Stites & Harbison, PLLC

On March 4, Franklin Circuit Judge Phillip J. Shepherd declared the Kentucky Motor Vehicle Retail Installment Sales Act unconstitutionally void for vagueness in Americredit Financial Services v. Tillman, No. 07-CI-196 (March 4, 2008).

The Kentucky statute establishes a $15 per $100 finance charge ceiling for used cars.  Under the statute, this cap is established in terms of the "add-on method," although the cap applies whether the add-on method or another method is used in figuring the finance charge.  The Court believed that the statute did not specify the applicable time period (i.e. $15 per $100 per year), and also found that the application of the "add-on" ceiling to a consumer contract was too complicated for "people upon whom it is designed to operate or whom it affects [to] understand."  Thus, the Court struck the statute as "void for vagueness."  The Court's ruling would also seem to cause the rate ceilings applicable to new car installment sales to be unconstitutional.

In the absence of finance charge limitations under KRS 190.110, the Court believed the general usury statute of KRS 360.010 would apply.  For loans of more than $15,000, there is no limitation on interest.  For loans of $15,000 or less, the rate is the lesser of:  (i) 4% over the federal discount rate on 90-day commercial paper; or (ii) 19%. If applicable, the lesser rate would appear to render numerous transactions usurious.

Oddly, the Court seems to have raised the constitutional issue sua sponte—the borrower was in default, and does not appear to have filed any motions or papers.  The Judge's decision is certainly subject to criticism.  First, the Judge seems to have overlooked KRS 190.110(2), which establishes that the $15 per $100 is for a one year contract, and if the contract is for a longer period, then the rate "shall be computed proportionately."  Second, it is not at all clear that KRS 360.010 would apply even if KRS 190.110 is void.  Third, this statute has been applied to countless transactions for over 50 years without challenge—it is hard to see how it has suddenly become so complex and vague as to be "unintelligible."

We expect the ruling to be appealed, and affected lenders may wish to be heard.