Bekins Bar V Ranch v. Huth, 17746

• Decision Date: 15 April 1983
• Docket Number: No. 17746,17746
• Citation: 664 P.2d 455
• Parties: 37 UCC Rep.Serv. 50 BEKINS BAR V RANCH, a Utah corporation, James F. Fain and Emma A. Fain, Plaintiffs, Respondents and Cross-Appellants, v. C. Stanley HUTH and Helen I. Huth, his wife, and Security Title Company of Southern Utah, Defendants, Appellants and Cross-Respondents.
• Court: Utah Supreme Court

Page 455

664 P.2d 455

37 UCC Rep.Serv. 50

BEKINS BAR V RANCH, a Utah corporation, James F. Fain and Emma A. Fain, Plaintiffs, Respondents and Cross-Appellants, v. C. Stanley HUTH and Helen I. Huth, his wife, and Security Title Company of Southern Utah, Defendants Appellants and Cross-Respondents.

No. 17746.

Supreme Court of Utah.

April 15, 1983.

Michael D. Hughes, St. George, for defendants, appellants and cross-respondents.

J. MacArthur Wright, John L. Miles, St. George, for plaintiffs, respondents and cross-appellants.

STEWART, Justice:

The principal issue on this appeal is whether finance charges that defendants Huths charged on two loans to plaintiff Bekins Bar V Ranch are unconscionable and therefore unenforceable. The trial court ruled that the finance charges were unconscionable and substantially reformed the parties' written loan agreements to reduce the amount that Bekins Ranch owed the Huths. We reverse the ruling that the finance charges were unconscionable and hold that the loan agreements should be enforced as written.

I.

In early 1977 Bekins Bar V Ranch, a Utah corporation, was struggling to extricate itself from a Chapter 11 bankruptcy proceeding and needed capital to help work its way out. To obtain the funds to refinance the ranch, James Fain, Bekins' president, negotiated a $1.1 million loan from Mutual of New York (Mutual). Fain subsequently discovered that in order to close the loan with Mutual he would need an additional $120,000. Fain initially sought loans from local banks in the southern Utah area which turned him down. Fain then visited Stanley Huth, a California real estate broker, and several investor friends of Huth from whom Fain had previously obtained loans. After some negotiation, Fain's business partners backed out because part of the security offered by Bekins had been previously pledged. Huth and his wife, however, loaned $120,000 to Bekins. In return Fain and his wife signed a $200,000 note payable to Huth and his wife on March 8, 1977. The $200,000 was to be repaid in annual installments over three years, $100,000 at the end of the first year and $50,000 at the end of the second and third years, with no additional interest on the outstanding balance (apart from the $80,000 finance charge) except for a 10 percent charge on late payments. Bekins' trustee in bankruptcy approved the transaction. The parties agreed that the premium paid by Bekins, treated as interest, would be the equivalent of an effective annual interest rate on the loan of 36.3 percent. The loan was secured by a second trust deed on the ranch real property (placing Huths in second position behind Mutual), a bill of sale and buy-back agreement giving Huths a security interest in the farm equipment, three years of hay crops, and other personal property.

Two months later, Bekins Ranch found itself in need of additional operating funds to complete production of the 1977 hay crop. Fain again contacted Huth and requested another $80,000, which Huth agreed to loan in order to protect his security interest in the hay crop. On May 17, 1977, Fain and his wife signed a $100,000 promissory note payable to Huth and his wife. Under the second agreement, Huth advanced $80,000 cash to Fain; the remaining $20,000 constituted a finance charge. The $100,000 was due some six months later on December 31, 1977. Interest at the rate of 10 percent was to be paid on any delinquent amounts. Treating the finance charge as interest, the rate of interest on the second note amounted to 58 percent per annum. This loan was secured by a third trust deed on the ranch real property and was to be repaid from the proceeds of the 1977 hay crop. Subsequently, Huths made other short-term loans to Bekins to help cover operating costs. Those loans were all repaid without incident.

By March 8, 1978, when the first $100,000 installment on Bekins' $200,000 note fell due, Bekins had not sold its harvested 1977 hay crop and the installment was not paid when due. Bekins was also at that time delinquent on the second note of $100,000 to Huths which was due December 31, 1977. In addition, Bekins was delinquent on the first installment of $190,000 owed to Mutual on the $1.1 million loan. That installment was due on January 1, 1978.

To help Bekins and to obtain some repayment of funds the Huths had loaned, Huths on April 19, 1978, agreed to buy Bekins' entire 1977 hay crop. At that time, the second note for $100,000 had been due and unpaid since December 31, 1977, and the first $100,000 installment on the first note of $200,000 had been due and unpaid since March 8, 1978. Therefore, at the time of the sale of hay, Bekins owed $200,000 to Huths plus interest on the delinquent amounts. The Huths and Fains later stipulated that the value of the hay crop sold to Huths was $185,846.20, and the proceeds were to be applied against Bekins' debts on the two loans. Significantly, when Huths resold the hay purchased from Bekins they were forced to sell at a lesser price than the price they had paid Bekins. Also, on April 19, 1978, Fain executed a bill of sale transferring Bekins' interest in the future 1978 hay crop to Huths. Because Huths determined that the value of the 1977 hay crop was sufficient to pay only the $100,000 due on the $100,000 note, plus interest, but not all of the additional first $100,000 installment which was past due on the $200,000 note, plus interest, Huths recorded a notice of default on the $200,000 note on May 10, 1978.

About one week later, Mr. Huth accompanied Fain to a meeting with Mutual to discuss the possibility of Mutual's increasing its loan to Bekins. But Mutual refused to consider increasing its loan until the $91,000 in accrued and past due interest on the existing $1.1 million loan was paid. To protect their own security position, Huths voluntarily paid the $91,000 in overdue interest to Mutual on June 1, 1978.

Some time during the same month, Bekins obtained a $240,000 loan from Rampart Development Company by pledging as collateral most of the same property already pledged to secure the loans from Huth, including the 1978 hay crop. From these additional funds, Bekins Ranch repaid Huth on some minor unsecured loans, and Huths directed the trustee of the $200,000 note and trust deed to postpone the foreclosure sale until at least January, 1979. Rampart was subsequently repaid the $240,000 from the proceeds of the 1978 hay crop.

Bekins Ranch then filed suit August 3, 1978 against Huth to enjoin foreclosure of the $200,000 trust deed and alleged that Bekins was not in default on the loan when the notice of default had been filed, and foreclosure therefore would be wrongful, and that Bekins' title to its real estate had been slandered by the foreclosure action. The trial court issued a preliminary injunction March 28, 1979. Bekins then amended its complaint to allege that California law governed the validity of the loans, that both the $200,000 loan and the $100,000 loan were usurious under California law, and that the collection of any interest on the loans was unlawful as usurious. Huths denied that California law governed and counterclaimed for the amount due on the promissory notes and for Bekins' conversion of the 1978 hay crop which Bekins had originally conveyed to Huth but had sold to a third party, the proceeds from that sale having been used to pay Rampart.

At trial, the court ruled that because of changes in the law neither of the loans was usurious under either California or Utah law. That ruling is not attacked on this appeal. However, at the close of all the evidence, Bekins Ranch moved to amend its pleadings to allege for the first time the defense of unconscionability. Over objection, the trial court granted the motion.

In a memorandum decision that specifically indicates the trial judge's subjective reaction to the fairness of the transactions as the basis for his ruling, the trial court ruled that the loans were unconscionable under the Uniform Commercial Code, U.C.A., 1953, § 70A-2-302 and the Uniform Consumer Credit Code, U.C.A., 1953, § 70B-5-108. Consequently, the court substantially modified the contractual agreements and stipulations between the parties to reach what the trial court deemed to be an equitable result. The court also denied Bekins' recovery for wrongful foreclosure and slander of title and rejected Huths' claim that Bekins had wrongfully converted the 1978 hay crop to pay the Rampart loan. Finally, the court denied Huths' claim for attorney fees as provided for in the notes and trust deeds on the ground that Bekins was not in default on either the first or second loan when the foreclosure was commenced.

With respect to the $200,000 note, the first installment of which was due March 8 in the amount of $100,000, the court credited the proceeds of the sale of the 1977 hay crop on April 19, 1978, to Bekins in three installments corresponding to the estimated 1977 harvest dates, instead of crediting the proceeds as of the actual date of sale. The theory apparently was that Huths had constructive possession of the hay on each harvest date and therefore the $100,000 was not in default. Indeed, the effect of the court's allocation was to treat those three installments (i.e., the installments "constructively" made at the time of harvest) as prepayments on which Bekins Ranch was entitled to interest. Thus, according to the trial court, Bekins, rather than being in default on May 10, 1978 when Huth began foreclosure, had actually prepaid and even overpaid the $100,000 note and the $100,000 payment on the $200,000 note. To reduce further the perceived unconscionability of the loans, the court disallowed the $20,000 prepaid finance charge on the $100,000 note and denied Huth the contract interest of 10 percent on the delinquent balance of the $200,000 note and recovery on the $91,000 advance paid to Mutual on behalf of Bekins. The net result was a judgment for Huths in the amount of...