearance of binding both sides to arbitrate. The practical effect of the clause though
is not to bind the creditor.
For example an arbitration clause may state that any multi-party claims, such as class actions, are to be sent
to arbitration. No creditor collection actions are ever brought as a class, but consumer claims often are.
Courts are willing to look beneath the surface of an arbitration agreement to determine if in fact the merchant
as a practical matter will arbitrate its disputes, or whether the arbitration provision allows the merchant to
avoid the impact of the requirement.n192
[vii] Other Challenges to Agreement's Enforceabilityn193
Other challenges to the enforceability of a consumer arbitration agreement include:
That the transaction is not in interstate commerce and state law restricts arbitration agreements;
That the agreement specifies it will be governed by a state's laws, and that state's laws restrict arbitration agreements;
That the agreement to arbitrate was not knowingly, willingly, and intelligently given, or the
agreement to arbitrate is ambiguous or equivocal;
That the agreement is not signed;
That the arbitration clause is procedurally unconscionable or that substantive terms are unconscionable, such as limitations on remedies, bias by the arbitrator or arbitration mechanism,
excessive fees and costs, inconvenient arbitration venue, loser pay rules;
Fraud in the factum in the creation of the whole contract or fraud in the inducement as to the
arbitration clause;
Under defenses under state contract law or state statutory law applying to any contract; or
Where the arbitration agreement conflicts with a federal statute or prevents the effective
vindication of federal statutory rights.
[viii] Class Arbitration
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Consumers invariably are better off bringing individual claims in court instead of before an arbitrator--particularly since the dealer has selected the arbitration service provider. But the same may not be true of
a classwide arbitration. Corporations appear to fear class arbitration more than class actions, and consumers
may have more success getting a case certified before an arbitrator than a judge.
The U.S. Supreme Court has held that, where the availability of class arbitration is ambiguous, it is for the
arbitrator to decide whether the arbitration can go forward on a classwide basis.n193.1 Unless a clause unambiguously prohibits class arbitration, the consumer can bring the arbitration on a classwide basis, and it is
up to the arbitrator whether to allow it to proceed on that basis. Arbitrators are increasingly allowing cases to
move forward on that basis, and defendants find themselves in the uncomfortable position of forcing consumers into a procedure that the defendants want to avoid at any cost.
As a result, corporations are amending their arbitration agreements to ban class arbitration. The fact that the
current version of an arbitration agreement prohibits class arbitration does not mean that an earlier version
did; thus class arbitration may still be possible on behalf of those who signed the earlier version of the
agreement.
Moreover, where the arbitration agreement explicitly bans classwide arbitration, the consumer can seek to
throw out the whole arbitration clause as unconscionable. A large number of courts in recent years have
struck down such bans as unconscionable, but an almost equal number have upheld them.n193.2 It will be
important in any unconscionability challenge to demonstrate how individual arbitration is not practical. A
number of courts have found this to be the case, in the context of credit cards or wireless charges where the
amount at stake for each class member is small.n193.3 It is imperative to show that this is still the case in
credit contexts where individual recoveries are larger. Where a court finds the ban on class arbitration to be
unconscionable, it can either strike the ban (thus allowing the consumer to seek classwide arbitration) or
throw out the whole arbitration clause (allowing the consumer to seek a class action in court).
[ix] Individual Arbitration Seeking Punitive Damages
While not as potent an approach as class arbitration, an individual arbitration seeking punitive damages poses
real risks for the defendant. Unlike a court action, there is very limited judicial review of a large punitive
damages award.n193.4 A private arbitration does not involve state action, so that a defendant will have difficulty pursuing a due process challenge to a large punitive damages award.n193.5 While consumer attorneys
find most arbitrators to have a pro-corporation bias, and are unlikely to award punitive damages, the defendant is rolling the dice, because any large award will likely stand--while the defendant has several avenues of
judicial relief to respond to a large punitive damages award made by a jury.
Unless the arbitration clause or arbitration service provider rules prohibit recovery of punitive damages, the
consumer should be able to seek them in arbitration. The U.S. Supreme Court has ruled that the arbitration
agreement controls whether punitive damages are available, and that silence or ambiguity will be interpreted
in favor of allowing such damages.n193.6 Consequently, check the language of the arbitration clause and
also examine the rules of any arbitration mechanism referred to in the arbitration clause. Currently, the three
major arbitration mechanisms (the American Arbitration Association (AAA), the National Arbitration Forum
(NAF), and Judicial Arbitration and Mediation Services (JAMS)) all appear to allow punitive damage
awards,n193.7 so it is particularly important to examine the arbitration agreement itself to see if any limitations on damages are specified there. Even where state law prohibits an arbitrator from awarding punitive
damages,n193.8 the Federal Arbitration Act may preempt these limits, particularly as the Supreme Court has
indicated that the arbitration agreement controls the issue.n193.9
If the arbitration agreement either explicitly or implicitly prohibits recovery of punitive damages, the defendant runs the risk that the agreement will be unenforceable and the consumer can sue in court. A number
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of cases find unconscionable an arbitration agreement that more generally limits the consumer's damage
remedy or that specifically limits the consumer's right to punitive damages.n193.10 The chances of the arbitration clause being thrown out are increased where a federal statute authorizes recovery of punitive damages, because then the limitation on punitive damages may not only make the arbitration requirement unconscionable, but also make it conflict with federal statutory rights.n193.11 For example, the Credit Repair Organizations Act, the Fair Credit Reporting Act, and the Equal Credit Opportunity Act all authorize recovery
of punitive damages.
[6] Special Defenses of Federal Receivers: D'Oench and Related Doctrines.
[a] D'Oench and 12 U.S.C. Section 1823.
Below is a summary of the special defenses available to the federal agencies responsible for insuring banks
and thrifts.n194
In 1942, in D'Oench, Duhme & Co. v. FDIC,n195 the United States Supreme Court crafted a federal common law doctrine of equitable estoppel to prevent borrowers from asserting "secret side agreements" with
bank officers as a defense against obligations being administered by the FDIC.n196 The doctrine, based on
public policy grounds, sought to provide the FDIC with some immunity against claims arising out of the
failed banks' past misconduct in order to allow the FDIC to more easily assess the strength of the bank's assets.
Eight years after the D'Oench decision, the Federal Deposit Insurance Act of 1950 ("FDIA") included a section, 12 U.S.C. section 1823(e), which added a new dimension to the limited immunity afforded by the equitable estoppel doctrine created in D'Oench. n197 Only an "agreement" which meets the four conditions of
section 1823(e) is enforceable against the FDIC when it relates to an asset acquired by the FDIC in its corporate (as opposed to receiver) capacity.n198
The courts have taken an extremely broad view of what constitutes an agreement under D'Oench and section
1823(e). In the last few years, however, the courts have begun to pull back a little and examine the D'Oench
cases with more of an eye toward the equities.n199 It is also important to note that although the D'Oench
doctrine and the requirements of section 1823(e) are closely intertwined, they are not identical.
[b] Federal Holder in Due Course Doctrine
As the cost of the 1980s bank crisis mounted and litigation ballooned, the protective policies of D'Oench and
section 1823 were pushed even further, with the creation of "super holder in due course" or "federal holder in
due course"n200 status for FDIC and Resolution Trust Corporation ("RTC"). More recently, there is moderating precedent to the cases reading the federal holder status broadly.n201 It may be that the O'Melveny decision has settled the question of federal holder in due course once and for all. If not, there remain other arguments which can be made by consumer advocates faced with this issue.
Beyond policy arguments, the present body of D'Oench-related law offers sound arguments as to why the
FTC holder notice should make consumer claims and defenses enforceable against the FDIC. First, because
the Rule works by requiring that it be included in the note, effectively making it a written contractual provision, it should be considered a "bilateral agreement," imposing duties on the bank. D'Oench does not protect
the FDIC or RTC from breach of contract claims arising from written agreements.n202 Second, the effect of
inserting the holder notice is to render an instrument non-negotiable,n203 and the Fifth Circuit at least has
held that the federal holder in due course doctrine does not apply to non-negotiable instruments.n204 At least
one court has apparently permitted recovery in a home improvement case against the RTC based on the FTC
notice, and further ruled that the borrower was entitled to a recovery of payments made even though the RTC
and its co-defendant did not receive the payments.n205
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As the bank crisis of the 1980s comes under control and begins to fade into the past, some courts are expressing more concern about past misapplications of the D'Oench doctrine. Consequently, some common
consumer claims have survived, or seem likely to survive, D'Oench and related defenses.n206
Finally, as a general rule, D'Oench and related doctrines will not protect the FDIC or RTC from claims or
defenses arising out of its own conduct.n207 There is also a broader developing question in the growing area
of FDIC accountability: whether the Federal Tort Claims Actn208 ("FTCA") affords a remedy for "negligent
operation of the receivership" by the FDIC or RTC.n209 Note that pursuant to FIRREA, all parties asserting
claims against failed institutions must participate in a mandatory administrative claims review process.n210
The requirements for this process are stringent and the failure to properly submit claims can result in a claim
being barred altogether, so it is imperative that any consumer attorney confronting the possibility of a claim
against a failed bank look closely at the statutory requirements.n211
[7] Remedies for Illegal Overcharges; Traditional Usury Remedies
[a] State Remedies
[i] Remedies at Law
The remedies available to victims of illegal overcharges are primarily determined by individual state statutes.
However, there are also other sources to consider.
Some licensing statutes, such as small loan laws or consumer loan laws metamorphosing from small loan
laws, may not include specific provisions for individual remedies, nor may other statutes limiting the right to
impose certain charges. However, the consumer may argue that such statutes create an implied private right
of action.n212
Generally speaking, illegal contracts are unenforceable as a matter of common law, but whether a particular
usurious contract fits into this category depends on the nature of the violation and public policy considerations.n213 Civil voidness penalties have been read into statutes for contracts violating their criminal provisions.n214 Usury cases have extended this principle even to the situation in which the criminal violation in
question had no express civil penalty, but other types of criminal violations did.n215 Or a court, finding a
contract to be illegal due to a violation of a criminal usury statute, may order that interest and other charges
be forfeited.n216
A number of practical issues often arise in determining how to handle payments made by a borrower after
bringing a successful usury-based claim. First, very often a statute will declare a usurious loan void as to all
or part of the interest, while leaving the principal obligation intact.n217 Under such statutes, the widely- accepted rule is that all payments already made on the contract, unless the parties have specifically agreed otherwise,n218 will be applied to the principal debt until that debt has been paid off.n219
A second critical question which often arises when a loan is declared usurious is: What happens to the money
already paid to the creditor? The answer will depend partly on whether the statute voids the entire obligation
or merely the interest. If only interest is forfeited, it is fairly clear, as mentioned previously, that all payments
made under the contract will be credited to the principal debt until that debt is satisfied, unless the parties
have specifically attributed some of those payments to interest. Less clear is what happens if the loan is completely void so that no principal debt technically ever existed, if payments exceed the amount of the principal
originally extended to the borrower, or if the payments were expressly deemed to be interest payments by the
parties.
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Some statutes, which declare usurious loans to be completely void, spell out the debtor's right to recover
payments made, in which case the problem is solved.n220 A federal court in Michigan allowed buyers to
recover finance charges from a dealer under this type of statutory provision even though the dealer had sold
and assigned the credit contracts to finance companies.n221 The court reasoned that the finance company's
payment to the dealer was based at least in part on the present value of the interest payments the buyers were
expected to make, so the dealer had received a benefit from those finance charges.
However, it can be difficult without such statutory or judicial authority to argue that payments to principal or
interest may be recovered simply because the obligation is declared "void" by statute. The problem is multifaceted. First, strictly speaking, if a contract is "void," a court will generally refuse to recognize its existence
and will leave the parties where it finds them.n222 This suggests that while a lender could not sue the debtor
on the purported debt, neither could the debtor recover payments back without specific statutory authorization, although courts have sometimes rejected this reasoning because of the intent of usury statutes to protect
borrowers.n223 Second, courts frequently reason that even though a statute declares a usurious debt to be
"void," the debt is actually voidable at the option of the debtor.n224 This position has led some courts to hold
that a borrower can waive the usury by "voluntary" payment,n225 and having so waived his rights, may not
recover the payments.n226 Third, some usury statutes are structured so that usury remedies are exclusively
defensive. For example, a statute might declare a usurious loan "void," but then proceed to provide merely
that the creditor may not collect on the debt.n227
One implication could be that no debtor recovery is available except by recoupment in a creditor's action.
However, it is possible to argue that such statutes create an implied private right of action to enforce the borrower's rights under the usury statute, and, in the absence of clear statutory language making it solely defensive, the consumer's advocate should explore that option. A New Hampshire trial court has also concluded
that a borrower can sue affirmatively to recover finance charges and other charges that the usury statute bars
the creditor from collecting.n228 The court reasoned that it would be illogical to require a buyer to stop
making payments, and wait to be sued, in order to take advantage of this right.
A significant exception to the rule against the debtor's recovery of payments made, apart from statutes which
specifically provide a recovery remedy, is that many states recognize a common law action for the recovery
of the usurious portion of interest payments made on a contract.n229
Consumer attorneys should be careful to plead a common law action, if available in their jurisdiction, separately in their complaint or counterclaim so that it will not be deemed waived.
Beyond providing restitution to a borrower who has proved usury, usually in the form of a credit for or recovery of usurious interest paid, usury statutes often impose penalties on the creditor involved. The penalties
frequently take the form of an award to the borrower of double or triple either the interest or the usurious
portion of the interest paid on the contract.n230
[ii] Equitable Remedies
Although most usury and other overcharge remedies exist under statutes or common law, there are circumstances when a debtor's appropriate remedy for usury is in equity. The most common occasion is when the
creditor is attempting to foreclose upon security, often the borrower's home, given in conjunction with the
usurious loan. Borrowers who want to enjoin foreclosures must typically invoke the court's equitable powers
to do so.
Seeking equitable remedies for usury can present serious problems for borrowers. The main obstacle is the
rule that a party seeking equity must do equity which, in the case of a borrower facing foreclosure of a usu-
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rious mortgage, means tendering the principal balance owed on the debt,n231 sometimes with legal interest,n232 and sometimes with amounts expended by the lender to maintain the security.n233
Tender may be avoided if a statute declares the underlying debt to be void or if the payments already made
on the contract exceed the principal originally lent, because in either case the principal balance owed is zero.n234 Yet, if principal is still owed, the debtor will have the difficult task of producing a large sum of
money quickly.
A second problem with equitable usury remedies is that the debtor may be unable to obtain in a foreclosure
proceeding all the offsets or penalties which might be available in a creditor's action on the debt.
A final equitable issue that may arise in usury cases is the question of reformation. Creditors have sometimes
sought to avoid usury penalties by requesting that usurious contracts be reformed to non-usurious rates. Such
reformation has occasionally been granted on grounds of mutual mistake of the parties or on grounds of fraud
by the borrower.n235 Another basis for a reformation-like remedy is any usury savings clause by which the
lender agrees to refund any excess interest. While typically consumers seek to avoid the effect of these
clauses so they can recover usury penalties, such a clause can form the basis of a contract claim if no other
remedy is available.n235.1 However, outside of these narrow circumstances, courts have viewed statutory
usury remedies as mandatory and have refused to resort to equity.n236
[b] Federal Remedies
[i] National Bank Act; DIDA; Excess Charges on High Cost Mortgages
The National Bank Act establishes the remedy for a usurious loan issued by a national bank: the lender forfeits the entire contract interest, and the borrower may recover a penalty of twice the interest paid within two
years of the action.n237 Similar, but not identical remedies, apply to state banks, state and federal savings
and loan institutions, and state and federal credit unions which are claiming federal preemption of state usury
laws under the alternative ceiling provisions of the DIDA.n238 If the alternative ceiling exceeds the interest
rate allowed by the state, and the state ceiling is thereby preempted, but the lender charges a rate even higher
than allowed by the DIDA alternative ceiling, then the lender forfeits the entire contract interest and the borrower may recover twice the amount of the interest paid within two years of the commencement of the action. If the state interest ceiling exceeds the DIDA alternative ceiling, or, if for some other reason, such as a
state opt-out, the alternative ceiling preemption does not apply, the wording of DIDA suggests that state
usury remedies control.
A separate set of federal remedies is available in the case of charges contracted for or imposed on certain
high cost mortgages in violation of the Home Ownership and Equity Protection Act of 1994.n239
[ii] RICO
The Racketeer Influenced and Corrupt Organizations Act (RICO)n240 provides powerful civil remedies,n241 including attorney's fees and treble damages, to victims of a broadly defined range of "racketeering
activity" or to those who have been subjected to the collection of an "unlawful debt," which is defined as any
usurious debt bearing interest of at least twice the "enforceable rate."n242
In order to state a claim under RICO, a plaintiff must allege either the conduct of an "enterprise" through a
"pattern" of "racketeering activity"n243 or the conduct of an enterprise through the collection of an "unlawful debt."n244 In H.J. Inc. v. Northwestern Bell Telephone Co.,n245 the Supreme Court held that the concept
of "pattern" has two separate properties that must be established: relationship and continuity.n246 The relationship property is met if the acts have "the same or similar purposes, results, participants, victims, or
methods of commission, or are otherwise interrelated."n247 As for continuity, although the Court declined to
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1-6 Debtor-Creditor Law § 6.08
express a specific test, it roughed out the requirement by providing that a plaintiff could meet the requirement by showing either closed-ended or open-ended continuity.n248 Closed-ended continuity could be
shown "by proving a series of related predicates extending over a substantial period of time."n249 Alternatively, a plaintiff could show "open-ended" continuity by proving a threat of continued racketeering activity.n250
Several RICO cases involving allegedly fraudulent creditor overcharges have been litigated.n251
Many states have state RICO statutes, which should also be considered.n252 Some of them may also offer
treble damages for collection of an unlawful debt.n253
[iii] Class Actions
Usury cases are well-suited to class action treatment.n254 Lenders who overcharge typically do so systematically, so there are common issues of law and fact. Often each borrower is entitled to a relatively small recovery, such as double the amount of the overcharge. A primary purpose of class actions is to provide a way
to recover damage awards that are too small to make individual suits economically feasible.n255
Usury class actions produce other benefits as well. As the California Supreme Court has noted, such actions
often produce "several salutary by-products, including a therapeutic effect upon those sellers who indulge in
fraudulent practices, aid to legitimate business enterprises by curtailing illegitimate competition, and avoidance to the judicial process of the burden of multiple litigation involving identical claims."n256
Individual issues are likely to be minimal in a usury class action. Some usury statutes apply only to
non-business loans, but, since in most cases the purpose of the loan is determined by the written representations the borrower made to the lender, this can easily be determined from the lender's records. If there are
individual factual questions about the purpose of the loan, they can be resolved through the claims process or
by bifurcating the proceedings.n257 Damages can usually be determined from the lender's own records.n258
For nationwide class actions, however, the court will either have to find a basis for applying the law of a single state, or conclude that variations among the states' laws are not so significant as to make the class action
unmanageable.n259
Legal Topics:
For related research and practice materials, see the following legal topics:
Banking LawNational BanksInterest & UsuryGeneral OverviewBanking LawNational BanksInterest & UsuryUsury LitigationContracts LawDebtor & Creditor RelationsContracts LawDefensesGeneral OverviewContracts LawDefensesUsury
FOOTNOTES:
(n1)Footnote 1. See Woods v. Holy Cross Hosp., 591 F.2d 1164, 1171 (5th Cir. 1979) ; Wartman v.
Branch 7, Civil Div., County Court, 510 F.2d 130 (7th Cir. 1975) .
(n2)Footnote 2. Some state usury laws may only be raised defensively. See, e.g., Kan. Stat. Ann. §
16-207(a); George v. Capital S. Mortgage Invs., Inc., 265 Kan. 431, 961 P.2d 32 (1998) . Kansas recognizes an affirmative claim for usury, however, under its common law. Id.
(n3)Footnote 3. See generally
Dairy Queen v. Wood, 369 U.S. 469, 82 S. Ct. 894, 8 L. Ed. 2d 44
(1962) (action to collect debt for breach of contract);
Raedeke v. Gibraltor Sav. & Loan Ass'n, 10 Cal. 3d
665, 111 Cal. Rptr. 693, 517 P.2d 1157 (1974) ; Whitfield v. Cornelius, 554 S.W.2d 870 (Ky. Ct. App. 1977)
, writ vacated, 563 S.W.2d 9 (Ky. 1978) .
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1-6 Debtor-Creditor Law § 6.08
(n4)Footnote 4. See Rowell v. Kaplan, 103 R.I. 60, 235 A.2d 91 (1967) ; see generally Annot., 17
A.L.R.3d 1321 (1968) (right in equity suit to jury trial of legal counterclaim).
(n5)Footnote 5. Jansen v. Nu-West, Inc., 2000 Wash. App. LEXIS 1993 (Wash. App. Aug. 17, 2000) .
Cf. Bryer v. Green-Venable, 2001 Cal. App. LEXIS 3238 (Dec. 12, 2001) (unpublished, citation limited)
(question whether a transaction is usurious is mixed question of law and fact).
(n6)Footnote 6. See generally Kenty v. Bank One, Columbus, N.A., 92 F.3d 384 (6th Cir. 1996) (financing force-placed insurance premium was a loan), reh'g, en banc, denied, 1996 U.S. App. LEXIS 24797
(6th Cir. Sept. 19, 1996) ; Turner v. E-Z Check Cashing, Inc., 35 F. Supp. 2d 1042 (M.D. Tenn. 1999) (deferred presentment of check constitutes a loan); Hamilton v. York, 987 F. Supp. 953 (E.D. Ky. 1997)
(same); Cazenovia Coll. v. Renshaw (In re Renshaw), 229 B.R. 552 (B.A.P. 2d Cir. 1999) , aff'd, 222 F.3d
82 (2d Cir. 2000) (unpaid balance of tuition, room, and board a credit sale and not a loan even though the
college charged a 19.2% per year "service charge"; therefore dischargeable by debtor in Chapter 7 bankruptcy proceeding);
Eikenberry v. Adirondack Spring Water Co., 65 N.Y.2d 125, 490 N.Y.S.2d 484, 480
N.E.2d 70 (1985) (distinguishing loan and forbearance); Miro v. Allied Fin. Co., 650 S.W.2d 938 (Tex. Ct.
App. 1983) (no loan when loan instrument cancelled shortly after signing and never funded). Statutes which
regulate charges for the "use" of money are generally addressing loans. See Tygrett v. Univ. Gardens Home
Ass'n, 687 S.W.2d 481 (Tex. Ct. App. 1985) . Aple Auto Cash Express, Inc. v. State ex rel. Oklahoma Dep't
of Consumer Credit, 78 P.3d 1231 (Okla. 2003) (sale-leaseback). Decision Point, Inc. v. Reece & Nichols
Realtors, Inc., 144 P.3d 706 (Kan. 2006) (applying U.C.C.C. definition of loan as "creation of debt by the
lender's payment of or agreement to pay money to the debtor"; advancing money to real estate agents in return for their agreement to repay it either through assignment of specific anticipated commissions or repurchase of the account creates loans); Opella v. Opella, 896 A.2d 714 (R.I. 2006) (finding intra-family transfer
to be loan rather than gift; fact that father kept meticulous records of payments to son is persuasive).
Finding no loan or credit: Rivera v. AT&T Corp., 141 F. Supp. 2d 719 (S.D. Tex. 2001) (late payment
of cable TV bill not a loan even though equipment was "loaned" to subscribers); Hoxie Implement Co. v.
Baker, 2001 Tex. App. LEXIS 6472 (Tex. App. Amarillo Sept. 21, 2001) , pet. for review denied, (Mar. 21,
2002) (demand for money allegedly due as a result of nonpayment of debt was not usury where jury found
that no debt was actually owed); Benchmark Land Dev., Inc. v. Wooley, 2001 Tex. App. LEXIS 8390 (Tex.
App. Austin Dec. 20, 2001) , pet. for review denied, (Mar. 14, 2002) (agreement to repay unauthorized transfers of funds would not be loan). See also Carey v. Lincoln Loan Co., 165 Or. App. 657, 998 P.2d 724
(2000) (installment land contract is not a loan as defined by statute that limits restrictions on prepayment);
Betts v. Advance Am., 213 F.R.D. 466 (M.D. Fla. 2003) (payday loan); In re Hoberg, 300 B.R. 752 (Bankr.
C.D. Cal. 2003) (husband's obligation to pay money to satisfy spousal support and division of property
claims not loan or forbearance); Carter v. Four Seasons Funding Corp., 97 S.W.3d 387 (Ark. 2003) (sale of
accounts receivable by sophisticated business entity not a loan even though buyer had recourse against seller
if accounts proved uncollectable); Mackey v. Bristol W. Ins. Servs., 130 Cal. Rptr. 2d 536 (Ct. App. 2003)
(financing of auto insurance policy not a credit transaction when insured was under no obligation to pay for
full term, but could cancel after paying for any number of months).
(n7)Footnote 7. See generally Henson v. Columbus Bank & Trust Co., 770 F.2d 1566 (11th Cir. 1985)
(refraining from calling a demand note is not a forbearance); Smith Mach. Co. v. Jenkins, 654 F.2d 693
(10th Cir. 1981) (detention, not forbearance); Sunburst Bank v. Keith, 648 So. 2d 1147 (Miss. 1995) (oral
agreements to extend loan term accompanied by payment of foreclosure fee were forbearance agreements);
Eikenberry v. Adirondack Spring Water Co., 65 N.Y.2d 125, 490 N.Y.S.2d 484, 480 N.E.2d 70 (1985)
(agreement was a forbearance); Lowell & Austin, Inc. v. Traux, 507 A.2d 949 (Vt. 1985) (no forbearance);
Carper v. Kanawha Banking & Trust Co., 207 S.E.2d 897 (W. Va. 1974) (no reversible error in usury verdict
where debtor's attorney claimed usurious "loan" in opening argument, but later proved usurious "forbearance").
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1-6 Debtor-Creditor Law § 6.08
(n8)Footnote 8. Edwards v. Alabama Farm Bureau Mut. Casualty Ins. Co., 509 So. 2d 232 (Ala. Civ.
App. 1986) , cert. quashed, 509 So. 2d 241 (1987) (no distinction between treatment of loan and forbearance in Alabama Mini-Code).
(n9)Footnote 9. See, e.g., Computer Sales Corp. v. Rousonelos Farms, Inc., 190 Ill. App. 3d 338, 546
N.E.2d 761 (1989) ; Citipostal, Inc. v. Unistar Leasing, 283 A.D.2d 916, 724 N.Y.S.2d 555 (4th Dep't
2001) (neither a credit sale nor a lease constitutes a loan or forbearance). Cf. Bell v. Muller, 118 P.3d 405
(Wash. Ct. App. 2005) (amended usury statute excludes retail installment sales from its coverage), amended
on other grounds, Bell v. Muller, 2005 Wash. App. LEXIS 3111 (Wash. Ct. App. Dec. 8, 2005) . But cf.
Perez v. Rent-A-Center, Inc., 892 A.2d 1255 (N.J. 2006) (holding that interest and time-price differential are
indistinguishable).
(n10)Footnote 10.
Luebbers v. Money Store, Inc., 40 S.W.3d 745 (Ark. 2001) .
(n11)Footnote 11. Pollice v. National Tax Funding, 225 F.3d 379, 396-97 (3d Cir. 2000) . Compare
Sheehy v. Franchise Tax Bd., 100 Cal. Rptr. 2d 760 (App. 2000) (no agreement to forbear collection of unpaid taxes, so usury laws did not apply); Alaskan Fireplace, Inc. v. Everett, 266 Wis. 2d 694, 667 N.W.2d
378 (2003) (Wis. Ct. App. 2003) (not a credit transaction when seller did not grant buyers the right to defer
payment, but imposed 1.5% monthly late charge as means of dissuading late payment), review denied 266
Wis. 2d 64, 671 N.W.2d 851 (Wis. 2003) .
(n12)Footnote 12. State ex rel. Salazar v. The Cash Now Store, Inc., 31 P.3d 161 (Colo. 2001) .
(n13)Footnote 13. State ex rel. Salazar v. The Cash Now Store, Inc., 31 P.3d 161, 167 (Colo. 2001)
(noting that the lender demonstrates that it does not view the refund as a chose in action because the borrower owes it a sum of money whether the refund of "chose" is valuable to the lender or not).
(n14)Footnote 14. See, e.g., Britz v. Kinsvater, 351 P.2d 986 (Ariz. 1960) ; Seargeant v. Smith, 163
P.2d 680 (Ariz. 1945) . See National Consumer Law Center, The Cost of Credit: Regulation, Preemption and
Industry Abuses, § 10.5.3 (3rd ed. and Supp.).
(n15)Footnote 15. Dopp v. Yari, 927 F. Supp. 814 (D.N.J. 1996) . See also Kraft v. Mason, 668 So.
2d 679 (Fla. Dist. Ct. App. 1996) (no usury where borrower had duty to repay principal, but the usurious interest was contingent on litigation success). See also Anglo-Dutch Petroleum Int'l, Inc. v. Haskell, 193
S.W.3d 87 (Tex. App. 2006) (loan that was only to be paid back at the successful completion of litigation created no absolute obligation to repay and was not therefore usurious); Goffney v. O'Quinn, 2004 Tex. App.
LEXIS 9593 (Tex. App. Oct. 28, 2004) (unpublished, citation limited) (contingency contracts between attorneys and clients for repayment of litigation expenses upon successful completion of case do not create an
absolute obligation to repay and so are not usurious).
(n16)Footnote 16.
Britz v. Kinsvater, 351 P.2d 986 (Ariz. 1960) .
(n17)Footnote 17. Some statutes, however, may impose liability for imposing any charge in excess of
that authorized, irrespective of whether the overall yield to the creditor would breach an applicable ceiling.
(n18)Footnote 18. For example, the Uniform Small Loan Law, 7th Draft § 13(c) (June 1, 1942), provides that amounts beyond those allowed may not be "directly or indirectly charged, contracted for, or received." The UCCC § 5.201(3) (1974 Act) provides consumer remedies when a creditor has "contracted for
or received" excess charges or has refused to give the consumer a valid refund within a reasonable time after
demand.
(n19)Footnote 19.
In re McCorhill Pub., Inc., 86 B.R. 783, 793-94 (Bankr. S.D.N.Y. 1988) .
(n20)Footnote 20. See generally National Consumer Law Center, The Cost of Credit: Regulation,
Preemption and Industry Abuses, Ch. 4 (3rd ed. and Supp.)
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1-6 Debtor-Creditor Law § 6.08
(n21)Footnote 21. Third party fees may also be treated as non-interest expenses by judicial interpretation of general usury laws. See § 6.05[3] supra.
(n22)Footnote 22. Non-interest charges may be the subject of separate regulation, even if the interest
rate itself is deregulated. E.g., Mayo v. Key Fin. Servs., Inc., 1994 Mass. Super. LEXIS 549 (June 22, 1994)
(interpreting Mass. Gen. Laws Ch.183, § 63), aff'd, as modified, on other issues, 678 N.E.2d 1311 (Mass.
1997) ; Torres v. Overby, 2000 Tex. App. LEXIS 2493 (Apr. 17, 2000) (unpublished, citation limited) (late
fees are contingent additional charges treated as interest under the usury laws, although not under the common law definition). Similarly, real estate closing fees may be limited to actual or reasonable and necessary
fees. Va. Code Ann. § 6.1-330.70-72. See also Alston v. Crown Auto, Inc., 224 F.3d 332 (4th Cir. 2000)
(excessive late fees do not make loan usurious, but penalties in late fee statute apply); S & A Indus., Inc. v.
Bank Atlanta, 543 S.E.2d 743 (Ga. Ct. App. 2000) (concurring opinion for half of equally divided court) (late
charge is considered a fee under criminal usury statutes but did not exceed limits). See, e.g., Rieser v. Todd (
In re Chari), 2005 Bankr. LEXIS 2895 (Bankr. S.D. Ohio Sept. 2, 2005) (fees were interest even though
termed loan commitment fees where they were consideration for the loan; extension fees also interest to extent they exceeded reasonable late fees).
(n23)Footnote 23. E.g., Garrison v. First Fed. Sav. & Loan Ass'n of S.C., 402 S.E.2d 24 (Va. 1991)
(risk management fee not listed among permissible charges and, therefore, was an illegal charge; only "actual" appraisal cost authorized, excess constituted interest). Cf. May v. Key Fin. Servs., Inc., Clearinghouse
No. 49,969 (Mass. Super Ct. June 22, 1994) (implied private right of action for violation of statute limiting
points; assertable by a suitable common law remedy; borrowers choose to assert common law restitution).
(n24)Footnote 24. "Principal" or "amount financed" is often statutorily defined. Observe that the principal amount of a loan in this functional sense may not be the face amount of the note signed by the borrower
because lenders often include charges such as "points"--which really are compensation to the creditor--in the
face amount of the note. Applicable law often sanctions this.
(n25)Footnote 25. E.g., Yazzie v. Ray Vicker's Special Cars, Inc., 12 F. Supp. 2d 1230 (D.N.M. 1998)
(pawn service fee exceeded legal limit); Fryer v. Easy Money Title Pawn, Inc., 183 B.R. 322 , reconsid. denied, 183 B.R. 654 (Bankr. S.D. Ga. 1995) (pawnbroker's 23% per month "service charge" was not to reimburse it for any specific expenses, and was, therefore, interest); Dunnam v. Burns, 901 S.W.2d 628 (Tex.
Ct. App. 1995) (additional sum to be repaid with principal was interest, even though not denominated as
such). But see Nicholas v. Deposit Guar. Nat'l Bank, 182 F.R.D. 226 (S.D. Miss. 1998) (NSF fee held not to
be interest under Mississippi law because it was not charged in connection with a credit transaction).
(n26)Footnote 26. See § 6.05 supra.
(n27)Footnote 27. But see § 6.03 supra, where early termination is at issue.
(n28)Footnote 28. For common interest calculation formulae, such as simple interest, add-on interest, or
discount interest, parties can frequently stipulate to the accuracy of a published rate chart which will show
the permissible finance charge for any given principal amount (or amount financed) and rate. A common
source is The Cost of Personal Borrowing in the United States, published by the Financial Publishing Company, Boston, MA. Requests for admission might also be used. See Ogier v. Johnson (In re Healing Touch,
Inc.), 2005 Bankr. LEXIS 1399 (Bankr. N.D. Ga. May 6, 2005) (court calculated interest rate by "taking the
total amount of interest charged under the loan and dividing by the number of months in the loan" and then
comparing that to the permissible rate); Wellman v. Bank One, 2005 Mich. App. LEXIS 2238 (Mich. Ct.
App. Sept. 20, 2005) (court calculates simple interest rate, lender had to know rate was usurious) (unpublished, citation limited). Cf. In re Williams, 330 B.R. 534 (Bankr. M.D. La. 2005) (court relied on lender's testimony that rate calculated correctly in absence of evidence from borrowers); Rivera v. Schlick, 887
A.2d 492 (D.C. 2005) (borrower failed to prove interest rate or provide information from which the court
could calculate the interest rate; conclusory allegations of interest rate insufficient); Perez v. Rent-A-Center,
Page 26
1-6 Debtor-Creditor Law § 6.08
Inc., 892 A.2d 1255 (N.J. 2006) (citing borrowers' expert witness on the interest rate of the rent-to-own contracts).
(n29)Footnote 29. See generally § 6.07[1] supra.
(n30)Footnote 30. See § 6.02 supra.
(n31)Footnote 31. See, e.g., In re Swartz, 37 B.R. 776 (Bankr. D.R.I. 1984) (small loans); Beneficial
Fin. Co. v. Administrator of Loan Laws, 260 Md. 430, 272 A.2d 649 (1971) (no intent requirement under
Small Loan Act); Duckworth v. Bernstein, 466 A.2d 517 (Md. Ct. Spec. App. 1983) (no intent requirement
under second mortgage law unless treble damages sought); Thelen v. Ducharme, 151 Mich. App. 441, 390
N.W.2d 264 (1986) ; Commercial Credit Equip. Corp. v. West, 677 S.W.2d 669 (Tex. Ct. App. 1984 writ
ref'd n.r.e.) .
(n32)Footnote 32. An exception is Florida which generally requires a showing of "corrupt intent." See,
e.g., North Am. Mortgage Invs. v. Cape San Blas Joint Venture, 378 So. 2d 287 (Fla. 1979) (corrupt intent
demonstrated); Dixon v. Sharp, 276 So. 2d 817 (Fla. 1973) (discussion of corrupt intent); Gergora v.
Goldstein Professional Ass'n Defined Benefits Plan Pension & Trust, 500 So. 2d 695 (Fla. Dist. Ct. App.
1987) (no corrupt intent). "Corrupt intent" is also required in North Carolina but, as interpreted by the courts
of that state, only the intent to charge a rate in excess of the statutory limit need be shown. See Swindell v.
Overton, 342 S.E.2d 391 (N.C. Ct. App. 1986) .
New Mexico has also now adopted the "corrupt intent" rule. See, e.g., Maulsby v. Magnuson, 107 N.M.
223, 755 P.2d 67 (1988) (the court overturned Hays v. Hudson, 85 N.M. 512, 514 P.2d 31 (1973)) .
(n33)Footnote 33. See Fogie v. Thorn Americas, Inc., 95 F.3d 645 (8th Cir. 1996) , cert. denied,
520 U.S. 1166, 117 S. Ct. 1427, 137 L. Ed. 2d 536 (1997) (applying Minnesota law); Henson v. Columbus
Bank & Trust Co., 770 F.2d 1566 (11th Cir. 1985) ; Duderwicz v. Sweetwater Sav. Ass'n, 595 F.2d 1008
(5th Cir. 1979) (applying Georgia law); In re McCorhill Pub., Inc., 86 B.R. 783 (Bankr. S.D.N.Y. 1988)
(New York law). See also Brodie v. Schmutz (In re Venture Mortgage Fund), 282 F.3d 185 (2d Cir. 2001)
(loan is usurious if lender intends to take and receive interest in excess of that allowed by law even though
lender has no specific intent to violate usury laws; loans made by victims to Ponzi scheme operator because
of promised high returns are void); SAL Leasing, Inc. v. State ex rel. Napolitano, 10 P.3d 1221 (Ariz. Ct.
App. 2000) (unlawful intent is shown by mere fact of intentionally doing what is forbidden by statute);
Robinson v. Poferl, 2000 Minn. App. LEXIS 58 (Minn. Ct. App. Jan. 25, 2000) .
(n34)Footnote 34. See, e.g., Cochran v. American Sav. & Loan Ass'n of Houston, 586 S.W.2d 849
(Tex. 1979) ; Commerce Crowdus & Canton, Ltd. v. DKS Constr., Inc., 776 S.W.2d 615, 618-19 (Tex. Ct.
App. 1989) (" 'bona fide error' defense is only available when the evidence shows that the charge of usury
results from the ignorance of a material fact or from other unintentional mishaps in office practice or routine
which may be fairly characterized as 'clerical' errors").
(n35)Footnote 35. See
Alamo Lumber Co. v. Gold, 661 S.W.2d 926 (Tex. 1983) .
(n36)Footnote 36. See, e.g., Greglon Indus., Inc. v. Bowman, 572 A.2d 369 (Conn. Ct. App. 1990) ;
Dang v. F & S Land Dev. Co., 618 P.2d 276 (Haw. 1980) ; A&M Dev. v. Sherwood & Roberts, Inc., 457
P.2d 439 (Idaho 1969) ;
Freitas v. Geddes Sav. & Loan Ass'n, 63 N.Y.2d 254, 471 N.E.2d 436, 481
N.Y.S.2d 665 (1984) (plurality opinion); Norstar Bank v. Pickard & Anderson, 547 N.Y.S.2d 734 (App. Div.
1989) ; W. Auto Supply v. Vick, 277 S.E.2d 360 (N.C. 1981) , reaff'd on reh'g, 283 S.E.2d 101 (1981) .
(n37)Footnote 37. See, e.g., Handi Inv. Co. v. Mobil Oil Corp., 550 F.2d 543 (9th Cir. 1977) (applying California law); McDermott v. Strauss, 678 S.W.2d 334 (Ark. 1984) .
(n38)Footnote 38. See, e.g., OMP v. Security Pac. Bus. Fin. Inc., 716 F. Supp. 239 (N.D. Miss. 1989)
("no 'presumption of usury' under Mississippi law: one claiming usury must furnish clear, positive, and cer-
Page 27
1-6 Debtor-Creditor Law § 6.08
tain proof of usury"); In re Borum, 60 B.R. 516 (Bankr. E.D. Ark. 1986) (burden of proof on debtor when
contract not usurious on its face). See generally Annot., 51 A.L.R.2d 1087 (1957). See also Transmedia
Rest. Co. v. 33 East 61st St. Rest. Corp., 710 N.Y.S.2d 756 (Sup. Ct. 2000) ("strong presumption against the
finding of usury").
(n39)Footnote 39. See Grotjohn Precise Connexiones Int'l, S.A. v. JEM Fin., Inc., 12 S.W.3d 859 (Tex.
App. 2000) (if loan is usurious on its face, lender has burden of proving bona fide error).
(n40)Footnote 40. See Bellagio Ins., Ltd. v. Digital Broad. Corp., 2005 U.S. Dist. LEXIS 4629 (W.D.
Va. Mar. 23, 2005) (under either New York or Virginia law, burden of proof by "clear and convincing" or
"clear and cogent" evidence on debtor); Hickman v. Courtney, 361 Ark. 5 (2005) (debtor has burden of
proof by "clear and convincing" evidence); Comstock v. Steinbergh, 18 Mass. L. Rep. 573 (Mass. Super. Ct.
2004) (debtor has burden); Hochman v. LaRea, 789 N.Y.S.2d 300 (N.Y. App. Div. 2005) (debtor has "heavy
burden" of showing usury by "clear and convincing" evidence). See also Pierce v. Emigrant Mortg. Co.,
2005 U.S. Dist. LEXIS 22397 (D. Conn. Sept. 29, 2005) (burden of proving that mortgage was bona fide and
therefore qualified for mortgage exception for usury statute on defendant lender).
(n41)Footnote 41. See, e.g., Giventer v. Arnow, 37 N.Y.2d 305, 372 N.Y.S.2d 63 (1975) ; Matter of
Estate of Dane, 55 A.D.2d 224, 390 N.Y.S.2d (1976) . See also C.I.O.S. Foundation v. Berkston Ins., 2000
U.S. Dist. LEXIS 2337 (N.D. Miss. Jan. 28, 2000) (where usurious contract was unambiguous, parol evidence
was not admissible).
(n42)Footnote 42. See Olson v. Porter, 539 N.W.2d 523 (Mich. Ct. App. 1995) . Cf. Robinson v.
Poferl, 2000 Minn. App. LEXIS 58 (Jan. 25, 2000) (unpublished, citation limited) (taking reasonable precautions to avoid usury, such as consulting qualified third party, can negate intent; not shown where lender did
not retain own attorney and refused to reform loan after borrower discovered the usury).
(n43)Footnote 43.
Zwayer v. Ford Motor Credit Co., 279 Ill. App. 3d 906, 216 Ill. Dec. 585, 665
N.E.2d 843 (1996) (court held the contract was ambiguous and should be construed against the maker where
it contained a clause allowing the use of the Rule of 78s to rebate upon prepayment, but was silent if acceleration occurred), appeal denied,
168 Ill. 2d 629, 219 Ill. Dec. 578, 671 N.E.2d 745 (1996) .
(n44)Footnote 44. For a discussion of the interpretation of adhesive contracts, see
rity Pac. Nat'l Bank, 28 Cal. 3d 764, 170 Cal. Rptr. 904, 621 P.2d 1318 , cert. denied,
S. Ct. 132, 70 L. Ed. 2d 112 (1981) .
Drennan v. Secu454 U.S. 833, 102
(n45)Footnote 45. Cf. Gonzalez v. Gainan's Chevrolet City, Inc., 690 S.W.2d 885 (Tex. 1985) (no presumption of legality for contracts under Consumer Credit Code except in cases alleging usury).
(n46)Footnote 46. See Matter of Sprouse, 577 F.2d 989 (5th Cir. 1978) .
(n47)Footnote 47. Checks and promissory notes are classic examples of instruments which generally
fall within the UCC definition of a "negotiable instrument." UCC § 3-104.
(n48)Footnote 48. UCC § 3-305. Defenses which can be asserted against a holder in due course include
the lack of the maker's capacity to execute the instrument, e.g., Shepard v. First Am. Mortgage Co., 347
S.E.2d 118 (S.C. Ct. App. 1986) , the illegality of the instrument, misrepresentation of the essential character
or terms of the contract, American Plan Corp. v. Woods, 16 Ohio App. 1, 240 N.E.2d 886 (1968) , and
bankruptcy. As is discussed in this section, usury can be a defense too as to holder in due course. For a discussion of fraud as a defense to a holder in due course, see generally Annot., 78 A.L.R.3d 1020 (1977); §
6.09[6] infra .
(n49)Footnote 49. See, e.g., Leasing Serv. Corp. v. River City Constr., 743 F.2d 871 (11th Cir. 1984) .
Page 28
1-6 Debtor-Creditor Law § 6.08
(n50)Footnote 50. UETA § 16. UETA is published at 7A U.L.A. Pt. 1 (Supp.). The text of UETA can
also be found on the website of the National Conference of Commissioners on Uniform State Laws,
www.nccusl.org. By the end of 2000, UETA had been adopted in 24 states.
(n51)Footnote 51. 15 U.S.C. § 7021. See National Consumer Law Center, Consumer Banking and
Payments Law Ch. 9 (2d ed. 2002 and Supp.).
(n52)Footnote 52. U.C.C. § 9-102(a)(11), (31). See ANSI X9.103-2004, Motor Vehicle Retail Sale and
Lease--Electronic Contracting, available at webstore.ansi.org.
(n53)Footnote 53. UETA § 16.
(n54)Footnote 54. UETA § 3 cmt. 6, § 16 cmt. 1.
(n55)Footnote 55. 15 U.S.C. § 7021, effective Oct. 27, 2000 (90 days after the enactment date of June
30, 2000). See National Consumer Law Center, The Cost of Credit: Regulation, Preemption and Industry
Abuses, § 9.2.10 (3rd ed. 2005) and National Consumer Law Center, Truth in Lending § 4.2.9 (6th ed. 2007)
for further discussion of this statute.
(n56)Footnote 56. See 15 U.S.C. § 7021(f) and UETA § 16(f), which require the person in control of a
transferrable record to provide the obligor "reasonable proof" of control.
(n57)Footnote 57. See 15 U.S.C. § 7021(d), (e), and UETA § 16(d), (e), both of which refer to the UCC
for rules governing the rights of holders and obligors.
(n58)Footnote 58. See 16 C.F.R. § 433.2 (1986).
(n59)Footnote 59. See 16 C.F.R. § 433.1(d) (1986).
(n60)Footnote 60. Cf. Heastie v. Community Bank, 727 F. Supp. 1133 (N.D. Ill. 1989) . For an interpretation of the final sentence of the FTC notice which limits a debtor's recovery under the FTC Rule, see
Home Sav. Ass'n v. Guerra, 720 S.W.2d 636 (Tex. Ct. App. 1986) .
(n61)Footnote 61. See UCC § 3-104(1)(b).
(n62)Footnote 62. UCC §§ 3-102(1)(e), 3-302. See Mahaffey v. Investor's Nat'l Sec. Co., 747 P.2d 890
(Nev. 1987) (home improvement contract with FTC holder rule notice precluded assignee from asserting
holder in due course; liable for defenses arising out of contractor's conduct, including fraudulent inducement
and failure of consideration). See also Carper v. Kanawha Banking & Trust Co., 207 S.E.2d 897 (W. Va.
1974) (conditional sales contract was not negotiable instrument).
(n63)Footnote 63. See Capital Bank & Trust Co. v. Lacey, 393 So. 2d 668 (La. 1980) . For a discussion of consumer remedies for creditor violations of FTC Rules, see National Consumer Law Center, Unfair
and Deceptive Acts and Practices § 6.6 (5th ed. 2001 and Supp.). That section contains a detailed discussion
of assignee liability, including the argument that consumer credit contracts impliedly incorporate all applicable laws, including the FTC notice, even where it is not explicitly included. Id.
(n64)Footnote 64. UCC §§ 9-403, 9-404.
(n65)Footnote 65. Rev. UCC § 3-305(e).
(n66)Footnote 66. See, e.g., Associates Home Equity Servs., Inc. v. Troup, 343 N.J. Super. 254, 778
A.2d 529 (App. Div. 2001) . But see Crisomia v. Parkway Mortgage, Inc., 2001 Bankr. LEXIS 1469 (Bankr.
E.D. Pa. Aug. 21, 2001) . See generally National Consumer Law Center, Unfair and Deceptive Acts and
Practices § 6.6.5.4.2 (5th ed. 2001 and Supp.).
(n67)Footnote 67. Cf. Barnes v. Michigan Nat'l Bank Corp., 159 Mich. App. 433, 407 N.W.2d 23
(Mich. Ct. App. 1987) (state MVSFA did not apply to direct loan entered into between bank and borrower to
Page 29
1-6 Debtor-Creditor Law § 6.08
finance vehicle purchase where no recourse by bank against dealer or other relationship between bank and
dealer).
This loophole has been somewhat limited in the context of certain high cost home equity loans. See Ch. 2
supra.
(n68)Footnote 68. See Ch. 2 supra.
(n69)Footnote 69. UCC § 3-306.
(n70)Footnote 70. UCC § 1-201(20). UCC § 3-302 describes a holder in due course as one who takes
an "instrument" under certain conditions. An "instrument" is defined as a "negotiable instrument." UCC §
3-102(1)(e). (Advocates should note that, in addition to the FTC Holder Rule, this provision also may protect
consumers from holder in due course defenses in many retail installment sales, as many Retail Installment
Sales Acts prohibit the use of negotiable instruments in creating the credit agreement.) Again, as noted
above, no holder of an instrument containing the FTC notice can become a holder in due course, regardless
of the manner in which it takes the instrument, because only a holder of a negotiable instrument can be a
holder in due course. UCC §§ 3-102(1)(e), 3-302.
(n71)Footnote 71.
Taylor v. Roeder, 360 S.E.2d 191, 4 U.C.C. Rep. Serv. 2d 652, 655 (Va. 1987) .
(n72)Footnote 72. UCC § 3-302.
(n73)Footnote 73. UCC § 3-203.
(n74)Footnote 74. Official Comments 2, 4 to UCC § 3-203.
(n75)Footnote 75. UCC § 3-203(b).
(n76)Footnote 76. Official Comment 2 to UCC § 3-203; see Triffin v. Somerset Valley Bank, 777 A.2d
993 (N.J. Super. Ct. App. Div. 2001) (buyer of forged check from holder in due course entitled to assert
rights of holder).
(n77)Footnote 77. See also § 6.09[6] infra; National Consumer Law Center, Unfair and Deceptive Acts
and Practices, §§ 11.7.2.5 (7th ed. 2008).
(n78)Footnote 78.
Maberry v. Said, 927 F. Supp. 1456, 1461-63 (D. Kan. 1996) .
(n79)Footnote 79. United States v. Cunningham, 83 F.3d 218 (8th Cir. 1996) (affirming criminal fraud
conviction); United States v. Camuti, 78 F.3d 738 (1st Cir. 1996) (affirming mail fraud conviction); Louis
Vuitton S.A. v. Lee, 875 F.2d 584, 590 (7th Cir. 1989) (trademark infringement by selling counterfeit goods);
Bosco v. Serhant, 836 F.2d 271, 276 (7th Cir. 1987) (brokerage's liability in securities fraud case), cert. denied,
486 U.S. 1056, 108 S. Ct. 2824, 100 L. Ed. 2d 925 (1988) .
(n80)Footnote 79.1. See U.C.C. §§ 3-302(a)(1) (holder is not holder in due course if instrument is so
irregular or incomplete as to call into question its authenticity), 1-202(a)(3) (definition of "notice").
(n81)Footnote 80. UCC § 9-206.
(n82)Footnote 81. See generally National Consumer Law Center, Unfair and Deceptive Acts and Practices, § 6.7.2 (6th ed. 2004).
(n83)Footnote 82. See Beatty v. Franklin Inv. Co., 319 F.2d 712 (D.C. Cir. 1963) (NIL decision);
Katz v. Simcha Co., 251 Md. 227, 246 A.2d 555 (1968) (dictum, citing Beatty, supra ); see also Hatton
v. Money Lenders & Assocs., Ltd., 127 Ill. App. 3d 577, 469 N.E.2d 360 (Ill. App. Ct. 1984) (summary judgment awarded to note holder once good faith and absence of notice of usury defense established; no discussion of possibility that usury is defense against a holder in due course).
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1-6 Debtor-Creditor Law § 6.08
(n84)Footnote 83. See Michigan Nat'l Bank v. Mattingly, 212 S.E.2d 754 (W. Va. 1975) ; Carper v.
Kanawha Banking & Trust Co., 207 S.E.2d 897 (W. Va. 1974) (West Virginia usury statute amended to preclude recovery from holder in due course).
(n85)Footnote 84. See, e.g., Bank of N.C. v. Rock Island Bank, 630 F.2d 1243 (7th Cir. 1980) ; Andrews v. Martin, 436 S.W.2d 285 (Ark. 1969) ; Fuller v. Universal Acceptance Corp., 264 A.2d 506 (D.C.
1970) ; Lucas v. Beco Homes, Inc., 494 S.W.2d 417 (Mo. Ct. App. 1973) ; Westervelt v. Gateway Fin.
Serv., 190 N.J. Super. 615, 464 A.2d 1203 (Super. Ct. Ch. Div. 1983) ; Robinson v. Rudy, 666 S.W.2d 507
(Tex. Ct. App. 1984 writ. ref'd n.r.e.) ; Michigan Nat'l Bank v. Mattingly, 212 S.E.2d 754 (W. Va. 1975)
(transaction prior to statutory amendment). See also National Consumer Law Center, Unfair and Deceptive
Acts and Practices § 6.6.5.5 (4th ed. 1997 and Supp.).
(n86)Footnote 85. See, e.g., Midwest Fed. Sav. v. West Bend Mut. Ins., 407 N.W.2d 690 (Minn. Ct.
App. 1987) (insurance company could not assert usury claim both because claim was personal to the borrower-insureds and because the usury defense is unavailable to corporations); La Barre v. Gold, 520 So. 2d
1327 (Miss. 1988) . See also All Seasons Window & Door Mfg. v. Red Dot Corp., 181 S.W.3d 490 (Tex.
App. 2005) (company for whose use funds were advanced cannot claim usury since only its president was a
party to the contract). Cf. Wombold v. Assocs. Fin. Servs. Co. of Mont., Inc., 104 P.3d 1080 (Mont. 2004)
(finding implied private right of action under Montana's Consumer Loan Act, since enacted to benefit borrowers).
(n87)Footnote 86. See Bizzoco v. Chintz, 193 Conn. 304, 476 A.2d 572 (1984) ; Fidelcor Mortgage
Co. v. Tyroff, 250 Ga. 900, 302 S.E.2d 96 (1983) (individual co-maker had standing to assert usury but lost
claim because of business purpose usury exception); Ciminelli v. Ford Motor Credit Co., 624 S.W.2d 903
(Tex. 1981) ; Miller v. First State Bank of Bedford, 551 S.W.2d 89 (Tex. Civ. App. 1977) ,, 563 S.W.2d 572
(Tex. 1978) ; Williams v. Security Sav. & Loan Ass'n, 120 Wis. 2d 480, 355 N.W.2d 370 (Ct. App. 1984) .
(n88)Footnote 87. See, e.g., Seidel v. 18 East 17th St. Owners, 598 N.E.2d 7 (N.Y. 1992) (original
borrower's corporate transferee was essentially same people, and transfer occurred as a result of building's
conversion to a co-op, not a sale to an independent third party; transferee, therefore, could assert usury). See,
e.g., Family Fed. Sav. & Loan v. Davis (In re Davis), 172 B.R. 437 (Bankr. D.D.C. 1994) ("purchaser of
equity of redemption in real estate who is in privity of estate or contract with the mortgagor and grantor can
plead usury" (D.C. law)). See, e.g., Eisenstein v. DiPrimio, 2000 Ga. App. LEXIS 1140 (Ga. Ct. App. Sept.
15, 2000) (law firm had standing to claim usury as defense when its client's creditor sought to impose constructive trust over money in client trust account). See also Sheehan v. Richardson, 315 B.R. 226 (D.R.I.
2004) (trustee has standing to pursue assigned claim); In re Colad Group, Inc., 324 B.R. 208 (Bankr.
W.D.N.Y. 2005) (debtor's waiver of defense of usury does not bind the bankruptcy estate).
(n89)Footnote 88. See
Martin v. Ajax Constr. Co., 124 Cal. App. 2d 425, 269 P.2d 132 (1954) .
(n90)Footnote 89. See, e.g., Superior Funding Corp. v. Big Apple Capital Corp., 738 F. Supp. 1468
(S.D.N.Y. 1990) (guarantor of corporate debt cannot assert usury as defense); Bizzoco v. Chintz, 193 Conn.
304, 476 A.2d 572 (1984) ; Snyder v. Woxo, Inc., 185 Neb. 545, 177 N.W.2d 281 (1970) . See generally
Annot., 63 A.L.R.2d 924 (1959).
But see Johnson v. Ronamy Consumer Credit Corp., 515 A.2d 682 (Del. 1986) (second mortgage statute
covered guarantors); First Nat'l Consumer Disc. Co. v. Fuller, 419 A.2d 940 (Del. 1980) (same); Skeen v.
Slavik, 555 S.W.2d 516 (Tex. Civ. App. 1977) (corporation's guarantor, who later executes personal note to
lender assuming the debt of the corporation, may assert usury).
(n91)Footnote 89.1.
Washburn v. Makedonsky, 718 N.W.2d 842 (Mich. Ct. App. 2006) .
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1-6 Debtor-Creditor Law § 6.08
(n92)Footnote 90. See General Elec. Credit Corp. v. Best Refrigerated Express, Inc., 222 Neb. 499,
385 N.W.2d 81 (1986) ; Rader v. Burnett, 175 Neb. 663, 122 N.W.2d 747 (1963) ; Eposti v. Rivers Bros.
Inc., 207 Cal. 570, 279 P. 423 (1929) .
(n93)Footnote 91. A New York decision, for example, allowed an assignee to claim usury after tendering the principal and legal interest to the creditor.
Moore v. Plaza Commercial Corp., 9 A.D.2d 223, 192
N.Y.S.2d 770 (N.Y. App. Div. 1959) , aff'd, 202 N.Y.S.2d 321, 168 N.E.2d 390 (N.Y. 1960) ; see also
Benser v. Independence Bank, 735 S.W.2d 566 (Tex. Ct. App. 1987) .
(n94)Footnote 92. The precise statement of the rule varies from court to court. Compare Murphy v.
Hagan, 275 S.C. 334, 271 S.E.2d 311 (S.C. 1980) , with First State Bank of Bedford v. Miller, 551 S.W.2d
89 (Tex. App. 1977) , on other grounds and aff'd as modified, 563 S.W.2d 572 (Tex. 1978) . See also Olson
v. Froslee, 2000 Minn. App. LEXIS 795 (Aug. 1, 2000) (unpublished, citation limited) (recognizing estoppel
defense if borrower knows of usury, but finding it not shown here).
(n95)Footnote 93. See, e.g., Seidel v. 18 East 17th St. Owners, 598 N.E.2d 7 (N.Y. 1992) ; Lenart v.
Ragsdale, 148 Mich. App. 571, 385 N.W.2d 282 (Mich. Ct. App. 1986) ; Lucas v. Beco Homes, Inc., 494
S.W.2d 417 (Mo. Ct. App. 1973) . See also Russo v. Carey, 706 N.Y.S.2d 760 (App. Div. 2000) (lender could
raise defense of estoppel where he and borrower were friends, borrower prepared note and set interest rate,
and some evidence suggested that borrower deliberately inserted usurious interest rate to avoid repayment);
Hornblower & Weeks, Inc. v. Blue Marlin Breweries, Inc., 2000 U.S. Dist. LEXIS 13748 (S.D.N.Y. Sept. 21,
2000) (borrower not estopped from raising criminal usury as defense even if it knew loan was usurious and
its agent prepared documents); In re Venture Mortg. Fund, L.P., 245 B.R. 460 (Bankr. S.D.N.Y. 2000) ,
aff'd, 282 F.3d 185 (2d. Cir. 2002) (lender must show special relationship with borrower, a representation
by borrower that the transaction is legal, intent to induce reliance, actual reliance, and injury; not shown
here); Hufnagel v. George, 135 F. Supp. 2d 406 (S.D.N.Y. 2001) (no estoppel without special relationship,
which is limited to attorney-client, fiduciary, trustee, or long-standing relationship or its equivalent; borrower's suggestion of interest rate is not a defense). But see Keezing v. Rodriguez, 765 N.Y.S.2d 196 (Sup.
Ct. 2003) (reducing interest to legal rate but refusing to void loan when debtor initiated and structured the
transaction and prepared the documents).
Van Carr Enters., Inc. v. Hamco, Inc., 365 Ark. 625, 232
S.W.3d 427, 2006 Ark. LEXIS 198 (Ark. Mar. 16, 2006) (no estoppel even though borrower's principal transcribed the parties' agreement, where there was testimony that he did not discuss state usury rate and did not
know if contract was usurious).
(n96)Footnote 94. See, e.g., City of Little Rock v. Cash, 644 S.W.2d 229 (Ark. 1982) (applying doctrine), cert. denied, 462 U.S. 1111 (1983) ; Sullivan v. Board of Comm'rs of Oak Lawn Park Dist., 743
N.E.2d 1057 (Ill. Ct. App. 2001) (applying doctrine); Louisville & N. Ry. Co. v. Hopkins County, 9 S.W. 497
(Ky. Ct. App. 1888) (applying doctrine); Quaker Oats Co. v. Stanton, 96 S.W.3d 133 (Mo. Ct. App. 2003)
(applying doctrine); Shenango Furnace Co. v. Fairfield Township, 78 A. 937 (Pa. 1911) (applying doctrine); City of Laredo v. South Tex. Nat'l Bank, 775 S.W.2d 729 (Tex. App. 1989) (doctrine did not apply to
taxes paid into court registry pursuant to an agreement between the taxing authority and the taxed); G.
Heileman Brewing Co. v. City of LaCrosse, 312 N.W.2d 875 (Wis. Ct. App. 1981) (applying doctrine). See
generally BMG Direct Mktg. v. Peake, 178 S.W.3d 763, 768-771 (Tex. 2005) (discussing history of the
voluntary payment doctrine; asserting that it has only been applied "infrequently" to illegal taxes); King v.
First Capital Fin. Servs. Corp., 828 N.E.2d 1155, 1170-74 (Ill. 2005) (discussing history of voluntary payment doctrine in Illinois).
(n97)Footnote 95. Quaker Oats Co. v. Stanton, 96 S.W.3d 133, 143 (Mo. Ct. App. 2003) (taxing authority needs to have certainty so that collector can disburse collected taxes); Putnam v. Time Warner Cable
of Southeastern Wis., Ltd., 649 N.W.2d 626, 637 (Wis. 2002) (government needs to have stability and certainty over funds that have been transferred without dispute).
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1-6 Debtor-Creditor Law § 6.08
(n98)Footnote 96. See, e.g., City of Little Rock v. Cash, 644 S.W.2d 229, 232 (Ark. 1982) , cert. denied, 462 U.S. 1111 (1983) ; Yates v. Royal Ins. Co., 65 N.E. 726, 727 (Ill. 1902) .
(n99)Footnote 97. See, e.g., La Barr v. Tombstone Territorial Mint, 580 P.2d 744 (Ariz. Ct. App.) (rejecting in pari delicto argument), opinion adopted by 582 P.2d 639 (Ariz. 1978) ; Stock v. Meek, 221 P.2d
15 (Cal. 1950) ; Baruch Inv. Co. v. Huntoon, 65 Cal. Rptr. 131 (Ct. App. 1967) ; Richlin v. Schleimer, 7
P.2d 711 (Cal. Ct. App. 1932) ; Babcock v. Olhasso, 293 P. 141 (Cal. Ct. App. 1930) ; Morgan v. Shepherd, 154 S.E. 780 (Ga. 1930) ; Young v. Barker, 342 P.2d 150, 159 (Kan. 1959) (arguing that it would be
futile to declare usury to be criminal while allowing the lender to keep the "fruits of [its] crime").
(n100)Footnote 98. See, e.g., Baruch Inv. Co. v. Huntoon, 65 Cal. Rptr. 131 (Ct. App. 1967) (noting
that usury laws are designed to protect society); Stock v. Meek, 221 P.2d 15, 20 (Cal. 1950) (rejecting in
pari delicto reasoning on grounds that applying voluntary payment doctrine would vitiate the usury law).
(n101)Footnote 99. Morgan v. Shepherd, 154 S.E. 780, 783 (Ga. 1930) ; see also Chakford v. Sturm,
65 So. 2d 864, 865 (Fla. 1953) (describing statute as regarding lender as oppressor and borrower as oppressed).
(n102)Footnote 100. See, e.g., Chakford v. Sturm, 65 So. 2d 864 (Fla. 1953) (under Fla. Stat. Ann. §
687.03, immaterial that usurious interest was paid voluntarily); Ostiguy v. A.F. Franke Constr., Inc., 347
P.2d 1049 (Wash. 1959) (citing Wash. Rev. Code § 19.52.030).
(n103)Footnote 101. BMG Direct Mktg. v. Peake, 178 S.W.3d 763, 776 n.9 (Tex. 2005) . Cf. Gonzalez v. Codilis & Assocs., P.C., 2004 U.S. Dist. LEXIS 5463 (N.D. Ill. Mar. 31, 2004) (FDCPA preempts voluntary payment doctrine).
(n104)Footnote 102. Wellman v. Bank One, 2005 Mich. App. LEXIS 2238 (Mich. Ct. App. Sept. 20,
2005) (unpublished, citation limited).
(n105)Footnote 103. See, e.g., Matter of Goehring, 23 B.R. 323 (Bankr. D. Mich. 1982) ; Lincoln
Nat'l Bank v. Kaufman, 406 F. Supp. 448 (D. Mich. 1976) ; Bell v. Barnes, 190 So. 273 (Ala. 1939) ; Bizzoco v. Chinitz, 476 A.2d 572 (Conn. 1984) (based on Conn. Gen. Stat. § 37-2); Christian v. Filbert, 249 Ill.
App. 230 (1928) ; Bebee v. Grettenberger, 266 N.W.2d 829 (Mich. Ct. App. 1978) ; Wright v. First Nat'l
Bank of Monroe, 297 N.W. 505 (Mich. 1941) ; Farmers' Bank & Trust Co. v. Redwine, 167 S.E. 687 (N.C.
1933) . These cases should be distinguished from decisions that bar plaintiffs from asserting a cause of action
to recover illegal interest on the grounds that it may only be used defensively. See, e.g., Alabama Cash
Credit Corp. v. Bartlett, 144 So. 808 (Ala. 1932) (statute only prohibits requirement to pay usury and does
not allow plaintiff to sue to recover usurious interest already paid). BMG Direct Mktg., Inc. v. Peake, 178
S.W.3d 763 (Tex. 2005) (voluntary payment doctrine applies where debtor pays late charge with knowledge
of its amount and the circumstances in which it is imposed, even though debtor does not know whether
amount so exceeds creditor's damages that it is illegal as a penalty).
(n106)Footnote 104. See e.g. Luebke v. Moser, 598 N.E.2d 760 (Ohio Ct. App. 1991) (allowing defense where plaintiff paid usurious interest due to a mistake of law).
(n107)Footnote 105.
Bell v. Barnes, 190 So. 273, 275 (Ala. 1939) .
(n108)Footnote 106. See e.g. Lincoln Nat'l Bank v. Kaufman, 406 F. Supp. 448 (D. Mich. 1976) (allowing plaintiff to recover prepaid interest where loan had not yet been fully repaid); Matter of Goehring,
23 B.R. 323, 325-26 (Bankr. D. Mich. 1982) (allowing debtor to recoup interest paid on unfulfilled note, but
barring claim based on fully paid note, on grounds payment was "voluntary"); Waldorf v. Zinberg, 307
N.W.2d 749 (Mich. Ct. App. 1981) (defendant must apply collected usurious interest against principal due on
matured loan); Bebee v. Grettenberger, 266 N.W.2d 829 (Mich. Ct. App. 1978) ; Sienkiewicz v. Leonard
Mortgage Co., 229 N.W.2d 352 (Mich. Ct. App. 1975) .
(n109)Footnote 107.
Thelen v. Ducharme, 390 N.W.2d 264 (Mich. Ct. App. 1986) .
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1-6 Debtor-Creditor Law § 6.08
(n110)Footnote 108. See, e.g., Richter v. Burdock, 100 N.E. 1063 (Ill. 1913) (finding that compulsion
existed when note was assigned to an innocent.
(n111)Footnote 109. This discussion assumes that proper service was made upon the borrower. Obviously, in the absence of service, default judgments may be challenged on jurisdictional or due process
grounds, but this topic is beyond the scope of this chapter.
(n112)Footnote 110. For general statements of these grounds outside of the context of usury, see, e.g.,
Citizens Nat'l Bank of Univ. City v. Gehl, 567 S.W.2d 423 (Mo. Ct. App. 1978) (moving party must show
reasonable diligence); Household Fin. Co. v. Avery, 476 S.W.2d 165 (Mo. Ct. App. 1972) (lender could not
reopen judgment).
(n113)Footnote 111. See Fielder v. Credit Acceptance Corp., 10 F. Supp. 2d 1101 (W.D. Mo. 1998)
(court rejected argument that it lacked jurisdiction to rectify such creditor conduct, and held that res judicata
did not bar the consumers' affirmative attack because the issue of excessive post-maturity interest charges
and official fees was not raised in the prior state court proceedings), partial summ. judgment granted, in part,
partial summ. judgment denied, in part, 19 F. Supp. 2d 966 (W.D. Mo. 1998) , vacated, remanded, mot. denied, 188 F.3d 1031 (8th Cir. 1999) .
(n114)Footnote 112. Restatement, Judgments 2d § 22 (1982). See also Circle v. Jim Walter Homes,
654 F.2d 688 (10th Cir. 1981) .
(n115)Footnote 113. See, e.g., Circle v. Jim Walter Homes, 654 F.2d 688 (10th Cir. 1981) (citing cases); Andrews v. Reidy, 60 P.2d 832 (Cal. 1936) ; Madden v. Harlandale Bank, 574 S.W.2d 590 (Tex. Ct.
App. 1978 writ ref'd n.r.e.) . See generally Annot., 98 A.L.R. 1027 (1935) . Some authority to the contrary
does exist, but much of it seems questionable in light of its age, later case law, or special circumstances. See
Flint v. Kimbrough, 45 N.M. 342, 115 P.2d 84 (N.M. 1941) (court in the underlying foreclosure action had
not obtained personal jurisdiction over the borrower); Murphy v. Fidelity Inv. Co., 161 Okla. 48, 17 P.2d
472 (1932) ; Weaver v. White, 164 S.W.2d 48 (Tex. Civ. App. 1942) (questionable authority after Madden
v. Harlandale Bank, 574 S.W.2d 590 (Tex. Ct. App. 1978 writ ref'd n.r.e.)) ; McDonald v. Smith, 53 Vt. 33
(1880) . But see Fielder v. Credit Acceptance Corp., 10 F. Supp. 2d 1101 , partial summ. judgment granted,
in part, partial summ. judgment denied, in part, 19 F. Supp. 2d 966 (W.D. Mo. 1998) , vacated, remanded,
mot. denied, 188 F.3d 1031 (8th Cir. 1999) (res judicata did not bar consumers' affirmative attack because
issue of excessive post-maturity interest charges and official fees was not raised in the prior state court proceedings).
(n116)Footnote 114. See Henson v. Columbus Bank & Trust Co., 770 F.2d 1566 (11th Cir. 1985)
(state court usury decision based solely on statute of limitations does not subsequently bar federal court's
consideration of merits of the same usury claim).
(n117)Footnote 115. See Alston v. Goodwin, 343 P.2d 993 (Cal. Ct. App. 1959) ; Yager v. Rubymar
Corp., 216 N.Y.S.2d 577 (Sup. Ct. Spec. Term 1961) (interpreting New Jersey law). See also Heine v. Albin
Gustafson Co., 118 Misc. 2d 593, 461 N.Y.S.2d 934 (Sup. Ct. 1983) . Cf. Sunbelt Sav., FSB. v. Barr, 824
S.W.2d 600 (Tex. Ct. App. 1991) (a note and a guaranty are separate transactions; prior suit against individual
in his capacity as guarantor was not res judicata as to suit against him as a partner on the partnership's note).
(n118)Footnote 116. See Yager v. Rubymar Corp., 216 N.Y.S.2d 577 (Sup. Ct. Spec. Term 1961) (interpreting New Jersey law).
(n119)Footnote 117. See, e.g., Scott v. Forest Lake Chrysler-Plymouth Dodge, 637 N.W.2d 587 (Minn.
Ct. App. 2002) (two year statute for penalty applies to MVRISA claim); Trapp v. Hancuh, 1997 Minn. App.
LEXIS 779 (Minn. Ct. App. July 15, 1997) (unpublished, citation limited) (two year statute for actions upon a
statute for a penalty applies). But see Beltz v. Dings, 27 Kan. App. 2d 507, 6 P.3d 424 (2000) (cause of
action for usury accrues with each payment made on a continuing contract). But see Miller v. Pac. Shore
Funding, 92 Fed. Appx. 933, 2004 U.S. App. LEXIS 1270 (4th Cir. Jan. 28, 2004) (table) (statute of limita-
Page 34
1-6 Debtor-Creditor Law § 6.08
tions for challenge to closing costs runs from day of closing because they are legally enforceable then, even
if they are financed).
(n120)Footnote 118. See, e.g., Matter of Ferris, 42 B.R. 374 (S.D. Ga 1984) , rev'd on other grounds,
764 F.2d 1475 (11th Cir. 1985) ($16.56 overcharge was not de minimis); Georgia Inv. Corp. v. Norman,
231 Ga. 821, 204 S.E.2d 740 (1974) ($1.00 notary fee not de minimis); In re Swartz, 37 B.R. 776 (Bankr.
D.R.I. 1984) ; Dickey v. Bank of Clarksdale, 183 Miss. 748, 184 So. 314 (1938) (overcharges between
$0.50 and $1).
(n121)Footnote 119. The de minimis defense has regularly been recognized in Texas in cases of small
overcharges. Compare Ceco Corp. v. Steve's Sash & Door Co., 714 S.W.2d 322 (Tex. Ct. App. 1986)
($245.69 was not de minimis on total contract price of $71,702.95), with Yates Ford v. Ramierez, 692
S.W.2d 51 (Tex. 1985) ; Cf. In re Cadillac Wildwood Dev. Corp., 138 B.R. 854 (Bankr. W.D. Mich. 1992)
($3 overcharge on closing costs was "mistake of fact" needing correction, but was not a usurious overcharge). See also Buendia v. Advanta Mortgage Corp.-USA, 2003 Tex. App. LEXIS 7136 (Tex. App. Aug.
21, 2003) (unpublished) ($2.36 overcharge is de minimus). Cf. Clean Harbors, Inc. v. John Hancock Life
Ins. Co., 833 N.E.2d 611 (Mass. App. Ct.) (failure to notify attorney general of rate until the afternoon when
loans funded in the morning, although a violation of the statute, will not support a finding of usury).
(n122)Footnote 120. See, e.g., Cohen v. District of Columbia Nat'l Bank, 382 F. Supp. 270 (D.D.C.
1974) (custom of ignoring declining balance in interest calculation); Perlman v. First Nat'l Bank of Chicago, 15 Ill. App. 3d 784, 305 N.E.2d 236 (Ill. App. Ct. 1973) , appeal dismissed, 331 N.E.2d 65 (Ill. 1975)
(360-day year); Beneficial Fin. Co. v. Administrator of Loan Laws, 260 Md. 430, 272 A.2d 649 (1971) (alleged custom of correcting errors discovered in lender's books without imposing penalty); Dickey v. Bank
of Clarksdale, 183 Miss. 748, 184 So. 314 (1938) (custom of imposing service charge on small loans);
Cowgill v. Jones, 99 Mo. App. 390, 73 S.W. 995 (Mo. Ct. App. 1903) (sales commissions); Kollman v. Hunnicutt, 385 S.W.2d 600 (Tex. Civ. App. Fort Worth 1964) (car dealer floor plan financing); Harmon v.
Lehmann, 85 Ala. 379, 5 So. 197 (1888) (sales commission). See also Barclay Kitchen, Inc. v. California
Bank, 25 Cal. Rptr. 383 (2d Dist. 1962) (bank deposits).
(n123)Footnote 121. See, e.g., Jersey Palm-Gross, Inc. v. Paper, 658 So. 2d 531 (Fla. 1995) . Court
rejected use of savings clause as absolute bar to usury claim; rather, it is one factor to be considered in overall determination of creditor's intent. Other factors listed as illustrative: how narrow the margin; whether it is
a complex transaction in which a mathematical error was made; whether the usury was contingent; and lender's knowledge of the urgency of borrower's need. The finding of usury was upheld. See also Mims v. Fid.
Funding, Inc., 307 B.R. 849 (N.D. Tex. 2002) (savings clause did not save contract that was usurious on its
face; hypothetical possibility that conditions for charging usurious fees would not occur did not make savings
clause effective). See, e.g., Rieser v. Todd ( In re Chari), 2005 Bankr. LEXIS 2895 (Bankr. S.D. Ohio Sept.
2, 2005) (giving no effect of savings clause where transaction was usurious on its face). Cf. Lieberman v.
Emigrant Mortg. Co., 436 F. Supp. 2d 357 (D. Conn. 2006) (existence of savings clause gives borrower a
contract remedy for refund of unconscionable interest).
(n124)Footnote 122. See Duderwicz v. Sweetwater Sav. Ass'n, 595 F.2d 1008 (5th Cir. 1979) (cancellation of usurious escrow account); Kissell Co. v. Gressley, 591 F.2d 47 (9th Cir. 1979) (acceleration due to
lender's misconduct; savings clause given no effect); Armstrong v. Steppes Apts. Ltd., 57 S.W.3d 37 (Tex.
App. 2001) , cert. denied,
536 U.S. 951, 122 S. Ct. 2645, 153 L. Ed. 2d 823 (2002) .
(n125)Footnote 123. See, e.g., Vickers v. Interstate Dodge, 882 So. 2d 1236, 1244 (La. App. 2004)
(creditor cannot complain of penalty for technical violation when it failed to correct the error after receiving
notice); Scott v. Forest Lake Chrysler-Plymouth Dodge, 637 N.W.2d 587 (Minn. App. 2002) .
(n126)Footnote 124. Tex. Fin. Code Ann. § 305.103(a). See In re CPDC, Inc., 337 F.3d 436 (5th Cir.
2003) (sixty days run from lender's subjective discovery that lender has violated usury prohibition); Strasburger Enterprises, Inc. v. TDGT Ltd. P'ship, 110 S.W.3d 566 (Tex. App. 2003) (no defense when complaint
Page 35
1-6 Debtor-Creditor Law § 6.08
that did not seek usurious interest was delivered to debtor only after creditor received usury notice). See
Sotelo v. Interstate Fin. Corp., 224 S.W.3d 517 (Tex. App. 2007) (lender has 60 days after notice to correct
the usury; notice sent while suit was abated is treated same as pre-suit notice).
(n127)Footnote 125.
Anderson v. Chainani (In re Kemper), 263 B.R. 773 (Bankr. E.D. Tex. 2001) .
(n128)Footnote 126. Anderson v. Chainani (In re Kemper), 263 B.R. 773 (Bankr. E.D. Tex. 2001) . See
also Pagel v. Whatley, 82 S.W.3d 571 (Tex. App. 2002) (attachment to complaint acknowledging possibility
of usury violation was sufficient where debtor first raised usury issue after receiving complaint).
(n129)Footnote 127. Tex. Fin. Code Ann. § 305.006(c). See also Ohio Rev. Code Ann. § 1317.08 (similar provision allowing refund within 10 days after receiving notice).
(n130)Footnote 128.
(n131)Footnote 129.
2002) .
Anderson v. Chainani (In re Kemper), 263 B.R. 773 (Bankr. E.D. Tex. 2001) .
Scott v. Forest Lake Chrysler-Plymouth Dodge, 637 N.W.2d 587 (Minn. Ct. App.
(n132)Footnote 129.1. Rieser v. Todd ( In re Chari), 2005 Bankr. LEXIS 2895 (Bankr. S.D. Ohio Sept.
2, 2005) .
(n133)Footnote 130. National Consumer Law Center, Consumer Arbitration Agreements (5th ed.
2007), examines the enforceability of such agreements in detail.
(n134)Footnote 131. 9 U.S.C. § 1.
(n135)Footnote 132.
Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 116 S. Ct. 1652, 134 L. Ed.
2d 902 (1996) ;
Perry v. Thomas, 482 U.S. 483, 107 S. Ct. 2520, 96 L. Ed. 2d 426 (1987) .
(n136)Footnote 133. See National Consumer Law Center, The Cost of Credit: Regulation, Preemption
and Industry Abuses, § 10.3 (3rd ed. and Supp.).
(n137)Footnote 134.
Alabama Catalog Sales v. Gloria Harris M.Q., Inc., 794 So. 2d 312 (Ala. 2000) .
(n138)Footnote 135. Party Yards, Inc. v. Templeton, 751 So. 2d 121 (Fla. Dist. Ct. App. 2000) ;
FastFunding The Co., Inc. v. Betts, 758 So. 2d 1143 (Fla. Dist. Ct. App. 2000) (payday lending case).
(n139)Footnote 136. Alabama Catalog Sales v. Gloria Harris M.Q., Inc., 794 So. 2d 312 (Ala. 2000)
(payday lending); FastFunding The Co., Inc. v. Betts, 758 So. 2d 1143 (Fla. Dist. Ct. App. 2000) (payday
lending case).
(n140)Footnote 137. Williams v. Showmethemoney, Inc., Clearinghouse No. 52,500 (Ark. Cir. Ct.
Aug. 26, 1999) (payday lending case), aff'd on other grounds, 27 S.W.3d 361 (Ark. 2000) ; Party Yards,
Inc. v. Templeton, 751 So. 2d 121 (Fla. Dist. Ct. App. 2000) .
(n141)Footnote 138. Burden v. Check Into Cash of Ky., LLC, 267 F.3d 483 (6th Cir. 2001) , cert. denied,
535 U.S. 970, 122 S. Ct. 1436, 152 L. Ed. 2d 380 (2002) .
(n142)Footnote 139. Burden v. Check Into Cash of Ky., LLC, 267 F.3d 483 (6th Cir. 2001) , cert. denied,
535 U.S. 970, 122 S. Ct. 1436, 152 L. Ed. 2d 380 (2002) .
(n143)Footnote 140. See Sphere Drake Ins. v. All Am. Ins. Co., 256 F.3d 587 (7th Cir. 2001) (holding
that, if a contract is void and wholly unenforceable, an arbitration clause within that contract will not be enforced; if a contract is merely voidable, such as a contract induced by fraud, the arbitration clause will be
enforced), rev'd, 307 F.3d 617 (7th Cir. 2002) , cert. denied,
538 U.S. 961, 123 S. Ct. 1754, 155 L. Ed.
2d 512 (2003) ; Haga v. Martin Homes, Inc., 1999 Ohio App. LEXIS 1740 (Ohio Ct. App. Apr. 19, 1999) .
Cf. In re FirstMerit Bank, 52 S.W.3d 749 (Tex. 2001) (that the consumer has revoked acceptance of a purchase does not void the arbitration agreement; revocation of acceptance does not automatically void a sales
agreement).
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1-6 Debtor-Creditor Law § 6.08
(n144)Footnote 141. Bess v. Check Express, 2002 U.S. App. LEXIS 12118 (11th Cir. June 19, 2002) ;
Burden v. Check Into Cash of Ky., LLC, 267 F.3d 483 (6th Cir. 2001) ; Conner v. Instant Cash Advance,
2003 U.S. Dist. LEXIS 2583 (S.D. Ind. Feb. 20, 2003) ; Buckeye Check Cashing, Inc. v. Cardegna, 824 So.
2d 228 (Fla. Dist. Ct. App. 2002) .
(n145)Footnote 142. See Southern Metal Treating Co. v. Goodner, 271 Ala. 510 (1960) ; see also National Consumer Law Center, The Cost of Credit: Regulation and Legal Challenges 9.2.4.5.2 (2d ed. and
Supp.).
(n146)Footnote 143. See Camaro Trading Co. v. Nissei Sangyo America, LTD., 577 So. 2d 1274 (Ala.
1991) ; Island House Developers v. AMAC Constr. Co., 686 So. 2d 1377 (Fla. Dist. Ct. App. 1997) . See
also Ackel v. Ackel, 696 So. 2d 140 (La. Ct. App. 1997) (whether contract is void as against public policy is
not arbitrable), writ denied, 703 So. 2d 1310 (La. 1997) .
(n147)Footnote 144. Harris v. Montgomery Catalog Sales, Clearinghouse No. 52,505 (Ala. Cir. Ct.
May 21, 1999) (payday lending).
(n148)Footnote 145.
Ex parte Payne, 741 So. 2d 398 (Ala. 1999) .
(n149)Footnote 146. Cheatham v. Air Sys. Eng'g Co., Clearinghouse No. 51,969 (Cal. Super. Ct. Apr.
30, 1997).
(n150)Footnote 147. See National Consumer Law Center, Truth in Lending Ch. 6 (4th ed. 1999 and
Supp.).
(n151)Footnote 148. See Fluehmann v. Associates Fin. Servs., 2002 U.S. Dist. LEXIS 5755 (D. Mass.
Mar. 29, 2002) ; Large v. Conseco Fin. Servicing Corp., 167 F. Supp. 2d 203 (D.R.I. 2001) , aff'd, 292
F.3d 49 (1st Cir. 2002) ; Livingston v. Associates Fin., Inc., 2001 U.S. Dist. LEXIS 8678 (N.D. Ill. June 22,
2001) ; Phillips v. Associates Home Equity Servs., 179 F. Supp. 2d 840 (N.D. Ill. 2001) ; Dorsey v. H.C.P.
Sales, Inc., 46 F. Supp. 2d 804 (N.D. Ill. 1999) .
(n152)Footnote 149. See Fluehmann v. Associates Fin. Servs., 2002 U.S. Dist. LEXIS 5755 (D. Mass.
Mar. 29, 2002) ; Livingston v. Associates Fin., Inc., 2001 U.S. Dist. LEXIS 8678 (N.D. Ill. June 22, 2001) ;
Dorsey v. H.C.P. Sales, Inc., 46 F. Supp. 2d 804 (N.D. Ill. 1999) .
(n153)Footnote 150.
1993) .
Sweet Dreams Unlimited, Inc. v. Dial-a-Mattress Int'l, Ltd., 1 F.3d 639 (7th Cir.
(n154)Footnote 151.
AT&T Technologies, Inc. v. Communications Workers of Am., 475 U.S. 643,
648, 106 S. Ct. 1415, 1418, 89 L. Ed. 2d 648 (1986) .
(n155)Footnote 152. See Fleetwood Enters. v. Gaskamp, 2002 U.S. App. LEXIS 933 (5th Cir. Jan. 24,
2002) , reh'g, en banc, denied, supplemented, remanded, 303 F.3d 570 (5th Cir. 2002) ; Oakwood Mobile
Homes, Inc. v. Godsey, 824 So. 2d 713 (Ala. 2001) ; Equifirst Corp. v. Ware, 808 So. 2d 1 (Ala. 2001) ;
Med Ctr. Cars, Inc. v. Smith, 727 So. 2d 9 (Ala. 1998) ; Ex parte Dickinson, 711 So. 2d 984 (Ala. 1998) ,
reh'g overruled, 1998 Ala. LEXIS 96 (Ala. Mar. 20, 1998) , ops. combined at 711 So. 2d 984 (Ala. 1998) ;
Pacheco v. Allen, 55 P.3d 141 (Colo. Ct. App. 2001) , cert. granted, 2002 Colo. LEXIS 839 (Colo. Sept. 23,
2002) ; see also Kaplan v. First Options, 19 F.3d 1503 (3d Cir. 1994) , aff'd,
514 U.S. 938, 115 S. Ct.
1920, 131 L. Ed. 2d 985 (1995) ; Liberty Communications, Inc. v. MCI Telecommunications Corp., 733 So.
2d 571 (Fla. Dist. Ct. App. 1999) (individual signed in corporate capacity and thus clause not binding on individual).
(n156)Footnote 153.
(2002) .
EEOC v. Waffle House, Inc., 534 U.S. 279, 122 S. Ct. 754, 151 L. Ed. 2d 755
(n157)Footnote 154.
(2002) .
EEOC v. Waffle House, Inc., 534 U.S. 279, 122 S. Ct. 754, 151 L. Ed. 2d 755
Page 37
1-6 Debtor-Creditor Law § 6.08
(n158)Footnote 155. Ballard Servs. v. Conner, 807 So. 2d 519 (Ala. 2001) ; Colonial
Sales-Lease-Rental, Inc. v. Target Auction & Land Co., 735 So. 2d 1161 (Ala. 1999) ; Westendorf v. Gateway 2000, Inc., 2000 Del. Ch. LEXIS 54 (Del. Ch. Mar. 16, 2000) , aff'd, 763 A.2d 92 (Del. 2000) ; Terminix Int'l Co., LP v. Ponzio, 693 So. 2d 104 (Fla. Dist. Ct. App. 1997) ; In re FirstMerit Bank, N.A., 52
S.W.3d 749 (Tex. 2001) ; Nationwide of Bryan v. Dyer, 969 S.W.2d 518 (Tex. App. 1998) . But see Kaplan
v. First Options, 19 F.3d 1503 (3d Cir. 1994) , aff'd,
514 U.S. 938, 115 S. Ct. 1920, 131 L. Ed. 2d 985
(1995) .
(n159)Footnote 156. See, e.g., Fluehmann v. Associates Fin. Servs., 2002 U.S. Dist. LEXIS 5755 (D.
Mass. Mar. 29, 2002) ; Ballard Servs. v. Conner, 807 So. 2d 519 (Ala. 2001) ; In re FirstMerit Bank, N.A.,
52 S.W.3d 749 (Tex. 2001) .
(n160)Footnote 157. Oakwood Mobile Homes, Inc. v. Godsey, 824 So. 2d 13 (Ala. 2001) ; Equifirst
Corp. v. Ware, 808 So. 2d 1 (Ala. 2001) .
(n161)Footnote 158. Jim Burke Auto., Inc. v. McGrue, 826 So. 2d 122 (Ala. 2002) ; Monsanto Co. v.
Benton Farm, 813 So. 2d 867 (Ala. 2001) ; Parkway Dodge, Inc. v. Yarbrough, 779 So. 2d 1205 (Ala. 2000)
.
(n162)Footnote 159. See Choctaw Generation L.P. v. American Home Assurance Co., 271 F.3d 403
(2d Cir. 2001) ; MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942 (11th Cir. 1999) , remanded with instructions to grant motion to compel arbitration, 1999 U.S. Dist. LEXIS 10662 (N.D. Ala. July 9, 1999) ;
Goodwin v. Ford Motor Credit Co., 970 F. Supp. 1007 (M.D. Ala. 1997) (FMCC can enforce arbitration
agreement found in dealership's installment sales agreements when FMCC is the intended and actual assignee); Boyd v. Homes of Legend, 981 F. Supp. 1423 (M.D. Ala. 1997) , remanded on jurisdictional grounds,
188 F.3d 1294 (11th Cir. 1999) ; Roberson v. Money Tree, 954 F. Supp. 1519 (M.D. Ala. 1997)
(forced-placed insurer can benefit from arbitration provision); Staples v. Money Tree, 936 F. Supp. 856
(M.D. Ala. 1996) ; Usina Costa Pinto S.A. Acucar E Alcool v. Louis Dreyfus Sugar Co., 933 F. Supp. 1170
(S.D.N.Y. 1996) ; Ex parte Napier, 723 So. 2d 49 (Ala. 1998) ; Ex parte Isbell, 708 So. 2d 571 (Ala. 1997)
; Nissan Motor Acceptance Corp. v. Ross, 703 So. 2d 324 (Ala. 1997) (assignee steps into shoes of assignor); Ex parte Gray, 686 So. 2d 250 (Ala. 1996) (salesman can enforce arbitration agreement entered into by
dealership employing the salesperson); Ex parte Gates, 675 So. 2d 371 (Ala. 1996) . But see Boyd v.
Homes of Legend, Inc., 981 F. Supp. 1423 (M.D. Ala. 1997) (finding estoppel theory inapplicable to the facts
of the case), remanded on jurisdictional grounds, 188 F.3d 1294 (11th Cir. 1999) ; Knepp v. Credit Acceptance Corp. (In re Knepp), 229 B.R. 821 (Bankr. N.D. Ala. 1999) .
(n163)Footnote 160. Price Plaintiffs v. Humana Ins. Co. (In re Humana Inc. Managed Care Litig.),
285 F.3d 971 (11th Cir. 2002) , rev'd, remanded sub nom.
PacifiCare Health Sys. v. Book, 538 U.S. 401,
123 S. Ct. 1531, 155 L. Ed. 2d 578 (2003) ; Choctaw Generation L.P. v. American Home Assurance Co.,
271 F.3d 403 (2d Cir. 2001) ; MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942 (11th Cir. 1999) , remanded with instructions to grant motion to compel arbitration, 1999 U.S. Dist. LEXIS 10662 (N.D. Ala. July 9,
1999) ; Sunkist Soft Drinks v. Sunkist Growers, 10 F.3d 753 (11th Cir. 1993) , cert. denied,
513 U.S.
869, 115 S. Ct. 190, 130 L. Ed. 2d 123 (1994) .
(n164)Footnote 161.
Hill v. GE Power Sys., 282 F.3d 343 (5th Cir. 2002) .
(n165)Footnote 162. Goodwin v. Ford Motor Credit Co., 970 F. Supp. 1007 (M.D. Ala. 1997) ; Universal Underwriters Life Ins. Co. v. Dutton, 736 So. 2d 564 (Ala. 1999) ; Nissan Motor Acceptance Corp. v.
Ross, 703 So. 2d 324 (Ala. 1997) . Cf. Green Tree Fin. Corp. v. Channell, 825 So. 2d 90 (Ala. 2002)
(where assignee could not take advantage of arbitration clause in one document between consumer and dealer, it could still take advantage of arbitration clause found in the installment sales agreement).
Page 38
1-6 Debtor-Creditor Law § 6.08
(n166)Footnote 163. Monsanto Co. v. Benton Farm, 813 So. 2d 867 (Ala. 2001) ; Ex parte Gray, 686
So. 2d 250 (Ala. 1996) (salesman can enforce arbitration agreement entered into by dealership employing the
salesperson).
(n167)Footnote 164. Knepp v. Credit Acceptance Corp. (In re Knepp), 229 B.R. 821 (Bankr. N.D. Ala.
1999) ; Universal Underwriters Life Ins. Co. v. Dutton, 736 So. 2d 564 (Ala. 1999) ; First Family Fin.
Servs. v. Rogers, 736 So. 2d 553 (Ala. 1999) . But see Staples v. Money Tree, 936 F. Supp. 856 (M.D. Ala.
1996) ; Ex parte Napier, 723 So. 2d 49 (Ala. 1998) (seller of physical damage insurance on mobile home).
(n168)Footnote 165. Ex parte Jones, 686 So. 2d 1166 (Ala. 1996) . But see Roberson v. Money Tree,
954 F. Supp. 1519 (M.D. Ala. 1997) .
(n169)Footnote 166. But see MS Dealer Serv. Corp. v. Franklin, 177 F.3d 942 (11th Cir. 1999)
(claims against service contract company are based on the contract containing arbitration clause and are
based on interdependent misconduct between dealer signing contract and service contract company), remanded with instructions to grant motion to compel arbitration, 1999 U.S. Dist. LEXIS 10662 (N.D. Ala.
July 9, 1999) .
(n170)Footnote 167. See, e.g., Mich. Comp. Laws § 566.302; Mich. Comp. Laws § 492.112(a).
(n171)Footnote 168.
Rugumbwa v. Betten Motor Sales, 136 F. Supp. 2d 729 (W.D. Mich. 2001) .
(n172)Footnote 169. See, e.g., Cal. Civ. Code § 2985.8 (leasing); Kroupa v. Sunrise Ford, 77 Cal.
App. 4th 835, 92 Cal. Rptr. 2d 42 (2d Dist. 1999) , review denied, request denied, 2000 Cal. LEXIS 1894
(Cal. 2000) ; Wash. Rev. Code § 63.14.040; Commonwealth v. Metro Chrysler-Plymouth Jeep-Eagle, Inc.,
Clearinghouse No. 52,028 (Pa. Commw. Ct. 1997); Kenworthy v. Bolin, 17 Wash. App. 650, 564 P.2d 835
(1977) . See also Ohio Rev. Code § 1317.02. But see Sharlow v. Wally McCarthy Pontiac-GMC
Trucks-Hyundai, Inc., 2000 U.S. App. LEXIS 15627 (8th Cir. July 6, 2000) (unpublished, citation limited)
(following Scott); Scott v. Forest Lake Chrysler-Plymouth-Dodge, 611 N.W.2d 346 (Minn. 2000) (contingency clause need not be included in retail installment contract despite single document rule), appeal after
remand, remanded, 637 N.W.2d 587 (Minn. Ct. App. 2002) .
(n173)Footnote 170. 15 U.S.C. § 1012(b); see also
U.S. 491, 113 S. Ct. 2202, 124 L. Ed. 2d 449 (1993) .
United States Dep't of Treasury v. Fabe, 508
(n174)Footnote 171. See Standard Sec. Life Ins. Co. of N.Y. v. West, 267 F.3d 821, 823 (8th Cir.
2001) (noting agreement of parties that FAA does not specifically relate to business of insurance); American Bankers Ins. Co. v. Crawford, 757 So. 2d 1125 (Ala. 1999) .
(n175)Footnote 172. Standard Sec. Life Ins. Co. of N.Y. v. West, 267 F.3d 821 (8th Cir. 2001) ;
Quackenbush v. Allstate Ins. Co., 121 F.3d 1372 (9th Cir. 1997) (insurance statute prohibiting insurance liquidator from being compelled to arbitrate disputes prevails over FAA); Stephens v. American Int'l Ins. Co.,
66 F.3d 41 (2d Cir. 1995) ; Mutual Reinsurance Bureau v. Great Plains Mut. Ins. Co., 969 F.2d 931 (10th
Cir.) , cert. denied,
506 U.S. 1001, 113 S. Ct. 604, 121 L. Ed. 2d 540 (1992) ; Smith v. PacifiCare Behavioral Health of Cal., Inc., 93 Cal. App. 4th 139, 158, 161-62, 113 Cal. Rptr. 2d 140, 154, 156-57 (2d Dist.
2001) , cert. denied,
537 U.S. 818, 123 S. Ct. 92, 154 L. Ed. 2d 23 (2002) ; Balaban-Zilke v. Cigna
Healthcare of Cal., Inc., 2003 Cal. App. Unpub. LEXIS 5198 (Cal. Ct. App. May 28, 2003) cert. denied
540 U.S. 1110, 124 S. Ct. 1077, 157 L. Ed. 2d 897 (2004) ; Ciccarelli v. Blue Cross of Cal., 2003 Cal. App.
Unpub. LEXIS 660 (Cal. Ct. App. Jan. 22, 2003) ; Imbler v. PacifiCare of Cal., Inc., 103 Cal. App. 4th
567, 126 Cal. Rptr. 2d 715 (2002) ; Pagarigan v. Super. Ct., 102 Cal. App. 4th 1121, 126 Cal. Rptr. 2d
124 (2001) .
(n176)Footnote 173. Ala. Code § 8-1-41. For the most recent Supreme Court discussion about whether
a statute "regulates the 'business of insurance,' " see
UNUM Life Ins. Co. of Am. v. Ward, 526 U.S. 358,
119 S. Ct. 1380, 143 L. Ed. 2d 462 (1999) .
Page 39
1-6 Debtor-Creditor Law § 6.08
(n177)Footnote 174. American Bankers Ins. Co. v. Crawford, 757 So. 2d 1125 (Ala. 1999) ; see also
Clayton v. Woodmen of the World Life Ins. Soc'y, 981 F. Supp. 1447 (M.D. Ala. 1997) ; Celtic Life Ins. Co.
v. McLendon, 814 So. 2d 222 (Ala. 2001) . See also Triton Lines, Inc. v. S.S. Mut. Underwriting Ass'n, 707
F. Supp. 277, 279 (S.D. Tex. 1989) (dealing with interrelationship of Texas insurance code and state UDAP
statute); Hart v. Orion Ins. Co., 453 F.2d 1358 (10th Cir. 1971) ; Hamilton Life Ins. Co. v. Republic Nat'l
Life Ins. Co., 408 F.2d 606 (2d Cir. 1969) . But see Knepp v. Credit Acceptance Corp. (In re Knepp), 229
B.R. 821 (Bankr. N.D. Ala. 1999) .
(n178)Footnote 175. Ark. Code Ann. § 16-108-201; Ga. Code Ann. § 9-9-1 (arbitration statute significantly different than the Uniform Arbitration Act); Kan. Stat. Ann. § 5-401; Mo. Stat. § 435.350; Mont. Code
Ann. § 27-5-111; Neb. Rev. Stat. § 25-2601; Okla. Stat. Rev. tit 15, § 802.
(n179)Footnote 176. Standard Sec. Life Ins. Co. v. West, 267 F.3d 821 (8th Cir. 2001) ; Mutual Reinsurance Bureau v. Great Plains Mut. Ins. Co., 969 F.2d 931 (10th Cir.) , cert. denied,
506 U.S. 1001,
113 S. Ct. 604, 121 L. Ed. 2d 540 (1992) ; Friday v. Trinity Universal, 262 Kan. 347, 939 P.2d 869 (1997)
.
(n180)Footnote 177. See Miller v. National Fid. Life Ins. Co., 588 F.2d 185 (5th Cir. 1979) (no law in
Georgia insurance code is impaired by the Federal Arbitration Act).
(n181)Footnote 178.
(1999) .
Humana Inc. v. Forsyth, 525 U.S. 299, 119 S. Ct. 710, 142 L. Ed. 2d 753
(n182)Footnote 179. Ark. Code Ann. § 16-108-201; Ga. Code Ann. § 9-9-1 (arbitration statute significantly different than the Uniform Arbitration Act); Kan. Stat. Ann. § 5-401; Mo. Stat. § 435.350; Mont. Code
Ann. § 27-5-111; Neb. Rev. Stat. § 25-2601; Okla. Stat. Rev. tit 15, § 802.
(n183)Footnote 180. Diskin v. J.P. Stevens & Co., 836 F.2d 47 (1st Cir. 1987) ; Coastal Indus., Inc.
v. Automatic Steam Prods. Corp., 654 F.2d 375 (5th Cir. 1981) ; Supak & Sons Mfg. Co. v. Pervel Indus.,
Inc., 593 F.2d 135 (4th Cir. 1979) ; N&D Fashions, Inc. v. DHJ Indus., Inc., 548 F.2d 722 (8th Cir. 1976) .
(n184)Footnote 181. See, e.g., Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997) , cert. denied,
522 U.S. 808, 118 S. Ct. 47, 139 L. Ed. 2d 13 (1997) (arbitration agreement binding where consumer orders a product over the telephone, product can be returned within thirty days if not opened, and product
arrives with an arbitration agreement included in the papers inside the box); Marsh v. First USA Bank, N.A.,
103 F. Supp. 2d 909 (N.D. Tex. 2000) .
(n185)Footnote 182.
Badie v. Bank of Am., 67 Cal. App. 4th 779, 79 Cal. Rptr. 2d 273 (1998) (finding
that a "bill-stuffer"-imposed change in terms that takes away the right to a jury trial is fundamentally different from change in interest rate, late charges, or other card terms); Union Planters Bank, N.A. v. Watson,
2000 Ala. LEXIS 546 (Ala. Dec. 15, 2000) , reh'g granted, op. withdrawn, substituted op., 794 So. 2d 1094
(Ala. 2001) (cited Badie approvingly; held (based on the agreement's language) that arbitration clause would
apply only if the cardholders affirmatively manifested their consent by signing a card). The consumer's complaint and two trial briefs from Badie are included in hard copy and on a WordPerfect disk in National Consumer Law Center's Consumer Law Pleadings With Disk, Number One, Ch. 1 (1994). See also Hurley State
Bank v. French, No. 97-C-1645-W (N.D. Ala. Sept. 10, 1997) (stuffer arbitration agreement is unenforceable); Navarro-Rice v. First USA Bank, Civ. No. 97009-06901 (Or. Cir. Ct. 1998) (arbitration agreement requiring cardholders to choose between arbitration and closing their accounts enjoined when mailed out to
card holders after class action instituted); Myers v. MBNA Am. & N. Am. Capitol Corp., 2001 U.S. Dist.
LEXIS 11900 (D. Mont. Mar. 28, 2001) ; Long v. Fidelity Water Sys., 2000 U.S. Dist. LEXIS 7827 (N.D.
Cal. May 24, 2000)) .
(n186)Footnote 183. See also Avedon Eng'g, Inc. v. Seatex, 126 F.3d 1279 (10th Cir. 1997) (state law
determines whether an unsigned statement requiring binding arbitration should be incorporated into the
signed contract between the two parties); Hurley State Bank v. French, No. 97-C-1645-W (N.D. Ala. Sept.
Page 40
1-6 Debtor-Creditor Law § 6.08
10, 1997) (stuffer arbitration agreement is unenforceable); Navarro-Rice v. First USA Bank, Civ. No.
97009-06901 (Or. Cir. Ct. 1998) (arbitration agreement enjoined where mailed out to card holders after class
action instituted requiring choice between arbitration and closing their accounts).
(n187)Footnote 184. See 1999 Del. Laws Ch. 15 (Apr. 9, 1999). See also 1999 Utah Laws Ch. 180 (defining a change and term and authorizing use of bill stuffers to change terms).
(n188)Footnote 185.
Blue Cross & Blue Shield v. Woodruff, 803 So. 2d 519 (Ala. 2001) .
(n189)Footnote 186.
2000) .
Kennedy v. Conseco Fin Corp., 2000 U.S. Dist. LEXIS 17704 (N.D. Ill. Nov. 29,
(n190)Footnote 187.
1126 (9th Cir. 2003) .
182 F. Supp. 2d 902 (N.D. Cal. 2002) , aff'd in part, rev'd in part, 319 F.3d
(n191)Footnote 188. See, e.g., United Computer Sys., Inc. v. AT & T Corp., 298 F.3d 756 (9th Cir.
2002) ; Chappel v. Laboratory Corp. of Am., 232 F.3d 719, 724 (9th Cir. 2000) ; Barker v. Golf U.S.A.,
Inc., 154 F.3d 788, 793 (8th Cir. 1998) ; PPG Indus., Inc. v. Webster Auto Parts, Inc., 128 F.3d 103, 107
(2d Cir. 1997) . The Seventh Circuit, however, has rejected the prejudice requirement for finding waiver,
focusing entirely on the actions and intentions of the party against whom waiver is sought. Grumhaus v.
Comerica Sec., Inc., 223 F.3d 648, 652 (7th Cir. 2000) ("the central question is whether the party against
whom the waiver is to be found intended its selection and not whether either party would be prejudiced by
the forum change.").
(n192)Footnote 189. Worldsource Coil Coating, Inc. v. McGraw Constr. Co., Inc., 946 F.2d 473, 477
(6th Cir. 1991) (applying Illinois law, and finding waiver of right to arbitrate based on moving party's filing
of a state court action seeking preliminary and permanent injunctions and compensatory and punitive damages); Palm Harbor Homes, Inc. v. Crawford, 689 So. 2d 3 (Ala. 1997) (manufacturer waives right to arbitrate breach of warranty claims by substantially invoking litigation process); Checksmart v. Morgan, 2003
Ohio 163 (Ct. App. 2003) . But see Louis Dreyfus Negoce S.A. v. Blystad Shipping & Trading, Inc., 252
F.3d 218, 229 (2d Cir.) , cert. denied,
534 U.S. 1020, 122 S. Ct. 546, 151 L. Ed. 2d 423 (2001) (finding
no waiver when party filed suit eight days before commencing arbitration and no litigation activity took
place beyond parties' initial assertion of claims); Williams v. HealthAlliance Hosps., Inc., 158 F. Supp. 2d
156, 161 (D. Mass. 2001) (finding no waiver when plaintiff sought arbitration before filing litigation complaint and complaint included arbitration request if agreement were found to be applicable).
(n193)Footnote 190. Nicholson v. Labor Ready, Inc., 1997 U.S. Dist. LEXIS 23494 (N.D. Cal. 1997) ;
Armendariz v. Foundation Health Psychare Servs., Inc., 24 Cal. 4th 83, 99 Cal. Rptr. 2d 745, 6 P.3d 669
(2000) ; Pinedo v. Premium Tobacco Stores, Inc., 85 Cal. App. 4th 774, 102 Cal. Rptr. 2d 435 (2d Dist.
2000) (arbitration clause held to be unconscionable, in part because it only addressed claims that would normally be raised by employees and not employers); Arnold v. United Cos. Lending Corp., 511 S.E.2d 854
(W. Va. 1998) .
(n194)Footnote 191. Bess v. Check Express, 294 F.3d 1298, 1301 (11th Cir. 2002) (fact that lender
may litigate while borrower must arbitrate does not by itself render clause unconscionable); Harris v. Green
Tree Fin. Corp, 183 F.3d 173 (3d Cir. 1999) (inequality of bargaining power not reason enough to invalidate
arbitration agreement); Torrance v. Aames Funding Corp., 242 F. Supp. 2d 862 (D. Or. 2002) (reserving
foreclosure claims for court justified on the basis of business realities; clause struck down on other unconscionability grounds); Pridgen v. Green Tree Fin. Servs. Corp., 88 F. Supp. 2d 655 (S.D. Miss. 2000) ;
Goodwin v. Ford Motor Credit Co., 970 F. Supp. 1007 (M.D. Ala. 1997) ; Ex parte Perry, 744 So. 2d 859
(Ala. 1999) ; Green Tree Fin. Corp. v. Wampler, 749 So. 2d 409 (Ala. 1999) ; Green Tree Fin. Corp. v.
Vintson, 753 So. 2d 497 (Ala. 1999) ; Pick v. Discover Fin. Servs., Inc., 2001 U.S. Dist. LEXIS 15777, at
*15-16 (D. Del. Sept. 28, 2001) ("mutuality is not a requirement of a valid arbitration clause, provided that
the underlying contract is supported by consideration"); Hale v. First USA Bank, N.A., 2001 U.S. Dist.
Page 41
1-6 Debtor-Creditor Law § 6.08
LEXIS 8045 (S.D.N.Y June 12, 2001) ; Conseco Fin. Servicing Corp. v. Wilder, 47 S.W.3d 335 (Ky. Ct. App.
2001) ("there is no inherent reason to require that the parties have equal arbitration rights").
(n195)Footnote 192. See Pitchford v. Oakwood Mobile Homes, Inc., 124 F. Supp. 2d 958 (W.D. Va.
2000) . But see Zawikowski v. Beneficial Nat'l Bank, 1999 U.S. Dist. LEXIS 514 (N.D. Ill. Jan. 7, 1999)
(finding no problems as to non-mutuality because the consumer still has the right to invoke arbitration).
(n196)Footnote 193. See National Consumer Law Center, Consumer Arbitration Agreements (2d ed.
2002).
(n197)Footnote 193.1.
Green Tree v. Bazzle, 539 U.S. 444 (2003) .
(n198)Footnote 193.2. See National Consumer Law Center, Consumer Arbitration Agreements § 4.3.7
(4th ed. 2004 and Supp.).
(n199)Footnote 193.3. Id.
(n200)Footnote 193.4. Id. § 9.6 (Supp.).
(n201)Footnote 193.5. Id.
(n202)Footnote 193.6.
L. Ed. 2d 76 (1995) .
Mastrobuono v. Shearson Lehman Hutton, 514 U.S. 52, 115 S. Ct. 1212, 131
(n203)Footnote 193.7. The AAA rules are found at www.adr.org, the NAF rules at
www.arbitration-forum.com, and the JAMS rules at http://JAMSadr.com. The AAA's Consumer Due Process
Protocol, Principle 14 states that punitive damages are available in an arbitration proceeding. On the other
hand, NAF Rule 37B states that the award can not exceed the amount requested in the claim, thus apparently
requiring a consumer seeking $11,000 in actual damages and $250,000 in punitive damages to list such
amounts in the claim and to pay NAF a filing fee based on a $261,000 claim: quite expensive indeed.
(n204)Footnote 193.8. See National Consumer Law Center, Consumer Arbitration Agreements §
9.6.3.4 (4th ed. 2004 and Supp.).
(n205)Footnote 193.9. Id.
(n206)Footnote 193.10. Id.
(n207)Footnote 193.11. National Consumer Law Center, Consumer Arbitration Agreements § 5.3 (4th
ed. 2004 and Supp.).
(n208)Footnote 194. These special defenses may be asserted by the RTC and the FSLIC as well as the
FDIC. The Resolution Trust Corporation (RTC) is appointed receiver by the Office of Thrift Supervision
created by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), Pub. L. No.
101-73, 103 Stat. 183. Among other things, FIRREA serves to clarify and amend certain sections of the Federal Deposit Insurance Act, which includes 12 U.S.C. § 1823(e). Section 1821(d)(a) of FIRREA provides that
"[a]ny agreement which does not meet the requirements set forth in [section 1823(e)] shall not form the basis
of, or substantially comprise, a claim against the receiver or the corporation." As a result of FIRREA, duties
of the former Federal Savings and Loan Insurance Corporation (FSLIC) have been transferred either to the
FDIC or Resolution Trust Corporation (RTC). Assignees of these agencies are also protected.
For a more extensive discussion, see National Consumer Law Center, The Cost of Credit: Regulation,
Preemption and Industry Abuses. § 10.7 (3d ed. and supp.)
(n209)Footnote 195.
315 U.S. 447, 62 S. Ct. 676, 86 L. Ed. 956 (1942) .
(n210)Footnote 196. D'Oench applies only to claims raised by borrowers, not depositors. Fletcher
Village Condo. Ass'n v. FDIC, 864 F. Supp. 259 (D. Mass. 1994) . D'Oench also does not apply to agree-
Page 42
1-6 Debtor-Creditor Law § 6.08
ments between the receiver and a party other than a borrower. See, e.g., Maryland Nat'l Bank v. RTC, 895
F. Supp. 762 (D. Md. 1995) .
(n211)Footnote 197. Federal Deposit Insurance Act of 1950, § 2(13)(e), codified at 12 U.S.C. §
1823(e). Section 1823(e) is often referred to as a "codification" of the holding in D'Oench. It is not a codification, but requires a separate legal analysis. To the extent § 1823(e) is a codification, it merely codifies the
positive duty of the FDIC to honor agreements between debtors and banks. There is no debate of § 1823(e) in
its legislative history. 96 Cong. Rec. 10, 731-32 (1950).
(n212)Footnote 198. The fact that a lawsuit was initiated against the bank before its failure and that
pleadings would have been part of the bank's records is insufficient to circumvent D'Oench. It is not enough
that bank records give notice of a potential defense to the obligation. Randolph v. RTC, 995 F.2d 611 (5th
Cir. 1993) (if pleadings qualified as bank records under D'Oench, regulators would have to speculate as to
the outcome of pending lawsuits).
(n213)Footnote 199. See, e.g., John v. RTC, 39 F.3d 773 (7th Cir. 1994) (D'Oench not "limitless, per
se guarantee of victory"); E.I. DuPont de Nemours & Co. v. FDIC, 32 F.3d 592 (D.C. Cir. 1994) , reh'g
denied, 45 F.3d 458 (D.C. Cir. 1995) (only if disclosure could have made a difference does D'Oench "logically bar recovery for failure to disclose"). This trend has been helped along immeasurably by the Supreme
Court's decision in
O'Melveny & Myers v. FDIC, 512 U.S. 79, 114 S. Ct. 2048, 129 L. Ed. 2d 67 (1994) ,
which held that FIRREA is a comprehensive statute which does not provide for extension though federal
common law. See also Cinco Enters., Inc. v. Benso, 1999 Okla. LEXIS 93 (Okla. Sept. 28, 1999) (unpublished) (the court cited evidence that showed that it was the guarantor's and bank's intention that the
guaranty would cover only one note, and other evidence indicating that the guaranty was never relied on for
antecedent debts); FDIC v. Deglau, 207 F.3d 153 (3d Cir. 2000) (suggesting that a conflict of interest defense, arising from the representation of an attorney to the original transaction who allegedly induced them to
sign the guaranty, would not be barred by § 1823(e) because it is not the sort of issue that would be the subject of bank records). But see Beal Bank, SSB v. Lucks, 791 A.2d 752 (Del. Ch. 2000) (deferring issue to
trial). See EMC Mortg. Corp. v. Davis, 167 S.W.3d 406, 417 (Tex. App. 2005) (where note ambiguous on its
face, section 1823(e) did not bar consideration of additional documents to construe the note's balloon payment provision because those documents did not tend to diminish the mortgagee's interest in the note, but
rather helped define that interest).
(n214)Footnote 200. Holder in due course is defined in UCC § 3-302(a)(2) as
"the holder of an instrument [where] ...
"(2) the holder took the instrument for value, (ii) in good faith, (iii) without notice that the
instrument is overdue or has been dishonored ... (iv) without notice that any party has a defense or claim in recoupment ..."
(emphasis added).
(n215)Footnote 201. In
O'Melveny & Meyers v. FDIC, 512 U.S. 79, 114 S. Ct. 2048, 129 L. Ed. 2d
67 (1994) , Justice Scalia roundly rejected the idea of a federal common law supplementing FIRREA and
refused to displace state law merely because the FDIC was involved. The lower courts that have taken note
of the O'Melveny decision have concluded that FIRREA implicitly excludes defenses based on federal common law which are not specifically mentioned in the statute. See, e.g., Ledo Fin. Corp. v. Summers, 122
F.3d 825 (9th Cir. 1997) (D'Oench doctrine not applicable in light of O'Melveny, but court declines to decide
whether D'Oench overruled); Murphy v. FDIC, 61 F.3d 34 (D.C. Cir. 1995) ; DiVall Insured Income Fund
Ltd. P'ship v. Boatmen's First Nat'l Bank, 69 F.3d 1398 (8th Cir. 1995) ; Nashville Lodging Co. v. RTC, 59
F.2d 236 (D.C. Cir. 1995) . But see Young v. FDIC, 103 F.3d 1180 (4th Cir.) , cert. denied,
522 U.S.
Page 43
1-6 Debtor-Creditor Law § 6.08
928, 118 S. Ct. 329, 139 L. Ed. 2d 255 (1997) (D'Oench remains separate and independent ground for decision); Rankin v. Toberoff, 1998 U.S. Dist. LEXIS 9714 (S.D.N.Y. June 30, 1998) (concluding that D'Oench
survives O'Melveny in Second Circuit). See also FDIC v. Deglau, 207 F.3d 153 (3d Cir. 2000) (holding that
O'Melveny overruled D'Oench); DiMuzio v. RTC, 68 F.3d 777, 780 n.2 (3d Cir. 1995) (suggesting that
D'Oench may no longer exist as a separate bar to defenses).
(n216)Footnote 202. See also Allied Elevator v. East Tex. State Bank, 965 F.2d 34 (5th Cir. 1992)
(D'Oench inapplicable to breach of contract claim for bank's failure to procure credit life insurance requested
in writing on the note).
(n217)Footnote 203. See § 6.08[5] supra.
(n218)Footnote 204. See, e.g., FSLIC v. Mackie, 962 F.2d 1144, 1151 (5th Cir. 1992) ; see also
FDIC v. Aetna Casualty & Sur. Co., 947 F.2d 196 (6th Cir. 1991) (D'Oench is inapplicable to insurance contracts which are conditional agreements and not negotiable instruments).
(n219)Footnote 205.
RTC v. Cook, 840 S.W.2d 42 (Tex. Ct. App. 1992) .
(n220)Footnote 206. For a sampling of claims and defenses making inroads, see National Consumer
Law Center, Cost of Credit § 10.7.5.
(n221)Footnote 207. FDIC v. Blue Rock Shopping Ctr., 766 F.2d 744 (3d Cir. 1985) (D'Oench and §
1823(e) do not protect the FDIC from the consequences of its own conduct). Maryland Nat'l Bank v. RTC,
895 F. Supp. 762 (D. Md. 1995) (RTC cannot use D'Oench to contest enforceability of settlement agreement
between the plaintiff and itself); Kuehl v. Numerica Fin. Corp., 1994 U.S. Dist. LEXIS 17259 (D.N.H. Nov.
23, 1994) (unpublished) (claim for misapplication of proceeds after FDIC stepped in is not barred); Cadle
Co. v. Wallach Concrete, Inc., 897 P.2d 1104 (N.M. 1995) (claim based on FDIC's breach of duty of good
faith and commercial reasonableness not barred).
(n222)Footnote 208. 28 U.S.C. §§ 2680
(n223)Footnote 209. The U.S. Supreme Court in United States v. Gaubert, 885 F.2d 1284 (5th Cir.
1989) , and remanded,
499 U.S. 315, 111 S. Ct. 1267, 113 L. Ed. 2d 335 (1991) , found that a discretionary function exception shields FHLBB decisions upon takeover. (It should be noted, however, that as Justice
Scalia observed in Gaubert, the lack of a factual record in this case made it quite difficult to find that the particular activities involved were properly shielded by DFE immunity. Since the Court could do little more
than speculate about the nature of the FHLBB's alleged negligent decision-making, a properly developed
factual record could produce a different result.) See also FDIC v. Healey, 991 F. Supp. 53 (D. Conn. 1998)
(finding that DFE immunity would bar any claims based upon an act or omission in the execution of
FIRREA); First Nat'l Ins. Co. of Am. v. FDIC, 977 F. Supp. 1060 (S.D. Cal. 1997) .
(n224)Footnote 210. 12 U.S.C. § 1821(d). See RTC v. Kolea, 866 F. Supp. 197 (E.D. Pa. 1994) , for a
good discussion of the case law in this area.
(n225)Footnote 211. Several courts have found that affirmative defenses are not subject to the claims
process. Bolduc v. Beal Bank, 167 F.3d 667 (1st Cir. 1999) (borrower's challenge to foreclosure action not
a FIRREA "claim" subject to exhaustion); RTC v. Love, 36 F.3d 972 (10th Cir. 1994) (defense to action for
deficiency after foreclosure not "claim" or "action" as used in § 1821(d)(13)(D)); National Union Fire Ins.
Co. v. City Sav., F.S.B., 28 F.3d 376 (3d Cir. 1994) (distinguishes between affirmative defense and counterclaim which would be barred).
(n226)Footnote 212. Bailey v. Defenbaugh & Co., 513 F. Supp. 232 (N.D. Miss. 1981) ;
Transamerica Fin. Corp. v. Superior Court, 158 Ariz. 115, 761 P.2d 1019 (1988) , rev'g 155 Ariz. 327,
746 P.2d 497 (Ct. App. 1987) (consumer loan act voiding usurious loans implied a right of action to seek that
remedy). But see Taylor v. Citizens Fed. Sav. & Loan, 846 F.2d 1320 (11th Cir. 1988) (no private right of
action to enforce FHLBB regulations promulgated pursuant to Home Owner's Loan Act of 1933, 12 U.S.C. §
Page 44
1-6 Debtor-Creditor Law § 6.08
1461); Doubet v. USA Fin. Servs., Inc., 714 F. Supp. 980 (C.D. Ill. 1987) ; Miller v. Pacific Shore Funding, 224 F. Supp. 2d 977 (D. Md. 2002) (no private cause of action to enforce provision of licensing statute
that limits lender's operations to certain locations); Staley v. Americorp Credit Corp., 164 F. Supp. 2d 578
(D. Md. 2001) (no private cause of action to enforce requirement that lender may operate only out of specific
location); Luckett v. Alpha Constr. & Dev., Inc., 2001 U.S. Dist. LEXIS 17623 (N.D. Ill. Oct. 22, 2001) (no
private right of action under Ill. Residential Loan Act where there was no evidence of legislative intent to
create private remedy and court found criminal penalty sufficient for enforcement). See also Wombold v.
Assocs. Fin. Servs. Co. of Mont., Inc., 104 P.3d 1080 (Mont. 2004) (finding implied private right of action
under Montana's Consumer Loan Act, since enacted to benefit borrowers); Patchell v. Option One Mortgage Corp. (In re Patchell), 334 B.R. 492 (Bankr. D. Mass. 2005) (loan may be avoided or rescinded, even
though no civil penalties available).
(n227)Footnote 213. See Lloyd Capital Corp. v. Pat Henchar, Inc., 544 N.Y.S.2d 178 (App. Div. 1989)
(violation of SBA regulations insufficient to render contract unenforceable), aff'd, 603 N.E.2d 246 (N.Y.
1992) . See generally § 6.08[7][a][ii] infra.
(n228)Footnote 214. 2B Singer, Sutherland Statutory Construction § 55.07 (5th ed. 1992).
(n229)Footnote 215.
Walker v. Peoples Fin. & Thrift Co., 46 Ariz. 224, 49 P.2d 1005 (Ariz. 1935) ;
G. Nicotera Loan Corp. v. Gallagher, 115 Conn. 102, 160 A. 426 (1932) ; Hartsfield Co. v. Robertson, 48
Ga. App. 735, 173 S.E. 201 (Ga. Ct. App. 1934) ; Burque v. Brodeur, 85 N.H. 310, 158 A. 127 (1932) .
(n230)Footnote 216. Moore v. Comfed Sav. Bank, 908 F.2d 834 (11th Cir. 1990) ; Norris v. Sigler
Daisy Corp., 392 S.E.2d 242 (Ga. 1990) . See also Schuran, Inc. v. Walnut Hill Assocs., 606 A.2d 885 (N.J.
Super. Ct. 1991) (criminal usury statute silent as to penalty; court held it made only excessive interest illegal,
not contract, thus, court severed illegal interest provision and permitted recovery of loan principal).
(n231)Footnote 217. E.g., In re Vehm Eng'g Corp., 521 F.2d 186 (9th Cir. 1975) ; Speare v. Consolidated Assets Corp., 367 F.2d 208 (2d Cir. 1966) ; Patterson v. Green, 474 So. 2d 725 (Ala. Ct. App. 1985)
; Thomas Lakes Owners Assoc. v. Riley, 612 N.W.2d 529 (Neb. App. 2000) (obligation to pay interest is
void, and creditor cannot replace usurious interest with interest at legal rate); Daenzer v. Wayland Ford,
Inc., 193 F. Supp. 2d 1030 (W.D. Mich. 2002) (finance charges void where seller does not give copy of contract to buyer at time buyer signs, but civil penalties under separate Motor Vehicle Sales Finance Act apply
only if seller has sought prohibited charges); Route 50 Auto Sales, Inc. v. Muncy, 771 N.E.2d 635 (Ill. App.
Ct. 2002) (credit seller whose contract did not include items required by MVRISA cannot recover interest,
late charges, or repossession fees, but debt for principal is not void); Thomas Lakes Owners Assoc. v. Riley,
612 N.W.2d 529 (Neb. Ct. App. 2000) (obligation to pay interest is void, and creditor cannot replace usurious
interest with interest at legal rate). See also First Bus. Credit Co. v. Graboyes (In re Grayboyes), 2006 U.S.
Dist. LEXIS 6671 (E.D. Pa. Feb. 22, 2006) (where interest capped by statute, interest reduced to statutory
rate cap); Walters v. PDI Mgmt. Servs., 2004 U.S. Dist. LEXIS 19570 (S.D. Ind. June 14, 2004) (same);
Van Carr Enters. v. Hamco, Inc., 2006 Ark. LEXIS 198 (Ark. Mar. 16, 2006) (loan void only as to unpaid
interest); Meklir v. J.C. Penney Co., 2005 Mich. App. LEXIS 1608 (Mich. Ct. App. July 5, 2005) (unpublished, citation limited) (loan void as to interest, late fees, and attorney fees); Badalamento v. Blonde, 57
U.C.C. Rep. Serv. 2d (Callaghan) 186 (Mich. Ct. App. 2005) (unpublished, citation limited) (interest void on
loan).
(n232)Footnote 218. Compare Cherry v. Berg, 508 S.W.2d 869 (Tex. Civ. App. 1974) (usurious bonus
designated by parties as interest), with In re Vehm Eng'g Corp., 521 F.2d 186 (9th Cir. 1975) (payments
under usurious agreement, although denominated as interest, will be deemed payment on principal); Baruch Inv. Co. v. Huntoon, 257 Cal. App. 2d 485, 65 Cal. Rptr. 131 (1967) (no actual application to interest
shown).
(n233)Footnote 219. See, e.g., In re Vehm Eng'g Corp., 521 F.2d 186 (9th Cir. 1975) (California law);
Speare v. Consolidated Assets Corp., 367 F.2d 208 (2d Cir. 1966) (New Jersey law); Westman v. Dye, 214
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1-6 Debtor-Creditor Law § 6.08
Cal. 28, 4 P.2d 134 (1931) ; Tauber v. Johnson, 8 Ill. App. 3d 789, 291 N.E.2d 180 (Ill. App. Ct. 1972)
(decision under MVRISA); In re Castillian Apartments, Inc., 281 N.C. 709, 190 S.E.2d 161 (1972) ;
Packer v. Wardwell, 88 Or. App. 236, 744 P.2d 1312 (Ct. App. 1987) ; In re Bogan, 281 F. Supp. 242 (W.D.
Tenn. 1968) (Tennessee law).
(n234)Footnote 220. See, e.g., UCCC § 5.202(2) (1968 Model Code); Edwards v. Alabama Farm Bureau Mut. Casualty Ins. Co., 509 So. 2d 232 (Ala. Civ. App. 1986) , cert. quashed, 509 So. 2d 241 (1987)
(loan by unlicensed lender voided under Alabama Mini-Code; borrower also entitled to refund of payments
made). Some versions of the uniform small loan act have denied the creditor the right to "retain" payments,
so a refund is obviously required. See Young v. Barker, 185 Kan. 246, 342 P.2d 150 (1959) (Kansas has
since adopted a version of the UCCC). See also Ganus v. Jopes, 470 So. 2d. 237 (La. Ct. App. 1985) (statutory "forfeiture" required return of all interest payments); Chandlee v. Tharp, 161 Miss. 623, 137 So. 540
(1931) (usury ceiling is 8%; payment to principal recoverable if contract rate exceeds 20%); Ferrari v.
Howard, 2002 Ohio App. LEXIS 3632 (July 11, 2002) (unpublished) (interpreting former version of retail
installment sales act; when violation was willful, consumer has no further obligation on the contract, need
not return the collateral, and is entitled to refund of all payments). See also Robertson v. Strickland (In re
Robertson), 333 B.R. 894 (Bankr. M. D. Fla. 2005) (under Florida law, entire principal obligation is voided);
North Carolina ex rel. Cooper v. NCCS Loans, Inc., 624 S.E.2d 371 (N.C. Ct. App. 2005) (North Carolina
law requires voiding usurious loan and return of all payments); Malespin v. AB, 10 Misc. 3d 1057A (N.Y.
Civ. Ct. 2005) (under New York law, entire loan is void and borrower can "walk away" from the loan with
no obligation and recover amounts paid).
(n235)Footnote 221.
Daenzer v. Wayland Ford, Inc., 210 F.R.D. 202 (W.D. Mich. 2002) .
(n236)Footnote 222. See
Szerdahelyi v. Harris, 67 N.Y.2d 42, 499 N.Y.S.2d 650, 490 N.E.2d 517
(1986) (voiding is neither penalty nor forfeiture).
(n237)Footnote 223. See In re Harrington, 6 B.R. 655 (Bankr. D.R.I. 1980) ; Kuykendall v. Malernee, 516 P.2d 558 (Okla. Ct. App. 1973) .
(n238)Footnote 224.
Ewell v. Daggs, 108 U.S. 143, 2 S. Ct. 408, 27 L. Ed. 682 (1883) (interpreting
Texas statute); Wakefield v. Goldstein, 644 F.2d 707 (8th Cir. 1981) (Arkansas law); Chandlee v. Tharp,
161 Miss. 623, 137 So. 540 (1931) .
(n239)Footnote 225. The precise distinction between the voluntary and involuntary payment of usury is
far from obvious. It is apparently a question of fact. See Conrad v. Home & Auto Loan Co., Inc., 53
A.D.2d 48, 385 N.Y.S.2d 979 (1976) (remand for factual determination). See also Thelen v. Ducharme, 151
Mich. App. 441, 390 N.W.2d 264 (Mich. Ct. App. 1986) (payment by borrowers after judgment rendered
against them is not voluntary payment which would waive usury); Sienkiewicz v. Leonard Mortgage Co.,
59 Mich. App. 154, 229 N.W.2d 352 (Mich. Ct. App. 1975) (issue of voluntariness not properly raised).
(n240)Footnote 226. See, e.g., Wakefield v. Goldstein, 644 F.2d 707 (8th Cir. 1981) ; Bizzoco v.
Chintz, 193 Conn. 304, 476 A.2d 572 (1984) ; Waldorf v. Zinberg, 106 Mich. App. 159, 307 N.W.2d 749
(Mich Ct. App. 1981) ; Sienkiewicz v. Leonard Mortgage Co., 59 Mich. App. 154, 229 N.W.2d 352 (Mich
Ct. App. 1975) . Other courts have held that usury voluntarily paid is nevertheless recoverable. See Kline v.
Robinson, 428 P.2d 190 (Nev. 1967) ; Siefkes v. Clark Title Co., 215 N.W.2d 648 (S.D. 1974) . It is frequently unclear whether the opinions addressing the recovery of usurious interest paid are based on statutory
interpretation or on the common law as it stands in the relevant jurisdiction.
(n241)Footnote 227. See Olsen v. Porter, 213 Mich. App. 25, 539 N.W.2d 523 (Mich Ct. App. 1995)
(Michigan law requiring prior interest paid be applied to principal applies only in defense to creditor's action
to enforce usurious contract; creditor's action to reform the contract was not enforcement action, so remedy
unavailable to borrowers).
Michigan Mobile Homeowners Ass'n v. Bank of Commonwealth, 56 Mich.
App. 206, 223 N.W.2d 725 (Mich Ct. App. 1974) (discussing former Michigan law). Cf. Bank of Guam v.
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1-6 Debtor-Creditor Law § 6.08
Demapan, 839 F.2d 1344 (9th Cir. 1988) (where statute merely limits the amount of interest a lender can
recover when suing on the contract and does not otherwise provide for voiding the contract or punishing the
lender, court will not enforce the contract for the excess; but borrower cannot recover interest paid).
(n242)Footnote 228. Couture v. G.W.M., Inc., 2002 WL 31962752 (N.H. Super. Ct. Dec. 3, 2002).
(n243)Footnote 229. See Dennis v. Bradbury, 236 F. Supp. 683 (D. Colo. 1964) , aff'd, 368 F.2d 905
(10th Cir. 1966) ; Westman v. Dye, 214 Cal. 28, 4 P.2d 134 (1931) ; Commercial Credit Equip. Corp. v.
West, 677 S.W.2d 669 (Tex. Ct. App. 1984 n.r.e.) (recovery extends to legal interest as well as usurious interest paid); Flannery v. Bishop, 81 Wash. 2d 696, 504 P.2d 778 (1972) . But see Marker v. Pacific Mezzanine Fund, 309 F.3d 744 (10th Cir. 2002) (provision for forfeiture of interest does not create right to recover
interest already paid); Anderson v. Chainani (In re Kemper), 263 B.R. 773, 781 n.15 (Bankr. E.D. Tex.
2001) (noting Texas legislature's 1999 abolition of common law remedies for usury).
(n244)Footnote 230. See, e.g., Skinner v. Cen-Pen Corp., 414 S.E.2d 824 (Va. 1992) (Va. Code §
6.1-330.46 interpreted to allow recovery of twice all interest paid within limitations period); Trapp v. Hancuh, 530 N.W.2d 879 (Minn. Ct. App. 1995) (interpreting Minn. Stat. § 334.011 subd.2 [small business/agricultural loans], providing for forfeiture of all interest plus recovery of twice interest actually paid);
Williams v. Seeley (In re Williams), 227 B.R. 83 (Bankr. E.D. Va. 1998) (Virginia's secondary mortgage loan
law provides for the recovery of the total amount of interest paid in excess of that permitted, plus twice the
total amount of interest paid during the two years immediately preceding the filing of the action plus court
costs and attorney fees); Skinner v. Cen-Pen Corp., 243 Va. 279, 414 S.E.2d 824 (1992) (Va. Code §
6.1-330.46 interpreted to allow recovery of twice all interest paid within limitations period).
(n245)Footnote 231. Speare v. Consolidated Assets Corp., 367 F.2d 208 (2d Cir. 1966) (applying New
Jersey law); Metcalf v. Bartrand, 491 P.2d 747 (Alaska 1971) ; Winnett v. Roberts, 179 Cal. App. 3d 909,
225 Cal. Rptr. 82 (1986) (proper tender made; foreclosure sale set aside); Feemster v. Schurkman, 291 So.
2d 622 (Fla. Dist. Ct. App. 1974) . But see Williams v. Macchio, 69 Misc. 2d 94, 329 N.Y.S.2d 405 (Sup.
Ct. 1972) (no tender necessary when usurious contract signed under duress).
(n246)Footnote 232. See Kawauchi v. Tabata, 413 P.2d 221 (Haw. 1966) (emphasizing the equities in
this particular case); Bohlinger v. American Credit Co., 594 S.W.2d 710 (Tenn. Ct. App. 1979) .
(n247)Footnote 233. Compare Barco Auto Leasing Corp. v. House, 202 Conn. 106, 520 A.2d 162
(1987) (creditor which violated Retail Installment Sales Financing Act was not entitled to offset for fair rental value of automobile when buyer rescinds contract), and Kuykendall v. Malernee, 516 P.2d 558 (Okla. Ct.
App. 1973) (payment for excise taxes and expenses on automobile not recoverable), with Metcalf v. Bartrand, 491 P.2d 747 (Alaska 1971) (tender must include amount paid for real estate tax); Feemster v.
Schurkman, 291 So. 2d 622 (Fla. Dist. Ct. App. 1974) (lender can recover expenses related to prior lease and
first mortgage).
(n248)Footnote 234. See I.D.S. Homes Corp. v. Lucas, 228 Ga. 521, 186 S.E.2d 745 (1972) (borrower must tender amount admittedly due; complete failure of consideration could obviate tender in proper case);
Bjornstad v. Perry, 92 Idaho 402, 443 P.2d 999 (1968) (recovery by borrowers exceeds remaining principal
due); Pisano v. Rand, 30 A.D.2d 173, 291 N.Y.S.2d 82 (1968) (mortgage was void).
(n249)Footnote 235. See Turney v. Roberts, 255 Ark. 503, 501 S.W.2d 601 (1973) ; Beach Assocs.,
Inc. v. Fauser, 9 Mass. App. 386, 401 N.E.2d 858 (1980) . Cf. Clean Harbors, Inc. v. John Hancock Life
Ins. Co., 833 N.E.2d 611 (Mass. App. Ct. 2005) (Massachusetts law permits judge to fashion equitable remedies for usury). See generally Annot., 74 A.L.R.3d 1239 (1976) (reformation of usurious contracts). Reformation due to fraud or misrepresentation of the borrower is similar to a creditor's defense of estoppel. See §
6.08[5][c] supra.
(n250)Footnote 235.1. See Lieberman v. Emigrant Mortg. Co., 436 F. Supp. 2d 357, 365 (D. Conn.
2006) .
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1-6 Debtor-Creditor Law § 6.08
(n251)Footnote 236. See Bjornstad v. Perry, 92 Idaho 402, 443 P.2d 999 (1968) (court cannot reform
contract after action to enforce contract is brought and usury defense is raised);
Szerdahelyi v. Harris, 67
N.Y.2d 42, 499 N.Y.S.2d 650, 490 N.E.2d 517 (1986) (loan is void despite tender of excess interest to borrower); Matter of Dane's Estate, 390 N.Y.S.2d 249 (1976) (cannot invoke equity when statute mandates
penalty); cf. Missouri-Kansas-Texas R.R. Co. v. Fiberglass Insulators, 707 S.W.2d 943 (Tex. Ct. App. 1986)
(in face of statute setting interest rate when contract states no specific rate, court cannot invoke equitable
powers to grant lender a higher prejudgment rate on its recovery, and a demand for higher rate would be usurious; extensive discussion of Texas cases on point).
(n252)Footnote 237. 12 U.S.C. § 86. For cases interpreting the Nat'l Bank Act remedies, see, e.g.,
McCollum v. Hamilton Nat'l Bank, 303 U.S. 245, 58 S. Ct. 568, 82 L. Ed. 819 (1938) ; American Timber &
Trading v. First Nat'l Bank of Ore., 690 F.2d 781 (9th Cir. 1982) (subclass recovers double interest paid on
usurious loans, but prejudgment interest denied); First Nat'l Bank in Mena v. Nowlin, 509 F.2d 872 (8th
Cir. 1975) (state remedies preempted); Bokum v. First Nat'l Bank, 740 P.2d 693 (N.M. 1987) (National
Bank Act claim disallowed where not filed within two years). For a discussion of usury preemption under the
National Bank Act, see § 6.02[2] supra.
(n253)Footnote 238. The remedy provisions are found at 12 U.S.C §§ 1463g(b) (thrifts); 1785(g) (credit unions); 1813d (state banks). For a discussion of DIDA preemption, see § 6.02[4] supra.
(n254)Footnote 239. Subtit. B of Title I, Riegle Community Development and Regulatory Improvement
Act of 1994, (H.R. 3474) Pub. L. No. 103-325, 108 Stat. 2160 (Sept. 23, 1994). See generally § 6.09 infra.
(n255)Footnote 240. 18 U.S.C. §§ 1961 et seq. The RICO Act is reprinted in Vol. 1B infra. For a detailed analysis of RICO, see § 4.07 supra. Some states have adopted their own RICO statutes which may be
even more favorable to consumers. See In re Giorgio, 62 B.R. 853 (Bankr. D.R.I. 1986) ("unlawful debt" is
any debt which is unenforceable in whole or in part due to usury); In re Marill Alarm Sys., Inc., 68 B.R. 399
(Bankr. S.D. Fla. 1986) (usury in sham consulting fees triggers state RICO statute).
(n256)Footnote 241. See 18 U.S.C. § 1964.
(n257)Footnote 242. 18 U.S.C. § 1961(6). See U.S. v. Megale, 363 F. Supp. 2d 359, 364 (D. Conn.
2005) (indictment that charged defendant with making a loan of $2,500 at a rate of $100 per week in interest
sufficiently charged collection of an unlawful debt where allowable interest under state law would have been
approximately $5.77 per week).
(n258)Footnote 243. See
Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 105 S. Ct. 3275, 3285, 87 L.
Ed. 2d 346, 358-59 (1985) . See also National Consumer Law Center, Unfair and Deceptive Acts and Practices § 9.2.3.4 (5th ed. 2001 and Supp.) (detailed discussion of pattern).
(n259)Footnote 244. See, e.g., Durante Bros. & Sons, Inc. v. Flushing Nat'l Bank, 755 F.2d 239 (2d
Cir.) , cert. denied,
473 U.S. 906, 105 S. Ct. 3530, 87 L. Ed. 2d 654 (1985) , on remand 652 F. Supp.
101 (E.D.N.Y. 1986) (overruled as to "racketeering injury" requirement by implication of Sedima, supra note
233), on remand, 652 F. Supp. 101 (E.D.N.Y. 1986).
(n260)Footnote 245. Id.
(n261)Footnote 246.
Id. at 239 .
(n262)Footnote 247.
Id. at 240 (quoting 18 U.S.C. § 3575(e)).
(n263)Footnote 248.
Id. at 241 .
(n264)Footnote 249. Id. at 242 . Predicate acts committed over just a few weeks or months would not
satisfy closed-ended continuity, in such a case the plaintiff would have to show "open-ended" continuity to
meet the continuity property of the pattern element.
(n265)Footnote 250.
Id. at 242 .
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(n266)Footnote 251. See
American Nat'l Bank & Trust Co. of Chicago v. Haroco, Inc., 473 U.S.
606, 105 S. Ct. 3291, 87 L. Ed. 2d 437 (1985) , aff'g 747 F.2d 384 (7th Cir. 1984) (fraudulent overcharging
stated RICO claim); Leff v. Olympic Fed. Sav. & Loan Ass'n, Case No. 86-3026, 1987 U.S. Dist. LEXIS
5589 (N.D. Ill. June 19, 1987) (RICO claim stated by mortgagor for alleged overcharge for tax and insurance
escrow). See also Dixon v. Ford Motor Credit Co., 2000 U.S. Dist. LEXIS 7934 (E.D. La. May 31, 2000)
(unpublished), aff'd without op., 252 F.3d 1356 (5th Cir. 2001) , cert. denied,
534 U.S. 952, 122 S. Ct.
349, 151 L. Ed. 2d 263 (2001) (allegations that auto dealer failed to disclose commissions on credit life insurance sales could present predicate act of mail fraud sufficient to avoid dismissal of RICO claim). See
generally National Consumer Law Center, The Cost of Credit: Regulation and Legal Challenges § 10.8.3.2
(2d ed. and Supp.). But see Bellizan v. Easy Money of La., Inc., 2002 U.S. Dist. LEXIS 13419 (E.D. La. July
19, 2002) (because "overlapping" loans made by payday lender did not violate state laws prohibiting "rollover" or "renewal" loans, plaintiff failed to establish that defendant collected an unlawful debt); Porter v.
ACE Cash Express, Inc., 2000 U.S. Dist. LEXIS 15996 (E.D. La. Oct. 26, 2000) (because term of loans made
to plaintiff exceeded those defined by state payday loan act by 5 days, they fell outside its interest limitations; since loans were not usurious under state law they did not meet RICO's definition of an unlawful debt,
action dismissed), aff'd, 277 F.3d 1372 (5th Cir. 2001) (table). See also Raceway Props., L.L.C. v. LSOF
Carlsbad Land L.P., 157 Fed. Appx. 959, 964 (9th Cir. Oct. 31, 2005) (refusing to dismiss RICO claim based
on alleged bait-and-switch lending scheme); Beard v. Worldwide Mortg. Corp., 354 F. Supp. 2d 789,
800-08 (W.D. Tenn. 2005) (denying motion to dismiss § 1962(c) claim against a title company and an attorney based on an alleged predatory lending scheme).
(n267)Footnote 252. E.g., George A. Fuller Co. v. Carpet Servs., Inc., 823 S.W.2d 603, 604 (Tex.
1992) ; Sumrall v. Navistar Fin. Corp., 818 S.W.2d 548, 559 (Tex. Ct. App. 1991) .
(n268)Footnote 253. See, e.g., In re Marill Alarm Sys., Inc., 68 B.R. 399 (Bankr. S.D. Fla. 1986) ,
aff'd, 81 B.R. 119 (S.D. Fla. 1987) (when sham "consulting fees" to third party were considered interest,
actual interest rates paid were 74%-95%; resultant violation of criminal usury statute or criminal fraud statute
constituted violation of Florida RICO statute).
(n269)Footnote 254. Violette v. P.A. Days, Inc., 214 F.R.D. 207 (S.D. Ohio 2003) (certifying class on
claim that interest charge exceeded RISA limits); Car Now Acceptance Co. v. Block, No. 427973 (Ohio C.P.
Nov. 25, 2002) (unpublished), aff'd, 2003 Ohio 3964, 2003 Ohio App. LEXIS 3533 (Ct. App. July 14,
2003) ; Tomlin v. Dylan Mortg. Inc., 2002 NCBC LEXIS 4 (N.C. Super. Ct. Feb. 1, 2002) (certifying class
on usury claim).
(n270)Footnote 255. See, e.g., Linder v. Thrifty Oil Co., 2 P.3d 27, 38 (Cal. 2000) (class action challenging surcharge imposed on customers who paid with credit card).
(n271)Footnote 256. Id. (quoting Vasquez v. Superior Court, 484 P.2d 964 (Cal. 1971)) .
(n272)Footnote 257. See Fed. R. Civ. P. 23(c)(4)(A); 2 Newberg on Class Actions, §§ 9.53, 9.64 (3d ed.
1992).
(n273)Footnote 258. See National Consumer Law Center, Consumer Class Actions, § 9.5.2.6 (6th ed.
2006).
(n274)Footnote 259. See Washington Mut. Bank v. Superior Court, 15 P.3d 1071 (Cal. 2001) . See
generally National Consumer Law Center, Unfair and Deceptive Acts and Practices, § 8.5.5 (6th ed. 2004
and supp.).