Perez: Paternalism Scoops Reliability
In Perez v. Rent-a-Center, Inc. the New Jersey Supreme Court reckoned that plaintiff's rental contract of mostly used household goods from Rent-a-Center, Inc. was subjugate to the Retail Installment Sale Act (RISA), NJS 17:16C-1 et seq, and therefore subject to the interest rate cap of 30% in the criminal usury statute, NJS 2C:21-19, and the Consumer Fraud Act, NJS 56:8-1 et seq.
RISA, by its terms, applies only to sales: transactions "evidencing an agreement to pay the retail purchase price of goods or services . . . in two or more installments over a period of time." Perez's contract permitted her to cancel her lease at any time and be free of further financial obligation. It also provided her the option to purchase.
The Appellate Division held that because of the cancellation right, the contract between Perez and Rent-a-Center was a true lease, and not a disguised retail installment sale contract.
The Supreme Court disagreed. Because "literal application" of RISA's language would "lead to results incompatible with the legislative design", the Court instead interpreted it to serve the "apparent statutory purpose".
Perez notes that although RISA is intended to apply to retail sales installment contracts: "Certain leases were included as well, presumably because the Legislature recognized that a transaction denominated as a lease could be, in substance, a retail installment sale." Although under her contract Perez could cancel the lease at any time and free herself from further obligation, the Court determined that "on the continuum from pure lease to pure sale, we view Perez's arrangements with Rent-A-Center as closer to the latter than to the former."
[I]n the quest for the intention, the letter gives way to the rationale of the expression. The words used may be expanded or limited according to the manifest reason and obvious purpose of the law. The spirit of the legislative direction prevails over the literal sense of the terms.
No authority other than Mr. Hill is provided for the legal principle that a right is immaterial if rarely exercised. Applying this logic, the Attorney Review Clause in consumer estate contracts fails to meet its statutory objectives because only a minority of buyers exercise their right to disapprove the contract, the giving of Miranda warnings is inconsequential and unnecessary because a substantial proportion of criminal suspects do not remain silent, and the right to prepay a mortgage without penalty is a sham because so few do it.
Under Perez it appears that RISA may be avoided merely by failing to include an option to purchase in the contract. While this may dissuade some from borrowing over their heads, it will frustrate the economic decision of the 46% of Rent-a-Center's customers who in fact purchased the goods. This trade-off is not truly mandated by an unambiguous legislative design. The policy decision should be left to the Legislature.
Most surprising is the opinion's failure to even acknowledge New Jersey Uniform Commercial Code, NJS. 12A:1-201(37) entitled "Lease Distinguished from Security Interest" and the considerable interpretative case law. The differentiation is necessary because of the differing treatment of tax treatment of lessors and secured creditors, their status in bankruptcy proceedings, and the difference in damages and enforcement procedures available to them respectively. Rights of third parties in the goods also turn on these distinctions.
The style or form of the agreement is immaterial in characterizing it; substance prevails over form. The distinction between leases and installment sales or security agreements is, at its heart, quite simple: title passes at the beginning in the latter, and at the conclusion of the transaction in the former. A lease is merely a right to possession.
A transaction in the form of a lease creates a security interest (or installment sale) only if the lease "is not subject to termination by the lessee." If it is cancellable by the lessee, it is a lease, not a sale. Perez simply ignores this body of law to pursue other ends. Consistency of commercial law and its uniformity among the States is an expressly stated legislative intent, and an implied repealer to the UCC is to be avoided.
Though the law cannot be static, businesses deserve to have a reasonable idea of what the law is. Stability and consistency in the administration of commercial law is an indispensable foundation of prosperous market economy. These principles should not to be removed and relevant authorities failed simply to force a square peg of a statute into a round hole of a widely over-generalized "spirit of the legislative direction".
This article is for informational purposes only and does not constitute legal advice. For your specific situation, consult an attorney licensed in your jurisdiction.
About the Author
William H. Tobolsky is an expert Debtor-Creditor Cherry Hill lawyer licensed to practice law in NJ and Pennsylvania. He is recognized as one of the Best Cherry Hill lawyers.
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