Buck v. Dahlgren

• Decision Date: 24 February 1972
• Citation: 23 Cal.App.3d 779,100 Cal.Rptr. 462
• Court: California Court of Appeals Court of Appeals
• Parties: Fred T. BUCK et al., Plaintiffs and Appellants, v. Mattee Folke Vincent DAHLGREN et al., Defendants and Respondents. Civ. 11586.

Page 462

100 Cal.Rptr. 462

23 Cal.App.3d 779

Fred T. BUCK et al., Plaintiffs and Appellants, v. Mattee Folke Vincent DAHLGREN et al., Defendants and Respondents.

Civ. 11586.

Court of Appeal, Fourth District, Division 2, California.

Feb. 24, 1972.

Shirley A. Engel, Encino, for plaintiffs and appellants.

Reid, Babbage & Coil, and Donald F. Powell, Riverside, for defendants and respondents.

OPINION

GABBERT, Associate Justice.

In an action for the recovery of usurious interest, treble damages, and to set aside a trustee's sale, appellant, plaintiff below, appeals from the judgment in favor of respondent.

On May 23, 1963, appellant, a real estate land developer, placed an advertisement in the classified section of the Los Angeles Times in the 'money wanted' section. The advertisement stated the borrower would pay 10% Interest per annum in exchange for a $30,000 loan, and would secure the loan by a first deed of trust on 40 acres or real property valued at $140,000. Shortly thereafter, respondent, a native of Sweden who had been in the United States for only a few years and with little or no experience in the field of real estate lending, contacted appellant, went with him to view the property and agreed to loan the money. On May 31, 1963, appellant executed a promissory note in the amount of $30,000 to respondent; the note was secured by a deed of trust on the real property and provided for the repayment of the principal amount within three years and for interest at the rate of 10% per annum.

In June 1964 appellant paid respondent $3,000 as the first annual interest payment on the loan. In July 1964 respondent loaned appellant an additional $6,000. A consolidation and extension agreement was signed again providing for interest at the annual rate of 10%.

On June 1, 1965, appellant informed respondent he was unable to pay the interest of $3,600, which was then due and owing on the consolidated loan. At appellant's request this interest was added to the principal amount of the loan and a new consolidation and extension agreement was executed, showing an indebtedness of $39,600. Again, the agreement provided for interest at the rate of 10% per annum.

On June 1, 1966, he principal amount of $39,600 and the interest thereon in the sum of $3,960 fell due under the terms of the original loan agreement and the subsequent additions. Again, appellant was unable to pay the loan and requested a further extension for a period of one year. Appellant informed respondent such an extension would enable him to complete certain real estate development projects and thereby obtain sufficient funds to pay off the loan. In reliance upon appellant's representation, respondent extended the time for payment to June 1, 1967. The accrued interest on the preceding loan was added to the principal then due, resulting in a total principal indebtedness of $43,560.

After having obtained this extension of time within which to pay the principal amount, appellant suggested he prepay one year's interest on the $43,560. Accordingly, on July 2, 1966, appellant gave respondent a check for $4,300, with a notation thereon that $50 had been paid, the check and payment representing one year's interest on $43,560. Immediately after signing the new consolidation and extension agreement, respondent loaned appellant a further $7,000. ¹ Consequently, the new principal indebtedness totaled $50,560, bearing interest at the rate of 10% Per anm and was due and payable on June 1, 1967. Appellant also gave respondent a check for $641.70 as 11 months' prepaid interest on the additional $7,000 loan. The new promissory note contained an acknowledgement that $4,997.70 (sic.) had been received as interest on the $50,560 indebtedness. ²

On June 1, 1967, appellant advised respondent he was unable to pay the loan of $50,560 and needed an additional extension of time. Respondent indicated the loan could not be extended any further since he needed the funds for his own use for a business venture. Respondent instituted foreclosure proceedings and the trustee's sale was set for November 6, 1967. However appellant induced respondent to extend the sale for one month for a payment of $500 on his representation that he intended to obtain the funds necessary for the payment of the loan from the sale of certain other property in Perris. Appellant requested and obtained one further extension of the sale for a $100 payment; this payment was also in consideration of an option to repurchase the property for the price paid at the trustee's sale.

The sale of the property under the trust deed was conducted on December 22, 1967, and respondent purchased the property for the sum of $55,711.34. The purchase price included the principal indebtedness of $50,560, interest at 10% per annum from June 1, 1967 on that amount, a penalty charge of $1,000, late interest of $282.29, and trustee's charges. At the time of the sale of the property under the trust deed, the fair market value of the property used as security for the loan did not exceed $40,000.

In its findings of fact, the trial court found the terms and conditions upon which the loans were made were suggested by appellant, including those terms concerning penalties and payment of interest. The court also found appellant induced respondent to make the additional loan of $7,000, thus increasing the total indebtedness to $50,560, with knowledge the security for the loan was worth substantially less than the principal. The court further found appellant had no intention nor reasonable anticipation of repaying the loan when he requested the extension of June 1, 1966, and at the time of the request anticipated foreclosure through a trustee's sale. Finally, the court found appellant's representation the loan would be repaid on the completion of the real estate projects was knowingly false, and made with the intention of inducing respondent's reliance.

From its findings of fact, the court concluded appellant was estopped from claiming the loans were usurious. ³ The court also concluded none of the various transactions were usurious.

On this appeal, appellant raises five major contentions:

(1) The transaction of June 1, 1966, was usurious as a matter of law;

(2) The receipt of $500 and $100 as a consideration for postponing the trustee's sale was a usurious forbearance;

(3) Respondent's purchase of the property at the trustee's sale constituted a usurious transaction;

(4) Estoppel is not a defense to usury; and

(5) The trustee's sale of December 22, 1967, was irregular and unfair.

As we shall discuss below, we conclude the trial court erred in determining none of the transactions were usurious: both the transaction of June 1, 1966, and the forbearance for $500 were usurious. However, the forbearance for $100 did not constitute usury. As we shall also discuss, respondent's purchase of the property at the trustee's sale did not constitute a usurious transaction since the amount bid was greater than the value of the property. Nonetheless, as we shall note, the trial court properly concluded appellant was estopped from asserting the claims of usury. Accordingly, we do not reach the question whether the trustee's sale was fundamentally unfair and we affirm the judgment.

As noted above, shortly after July 3, 1966, appellant executed a note in respondent's favor for $50,560. The total sum represented $43,560 ($39,600 previously owed, and $3,960 in interest for the previous year) and the additional $7,000 advanced by respondent. At the time the note was executed, appellant paid $4,300 as one-year's prepaid interest on the sum of $43,560; an additional payment of $50, previously over-paid in interest, was also credited toward prepayment of interest. On July 5, 1966, appellant paid respondent the additional sum of $641.70 as prepaid interest for 11 months on the additional $7,000 advance. Thus, appellant prepaid a total amount of $4,991.70 in interest on the amount due.

If a lender charges the maximum amount of interest permissible under the Usury Law, no interest may be lawfully collected in advance. If interest is deducted in advance from the loan, in testing the transaction for usury the principal sum advanced will be considered as the amount of the loan Less the interest deducted in advance. (Taylor v. Budd, 217 Cal. 262, 265, 18 P.2d 333; Haines v. Commercial Mortgage Co.,200 Cal. 609, 625, 254 P. 956, 255 P. 805.) Accordingly, rather than $50,560 appellant received only $45,568.30; for that sum, he paid $4,991.70 in interest. It is thus clear appellant paid interest in excess of the 10% Rate permitted by law. ⁴

Article XX, section 22 of the California Constitution enacted after the California Usury Law (Stats.1919, p. lxxxiii; Deering's Gen.Laws, 1954, Act 3757) specifies the permissible rate is '. . . 10 percent per annum upon any loan or forbearance of any money . . .' The 10 percent rate specified by the later enacted constitutional provision is the rate to be applied in determining whether treble interest is to be awarded under the Usury Law. (Heald v. Friis-Hansen, 52 Cal.2d 834, 839, 345 P.2d 457.)

The existence of the usurious interest charges was not diminished by the fact the promissory note included a provision allowing appellant to pay the note before maturity, and to apply the excess of interest received by respondent to the principal. ⁵ Although the total amount of interest paid was subject to a contingency, the actual rate of interest whenever paid would always have been usurious. Since the borrower had no control over whether the transaction would or would not be usurious, Abbot v. Stevens, 133 Cal.App.2d 242, 247, 284 P.2d 159 is not controlling. The lender would still be subject to treble damages for whatever total interest the borrower actually paid. Accordingly, the agreement of June 1, 1966, requiring the prepayment of 10% Interest constituted a usurious transaction.

The record also demonstrates the...