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Folands Jewelry v. Warren

Michigan Court of Appeals
Apr 28, 1995
532 N.W.2d 920 (Mich. Ct. App. 1995)


Docket No. 167595.

Submitted January 17, 1995, at Detroit.

Decided April 28, 1995, at 9:15 A.M. Leave to appeal sought.

Honigman Miller Schwartz Cohn (by Lee W. Brooks and Michael A. Gruskin), for the plaintiff.

Robert J. Chrzanowski, City Attorney, and Nancy Cooper Green, Assistant City Attorney, for the defendant.

Before: CORRIGAN, P.J., and O'CONNELL and G.S. ALLEN, JJ.

Former Court of Appeals judge, sitting on the Court of Appeals by assignment.

In this declaratory judgment action, plaintiff, Folands Jewelry Brokers, Inc., appeals as of right the grant of summary disposition pursuant to MCR 2.116(C)(10) (no genuine issue of material fact) for defendant, City of Warren. We affirm.

Folands operates a licensed precious metal and gem dealership at 4100 Fourteen Mile Road in Warren, Michigan. As a dealer, Folands buys and sells precious metals and gems. Most of the precious metals and gems Folands purchases are sold to the general public. However, customers sometimes repurchase gems or metals at a substantially higher price, pursuant to a repurchase option offered by Folands.

The Warren city attorney issued an opinion stating that Folands' jewelry business constituted pawnbroking and was, therefore, subject to regulation under the city's pawnbroker ordinance. Folands filed suit, seeking a declaratory judgment that it was not a pawnbroker. In a well-reasoned opinion, the circuit court concluded that Folands was subject to regulation as a pawnbroker.

The sole issue on appeal is whether Folands falls within the statutory definition of a pawnbroker and is, therefore, subject to regulation as a pawnbroker. The Warren Code, art IV, § 30-47, which follows closely the language of § 3 of Michigan's pawnbroker act, MCL 446.203; MSA 19.583, provides as follows:

Any person who loans money on deposit or pledge of personal property or other valuable thing, other than securities or printed evidence of indebtedness, or who deals in the purchasing of personal property or other valuable thing on condition of selling the same back again at a stipulated price, is hereby defined to be a pawnbroker.

As noted, Folands purchases precious metals or gems from customers. At the time of sale, it grants the customer the right to repurchase the item at the full purchase price within fifteen days. However, Folands also extends a second type of repurchase option to certain customers. Within one week after the sale, select customers may buy a thirty-day option to repurchase their precious metal or gem at an eight to eleven percent premium over the original purchase price. The option itself also costs between eight and eleven percent of the original purchase price of the item. Further, the option may be renewed at the same cost, that is, eight to eleven percent, every thirty days for up to six months. In effect, Folands receives an annualized rate of return of between 96 and 132 percent, plus the eight to eleven percent premium charged.

By labeling this transaction a "sale" rather than a "pawn," our Supreme Court in People v Lee, 447 Mich. 552; 526 N.W.2d 882 (1994), has stated that this chicanery is not usurious.

The city contends that both types of repurchase options constitute pawnbroking because both involve the sale of property "on condition of selling the same back again at a stipulated price." Warren Code, art IV, § 30-47 and MCL 446.203; MSA 19.583. We agree.

When interpreting a statute, our goal is to ascertain and effectuate the intent of the Legislature. Farrington v Total Petroleum, Inc, 442 Mich. 201, 212; 501 N.W.2d 76 (1993). We look first to the specific language of the statute, House Speaker v State Administrative Bd, 441 Mich. 547, 567; 495 N.W.2d 539 (1993), resorting to judicial construction only where reasonable minds could disagree with regard to the statute's meaning. Dep't of Social Services v Brewer, 180 Mich. App. 82, 84; 446 N.W.2d 593 (1989). Additionally, when considering an ordinance, we apply the same rules of construction as when considering a statute. Albright v Portage, 188 Mich. App. 342, 350, n 7; 470 N.W.2d 657 (1991). Finally, our review of the lower court's construction is de novo. Madison v Detroit, 208 Mich. App. 356, 358; 527 N.W.2d 71 (1995).

Turning to the statute and ordinance in issue, we find no express legislative recognition of repurchase transactions such as those conducted by Folands. We are also unaware of any Michigan precedent addressing the question whether these transactions constitute pawnbroking. However, while this question may be new to Michigan, it has been addressed by the Supreme Court of Connecticut.

In Rhodes v City of Hartford, 201 Conn. 89; 513 A.2d 124 (1986), the Supreme Court of Connecticut was faced with a factual situation remarkably similar to that at hand, and traced the history of "repurchase transactions" to 1911, when they were vilified as "[t]he greatest evil of the small money lending business." Id., p 97, quoting S. Levine, A Treatise on the Law of Pawnbroking (1911), pp 115-116. That Court concluded as follows:

[T]he legislature indicated that it intended the statutes to regulate not only those transactions that take the classic form of a conventional pawnbroking loan, but also financing arrangements that, in substance if not in form, amount to any economic equivalents of such a loan. Accordingly, the statutes apply to any transaction, regardless of its label or form, in which a pawnbroker gives a customer money and, in return, receives the right to hold the customer's property and the right to demand payment from the customer for the use of the money before allowing the customer to reclaim his property. ( Id., p 96. Emphasis added.)

We conclude that the broad language used by our Legislature in MCL 446.203; MSA 19.583 evinces a similar intent to include activities such as those of Folands within the definition of pawnbroking.

Therefore, regardless of the legerdemain of denominating the transaction in issue a sale rather than pawnbroking, such transactions legally constitute pawnbroking. Accordingly, those engaging in such transactions must possess pawnbrokers' licenses and may charge an effective interest rate not in excess of thirty-six percent a year, the maximum allowed by law for pawnbrokers. MCL 446.210; MSA 19.590.

As noted by the trial court in Rhodes, supra, p 92, "[o]ne should not be able to avoid a tax on shoes by calling shoes slippers."

We would note in passing that our Supreme Court's recent decision in People v Lee, 447 Mich. 552; 526 N.W.2d 882 (1994), does not control the matter presently before this Court. In Lee, the Supreme Court decided that transactions such as the ones in issue may not be considered loans, and, accordingly, may not be prosecuted as usurious. We conclude only that these transactions constitute pawnbroking and must be regulated as such. To extend the reasoning of Lee to the present situation would serve only to sound the death knell of pawnbroking and the concomitant compliance with the Pawnbroker Act, a result obviously at odds with the intent of our Legislature.

We would limit the application of Lee, supra, to criminal cases involving the charge of usury.

Which is to say, what individual would become a pawnbroker, thereby becoming subject to the Byzantine regulation pawnbroking entails, when one could simply engage in the type of transactions conducted by Lee and Folands, and thereby operate essentially unregulated with the freedom to, in effect, exact usurious rates of interest?

G.S. ALLEN, J., concurred.

I dissent from the majority opinion because I reluctantly must conclude that our Supreme Court's recent decision in People v Lee, 447 Mich. 552; 526 N.W.2d 882 (1994), controls the outcome of this case. I believe the majority's limitation on the application of Lee to criminal usury cases construes Lee too narrowly.

In Lee, the complainant, Lonnie May, approached the defendants, Jeffrey Lee and David Miller, for a loan. As security for the loan, May offered his Rolex watch. The defendants did not want to loan May money, but offered to buy the watch for $2,600 and then resell it to him in thirty days for $3,250. Believing the watch to be worth five or six thousand dollars, May agreed to the "sale" and option to repurchase the watch. May was under no obligation to repurchase the watch. At the end of the thirty-day period, May could not tender the $3,250. The defendants offered May a second option for $625 to extend his right to repurchase the watch for another thirty days.

May testified that Lee wanted to avoid the legal ramifications of operating as a pawnbroker.

The circuit court found that the underlying transaction amounted to either a loan or a pawn and that it was usurious. This Court summarily affirmed the judgment of the circuit court in People v Lee, unpublished memorandum opinion of the Court of Appeals, decided April 22, 1993 (Docket Nos. 149014 and 149015). In rejecting the circuit court's ruling, the Supreme Court held that no loan existed because May was under no obligation to repurchase the watch. Id. Thus, no probable cause existed to support a violation of the usury statute, MCL 438.41; MSA 19.15(51). Lee, supra at 564.

Chief Justice CAVANAGH dissented and was joined by Justices BOYLE and GRIFFIN.

The majority opinion distinguishes Lee on the basis that it involved a criminal prosecution for usury. I cannot agree. I believe that the definition of a loan announced in Lee governs this case. The majority, relying on the Supreme Court of Connecticut's reasoning in Rhodes v City of Hartford, 201 Conn. 89; 513 A.2d 124 (1986), opines that Folands' business falls within Michigan's pawnbroking statute, MCL 446.203; MSA 19.583, whether or not repurchase agreements constitute loans. However, in determining that the plaintiff's business amounted to pawnbroking, Rhodes held that repurchase transactions, in substance if not in form, are loans. Rhodes, supra at 96. Consequently, a determination whether Folands' business falls within Michigan's definition of pawnbroking necessarily turns on whether repurchase agreements are loans. Accordingly, I conclude that Lee controls our disposition of this case.

Applying Lee, I would hold that Folands' business does not constitute pawnbroking because Folands' customers are not obligated to repurchase the precious metals or gems pursuant to either repurchase option available.

I also believe that Lee construed these loan transactions too narrowly. Customers who "sell" their valuables at a price substantially less than they are worth with an option to repurchase the same for a substantially higher price are actually pledging their property as security for a loan, i.e. pawnbroking. Although no obligation technically exists under the repurchase option, the customer who sells property for less than it is worth must repurchase the item or forgo the property at a significant loss. The "option" is in reality no option at all; the customers are virtually forced to repurchase by the inequities inherent in the transaction. Indeed, Folands applied for a pawnbroker license in 1992, but had not obtained it at the time of this litigation. Thus, Folands could not legally pawn precious metals or gems or loan money. Instead, it utilized the repurchase option to subvert the pawnbroker statute. Nevertheless, because of Lee, I am compelled to conclude that Folands is not a pawnbroker.

See Caudle v City of Fayetteville, 315 Ark. 276; 866 S.W.2d 410 (1993); Rhodes v City of Hartford, 201 Conn. 89; 513 A.2d 124 (1986); City of Wanatchee v Johnston, 68 Wn. App. 697; 846 P.2d 547 (1993).

I would reverse.

Summaries of

Folands Jewelry v. Warren

Michigan Court of Appeals
Apr 28, 1995
532 N.W.2d 920 (Mich. Ct. App. 1995)
Case details for

Folands Jewelry v. Warren

Case Details


Court:Michigan Court of Appeals

Date published: Apr 28, 1995


532 N.W.2d 920 (Mich. Ct. App. 1995)
532 N.W.2d 920

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