Burr v. Capital Reserve Corp.

• Decision Date: 11 September 1969
• Citation: 71 Cal.2d 983,80 Cal.Rptr. 345,458 P.2d 185
• Court: California Supreme Court
• Parties: , 458 P.2d 185 Jerome BURR et al., Plaintiffs and Appellants, v. CAPITAL RESERVE CORPORATION, Defendant and Appellant. L.A. 29496.

Page 345

80 Cal.Rptr. 345

71 Cal.2d 983, 458 P.2d 185

Jerome BURR et al., Plaintiffs and Appellants, v. CAPITAL RESERVE CORPORATION, Defendant and Appellant.

L.A. 29496.

Supreme Court of California,

In Bank.

Sept. 11, 1969.

Sam Houston Allen, Van Nuys, for plaintiffs and appellants.

Abraham Gorenfeld, Beverly Hills, and Ellis J. Horvitz, Los Angeles, for defendant and appellant.

MOSK, Justice.

The litigants here are at odds over whether three financial transactions in which plaintiffs purportedly leased personal property from defendant were in fact loans at a usurious rate of interest. The trial court concluded that the first two transactions were bona fide leases of personal property but that the third was a loan of money and that the rate of interest was usurious. ¹ It granted judgment for the total amount of interest plaintiffs had paid on account of the third transaction.

Defendant is a corporation engaged in the business of leasing personal property, which it purchases for that purpose. Plaintiff Burr operated an ice-skating rink in Culver City in 1963 and desired to open a family billiard parlor, at that time a novel enterprise. ² He selected the carpeting, pool tables and other equipment needed for the new venture and discussed with two brokers who were partners the means by which he could obtain the items. The brokers had dealings with defendant in the past and had received commissions for securing business for defendant.

A meeting was held among Burr, the brokers, and Michael Savage, defendant's president. Savage explained to Burr that defendant would be required to borrow the money from a bank to purchase the equipment and that since the family billiard parlor business was of a speculative nature, the bank from which defendant would borrow the money required collateral over and above the equipment itself. The amount Burr would be required to pay as rental for the equipment was calculated by ascertaining the number of years for which the leases were to run and, according to Savage, 'you simply use a figure which is based on the return that you want to receive on equipment that you own and multiply it by the cost of the equipment to give you your payment.' Defendant desired a return of $35 for each $1,000 to be paid out, and on this basis it entered into a contract with Burr.

Under terms of the agreement Burr pledged stock with a value of $70,000 to defendant to secure the obligations under two leases. Defendant paid the supplier of carpeting for the billiard parlor the sum of $5,417. The invoice for this purchase was issued to defendant, who was designated as the buyer, but the carpeting was delivered to Burr. As a part of the transaction Burr executed a lease form (hereinafter called Exhibit A) under which he agreed to pay $568.80 upon execution and to make 33 monthly payments of $189.60 each. A similar arrangement was made as to other equipment. Pool tables and other property selected by Burr were delivered to him. Defendant paid $39,060.04 to the supplier for this equipment and was named as the purchaser in the invoice. Burr signed another lease (hereinafter called Exhibit B) and paid defendant $4,942.50 upon execution. Under Exhibit B he obligated himself to make 34 payments of.$884.97 each.

Exhibits A and B, which were executed in May 1963, provided Inter alia that the lessee would have no title or interest in the property which was the subject of the lease, that he would return the property to the lessor upon the expiration of the term, and that the lessor had the right to assign the lease and its proceeds. There was also a provision that if the lessee defaulted in his payments the lessor could immediately terminate the lease, declare all the payments under it immediately due and payable, and repossess the property. The lessee assumed the entire risk of loss 'from hazard' and agreed to keep the property insured at his own expense for the lessor's benefit. Finally, the lessee was accorded an option to renew the lease for one year at the same rental. Savage testified that at the end of the term he expected Burr to renew the lease, return the property to defendant, or trade it in.

The money to purchase the equipment was borrowed by defendant from the Union Bank at an interest rate of 10 percent. Defendant gave the bank a promissory note and as security for the loan it assigned the leases and their proceeds to the bank. It also repledged to the bank the $70,000 in stock which Burr had pledged as security.

In early 1964 Burr proposed to open a second billiard parlor. In order to finance this expansion, it was necessary for him to sell the stock which he had pledged to defendant and the latter had repledged to the bank. The bank would release the stock only upon condition that Burr deposit $15,000 in cash as security in a savings account at the bank.

Burr entered into the third transaction with defendant in response to his expansion need. He obtained the money to make the deposit from defendant by 'selling' to defendant equipment he owned in his business, such as a stove, steam table, cash register and air conditioner, and 'leased' it back from defendant. Savage told Burr that 'the only way we could work out a loan' was if Burr would 'sell the property' to defendant and Burr would 'get * * * the money bakc.' Prior to the time the third transaction was consummated, Savage explained to Burr that under the sale and lease-back he could obtain a far higher percentage of the value of the property than if he obtained an unsecured loan or a chattel mortgage on the equipment and that certain other advantages, such as tax benefits, would flow from a sale and leaseback arrangement.

Burr listed the items he desired to sell to defendant and Savage selected those it was willing to purchase. As additional collateral to secure the 'rental' payments Burr assigned to defendant equipment located at another billiard parlor. ³ An escrow was opened for the transfer of the property. Burr executed a lease form (hereinafter called Exhibit C) with terms identical to those provided in Exhibits A and B. Exhibit C recited that Burr leased the specified property from defendant and that $1,675 was due on execution. Burr was to make 24 monthly payments of $787.25 each. However, the $1,675 was not paid. Burr actually received $15,075 from this transaction, $15,000 of which was deposited in escrow. ⁴ He retained possession of the property at all times.

Defendant borrowed the $15,075 from the Union Bank for the purchase of this equipment, and as in the prior transactions it assigned the lease as security for the payment of the loan it received from the bank.

In January 1965 Burr sought the release of the $15,000 which was deposited as security in the savings account at the Union Bank, claiming that when he entered into the agreements with defendant he had been granted options to purchase the property leased to him. Savage denied that such options existed. Later he wrote Burr that defendant would grant purchase options to him for the property represented by all three leases upon payment of a sum which amounted to three months' rental on each lease. ⁵

Burr defaulted in his payments in April 1965, and Savage informed him that the bank would resort to the $15,000 security deposit if the default was not corrected. Thereupon defendant and Burr worked out an arrangement under which Burr would accomplish the release of the $15,000 security deposit and, in addition, be relieved of his obligations under Exhibits A and C. The $15,000 deposit was released by the bank and this sum was used to pay off Burr's obligations under Exhibits A and C and to pay the option prices for the property represented by those documents. Defendant gave Burr a bill of sale for this property. In addition, defendant paid the Union Bank the amount still due under Exhibit B and assigned the rentals due under it to a second bank as security for the payment of future sums. Burr began to make payments under the new arrangement in July. He filed this action shortly thereafter.

Defendant expended $5,417 on Burr's behalf in the first transaction, and Burr paid out $7,394.40, or a total of $1,977.40 over what he received. As to the third transaction, Burr received $15,075 from defendant and paid out $21,180.75, a total of $6,105.75 over the sum he received. The terms of Exhibit B required Burr to pay $52,740.88, of which $34,146.51 had been paid by July 1, 1966, leaving a balance of $18,584.37 still due. ⁶ Defendant had paid out $39,060.04 on Burr's behalf in the second transaction.

The trial court concluded that the transactions represented by Exhibits A and B 'are not loans of money * * * but are leases of the personal property involved by the defendant to the plaintiffs, with an option to the plaintiffs to acquire title to the said property provided plaintiffs make all of the monthly payments required by the said Exhibits and in addition thereto, a sum equivalent to 3 equal monthly payments thereunder.'

The court found that Burr 'assigned' title to the personal property represented by Exhibit C to defendant 'only for the purpose of securing the obligations under * * * Exhibit C' and that Burr paid nothing to defendant upon execution of that document despite the assertion in the instrument that $1,675 was due on execution. The court concluded that this transaction was 'not a lease but a loan of money and the lease form employed by the parties was but a device used in an effort to evade the usury law of the State of California.' It was held that the $6,105.75 paid by Burr for the 'loan' exceeded the allowable interest rate and that Burr was entitled to have that amount credited to the sum still due under Exhibit B, but that he was not entitled to treble damages.

Both parties appeal from the trial court's judgment. Burr contends that the first two transactions were in fact usurious loans of money disguised as leases and that he is entitled to...