DAVID I. BEGELFER & others [Note 1] vs. RICHARD A. NAJARIAN & another. [Note 2]

ABRAMS, J. The Legislature has provided that any person who charges more than twenty per cent a year for interest and expenses on a loan must register with the Attorney General. [Note 3] Any person who obtains a loan in which the interest

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and expenses exceed twenty per cent a year may request that the loan be declared void by the Superior Court or this court if the lender failed to register with the Attorney General. G. L. c. 271, Section 49.

The plaintiffs seek a declaration that a promissory note executed by them is void because the defendants' exercise of their rights under the default provision caused the interest and expenses to exceed twenty per cent a year and the defendants failed to register with the Attorney General. The plaintiffs suggest that, in any event, the amount of damages sought to be recovered from them after default is unconscionable. Lastly, the plaintiffs also contend that violation of G. L. c. 271, Section 49, is an unfair and deceptive act which entitles them to damages and attorneys' fees pursuant to Section 11 of G. L. c. 93A. The defendants answered, denying that interest and expenses exceeded twenty per cent a year, and counterclaimed for enforcement of the note. Each party filed an affidavit and moved for summary judgment. Mass. R. Civ. P. 56, 365 Mass. 824 (1974).

After hearing the cross-motions for summary judgment, the judge allowed the defendants' motion. He ruled that there was no genuine issue of fact; that the note in question was an enforceable obligation, not in violation of G. L. c. 271, Section 49; and that the defendants had not engaged in any unfair or deceptive practice as that term is used in G. L. c. 93A, Section 11. Judgment was entered in the amount of $99,522.50. [Note 4] The plaintiffs appealed, and we transferred

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the case on our own motion. We hold that the default provision of the note does, indeed, violate G. L. c. 271, Section 49. Therefore, we reverse the judgment, which ordered enforcement of the entire note including the default provision. We agree with the judge that the plaintiffs are not entitled to relief pursuant to Section 11 of G. L. c. 93A, but we do so for different reasons.

We summarize the pleadings. The plaintiffs are in the business of buying, selling, renting, constructing, and renovating residential properties. On or about September 26, 1973, the plaintiffs executed nine separate notes to various payees to evidence a total loan of $300,000. The nine notes were secured by a junior mortgage on real estate located in Cambridge. The proceeds of the loan were to be used for the renovation of rental property.

The defendant Richard Najarian owns a pharmacy in Waltham, at which his wife occasionally works. The defendants were asked to participate in the loan by two of the other investors; the defendants did not know the plaintiffs. On or about September 30, 1973, the plaintiffs, as comakers, executed a promissory note dated September 26, 1973, payable to the defendants in the amount of $30,000 with interest from the date of the note at the rate of fifteen per cent (15%) a year on the unpaid balance until paid. Principal and interest were payable in monthly instalments to be applied first to interest, then to principal. All unpaid balances were to be paid one year from the date of the note. In addition, the parties included a provision calling for default charges. [Note 5] An amendment to the note was executed in October,

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1974, extending the time for payment until September 26, 1975, and increasing the interest to seventeen per cent a year.

The plaintiffs did not pay the note when due and failed to make the interest payments from March 26, 1976, to the date of the judgment. [Note 6] The defendants made a written demand for payment of the amount due under the provisions of the note on July 5, 1977, and shortly thereafter the plaintiffs commenced this action. The central issue is the effect to be given the default provision of the note in light of G. L. c. 271, Section 49.

1. General Laws c. 271, Section 49. "The word interest in its usual sense is the compensation fixed by the parties or allowed by law for the use of money or as damages for its detention." Hayes v. Commissioner of Corps. & Taxation, 261 Mass. 134, 136 (1927). Usury is generally defined as the taking of interest in excess of the rate permitted by law. 45 Am. Jur. 2d Interest and Usury Section 2 (1969). 6A A. Corbin, Contracts Section 1498, at 677 (1962). Hopkins v. Flower, 256 Mass. 367, 371-372 (1926). From 1641 to 1867, Massachusetts laws prohibited the taking of usury. See e.g., St. 1783, c. 55; St. 1825, c. 143; St. 1826, c. 27. See generally Gray v. Bennett, 3 Met. 522, 527-528 (1842). After 1867, Massachusetts had no general usury statute until 1970, although loans at a rate of interest greater than six per cent were required to be in writing. St. 1867, c. 56. See also St. 1898, c. 577 (Small Loans Act). [Note 7]

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In 1965 the Special Commission on Laws Relative to Loans and Credit declined to recommend passage of a usury law since, in their opinion, existing and recommended legislation in the areas of small loans, home mortgages, retail credit sales, and credit disclosure provided ample protection to borrowers. 1965 House Doc. No. 3915, at 12. However, in 1970, the Governor recommended passage of a usury law to provide an effective tool against organized crime and "the vicious offense of loansharking." Message of the Governor, 1970 House Doc. No. 5439, at 3. Beach Assocs. v. Fauser, 9 Mass. App. Ct. 386 (1980). General Laws c. 271, Section 49, was thereafter enacted by St. 1970, c. 826. The law is designed to protect the necessitous debtor from outrageous demands by lenders. 14 S. Williston, Contracts Section 1683 n.17 (3d ed. 1972). Gray v. Bennett, supra at 527-528. See Goldstock and Coenen, Controlling the Contemporary Loanshark: The Law of Illicit Lending and the Problem of Witness Fear, 65 Cornell L. Rev. 127, 180-184 (1980).

As defined by G. L. c. 271, Section 49, "the amount to be paid upon any loan for interest or expenses shall include all sums paid or to be paid by or on behalf of the borrower for interest, brokerage, recording fees, commissions, services, extension of loan, forbearance to enforce payment, and all other sums charged against or paid or to be paid by the borrower for making or securing directly or indirectly the loan ...." The plaintiffs contend that the overdue charges fall squarely within this statutory prohibition. The defendants, on the other hand, argue that the note does not violate Section 49 (a), because the interest was only seventeen per cent and the default charges are not interest within the meaning of Section 49 (a). We disagree with the defendants because the all-inclusive language utilized by the Legislature in Section 49 brings within its ambit the default provision of the note in issue.

Analogous statutes regulating instalment sales or loans limit the maximum amount to be charged and specifically include or exclude default charges. See G. L. c. 255B, Sections 11, 20 (Motor Vehicle Installment Sales Act); G. L. c. 255D, Sections 9C (12) (4), 20, 21 (Retail Installment Sales

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Act); G. L. c. 140, Section 114A. Statutes regulating small loans and certain home mortgage loans do not mention default charges specifically, but their language requires that the maximum charge permitted under these statutory provisions include all but specially enumerated items. G. L. c. 140, Sections 90A, 96, 100; Greenleaf Fin. Co. v. Small Loans Regulatory Bd., 377 Mass. 282, 289 (1979). See also G. L. c. 140C, Section 3 (e) (Truth-in-Lending Act); 12 C.F.R. Section 226.8(b) (4) (Federal Truth-in-Lending regulation). [Note 8] We think that the Legislature's decision to employ language similar to the language found in statutes regulating small loans and certain home loans, coupled with the Legislature's failure specifically to exclude default charges from G. L. c. 271, Section 49 (a), is fatal to the defendants' claim that the note does not violate Section 49(a). Our interpretation is consistent with decisions from other jurisdictions interpreting similar statutes. See State ex rel. Turner v. Altoona, 274 N.W.2d 366, 367 (Iowa 1979); Watson v. Cargill, Inc., 573 S.W.2d 35, 42 (Ct. Civ. App. Tex. 1978); Thrift Funds of Baton Rouge, Inc. v. Jones, 274 So. 2d 150 (La.), cert. denied, 414 U.S. 820 (1973); Gordon Fin. Co. v. Chambliss, 236 So. 2d 533 (La. App. 1970).

The defendants' next argument is that the contract rate in the note must be enforced because under G. L. c. 107, Section 3, [Note 9] it is lawful to contract for any rate of interest except as provided under certain sections of the Small Loans Act, G. L. c. 140. The defendants' premise is correct in so far as it goes. While parties may contract for interest in an amount

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greater than twenty per cent, the Legislature has determined that as a matter of public policy persons who charge more than twenty per cent interest must register with the Attorney General. No reason suggests itself why we should not give effect to the legislative policy expressed in G. L. c. 271, Section 49, as well as G. L. c. 107, Section 3. Reading these statutes together permits parties to contract for an amount of interest greater than twenty per cent so long as the lender complies with the registration and record-keeping requirements of G. L. c. 271, Section 49. In the absence of compliance with these requirements, the maximum amount to be charged for interest and expenses on any loan is limited to twenty per cent a year. "If reasonably practicable and there is no positive repugnancy, a rational and workable effect must be given to both statutes, to the end that there may be a harmonious and consistent body of legislation." Smith v. Director of Civil Serv., 324 Mass. 455, 458 (1949). Cases relied on by the defendants which suggest that parties may contract for any interest charged without a penalty were decided before the enactment of G. L. c. 271, Section 49. See, e.g., Manganaro Drywall, Inc. v. Penn-Simon Constr. Co., 357 Mass. 653, 658 (1970), and cases cited.

The defendants also contend that there are several policy reasons why we should not construe the late charges as "interest or expenses" for the purposes of the usury statute. They claim it is sound policy to allow imposition of a default charge, particularly since the prior mortgage increased the risk of the loan. Such a policy, they claim, "is a well known incentive to lenders ... [and] the threat of the late charge serves as incentive to the debtor to make prompt payments." Sanders v. Federal Nat'l Mortgage Ass'n, 393 F. Supp. 739, 740 (E.D. La. 1975). See Garrett v. Coast & S. Fed. Sav. & Loan Ass'n, 9 Cal. 3d 731, 739-740 (1973); In re Tastyeast, Inc., 126 F.2d 879, 882 (3d Cir. 1942).

The defendants also cite authority which indicates that a majority of courts in this country do not treat late charges or delinquency payments as interest for the purposes of ascertaining violations of usury statutes. The general rule is that

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a provision in a note for default charges or a higher rate of interest after maturity than permitted by law is not considered usurious if adopted in good faith. Heelan v. Security Nat'l Bank, 73 Misc. 2d 1004, 1008 (N.Y. Dist. Ct. 1973). Union Bank v. Kruger, 1 Wash. App. 622 (1969). Randall v. Home Loan & Inv. Co., 244 Wisc. 623 (1944). 6AA. Corbin, Contracts, Section 1503 at 694 (1962). Annot., 28 A.L.R.3d 449 (1969). See Hayes v. First Nat'l Bank, 256 Ark. 328 (1974). Annot., 63 A.L.R.3d 50 (1975). One early Massachusetts case followed this general rule. Cutler v. How, 8 Mass. 257 (1811). See Fisher v. Otis, 3 Pin. 78 (Wis. 1850) (applying Massachusetts law). Under the cases cited above, late charges of a higher rate of interest after maturity do not have to pass muster under usury statutes because the buyer can avoid them by discharging his debt in a timely manner. This argument assumes that persons who do not make timely payments are financially able to do so, but voluntarily choose not to pay.

Even if we assume that the defendants' arguments are sound, the fact remains that the Legislature has chosen not to follow the defendants' logic, and instead has limited to twenty per cent a year the amount which may be charged for interest and all expenses on loans made by lenders who are not registered with the Attorney General. The public policy against usury is clearly a matter for grave legislative concern, see Gray v. Bennett, 3 Met. 525, 527 (1842), and the wisdom of their choice of remedies is solely their responsibility. Blue Hills Cemetery, Inc. v. Board of Registration in Embalming & Funeral Directing, 379 Mass. 368, 371-372 (1979). A lender faced with bad credit risks and inadequate collateral is not helpless to protect himself: he may register with the Attorney General, and then charge more than twenty per cent a year for interest and expenses.

In sum, the Legislature has determined, as it may, that a lender who does not comply with the requirements of Section 49 may not charge interest and expenses in excess of twenty per cent a year. Since the default provision in the note causes the total interest and charges to exceed twenty per cent a

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year, it violates the legislative policy embodied in G. L. c. 271, Section 49, and cannot be enforced.

Alternatively, apart from the statute, we also consider whether the difference between $48,487.50 and $99,522.50 due to the default (see note 4, supra) was "so disproportionate to the damages caused to the [defendants] by the [plaintiffs'] breach of the agreement that it amounts to a penalty." Manganaro Drywall, Inc. v. Penn-Simon Constr. Co., 357 Mass. 653, 658 (1970). See In re Tastyeast, Inc., 126 F.2d 879 (3d Cir. 1942). Feller v. Architects Display Bldgs., Inc., 54 N.J. Super. 205 (1959). See also Clermont v. Secured Inv. Corp., 25 Cal. App. 3d 766, 769 (1972). Garrett v. Coast & S. Fed. Sav. & Loan Ass'n, 9 Cal. 3d 731, 738-740 (1973).

In the past, we have set aside a provision by which the contract rate of interest was doubled after default as an unreasonable, unconscionable and oppressive penalty. [Note 10] deCordova v. Weeks, 246 Mass. 100, 105 (1923). See Feller v. Architects Display Bldgs., Inc., supra at 213-214. See also Makletzova v. Diaghileff, 227 Mass. 100 (1917); Guerin v. Stacy, 175 Mass. 595, 597 (1900); Manhattan Syndicate, Inc. v. Ryan, 14 App. Div. 2d 323, 327-328 (N.Y. 1961). Were we to treat the default charges in this case as "liquidated damages" we would strike the default provision as "unreasonably and grossly disproportionate to the real damages from [the] breach...." A-Z Servicenter, Inc. v. Segall, 334 Mass. 672, 675 (1956). [Note 11]

General Laws c. 271, Section 49(c), [Note 12] provides that any loan at a proscribed rate of interest may be declared void by the

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Supreme Judicial Court or the Superior Court in equity upon the borrowers' petition. The plaintiffs argue that this language requires any loan made in violation of the statute to be declared void. The plaintiffs contend that as a result of the violation of the statute they are relieved of any obligation to pay the defendants. [Note 13] We do not agree.

"Unless no other conclusion is possible from the words of a statute it should not be held to make agreements contravening it totally void." 14 S. Williston, Contracts Section 1630A, at 26 (3d ed. 1972). We think the permissive language of Section 49(c) is properly read to empower a court to utilize its full range of equitable powers, including cancellation, in order to reach an appropriate result in each case.

This precise issue was extensively analyzed in the case of Beach Assocs. v. Fauser, 9 Mass. App. Ct. 386 (1980). In that case, the loan agreement called for interest at the rate of twenty-four per cent a year, which the trial judge reduced to twenty per cent, the maximum permissible rate allowed by G. L. c. 271, Section 49. In affirming the trial judge's order, the Appeals Court held that an "equitable remedy, statutorily expressed in permissive terms, allows a judge to exercise discretion in granting relief, which can include reformation to reduce the excessive rate charged to one that is legally permissible." Id. at 389. As the Appeals Court stated, "There is ample authority for the proposition that when the only flaw in a loan is the excessive interest, the amount constituting the excess is to be refunded or credited to the borrower without necessarily voiding the loan." Beach Assocs. v. Fauser, supra at 393, and cases cited therein. See 1970 Ann. Survey Mass. Law 128-129.

The plaintiffs' argument that the entire note is void is based on the construction which has been given to similar language in Section 103 of the Small Loans Act. [Note 14] See Bernhardt

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v. Atlantic Fin. Co., 311 Mass. 183, 187 (1942) (holding that a note taken by an unlicensed small loan lender was void). Ordinarily, "[t]he word `may' in a statute commonly imports discretion." Turnpike Amusement Park, Inc. v. Licensing Comm'n of Cambridge, 343 Mass. 435, 437 (1962), and cases cited. There is nothing in the language of the statute or its purpose which suggests that the Legislature intended to limit the court's discretion. In contrast to Section 49, the Legislature has determined that loans made in violation of the Small Loans Act by unlicensed persons must be declared void. See G. L. c. 140, Section 110; [Note 15] Beach Assocs. v. Fauser, supra at 392-393. Cuneo v. Bornstein, 269 Mass. 232, 237 (1929).

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We conclude that there is "no apparent legislative intent that a loan in violation of Section 49(a) must be declared void in the absence of circumstances and conditions which would cause the integrity of the loan itself to be questionable. See Lawrence v. Falzarano, 380 Mass. 18, 23 (1980). To view Section 49(a) differently is to make relief available to borrowers which in many instances will exceed their injuries." Beach Assocs. v. Fauser, supra at 393.

The appropriate remedy in any particular case is arrived at by balancing a number of factors including the importance of the public policy against usury, whether a refusal to enforce the term will further that policy, the gravity of the misconduct involved, the materiality of the provision to the rest of the contract, and the impact of the remedy on the parties' rights and duties. Town Planning & Eng'r Assocs. v. Amesbury Specialty Co., 369 Mass. 737, 745-746 (1976). Cadillac Auto. Co. v. Engeian, 339 Mass. 26, 30 (1959). Missouri, Kan. & Tex. Trust Co. v. Krumseig, 172 U.S. 351, 357 (1899). See generally REstatement (Second) of Contracts Section 320 (Tent. Draft No. 12, 1977).

In the circumstances of the present case; we think that the proper equitable remedy is to strike the default provision of the note as offensive to the statute. [Note 16] Such a remedy is a proper accommodation between enforcing the public policy underlying the prohibitions of the act and preventing an undeserved windfall to the plaintiffs.

2. The consumer protection action. The plaintiffs seek additional relief under the provisions of G. L. c. 93A, Section 11, which provides a remedy for "[a]ny person who engages in

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the conduct of any trade or commerce and who suffers any loss of money or property, real or personal, as a result of the use or employment by another person who engages in any trade or commerce of an unfair method of competition or an unfair or deceptive act or practice declared unlawful by section two ...." [Note 17] The plaintiffs claim that the defendants were engaged in trade or commerce as those terms are used in G. L. c. 93A, and that a violation of Section 49 is "an unfair or deceptive act or practice." The defendants disagree.

The only issue we consider is whether the defendants are persons engaged in trade or commerce. The principal case construing this language is Lantner v. Carson, 374 Mass. 606 (1978). In that case, we held that the consumer protection statute did not reach strictly private transactions such as the isolated sale of a private home. Based on the distinction in G. L. c. 93A between "a business person and an individual who participates in commercial transactions on a private, nonprofessional basis," id. at 610, we concluded that "where the Legislature employed the terms `persons engaged in the conduct of any trade or commerce,' it intended to refer specifically to individuals acting in a business context," id. at 611. See Young v. Joyce, 351 A.2d 857 (Del. 1975).

The question whether a private individual's participation in an isolated transaction takes place in a "business context"

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must be determined from the circumstances of each case. To establish a private person's liability under Section 11 we assess the nature of the transaction, the character of the parties involved, and the activities engaged in by the parties. See Lantner v. Carson, supra. Other relevant factors are whether similar transactions have been undertaken in the past, whether the transaction is motivated by business or personal reasons (as in the sale of a home), and whether the participant played an active part in the transaction. We do not read Section 11 as requiring that a commercial transaction must take place only in the ordinary course of a person's business or occupation before its participants may be subject to liability under G. L. c. 93A, Section 11.

In view of these criteria, however, we cannot say that the plaintiffs proved that the defendants were "persons engaged in the conduct of any trade or commerce" or that their participation took place in a business context. Significantly, the record indicates that the defendants' participation in the real estate transaction underlying the loan was minimal. The defendants had no voice in negotiating the terms of the loan. The payments were made to an agent and not directly to them. They were solicited by other investors to participate in the loan, and were not active in the management of the loan. [Note 18] The plaintiffs contend that the defendants' pursuit of their contractual and legal remedies requires us to hold that the defendants are "persons engaged in any trade or commerce," suggesting that pursuit of legal remedies indicates such active participation and control over the transaction as to render the defendants liable under Section 11. We disagree. A person is not engaged in trade or commerce merely by the exercise of contractual or legal remedies.

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The judgment is reversed, and the case is remanded to the Superior Court for proceedings not inconsistent with this opinion.

So ordered.