Opinion
Index No. CV-007490-22/BX
07-17-2023
CREDIT ACCEPTANCE CORPORATION, Plaintiff(s) v. Jacqueline M. HOLNESS, Defendant(s)
Relin, Goldstein & Crane LLP, Rochester (Shelly Baldwin of counsel), for plaintiff. Jacqueline Holness, defendant pro se.
Relin, Goldstein & Crane LLP, Rochester (Shelly Baldwin of counsel), for plaintiff.
Jacqueline Holness, defendant pro se.
Jeffrey S. Zellan, J. The Decision/ Order of the Court is as follows:
The instant motion by plaintiff to strike defendant's answer and for summary judgment seeking the remaining balance of a 2018 retail instalment contract financing defendant's purchase of an automobile is denied, and the Court instead grants summary judgment to defendant dismissing this action pursuant to CPLR 3212(b).
CPLR 3212(b) provides that "if it shall appear that any party other than the moving party is entitled to a summary judgment, the court may grant such judgment without the necessity of a cross-motion." Merritt Hill Vineyards, Inc. v. Windy Heights Vineyard, Inc. , 61 N.Y.2d 106, 110, 472 N.Y.S.2d 592, 460 N.E.2d 1077 (1984). "Thus, under CPLR 3212(b) the court may, in its discretion, search the record and grant summary judgment to" a non-moving party, such as defendant in the instant action. West 152 Assoc., LP v. Gassama , 65 Misc 3d 1218(A), *5, 2019 WL 5483547 (Civ. Ct., New York Co. 2019). The Court need not provide notice to the parties that it intends to search the record. See, 205 W. 147th St., LLC v. Daub , Index No. 81704/17, 2018 NYLJ LEXIS 3753, *13 (Civ. Ct., New York Co. Oct. 12, 2018) (collecting authorities). Here, notwithstanding that defendant did not submit written opposition to the instant motion, nor file any cross-motion, the Court's review of the papers reveals a loan agreement that insidiously violates the clear public policy of New York to protect New Yorkers from usurious lenders through the sham use of a retail instalment contract to charge illegally high interest, and cannot be enforced in a New York court. Accordingly, plaintiff has not (and indeed cannot) establish a claim for which relief can be granted. The Contract and Proceedings in this Action
New York law, as discussed later in this decision, refers to the type of agreement at issue here as a "retail instalment contract," rather than ‘retail installment contract,’ and plaintiff uses both names interchangeably. Unless quoting others, the Court uses ‘retail instalment contract’ in keeping with the statutory spelling.
According to plaintiff, "[t]he parties entered into a Retail Installment Contract on or about September 14, 2018 for the purchase of a 2012 Mercedes-Benz C Class." (Plaintiff's Statement of Facts, ¶ 3). "The terms of the Contract called for a 22.99% annual percentage rate ("APR") on the amount financed of $15,844.87, resulting in sixty (60) consecutive monthly payments of $446.58," commencing on October 14, 2018. (Affidavit of Sandi Ostler in Support, ¶ 5 and Ex. B). With interest and fees, the total cost of the vehicle — which had 113,464 miles on it when sold — was $29,294.80, from a cash sale price of $14,400.00. (Ostler Aff. in Supp., Ex. B).
The Court notes that the copy of the contract offered by plaintiff is, by its own terms, incomplete. As noted in the contract, in all capital letters, "[t]he information you see on the window form for this vehicle is part of this contract. Information on the window form overrides any contrary provisions in the contract of sale. " (Ostler Aff., Ex. B., at 1) (emphasis added). Although the moving papers describe the copy of the contract offered as an exhibit as "a true and accurate copy of the Contract," there is no copy of any window form in plaintiff's exhibits, or any explanation why a copy is not included. (Ostler Aff., ¶ 4). On its face, the contract is not a complete recitation of the parties’ agreement, which is troubling given that plaintiff is seeking summary judgment based upon the terms of a contract without apparently providing a complete copy of those terms. That alone would be an independent basis to deny summary judgment to plaintiff. However, as the Court finds that other terms of the contract render it irretrievably illegal, as discussed infra. , that issue is moot.
Defendant soon fell behind in making payments, and plaintiff repossessed the vehicle on or about November 16, 2021. (Ostler Aff. in Supp., Ex. C). Plaintiff subsequently notified defendant that it intended to sell the vehicle by notice dated December 12, 2021, and did so by selling the vehicle at auction (for $4,500.00) on January 28, 2022. (Ostler Aff. in Supp., Exs. C and D). Plaintiff then sought the alleged remaining balance of the loan and associated fees from defendant, and later commenced the instant action. (Ostler Aff. in Supp., ¶¶ 9-12).
Defendant answered the complaint in person at the clerk's office, asserting a general denial and what plaintiff asserts are six affirmative defenses: (1) lack of service; (2) denying owing the debt sought; (3) contesting the amount of the debt; (4) unjust enrichment; (5) unconscionability; and (6) a combined affirmative defense asserting that the vehicle was defective as sold (also known as a ‘lemon’) and that defendant was unemployed due to recent surgery. (Answer; and Affirmation of Shelly Baldwin in Support, ¶ 6). There is no indication in the record before the Court that any discovery was sought or conducted, and plaintiff filed the instant motion on January 17, 2023. Defendant did not submit written opposition, and the Court took the motion on submission.
Whether defendant's second, third, and sixth defenses are affirmative defenses for which defendant would bear the burden, or ordinary defenses for which plaintiff would bear the burden to disprove, are irrelevant for the purposes of this decision, and the Court will assume (but expressly does not decide) that they are affirmative defenses for ease of reference.
Usury Laws in New York and Retail Instalment Contracts
"Statutes prohibiting usurious loans were enacted in 15th century England, became part of New York's colonial history, and have remained since." Seidel v. 18 East 17th St. Owners, Inc. , 79 N.Y.2d 735, 740, 586 N.Y.S.2d 240, 598 N.E.2d 7 (1992). "As early as 1717 the law-making body of the Colony [of New York] passed an act against usury," which "was in substance re-enacted in 1737," and "avoided usurious contracts and obligations, and imposed upon the lender a penalty or forfeiture." Curtiss v. Teller , 157 A.D. 804, 811, 143 N.Y.S. 188 (4th Dept. 1913). "After the Colony became a State, and in 1787, an act was passed which retained the essential provisions of the colonial act," and "[t]his principle has long been acknowledged, and acted upon in courts," of the State. Id. The State's usury laws are designed "to protect desperately poor people from the consequences of their own desperation." Seidel , at 740, 586 N.Y.S.2d 240, 598 N.E.2d 7. For all relevant times to the instant action, the maximum interest generally chargeable in New York is 16% per annum. See , General Obligations Law § 5-501(1) ; and Banking Law § 14-a. Usurious contracts are void by statute. See , General Obligations Law § 5-511. The parties actively adopted New York law in a choice-of-law clause in the contract. An exception to New York's usury laws exists for "retail instalment contracts," a specific type of sales agreements established by the Motor Vehicle Retail Instalment Sales Act, codified as Personal Property Law § 301 et seq. As defined by Personal Property Law § 301(5), a retail instalment contract is "an agreement, entered into in this state, pursuant to which the title to, the property or a security interest in or a lien upon a motor vehicle, which is the subject matter of a retail instalment sale, is retained or taken by a retail seller from a retail buyer as security, in whole or in part, for the buyer's obligation." A "retail seller" is defined as a person or entity "who sells a motor vehicle to a retail buyer under or subject to a retail instalment contract," who may then sell the interest in the contract to a "financing agency," which is defined in relevant part as someone who is "engaged, in whole or in part, in the business of purchasing retail instalment contracts from one or more retail sellers." Personal Property Law § 301(3) and (9). Retail instalment contracts may provide for interest at "any rate agreed to by the retail seller and the buyer." Personal Property Law § 303. A willful violation of the procedures governing retail instalment contracts "shall bar recovery of any credit service charge [i.e., interest], delinquency or collection charge or refinancing charge on the retail instalment contract involved," however, and violations can also be punished as an unclassified misdemeanor. Personal Property Law § 307(1) and (2).
Although collecting interest over 25% (unless exempted) is a class E felony pursuant to Penal Law § 190.40, interest over 16% (unless similarly exempted) is subject to civil remedies as discussed in this decision. That the interest noted in the contract does not appear to be feloniously high is not dispositive of the usury question before the Court. Moreover, the Court takes notice of the publicly-available pleadings of the Consumer Financial Protection Bureau and the Attorney General of New York in Consumer Financial Protection Bureau v. Credit Acceptance Corp. , pending in the Southern District of New York under docket number 23-cv-38 alleging that over 84% of plaintiff's loans in New York exceed the criminal usury rate, and the Court assumes without deciding that the true interest rate at this action is ‘only’ 22.99%. See, U.S. Equities Corp. v. Cavadias , 74 Misc.3d 1226(A), *2, 2022 WL 906384 (Civ. Ct., New York Co. 2022) (taking notice of pleadings by Attorney General in another action in deciding motion).
There is no Basis to Strike Defendant's Answer, Which Preserved a Usury Defense
Although plaintiff disagrees with defendant's pleadings in the answer, "the CPLR does not provide for the striking of improper denials," and that is not itself a basis to strike them as plaintiff seeks. Gilberg v. Lennon , 193 A.D.2d 646, 646, 597 N.Y.S.2d 462 (2d Dept. 1993). However, even construing the instant motion as seeking summary judgment based upon dismissal of affirmative defenses, plaintiff's papers do not support granting it summary judgment. Even if defendant's first, second, third, fourth, and sixth affirmative defenses could be dispensed with in plaintiff's favor upon summary judgment, defendant's fifth affirmative defense — unconscionability — cannot.
Although defendant does not expressly plead usury as an affirmative defense, and "since at least 1853, it has been held that the defense of usury is personal to the defendant and may be waived," that does not conclude the question. Merchant Funding Servs., LLC v. Realtime Carriers, LLC , Index No. 33639/2016, 2017 NY Misc. LEXIS 13503, *6 (Sup. Ct., Rockland Co. Jul. 7, 2017) (collecting authorities and finding that defense had been waived). A usurious loan agreement under New York law "constitutes an agreement with terms unreasonably favorable sufficient to satisfy the requirement of substantive unconscionability." GMI Grp., Inc. v. Unique Funding Sols., LLC (In re GMI Grp., Inc.) , 606 B.R. 467, 499 (Bankr. N.D. Ga. 2019). Here, where defendant expressly pled unconscionability as an affirmative defense, defendant provided plaintiff sufficient notice of defendant's intent to rely upon that defense. As a consequence, defendant's fifth affirmative defense of unconscionability is live and, as discussed below, compelling.
The Contract is a Sham Retail Instalment Contract
While the subject contract is ostensibly between defendant auto buyer and non-party auto seller C&M Auto Sales Group initially, only to be allegedly ‘subsequently’ assigned to plaintiff — and thus exempt from New York's usury limits—courts have recognized the need to carefully review and scrutinize purported retail instalment contracts. See, e.g., Sheffield Commercial Corp. v. Clemente , 792 F.2d 282, 286 (2d Cir. 1986) (noting "the strong public interest in enforcement of the [Motor Vehicle Retail Instalment Sales] Act"). This includes scrutiny to guard against the use of shams or cut-outs, as "[w]hile retail installment contracts are transferable that presumes that the original transaction between the buyer and seller is a real payment agreement between those parties and not merely a vehicle for a third-party financing company to avoid the usury laws." Capitol Discount Corp. v. Rivera , 38 Misc 3d 1226(A), *6, 2013 WL 692940 (Civ. Ct., Kings Co. 2013). The contract plaintiff seeks to enforce does not even come close to surviving such scrutiny, and "[a]nalysis of the transaction leads to the conclusion that rather than being an agreement subject to a time-price equalization standard which forms the basis of the Personal Property Law, it is in fact a sham financial arrangement designed to avoid New York's usury laws." Ford Motor Credit Co. LLC v. Black , 27 Misc.3d 1211(A), *6, 2010 WL 1539732 (Civ. Ct., Richmond Co. 2010).
"It does not take careful and perceptive analysis to understand such a threat because this wolf comes as a wolf." Bullock v. United States Bureau of Land Management , 489 F. Supp. 3d 1112, 1129 (D. Mont. 2020) (quotation and citation omitted) (discussing implications of defendant's position in granting summary judgment). The subject contract itself (ostensibly between defendant and non-party C&M Auto Sales Group) is a five-page pre-printed form labeled as a "New York Credit Acceptance Corporation (11-16)" form, bearing a copyright mark and reservation of rights by plaintiff Credit Acceptance Corporation on the bottom of every page. (Ostler Aff., Ex. B). Further, although the identified seller in the contract (Ostler Aff, Ex. B, at 1) is non-party C&M Auto Sales Group with an address in Bronx County, the contract itself includes (at page 4) pre-printed language immediately assigning the contract to plaintiff, and (at page 5) an extensive arbitration clause specifically detailing an arbitration scheme between plaintiff and defendant. Not a single payment pursuant to the agreement was scheduled to be made to C&M Auto Sales Group. (Ostler Aff, Ex. B, at 1 and 4). Additionally, despite the contract ostensibly being between defendant and C&M Auto Sales Group in the Bronx, all notices under the arbitration clause are pre-printed to be noticed to a post office box in Southfield, Michigan (the location of plaintiff, not C&M Auto Sales Group), and the arbitration clause contains a provision stating that "[i]t is expressly agreed that this Contract evidences a transaction in interstate commerce," and that the arbitration clause will be interpreted pursuant to the terms of the Federal Arbitration Act rather than state law. (Ostler Aff., Ex. B, at 5). Indeed, unlike the definitions section in page 1 of the contract, the parties to the subject contract are identified in page 5 to expressly include plaintiff. (Ostler Aff., Ex. B, at 1 and 5). Notably, that express inclusion is pre-printed in a form contract to which plaintiff was ostensibly not yet a party.
In using a pre-printed contract form created and copywritten by plaintiff, with a pre-printed arbitration clause featuring an opt-out procedure requiring notice to plaintiff and stipulating that the contract reflected "a transaction in interstate commerce," despite being executed in Bronx County and ostensibly between a resident of Bronx County and a car dealership located in Bronx County, it does not take long to see the parties’ contract for what it is. What little effort plaintiff made to "clad, so to speak, in sheep's clothing," the contract it now seeks to enforce is quite transparent, and while plaintiff may have attempted to disguise the contract as initially between a local merchant and its customer, that attempted veneer of legality does not change the character of the contract. ASARCO, LLC v. Union Pacific R. Co. , 762 F.3d 744, 749 (8th Cir. 2014) (citation omitted). To the extent C&M Auto Sales Group was a party to the agreement underlying the contract at all, it was at best as a pass-through specifically intended for the express purpose of qualifying for an exemption from New York's usury limits, in a similar manner to the use of fronts or cut-outs in other industries. See, e.g., United States v. Kousisis , 66 F.4th 406, 411 (3d Cir. Apr. 21, 2023) (discussing use of pass-through front companies to obtain contract terms available for disadvantaged business enterprises). As if to remove all doubt, plaintiff's own moving papers state that "the parties [without any mention of C&M Auto Sales Group] entered into" the contract. (Plaintiff's Statement of Facts, ¶ 3).
Further, to the extent the Court has discretion as to whether plaintiff would merely be precluded from recovery of any finance charges (i.e., interest) pursuant to Personal Property Law § 302 rather than rendering the entire agreement void pursuant to General Obligations Law § 5-511, the egregious facts presented support voiding the agreement ab initio. Ford Motor Credit Co. , at *7. New York has been unequivocal that "a party cannot ask a court of law to help him carry out his illegal object," which is the precise relief plaintiff now seeks. Braunstein v. Jason Tarantella, Inc. , 87 A.D.2d 203, 207, 450 N.Y.S.2d 862 (2d Dept. 1982), quoting Stone v. Freeman , 298 N.Y. 268, 271, 82 N.E.2d 571 (1948). Moreover, plaintiff admits having received more than the total finance charge as agreed prior to instituting this action, including through repossession and sale of the vehicle. (Ostler Aff, at ¶¶ 8 and 11; and Ex. B, at 1). Under either theory, there is no mechanism by which plaintiff could obtain relief. Accordingly, it is
The Court is aware of the Southern District of New York's decision in Garcia v. Chrysler Capital LLC , Dkt. No. 15-cv-5949, 2016 WL 5719792 *4-5, 2016 U.S. Dist. LEXIS 136624 *13-14 (S.D.N.Y. Sept. 30, 2016) in which that Court dismissed a class action alleging sham retail instalment contracts with usurious interest rates but finds that case to be wholly distinguishable to the case at bar in that the egregious evidence of sham before the Court in the instant action far exceeds that which was at issue before the Court in Garcia . The Court is also aware that the federal district court in Garcia expressly cited and declined to follow the state court's decision in Ford Motor Credit Co. , which, unlike Garcia , has been cited favorably on the relevant point. Compare, Garcia , at *5-6, 2016 U.S. Dist. LEXIS 136624 at *17-18; with Capitol Discount Corp. , at *6. To the extent the factual distinction alone was not determinative, the present Court would respectfully choose to follow Ford Motor Co .
ORDERED that plaintiff's motion for an order striking defendant's answer and granting plaintiff summary judgment in this action is denied, and it is further
ORDERED, pursuant to CPLR 3212(b), that the clerk enter judgment in favor of defendant dismissing this action.
This constitutes the Decision and Order of the Court.