UNI-SERV CORPORATION OF MASSACHUSETTS vs. COMMISSIONER OF BANKS.

SPALDING, J. The plaintiff (Uni-Serv), a Massachusetts corporation, is engaged in the retail credit card business. The business is conducted as follows: Persons desiring to be cardholders apply to Uni-Serv on a form supplied by it. Applicants who are approved receive a credit card which identifies them as cardholders; they also receive an agreement signed by Uni-Serv, which is a copy of that contained in the application form. The card permits the holder to make credit purchases at stores participating in the Uni-Serv plan, subject to a limit fixed by Uni-Serv on the aggregate amount of the cardholder's indebtedness at any one time.

Retailers wishing to participate in the plan enter into a "Member Agreement" with Uni-Serv which provides for the purchase by Uni-Serv of accounts receivable created through purchases by cardholders. Under the agreement a member store is furnished a "Member Operating Guide" and a "Member Discount and Fee Chart."

A cardholder, after selecting his merchandise, presents his card to the member store. The store fills out a sales slip which the cardholder signs. The sales slip contains an agreement by the cardholder to pay either the seller or the assignee of the sales slip in accordance with the "Consumers' Agreement" on the reverse side.

After the sales slip has been signed and the merchandise together with a copy of the slip has been given to the cardholder, the member store delivers its copy of the slip to Uni-Serv. The delivery of the sales slip to Uni-Serv constitutes an assignment of the account receivable evidenced by the slip and obligates Uni-Serv to pay to the member store the amount of such account less an agreed discount.

Page 285

Uni-Serv, as assignee of the account, acquires the rights of the member store set forth in the "Consumers' Agreement."

The cardholder receives a monthly statement from Uni-Serv in which all purchases made by him under the Uni-Serv plan are consolidated. The cardholder's liability to pay this bill is governed by the "Consumers' Agreement" under which he is obligated to pay service charges to the extent therein provided on such portions of the bill as are not paid on or before twenty-four days after the billing date. [Note p285-1] Prepayments in part or in full may be made at any time without charge or penalty.

The commissioner of banks has notified Uni-Serv that the continued operation of its credit card business in the Commonwealth is a violation of G. L. c. 140, Sections 96-114, because it does not have a license to engage in the business of making loans of the sort governed by those sections. Uni-Serv has brought this bill for declaratory relief to determine whether it may lawfully engage in the credit card business outlined above without the license required by Sections 96-114. [Note p285-2] The case was submitted on a statement of agreed facts, and the judge reported it without decision. G. L. c. 214, Section 31.

The sole issue is whether Uni-Serv is engaged "in the business of making loans of three thousand dollars or less" within the intendment of Section 96. We are of opinion it is not.

Page 286

Under our decisions a distinction has been drawn between the making of small loans and time sales financing. Despite the fact that the financing of a purchase involves the extension of credit, and ordinarily a charge for such credit, the arrangement has not been considered to be a loan. Parker v. Coburn, 10 Allen 82. Hayes v. Commissioner of Corps. & Taxn. 261 Mass. 134. The theory was that everything the buyer promised was consideration for the sale of property, not interest on a loan. Williston, Contracts (Rev. ed.) Section 1685.

This distinction has been maintained in interpreting small loan statutes. See Day v. Cohen, 165 Mass. 304, 305 (statute governing the mortgaging of household furniture to secure a loan). In construing G. L. c. 140, Section 96, this court recognized that there was much authority to the effect that "usury laws and small loan laws cover loans only, and that sales at higher prices . . . [due to finance charges] where not mere shams, are sales and not loans." Modern Fin. Co. v. Holz, 307 Mass. 281, 285. See Annual Report of the Supervisor of Loan Agencies, 1936 Pub. Doc. No. 95, p. 7. Nevertheless, the commissioner urges that the existence of an agreement between the cardholder and Uni-Serv changes the character of the transaction. We disagree.

The Uni-Serv plan is essentially a time sales financing arrangement in which credit is extended for the sole purpose of purchasing goods or services from stores participating in the plan. There is no way in which a cardholder can use the plan so as to receive a cash loan. If he purchases goods and then returns them, the member store is expressly prohibited from giving him cash. All the buyer receives is a credit to his Uni-Serv account. Of course a cardholder could sell the goods so purchased, but this would be true of any time sales financing in which a seller or his assignee did not retain a security interest in the goods sold. The fact that the ultimate creditor is Uni-Serv and not the seller of the goods or services is likewise of no consequence. This, we think, is made clear by an analysis of the development of Section 96 and its judicial interpretation.

Page 287

In 1912 what is now Section 96 was amended by the insertion of the following provision: "The buying or endorsing of notes, or the furnishing of guarantee or security for compensation shall be considered to be engaging in the business of making small loans within the provisions of this act." St. 1912, c. 675, Section 2. In Modern Fin. Co. v. Holz, 307 Mass. 281 (decided in 1940) it was held that under this provision a finance company in the business of purchasing from automobile dealers notes executed by purchasers was in the business of making small loans, and therefore subject to the provisions of Sections 96-114. But in 1941, Section 96 was again amended by adding an important qualification to the 1912 amendment. The 1912 amendment was no longer to apply ". . . in the case of any transaction which involves any note or other instrument evidencing the indebtedness of a buyer to the seller of goods, services or insurance for a part or all of the purchase price" (emphasis added). St. 1941, c. 158, Section 1. [Note p287-1]

We are of opinion that this legislative pattern indicates an intent to exempt from the small loans provisions of Sections 96-114 time sales financing notwithstanding the fact that the instruments evidencing the debt (in this case a signed sales slip containing the "Consumers' Agreement") are assigned to a third party.

A declaratory decree in accordance with this opinion may be entered.

So ordered.