187 N.E.2d 24
No. 37496Supreme Court of Ohio.
Decided December 28, 1962.
Small loans — Motor vehicles as security — Agreement between car dealer and loan company — Loan company extends 80 per cent of credit — Charges interest on full loan — Interest rate usurious, when — Contract of loan void.
An agreement entered into prior to the making of any loans between a used-car dealer and a small-loan company (operating under a license issued by the Division of Securities of the state of Ohio), in connection with the negotiating, arranging and making of loans to the purchasers of used cars, pursuant to which but unknown to the car purchaser, the used-car dealer extends credit for 20% of the amount of the loan, without interest, and the small-loan company loans 80% of the amount of the loan but charges and receives interest at the maximum lawful small-loan rate on 100% or the full amount of the loan, is usurious and in violation of Sections 1321.13 and 1321.16, Revised Code (as in effect October 1, 1953, to October 1, 1961), and such contract is void ab initio and any charges paid in excess of those provided by Section 1321.13, Revised Code, may be recovered by the purchaser-borrower in an action at law.
CERTIFIED by the Court of Appeals for Lucas County.
This is an action based upon an agreement made in connection with the negotiating, arranging and making of loans to the purchasers of used cars.
The plaintiff alleges that there is due him from the defendant $14,550 from the “reserve fund” and $5,700 which he alleges defendant received as interest on plaintiff’s money, and the plaintiff seeks $25,000 as exemplary damages.
The case came on for trial in the Common Pleas Court of Lucas County. The court directed the jury to return a verdict for the defendant, based upon the pleadings and opening statement of counsel for the plaintiff.
The Court of Appeals reversed the judgment of the Common
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Pleas Court and remanded the cause for further proceedings.
The defendant filed a supplemental answer alleging that the sum of $2,426.06 is due the plaintiff and praying that judgment be entered against the defendant in this amount as a full settlement under the contract.
The cause came on for trial before a jury, and, upon the evidence adduced by the plaintiff, the court directed the jury to enter judgment for the defendant at the end of plaintiff’s case. The judgment was without prejudice to an action for a general accounting.
The Court of Appeals affirmed the judgment of the Common Pleas Court, without prejudice to an action in law, and, finding the judgment rendered to be in conflict with the judgment pronounced upon the same question by the Court of Appeals for Lorain County in the case of McFadden v. Public Loan Corp., 71 Ohio App. 407, certified the record to this court.
Messrs. Rosenberger Rosenberger and Messrs. Wonnell Zingarelli, for appellant.
Messrs. Cline, Bischoff Cook and Mr. David R. Goldberg, for appellee.
O’NEILL, J.
The plaintiff was a used-car dealer and the defendant a small-loan company operating under a license issued by the Division of Securities of the state of Ohio.
On November 26, 1957, the plaintiff and defendant entered into a written agreement, the provisions of which are as follows:
“We, the undersigned hereby agree on the following reserve plan to begin November 26th, 1957 covering the retail sale of automobiles sold to individuals by Duane’s Used Cars, 1804 Adams Street, Toledo, Ohio, and financed by Midwest Finance Corporation.
“We, Midwest Finance Corporation, are to hold a 20% reserve on all deals up to and including $550 and a 15% reserve on all deals above $550. All losses are to be charged against this reserve and after an account becomes 60 days past due according to contract must be charged off. On December 1st, 1958 and every 6 months thereafter Midwest Finance Corporation will
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adjust this reserve and Duane’s Used Cars will be paid the excess on accumulated reserve above 20% of the ten existing balance. This 20% applies to existing balance on business acquired from Duane’s Used Cars starting November 26, 1957.”
Subsequent to the signing of this contract between plaintiff and the defendant and pursuant to the terms thereof, the plaintiff referred 219 used-car customers to the defendant and loans were made to these customers.
The word, “reserve,” is misleading in this contract and, upon a casual reading, conceals the intent of the parties and what the parties did pursuant to the contract.
In each loan which was made, the borrower signed a note and also signed a separate written paper directing the defendant to disburse to the plaintiff the full amount stated on the face of the note.
Unknown to the borrower, but pursuant to the agreement between the plaintiff and the defendant, the defendant disbursed, i.e., loaned, only 80% of the amount stated on the face of the note, and, in effect, the plaintiff extended credit to the borrower for the other 20% of the amount stated on the face of the note. The plaintiff received no interest on the 20% of the amount stated on the face of the note which he advanced, but the defendant collected interest on the full amount of the face of the note at the maximum small-loan rate of interest, although it in fact had loaned only 80% of this amount. The agreement between the plaintiff and the defendant was usurious and in violation of Sections 1321.13 and 1321.16, Revised Code (references are to these sections as in effect between October 1, 1953, to October 1, 1961), and, therefore, void ab initio. See Capital Loan Savings Co. v. Biery, 134 Ohio St. 333, 16 N.E.2d 450.
It should be noted here that violations of Section 1321.13, Revised Code, are punishable by penalties provided in Section 1321.99, Revised Code.
In the event of default by a borrower for more than 60 days, pursuant to the agreement, the defendant must cancel the plaintiff’s right to that 20% of the loan for which the plaintiff had extended credit and the plaintiff was then entitled to receive neither the principal nor interest on the share of the loan for which he had extended credit.
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In several instances where the borrower was in default for 60 days or more, the plaintiff paid to the defendant the full amount stated on the face of the note, plus the maximum legal small-loan rate of interest on the full amount stated on the face of the note. After this payment by the plaintiff to the defendant, the defendant then disbursed to the plaintiff the 20% of the amount stated on the face of the note for which plaintiff had extended credit but paid the plaintiff no interest, the defendant retaining the interest on the full amount stated on the face of the note, even though it had “loaned” only 80% of that amount. This was in violation of law, Sections 1321.13 and 1321.16, Revised Code.
The defendant contends that these payments by the plaintiff were “voluntary.” A careful scrutiny of the transaction indicates that pursuant to the agreement the plaintiff was not required to make this payment to the defendant, but, if he had not done so he would have lost the entire principal for which he had extended credit, which amounted to 20% of the total loan to the borrower, and would have received no interest.
The defendant makes two contentions:
First, that this arrangement between the plaintiff and the defendant was similar to a seller obligating his savings account deposited with a loaning institution as additional security for a loan to a purchaser. This contention is without merit because there was no deposit of any kind made here by the plaintiff with the defendant.
Second, the defendant argues that this arrangement was in the nature of a pledge by the plaintiff to the defendant. A careful analysis makes it clear that this contention is without merit. At the time the agreement was entered into, which was prior to the making of any loan, there was no delivery of any personal property by the plaintiff to the defendant as a pledge and no paper or thing was delivered by the plaintiff to the defendant which represented legal or equitable title to personal property being pledged. The elements of a pledge are not present in this transaction.
Judgment can not be entered for the plaintiff against the defendant because the plaintiff was a party to this contract which was void ab initio, and he can not recover upon a void contract.
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The judgment of the Court of Appeals for the defendant is, therefore, affirmed.
Judgment affirmed.
WEYGANDT, C.J., ZIMMERMAN, TAFT, MATTHIAS, RADCLIFF and GRIFFITH, JJ., concur.
RADCLIFF, J., of the Fourth Appellate District, sitting by designation in the place and stead of HERBERT, J.