Small business owners have frequently sought legal advice on charging 2% per month interest on unpaid accounts. A recent local case provides a lesson on the always murky question of what is usury. Usury is defined as “an excessive rate of interest,” and what is excessive varies with time, place and parties to the agreement. Usurious contracts are void and unenforceable and sometimes are even a crime.
The Grooms are farmers in Adams County. They bought feed on credit from W.C. Milling, LLC. Milling presented an invoice for $17,152 when it delivered the feed. The invoice did not mention interest charges for late payments. But the first and later monthly statements applied a 2% per month charge to unpaid balances. The Grooms did not object to the interest charges and even paid some of the invoices. Milling eventually sued and recovered a judgment of $76,991 by default when the Grooms did not file an answer.
Over a year later, the Grooms moved to set aside the judgment on the grounds that the interest, calculated at 26.83% per year, was usurious and therefore the agreement was void and unenforceable. The trial court refused to set aside the judgment, finding that the motion was out of time, that the Grooms had not objected to the interest charges and had created an implied contract for the monthly charges by paying on account. The Grooms appealed.
Although the appellate court agreed that the Grooms waited too long to challenge the extremely high interest, and was therefore stuck with the almost $77,000 judgment, it found that the contract was usurious and the Grooms could have avoided it. The court analyzed the Ohio usury laws as follows:
First, Ohio’s General Rule is that 8% simple interest is the maximum chargeable on a bond bill, note or promise to pay a “loan.”
Second, if the “loan” (on a bill, note or promise) is to a business, the parties may agree to higher rates. The Grooms were a business but the transaction did not involve a “loan.”
Third, for other obligations in connection with a “book account,” the creditor is entitled to a maximum rate of 10% simple interest. The Grooms’ transaction was a “book account.”
Fourth, for “book account” obligations, the parties in a written agreement may agree to a larger rate. However, monthly statements and payments on account, while creating an implied contract, do not rise to the dignity of a written agreement, which the appeals court stated should be in the format of a contractual agreement to which both parties assent. What constitutes assent is still unclear, but in view of the policy of the law to discourage excessive interest charges, a contract not signed by the obligor will always be weak. The best advice to a business intending to charge interest on unpaid accounts, is to have a contract up front that clearly states that interest on unpaid accounts will be at a specified rate of monthly interest.
By the way, the court noted wryly that the Grooms had sued their first attorney for malpractice in failing to timely challenge the usurious interest in the lower court.
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