The Crownpoint District Court uses Section 2-302(A) (unconscionable contracts) to void interests rates in consumer loans of 191.31%, 233.67% and 89.62% and reforms the contracts to allow a maximum 21% interest rate. The court does not apply the Navajo Nation Charge Limitation Act because the contracts were made before the Actís effective date.













2000 CP-CV-001






[1] This is an opinion on three small claims before the court, and the court chooses to give it for all three cases because they involve the same principle of law. This opinion and order is entered on the courtís own motion because the claim in each case is contrary to Navajo Nation law, and that is clear on the face of the complaint and attached agreement in each case.


[2] On May 27, 1999, Genevieve Platero of Crownpoint, within this judicial district, took a loan for $200 from Capital Loan Corporation ("Capital") in Gallup, New Mexico. The annual percentage rate was 191.31%, with a finance charge of $105 and a total of payments of $305. The loan was to be repaid in five monthly installments. On June 15, 1999, Fern Henry of Mexican Springs, within this judicial district, took a loan from Capital for $100, at an annual percentage rate of 233.76%, with the resulting finance charge of $53.60 and total payments of $153 over four payment periods. On July 15, 1999, Julia Largo of Continental Divide, within this judicial district, borrowed $500 from Capital. The interest rate was 89.62%, for a finance charge of $205 and a total of payments of $705. There were nine installment payments. There was a 5% charge for late payments in all three contracts.


[3] The Navajo Nation Finance Charge Limitation Act, which is subchapter 6 of the Navajo Nation Consumer Protection Law, prohibits charging more than one and one-half percent interest per month over the term of a loan. 5 NNC Sec. 1155(A). If a higher rate of interest is charged, that is a "complete defense" to the entire transaction. 5 NNC Sec. 1156(A). In addition, lenders who charge more than the permissible rate commit usury, and they can be subjected to a penalty in the sum of three times the finance charge, but not less than $1,000. 5 NNC Sec. 1156(B).


[4] Unfortunately for these defendants, the Navajo Nation Consumer Protection Law was enacted by the Navajo Nation Council on July 22, 1999, and the President of the Navajo Nation signed the measure on August 3, 1999. These agreements were made before the new law. The Navajo Nation is prohibited from enacting an ex post facto laws under the Navajo Nation Bill of Rights, 1 NNC Sec. 3 (1995), and thus the new consumer protection law cannot be retroactively applied in these cases.



[5] Despite the fact that the new Consumer Protection Law does not apply to these loan contracts, 5A NNC Sec. 2-302(A) (1995) provides: "If the court as a matter of law finds the contract or any clause of the contract to have been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result." In the leading case of Carboni v. Arrospide, 2 Cal. Rptr. 845, 850 (Cal. App. 1991), the court found that an interest rate of 200% was "unconscionably excessive," and upheld the trial courtís judgment to drop the interest rate to a reasonable rate of 24%. In other words, Genevieve Platero was charged 167.31% over the "reasonable" rate; Fern Henry was charged 209.76% more than the "reasonable" rate; and Julia Largo was charged 65.52% over that "reasonable" rate of 24%. The court does not know why there was such a large variance in the interest charged, except perhaps for the fact that the loans were for $200, $100, and $500 respectively.


[6] This court finds, as a matter of law, that the interest rates in the loan agreements and notes are unconscionable. There is no dispute over the interest rate amounts, and they are clearly unconscionable. The court has three options under Section 2-302(A): it can refuse to enforce the loan contracts as a whole; it can enforce the remainder of the contracts without the unconscionable clause; or, it can limit the application of the unconscionable loan provision to avoid an unconscionable result. The court chooses the third option. The court is not aware of any other small claim or case in which the unconscionability provision of the Navajo Nation version of the Uniform Commercial Code (which Arizona, New Mexico and Utah also have) has been applied. Prudence requires that when a court announces a new rule, it should be moderate in the application of potential options. However, this court is making this decision in a form so that the rule for this judicial district can be reported, and so that people who bring or defend actions involving interest rates within this district will know the interest rate limit for cases which arise prior to the Navajo Nation usury statute. The rule in this case will apply to all other contracts in excess of 21% made before July 22, 1999.



[7] The court is aware that the plaintiff has not had prior notice of this ruling, and it has the due process right to contest it. However, these loans certainly appear to be an "unconscionable bargain," which is "one which no man [sic] in his senses, not under delusion, would make, on the one hand, and which no fair and honest man [sic] would accept, on the other." BLACKíS LAW DICTIONARY 1694 (Rev. 4th ed. 1968). Are these interest rate agreements ones which are freely made? The court takes judicial notice of the very high poverty rates in the Navajo Nation, and the smallness of these loans indicate need by the borrowers. The court also wonders what fair and honest lender would charge interest rates from 89.62% to 233.76%. This court cannot enforce that kind of agreement.


Accordingly, it is hereby ORDERED:


1. These three cases will be heard on the merits.

2. If the plaintiff prevails, its recovery of interest shall be limited to 21% per annum, and it shall recalculate the loans to reflect that figure in any judgment.

3. The plaintiff may show cause, if any it has, why the court should limit the interest rate to 21%.


Dated this 25th day of January, 2000

Hon. Loretta Morris, District Judge

NOTE: This opinion uses generic citation, and it may be cited as 2000 CP-CV-001.


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