Request By:
Hon. Jeffrey R. O'Grody
Attorney at Law
408 East Tenth Street
Bowling Green, Kentucky 42101
Opinion
Opinion By: Steven L. Beshear, Attorney General; By: Kenneth A. Meng, Assistant Attorney General
You have expressed concern about individuals across the state who are advancing money to the public in return for the assignment of their refund of federal and state withholding taxes. Although the nature of the transactions do vary, it seems the normal practice is for the entrepreneur to advance sixty percent of the expected return whereupon the individual has the refund check sent to the purchaser's address. Additionally, a power of attorney is executed enabling the person advancing the money to cash the refund check when it is received. You inquire first as to whether it is permissible to have the refund check sent to an address other than the claimant's; and, secondly, if it is permissible, is the percentage that the checks are being discounted covered by any usury statute in effect in the Commonwealth.
The claimant of a refund check may have it sent wherever he desires. However, there are laws pertaining to the "negotiation" of a check for the refund of tax. Regulations under Subtitle A of the$=P7179* 2 Internal Revenue Code of 1954 provide that no person who is an income tax return preparer may endorse or otherwise negotiate, directly or through an agent, a check for the refund of tax which is issued to a taxpayer other than the preparer if the person was a preparer of the return or claim for refund which gave rise to the refund check. As long as the person who advances the money does not prepare the return, there is nothing prohibiting that person from endorsing or otherwise negotiating the check.
As to your second point of inquiry, for reasons hereinafter set forth, we are of the opinion that these types of transactions are regulated by our usury statute, KRS 360.010. The statute provides in pertinent part as follows:
(1) The legal rate of interest is eight percent (8%) per annum, but any party or parties may agree, in writing, for the payment of interest in excess of that rate as follows:
(a) At a per annum not to exceed four percent in excess of the disount rate on ninety day commercial paper in effect at the Federal Reserve Bank in the Federal Reserve District where the transaction is consummated or nineteen percent (19%), whichever is less, on money due or to become due upon any contract or other obligation in writing where the original principal amount is $15,000 or less, . . . . KRS 360.010.
"The definition of usury imports the existence of certain essential elements generally enumerated as (1) a loan or forebearance, either expressed or implied, of money, or of something circulating as such; (2) an understanding between the parties that the principal shall be repayable absolutely; (3) the exaction of a greater profit than is allowed by law; and (4) an intention to violate the law. The presence of these elements infallibly indicates usury irrespective of the form in which the parties put the transaction; on the other hand, the absence of any one of them conclusively refutes the claim of usurious practice." 165 ALR 626, 628; 45 Am.Jur.2d, Interest and Usury, § 111. Applying this definition to the fact situation described above leads to the single and clear conclusion that the usury statute is being violated.
At first blush it may appear that the agreement would not be subject to the usury statute because it is a sale of a chose in action rather than a loan or forebearance. However, "the courts of Kentucky in usury cases look behind the form of the transaction to its substance."
Anderson v. Hershey (6th Cir.-1942) 127 F.2d 884 citing
Hurt v. Crystal Ice and Coal Storage Co., Ky., 286 SW 1055 (1926). The following language found in
Graham and Locke Investments v. Madison, Tex. 295 S.W.2d 234 (1956) is dispositive of the issue: "When the chose discounted is obtained directly from the maker or before it has acquired validity by a transfer for value, it can be nothing more than the maker's promise to pay and the purchase of such a promise at a discount exceeding the lawful rate of interest is merely making a loan at a usurious rate." Graham and Locke Investments, supra (Emphasis ours). See also
Williams v. Eagle Bank, Ky. 189 SW 883 (1916). In
Leavitt v. Enos, 155 App. Div. 584, 140 NYS 862 (1913), it was held that where a borrower agreed to assign $7,500 worth of an estate he was about to receive, in exchange for an advance of $5,500, the transaction was a mere instrument to evade the usury statute and therefore illegal. The assignment was a cloak to evade the statute regulating interest rates.
The second element of a usurious transaction is an understanding between the parties that the principal shall be repaid absolutely. By requiring the payee of the refund check to enter the entrepreneur's address on the tax form and simultaneously execute a power of attorney, there is no question but that the parties intend that the principal shall be repaid absolutely. By executing the power of attorney, the payee has assigned the refund check to the person advancing the money thereby further evidencing the agreement that the principal is to be repaid absolutely. See Maxwell v. Estate of Bankston, infra; and
Leavitt v. Enos, supra.
Naturally, before the transaction can be deemed usurious, there must be an exaction of a greater profit than is allowed by law. In Kentucky, absent a written agreement to the contrary, the legal rate of interest is eight percent, and with a written agreement, the maximum is nineteen percent. KRS 360.010. The issue in this fact situation is whether the contingency as to the date the person advancing the money will receive the refund check will operate to circumvent the usury statute. An excellent discussion of this question is found at 92 ALR 3rd 623. In the summary of the annotation, it is stated that "where the necessary usurious intent is present, a transaction is rendered usurious by the fact that no matter how long it is, within the realm of practicality, before the contingency upon which payment is dependent takes place, the rate will exceed the legal limit." 92 ALR 3rd 623. One factor listed as almost always determinative of the issue is the degree of certainty that the lender will be repaid within a time period rendering the interest charge usurious. Most refund checks are issued by the State and Federal Revenue Departments between six and twelve weeks after the claim for refund is submitted. Applying the fact situation we are addressing where the individual advances sixty percent of the anticipated return, it is obvious that interest is being charged far in excess of the legal rate. Even if the refund check was received one year after the claim for refund is submitted, interest far in excess of that allowed by KRS 360.010 is being charged. In the case of
Maxwell v. Estate of Bankston, Tex., 433 S.W.2d 229 (1968), the sum of $3,025 was loaned to Mr. Bankston for his guarantee of a one hundred percent (100%) return for the use of the money. The total sum to be repaid, $6,050, was to be raised from the proceeds of a land deal Bankston was negotiating with a third party; however, no date had been set for the loan to be repaid or the land deal to be completed. The Court held the transaction to be usurious despite the fact that there was no date or time limit agreed upon for repayment.
We are aware of cases where courts have held that transactions are not usurious if the possibility exists that unlawful interest will not be charged due to the uncertainty of the payment date. One such case is
W. E. Grace Mfg. Co. v. Levin, Tex., 506 S.W.2d 580 (1974) involving the repayment of a loan from proceeds the borrower was to receive from the sale of machinery to a third party. The Court found the transaction required the payment of a fixed charge for an uncertain period of time based on a contingency (the sale of the machinery) ; and, because the contingency was reasonable, the transaction was not necessarily usurious solely because there was a possibility that more than legal interest would be paid. Advancing money in return for the assignment of tax refund checks is distinguishable because of the high "discount" rate and the short period of time before the check is received from the State or Federal Revenue Department. It is hard to believe the refund check would ever be received so distant in time as to bring the interest charge within the legal limits.
The fourth and final element of a usurious transaction is intent to violate the law. As stated in
Anderson v. Hershey, supra, courts will examine usury cases to determine if it is merely a device to evade the statute. "Where a contract upon its face imports usury as by an express reservation of more than legal interest, there is no room for presumption, for intent to take usurious interest is apparent. . . ."
Bank of U.S. v. Waggener, 34 US 378, 9 Pet 378, 9 L. Ed. 163 (1835) cited in Maxwell, supra.
In summary, we point out that the common thread running through all the cases appears to be that the courts will examine the transaction in order to determine whether it is a good faith, arms length negotiation between the two parties or whether the transaction is merely a device to circumvent the usury statute. Advancing sixty percent of an anticipated tax refund in return for the assignment of the tax refund through the execution of a power of attorney, which in all probability will be received by the lender in six to twelve weeks, is clearly usurious. A transaction such as this is the very reason that our legislature has deemed it necessary to pass such a statute. "This is an evil that the usury statute attempts to prevent. It is designed to protect those who by adversity and necessity of economic life are driven to borrow money at any cost. The protection granted is based on the fact that many borrowers are powerless to resist the avarice of the moneylenders."