Boerner v. Colwell Co.

• Decision Date: 24 April 1978
• Citation: 145 Cal.Rptr. 380,21 Cal.3d 37,577 P.2d 200
• Court: California Supreme Court
• Parties: , 577 P.2d 200 Florentine G. BOERNER et al., Plaintiffs and Appellants, v. COLWELL COMPANY, Defendant and Respondent. L.A. 30778.

Page 380

145 Cal.Rptr. 380

21 Cal.3d 37, 577 P.2d 200

Florentine G. BOERNER et al., Plaintiffs and Appellants, v. COLWELL COMPANY, Defendant and Respondent.

L.A. 30778.

Supreme Court of California, In Bank.

April 24, 1978.

As modified May 5, 1978.

Rehearing Denied May 24, 1978.

Patricia Herzog, Corona Del Mar, Goldin & Goldin and Martha Goldin, Hollywood, for plaintiffs and appellants.

Meserve, Mumper & Hughes, Cromwell Warner, Jr., L. Allan Songstad, Jr., Los Angeles, and Ellis J. Horvitz, Encino, for defendant and respondent.

Sheppard, Mullin, Richter & Hampton, George R. Richter, Jr., and Ronald M. Bayer, Los Angeles, as amici curiae on behalf of defendant and respondent.

MANUEL, Justice.

Plaintiff Florentine Boerner and eight other named plaintiffs commenced this class action against defendant The Colwell Company (Colwell), alleging in substance that certain transactions involving its purchase of installment contracts for the construction of vacation homes constituted usurious loans to the purchasers of such homes (including plaintiffs) and seeking appropriate equitable and monetary relief. Pursuant to stipulation of the parties the cause was bifurcated for trial, the issue of defendant's liability to be tried first to the court sitting without a jury, and certain other issues, including those relating to the class action aspects of the matter, to be reserved for any necessary subsequent proceedings. The trial court, following trial of the liability issue, entered judgment for defendant Colwell, finding and concluding in essence that the contracts constituted bona fide credit sales from the building contractors to the purchasers followed by valid assignments to Colwell and that the transactions as a whole did not constitute loans subject to the usury laws. Plaintiffs appeal from the judgment.

I

The evidence, which is essentially uncontradicted, established the following: Colwell is a mortgage banking firm. Since 1961 it has had an installment contract department engaged in the purchase of installment contracts for the sale of mobile homes, vacation homes, and home improvements. Transactions in the latter two categories are handled in essentially the same fashion. When contacted by a builder interested in arranging for the purchase of its contracts, ¹ and when satisfied with the builder's qualifications and general business reputation, Colwell and the builder sign an agreement detailing the conditions on which the builder's contracts will be accepted for purchase. Colwell then provides the builder with a series of forms an individual set of which includes a credit application, a lien contract and deed of trust, and a truth-in-lending disclosure statement. ² It also advises the builder of the finance charge rate to be included in a contract if it is to be accepted for assignment.

When a builder using the Colwell service enters into a vacation home construction contract with a landowner wishing financing, the forms provided by Colwell are filled out and executed by both parties to the contract. ³ These forms, along with the construction contract and the plans and specifications, are submitted to Colwell, which then undertakes a credit check, makes a "desk appraisal" of the value of the real property including the contemplated improvements, and orders a preliminary title report. If these investigations yield results acceptable to Colwell, it informs the builder and the landowner that it has accepted the contract for purchase and records the assigned lien contract and deed of trust. The price paid is the cash price reflected in the construction contract less a small charge for the builder's use of Colwell's "voucher system," a system developed by it to avoid mechanic's liens and disputes over payment. ⁴ The buyer, however, at this point becomes bound to pay Colwell the deferred purchase price (cash price plus finance charge), in monthly installments as reflected in the assigned lien contract payment being secured by means of the assigned trust deed.

The evidence further showed that plaintiff Boerner and her husband (now deceased) contracted with FWF Construction Company for the construction of a vacation home on their property; that the eight other named plaintiffs (hereinafter the Wards) contracted with Nordic Mountain Homes for the construction of a vacation home on property which they owned jointly; that in each case the buyer desired financing and requested that the builder arrange it if possible; that in each case the builder arranged to have the construction financed by defendant Colwell in accordance with the procedure outlined above; and that in each case the annual percentage rate payable under the assigned lien contract and deed of trust was in excess of 10 percent. ⁵

On the basis of these facts the trial court found and concluded that the transactions taking place between plaintiffs and their respective builders were bona fide credit sales and "not parts of loan transactions clothed in the form of credit sales" and that the respective assignments of the builder's rights to Colwell were "an assignment of rights under a credit sale and were not loans by (Colwell) in the form of assignments." Accordingly, judgment on the complaint was entered for defendant Colwell. (See fn. 5, ante.)

II

The law of usury in this state is based upon the provisions of article XV, section 1 (formerly art. XX, § 22) of the state Constitution. That section provides: "The rate of interest upon the loan or forbearance of any money, goods or things in action, or on accounts after demand or judgment rendered in any court of the State, shall be 7 per cent per annum but it shall be competent for the parties to any loan or forbearance of any money, goods or things in action to contract in writing for a rate of interest not exceeding 10 per cent per annum. (P) No person, association, copartnership or corporation shall by charging any fee, bonus, commission, discount or other compensation receive from a borrower more than 10 per cent per annum upon any loan or forbearance of any money, goods or things in action." ⁶ Sanctions and penalties to be applied in cases of violation are provided for by statute. (Deering's Ann.Uncod. Measures 1919-1, §§ 2, 3 (1973 ed.) pp. 40, 78; 10 West's Ann.Civ.Code (1954 ed.) foll. § 1916, p. 137, (1978 Cum.Supp.) p. 31; see Heald v. Friis-Hansen (1959) 52 Cal.2d 834, 838-839, 345 P.2d 457.)

Although the constitutional and statutory provisions dealing with usury speak only in terms of a "loan" or a "forbearance" of money or other things of value, ⁷ the courts, alert to the resourcefulness of some lenders in fashioning transactions designed to evade the usury law, have looked to the substance rather than the form of such transactions in assessing their effect and validity, and in many cases have struck down as usurious arrangements bearing little facial resemblance to what is normally thought of as a "loan" or a "forbearance" of money. (See, e. g., Burr v. Capital Reserve Corp. (1969) 71 Cal.2d 983, 80 Cal.Rptr. 345, 458 P.2d 185) (sale-leaseback); Rochester Capital Leasing Corp. v. K & L Litho. Corp. (1970) 13 Cal.App.3d 697, 91 Cal.Rptr. 827 (sale-leaseback); Golden State Lanes v. Fox (1965) 232 Cal.App.2d 135, 42 Cal.Rptr. 568 (assignment of lease, sublease with agreement to repurchase).) ⁸ In all such cases the issue is whether or not the bargain of the parties, assessed in light of all the circumstances and with a view to substance rather than form, has as its true object the hire of money at an excessive rate of interest. (Burr, supra, 71 Cal.2d at p. 989, 80 Cal.Rptr. 345, 458 P.2d 185.) The existence of the requisite intent is always a question of fact. (Id.)

One area of great concern in this respect to the commentators as well as to the courts has been that of credit sales. It has long been the law in this jurisdiction, as well as in the vast majority of other jurisdictions, that a bona fide credit sale is not subject to the usury law because it does not involve a "loan" or "forbearance" of money or other things of value.

The leading case on the subject in this jurisdiction Verbeck v. Clymer (1927) 202 Cal. 557, 261 P. 1017 was an action in ejectment based upon an alleged default in payment under a contract for the sale of real property. The buyers in possession defended on the ground that the transaction represented by the contract was usurious, calling as it did for interest in excess of the legal rate on deferred payments, which were to extend over a 15-year period; they sought not only nullification of the interest provision in the contract but also treble damages. Declaring these claims "astonishing," we made haste to reject them: "(W)e have no hesitancy whatsoever in declaring that the transaction set up in the answer and cross-complaint is not in any sense a loan within the meaning of said usury law. The contract is admittedly a bona fide one of sale and purchase of real property where the title is retained by the vendor. The purchase price is therein named and the terms of sale are fixed and certain deferred payments are provided for. There is in the transaction no element of a loan. The parties were unfettered, dealt with each other at arm's-length and in apparent good faith. The transaction was not a subterfuge devised to conceal what was in fact a loan. . . . 'On principle and authority, the owner of property, whether real or personal, has a perfect right to name the price on which he is willing to sell, and to refuse to accede to any other. He may offer to sell at a designated price for cash or at a much higher price on credit, and a credit sale will not constitute usury however great the difference between the two prices, unless the buying and selling was a mere pretense; and it has been held that it is not material that the agreement for the purchase price in the future, instead of specifying the whole sum then to be paid, names a particular sum as...