This opinion will be unpublished and
may not be cited except as provided by
Minn. Stat. § 480A.08, subd. 3 (1998).

STATE OF MINNESOTA
IN COURT OF APPEALS
C5-99-881

Esther Walker, et al.,
Appellants,

vs.

Fingerhut Corporation,
Respondent.

Filed January 28, 2000
Affirmed in part, reversed in part, and remanded; motion granted.
Peterson, Judge

Hennepin County District Court
File No. CT 9713744

William H. Crowder, Susan Ford Bedor, Gregory L. Paulson, Crowder & Bedor, 555 West Seventh Street, Suite 201, St. Paul, MN 55102;

Seymour J. Mansfield, Richard J. Fuller, Mansfield, Tanick & Cohen, P.A., 1560 International Centre, 900 Second Avenue South, Minneapolis, MN 55402; and

Charles H. Johnson, Charles H. Johnson & Associates, P.A., 2599 Mississippi Street, New Brighton, MN 55112 (for appellants)

Edward M. Laine, Christopher M. Scotti, Bridget A. Sullivan, Oppenheimer, Wolff & Donnelly, LLP, 3400 Plaza VII Building, 45 South Seventh Street, Minneapolis, MN 55402 (for respondent)

Anne L. Bergman, 314 North Main Street, Stillwater, MN 55082 (for amicus curiae Minneapolis Urban League)

Kay Nord Hunt, Ronald L. Haskvitz, Markus C. Yira, Lommen, Nelson, Cole & Stageberg, P.A., 1800 IDS Center, 80 South Eighth Street, Minneapolis, MN 55402 (for amicus curiae Minnesota Retail Merchants Association)

Michael R. Schuster, AARP, Deborah Zuckerman, AARP Foundation Litigation, 601 E Street Northwest, Washington, D.C. 20049 (for amicus curiae AARP)

Considered and decided by Klaphake, Presiding Judge, Randall, Judge, and Peterson, Judge.

U N P U B L I S H E D   O P I N I O N

PETERSON, Judge

In this appeal from a summary judgment, appellants argue that the district court erred by concluding that respondent Fingerhut Corporation’s retail sales contracts did not violate Minnesota’s usury statute and that Fingerhut’s use of the term "30-Day Free Trial Period" did not violate Minnesota consumer protection laws. Appellants also move to strike portions of Fingerhut’s appellate brief. We affirm in part, reverse in part, and remand, and we grant the motion to strike.

FACTS

This action began as a class action. The named appellants are individuals from ten states who represent a class of individuals who bought merchandise from respondent Fingerhut Corporation. Fingerhut uses direct mailings to offer goods for retail sale. Customers place orders by mail or by telephone. Customers are offered a 30-day free trial period, subject to credit approval, as an opportunity to try the merchandise before buying it. Each sale contract includes a catalog payment chart, an order form, and an invoice.[1] An explanation that accompanies the catalog payment chart states:

No down payment required. Cash price plus shipping and handling. Total sale price includes a finance charge added to your purchase at the annual percentage rate of 24.9%, except for those items indicated with which will be at the annual percentage rate of 24.75%. Shipping and Handling charges are included in the total sale price.

The payment chart also states that if a payment is more than 30 days past due, Fingerhut may "declare all remaining payments immediately due and payable."

Fingerhut determines the finance charge by applying a stated annual percentage rate from the beginning of the free trial period to the end of the monthly payment plan. To determine the finance charge, Fingerhut considers costs associated with managing the transaction over the life of the sale, such as additional personnel and equipment costs, the costs of financing the merchandise sold, and the risks and costs of delinquency and customer default. Fingerhut’s internal documents refer to the finance charge that accrues during the free trial period as "interest during deferred."

Customers fill out an order form and send it to Fingerhut’s office in Minnesota. The order form states:

Please accept my order for the product(s) indicated. At the end of my 30-day Free Trial, I agree to pay for my selection under the liberal payment terms stated in the payment chart of this catalog and on the invoice which accompanies the merchandise, or return it at my expense and owe nothing. * * * This order is governed by Minnesota law and subject to approval of my credit by Fingerhut.

When Fingerhut receives an order form, it determines whether it will approve the customer’s credit, and if credit is approved, the merchandise is delivered with an invoice, which states:

During your Free Trial Period, you may elect to use our convenient monthly payment plan, or you may wish to avoid paying finance charges by making one cash payment.

The precise amount due under each option is printed on the invoice in the following format:

MONTHLY PAYMENT PLAN: You have ___ monthly payments. The first payment of ___, which includes state and local taxes of ___ is due on ___. The remaining ___ payments of ___ are due on the __ of each subsequent month.

ONE CASH PAYMENT: The total of ___, which includes the Fingerhut price of ___, state and local taxes of ___ and shipping and handling of ___ must be received by ___, and no finance charge will be due.

In some of the states where Fingerhut makes sales, statutes that regulate consumer credit require sellers to rebate finance charges when a consumer purchases merchandise on credit and then pays the credit price before payment is due. In these states, which the parties refer to as the special states, Fingerhut makes the required rebates. In states that do not require rebates, which the parties refer to as the regular states, Fingerhut does not rebate any finance charges when a credit customer pays the credit price before it is due.

Appellants’ complaint alleged that Fingerhut’s consumer credit sales violated Minn. Stat. §§ 334.01-.03, .05 (1996) (regulating usury), and Minn. Stat. §§ 325D.44 et seq. and 325F.69 et seq. (1996) (regulating trade practices and consumer fraud). Following consideration and reconsideration of cross-motions for summary judgment, the district court:

(1) dismissed with prejudice appellants’ claims for usury in states where Fingerhut does not rebate,

(2) ruled that Fingerhut’s contracts in states where it rebates are usurious, but Fingerhut’s good-faith efforts to comply with those states’ consumer regulations justify application of the "good faith exception rule" and are an absolute defense against the finding of usury,

(3) ruled that Fingerhut’s use of the phrase "free home trial" did not violate Minnesota consumer protection laws, and

(4) certified a class of Fingerhut’s customers who entered consumer credit sales contracts on or after December 1, 1989, or who made payments on a prior contract on or after December 1, 1989. Customers who entered contracts with Fingerhut through its new credit card sales financing program operated by Fingerhut National Bank after January 12, 1997, are excluded from this class.

Accordingly, the court granted Fingerhut’s motion for summary judgment.

D E C I S I O N

On an appeal from a grant of summary judgment, this court must determine whether there are any genuine issues of material fact and whether the district court erred in its application of the law. State by Cooper v. French, 460 N.W.2d 2, 4 (Minn. 1990). We "view the evidence in the light most favorable to the party against whom judgment was granted." Fabio v. Bellomo, 504 N.W.2d 758, 761 (Minn. 1993) (citation omitted).

1. Usury claims

Minnesota follows the general rule that usury is the taking or receiving of more interest or profit on a loan of money or forbearance of indebtedness than the law allows. St. Paul Bank for Coops. v. Ohman, 402 N.W.2d 235, 237 (Minn. App. 1987). To conclude that a transaction is void for usury, the court must find

(a) A loan of money or forbearance of a debt; (b) an agreement between the parties that the principal shall be repayable absolutely; (c) the exaction of a greater amount of interest or profit than is allowed by law; and (d) the presence of an intention to evade the law at the inception of the transaction.

Rathbun v. W.T. Grant Co., 300 Minn. 223, 230, 219 N.W.2d 641, 646 (1974).

[T]he required intent "consists in the intent to take or receive more for the forbearance of money than the law permits, and this is true whether or not the taker knows he is violating the usury law." Thus, if a lender intentionally charges an interest rate that is in fact usurious, it is presumed that he intends the natural consequences of his act–a usury violation.

Citizen’s Nat’l Bank of Willmar v. Taylor, 368 N.W.2d 913, 919 (Minn. 1985) (quoting Cemstone Prods. Co. v. Gersbach, 187 Minn. 416, 419, 245 N.W. 624, 625 (1932)).

The amount of interest or profit allowed by law is limited by Minn. Stat. § 334.01, subd. 1 (1996), which states:

No person shall directly or indirectly take or receive in money, goods or other things in action, or in any other way, any greater sum, or any greater value, for the loan or forbearance of money [or] goods * * * than $8 on $100 for one year.

Under a judicially created doctrine, known commonly as the time-price doctrine, certain transactions are outside the scope of the usury law. Ohman, 402 N.W.2d at 238. The time-price doctrine is

based on the theory that the prohibition against usury is limited to (1) loans of money or personal property repayable in kind, and (2) forbearances to require payment on a loan or debt then due. A time-price transaction is outside this limitation because it is merely a sale of goods and not a loan of money, and there is no forbearance or loan because the debt is based on a future price and not on an amount then due.

Id.

In Dunn v. Midland Loan Fin. Corp., 206 Minn. 550, 554, 289 N.W. 411, 413 (1939), which first upheld the time-price doctrine in Minnesota, the supreme court explained:

The owner has the right to determine the price at which he will sell his property. He may fix one price for cash and another price for credit. The fact that the credit price exceeds the cash price by a greater percentage than is permitted by the usury law does not make the transaction usurious for the very plain reason that the transaction is a sale and not a loan.

Courts have observed that in calculating the addition to the cash price the owner may consider all factors which influence vendors, such as profit, return on investment, overhead, handling charges, risks involved, insurance, sale discount of contract for deferred payments, and perhaps other items.

Schauman v. Slomica Midwest, Inc., 283 Minn. 437, 440, 168 N.W.2d 667, 670 (1969).

The Dunn court distinguished the time-price transaction from one involving deferred payment:

This type of transaction is not to be confused with that where the parties definitely agree upon a binding sale price, payable in whole or in part by deferred payments for the reason that such a contract creates a debt for the unpaid purchase price, or part thereof, and the granting of time to pay is a forbearance to collect such existing debt, which is conceded everywhere is subject to the usury law.

206 Minn. at 555, 289 N.W. at 413.

The distinction centers on whether there is in fact a "cash" price and a "time" price, or whether there is only a "cash" price which impermissibly charges an illegal rate of interest on the deferred payments. Finding that a transaction is within the time-price doctrine "is predicated on the absence of a contract binding the seller to sell at the so-called cash price."

Ohman, 402 N.W.2d at 238 (quoting Schauman, 283 Minn. at 444, 168 N.W.2d at 672).

a. Sales to customers in the regular states

Appellants contend that the district court erred when it concluded that Fingerhut’s contracts in the regular states were time-price contracts, and therefore, not subject to the Minnesota usury laws. Appellants argue first that the time-price doctrine does not apply to these contracts because from the date of delivery until the end of the free trial period, Fingerhut was unconditionally bound to sell for a cash price, and the time-price doctrine is predicated on the absence of a binding cash price. We disagree.

There was never a contract to sell for a cash price in transactions where the customer chose to purchase for a credit price. Upon the delivery of merchandise, customers could make one of three choices: (1) pay cash for the merchandise, (2) make payments according to a monthly payment plan, or (3) return the merchandise. There was a contract to sell at the cash price only when a customer chose the cash option. As the district court found, Fingerhut’s offer gave customers a genuine choice between a time price and a cash price, which is what the time-price doctrine requires.

Appellants argue next that the time-price doctrine does not apply to the contracts in the regular states because customers who elected to use a monthly payment plan could prepay and receive a refund of the unearned finance charge. But the only evidence appellants cite to support their argument indicates that some customers in the regular states received payment envelopes that bore the statement, "You have the right at any time to pay in advance the full unpaid balance and may be entitled to a partial refund of the finance charge." There is no evidence that any customer in any of the regular states received a finance-charge refund. The plain meaning of the statement on the envelopes is that full payment in advance establishes a right to a refund for some, but not all, customers. Customers in the regular states had no right to a refund.

Finally, appellants argue that the time-price doctrine does not apply to the contracts in the regular states because Fingerhut charged sales tax on the cash price for merchandise, not the credit price. This argument is based on the fact that in Ohman, one of the four factors the court considered when determining that the time-price doctrine did not apply was that the seller computed sales tax on the cash price, not the time price. But in Ohman, each of the other three factors considered indicated that the time-price doctrine did not apply. The Ohman court simply stated that the sales tax computation was a factor without analyzing its significance, and there is no indication that the sales-tax factor alone would have been sufficient to reach the same conclusion. We also note that computing sales tax based on the cash price, rather than the time price, is in accord with Minnesota tax law. Under Minn. Stat. § 297A.01, subd. 8 (1996), the sales price to be used to calculate sales taxes does not include financing charges if the financing charges are separately stated. The sales-tax factor was not sufficient by itself to make the time-price doctrine inapplicable to the sales to customers in the regular states.

b. Sales to customers in the special states

The district court concluded that the contracts for sales to customers in the special states were usurious but that the precautions Fingerhut took to comply with the special states’ consumer-credit laws were within the spirit of Minnesota’s good-faith exception to usury. This conclusion is internally inconsistent. To conclude that the transactions were usurious, the district court would have to conclude that Fingerhut intended to evade the usury law at the inception of the transactions. See Rathbun, 300 Minn. at 230, 219 N.W.2d at 646 (elements of usury include intent to evade usury law at inception of transaction). But to conclude that the good-faith exception applies, the district court would have to conclude that the precautions Fingerhut took to comply with the special states’ consumer-credit laws were taken in order to comply with the usury law. See Trapp v. Hancuh, 530 N.W.2d 879, 886 (Minn. App. 1995) (finding of good faith limited to situations where lender took reasonable precautionary actions before making loan in order to comply with the usury law). Fingerhut could not have taken the precautions in order to comply with the usury law if it intended to evade the usury law.

As we explained above,

if a lender intentionally charges an interest rate that is in fact usurious, it is presumed that he intends the natural consequences of his act–a usury violation.

Citizen’s Nat’l Bank of Willmar, 368 N.W.2d at 919. "However, where a transaction is entered into in good faith, with no purpose to evade the usury laws, it will be upheld." Wetsel v. Guaranteed Mortgage Co., 195 Minn. 509, 512, 263 N.W. 605, 606 (1935). Under this good-faith exception, the presumption of intent that arises when a usurious rate is charged may be overcome if, before making a loan, the lender took reasonable precautions that demonstrate a purpose to act in good faith and comply with the usury law.

For example, in Wetsel, a mortgage company charged a usurious rate, but the supreme court determined that the company acted in good faith and there was no intent to exact usury because, before making the loan, the company received from certified public accountants schedules that set out the monthly payments that could be received for loans without violating the usury laws. See also Washington Fed. Sav. & Loan Ass’n v. Baker, 374 N.W.2d 786, 788 (Minn. App. 1985) (bank’s adoption of assignment of rents agreement on recommendation of HUD officials and submission to HUD of insurance premiums showed good faith belief that loan met requirements of HUD-insured loan to which usury statute did not apply), review denied (Minn. Dec. 13, 1985).

The good-faith exception simply recognizes that charging an interest rate that exceeds the legal rate does not conclusively prove that the lender intended to evade the usury law. Consequently, when a lender has charged an interest rate that is in fact usurious, but there is evidence that the lender took precautions before making the loan, the precautions must be examined to determine whether they were taken in order to comply with the usury law and, therefore, overcome the presumption that the lender intended to evade the usury law.

In reaching its conclusion that the good-faith exception applies to sales to customers in the special states, the district court examined the actions Fingerhut took to comply with the consumer credit laws in the special states. But the district court did not determine whether the evidence demonstrated, as a matter of law, that Fingerhut took these actions in order to comply with Minnesota usury law and, therefore, did not intend to evade the usury law. Because the district court did not apply the correct legal analysis to the usury claim based on sales to customers in the special states, we reverse the grant of summary judgment to Fingerhut on that claim and remand for further proceedings.

Appellants contend that because Fingerhut did not file a notice of review challenging the district court’s determination that the contracts in the special states were usurious, that issue is not properly before us and we may not review that determination. But because the district court’s incorrect application of the good-faith exception directly affects its usury determination, we cannot separate the usury determination from appellants’ challenge of the district court’s application of the good-faith exception.

2. 30-Day Free Trial Period

Appellants contend that the district court erred by concluding that Fingerhut’s contracts did not violate Minnesota consumer-protection statutes. Appellants argue that Fingerhut’s contracts and advertising were misleading and deceptive due to Fingerhut’s assessing interest during its so-called "30-Day Free Trial Period" without informing customers of any limitations on the word "free."

Minn. Stat. § 325D.44, subd. 1(13) (1996), prohibits a trade practice that "creates a likelihood of confusion or of misunderstanding." Minn. Stat. § 325F.69, subd. 1 (1996), prohibits

The act, use, or employment by any person of any fraud, false pretense, false promise, misrepresentation, misleading statement or deceptive practice, with the intent that others rely thereon in connection with the sale of any merchandise * * * .

In determining whether these statutes have been violated, courts have applied the standards of "tended to deceive" or "likely to mislead." Lenscrafters, Inc. v. Vision World, Inc., 943 F.Supp. 1481, 1488 (D. Minn. 1996).

Appellants’ premise that customers who chose to use the monthly payment plan were assessed interest during the 30-day free trial period is based on the fact that finance charges were determined by applying a stated annual percentage rate from the beginning of the free-trial period to the end of the monthly payment plan. But what matters for purposes of the consumer-protection statutes is whether the seller’s conduct tended to deceive or was likely to mislead consumers.

Appellants concede that the fact that customers who chose to return merchandise were required to make the return at their own expense did not make the "30-Day Free Trial Period" language misleading because this requirement was stated in the sales contracts. We see no basis for reaching a different conclusion with respect to customers who chose to use the monthly payment plan.

Fingerhut told those customers the exact payments they would be required to make for the merchandise. The payment requirements were stated in precise terms that told each customer exactly what the customer’s obligations were. The fact that the stated finance charges could be characterized as interest charges from the date the merchandise was delivered does not demonstrate that using the phrase "30-Day Free Trial Period" in conjunction with the precise contract terms tended to deceive or was likely to mislead any customer. We agree with the district court’s conclusion that "Fingerhut’s stated terms are sufficiently clear so as not to confuse, mislead or deceive its customers."

4. Motion to Strike

Appellants filed a motion to strike sections III. C. and III. D. of Fingerhut’s brief. Because these sections contain arguments pertaining to issues that Fingerhut failed to preserve for appellate review, we grant the motion to strike.

Affirmed in part, reversed in part, and remanded; motion granted.

[1] Forms received by various class members were substantially similar.