Charlotte Guyer and Assoc. v. Franklin Factors

• Decision Date: 10 January 1963
• Parties: CHARLOTTE GUYER AND ASSOC., Plaintiff, Cross-Defendant and Appellant, v. FRANKLIN FACTORS, a co-partnership, Martin Radoff, A. M. Lurie, Franklin Factors, a limited partnership, Abraham M. Lurie, General Partner, Martin Radoff, General Partner, Wonderbilt, a California Corporation, Martin Radoff, President of Wonderbilt, a California Corporation, Defendants, Cross-Complainants and Respondents. Civ. 25905.
• Court: California Court of Appeals Court of Appeals

Page 575

27 Cal.Rptr. 575

211 Cal.App.2d 690

CHARLOTTE GUYER AND ASSOC., Plaintiff, Cross-Defendant and Appellant, v. FRANKLIN FACTORS, a co-partnership, Martin Radoff, A. M. Lurie, Franklin Factors, a limited partnership, Abraham M. Lurie, General Partner, Martin Radoff, General Partner, Wonderbilt, a California Corporation, Martin Radoff, President of Wonderbilt, a California Corporation, Defendants, Cross-Complainants and Respondents.

Civ. 25905.

District Court of Appeal, Second District, Division 4, California.

Jan. 10, 1963.

Moidel, Moidel, Moidel & Smith Associates, by Leonard Smith, Los Angeles, for plaintiff, cross-defendant and appellant.

Harry A. Fry, Los Angeles, for defendants, cross-complainants and respondents.

BURKE, Presiding Justice.

Plaintiff sued for an accounting, damages for usury arising from successive agreements to factor accounts receivable, and damages for breach of contract based on revocation of a check drawn by defendant in favor of plaintiff. The court found the first factoring agreement to be usurious but held the second free of the taint. Damages for revocation of the check were refused. Thereupon, the court struck a balance on the accounting in favor of plaintiff. Being dissatisfied with the judgment as rendered plaintiff has taken this appeal.

Plaintiff was in the business of selling ladies' garments to retail stores in the Los Angeles area. It entered into an agreement with defendants to factor plaintiff's accounts receivable at an interest rate of 5/6 per cent per month on the gross amount of accounts factored. In addition, a service charge of 1 2/3 per cent per invoice for 'bookkeeping, credit checks, mailing, Postage, financial consultations and other administrative costs' was exacted on the same basis. There was also a charge of four cents per invoice for mailing and postage which included an envelope supplied by defendant. 25 per cent of each invoice was withheld as a reserve which was credited to plaintiff after collection of the account had been made. Defendant agreed to advance to plaintiff the gross amount of each invoice less reserve, interest charge, service charge, postage and time trade discounts accorded by plaintiff to its customers. In practice when a customer failed to take advantage of the time discount it was retained by defendants without any intention to pass it on to plaintiff. This agreement made April 2, 1958, was rescinded on July 15, 1958, and a second agreement was entered into on the following day.

The second agreement to the extent relevant here was substantially the same as the first agreement except that the interest charge was reduced to 1/2 per cent and the service charge was increased to 2 1/2 per cent. The description of services to be rendered under the label 'service charge' was enlarged to include 'supervision of assigned accounts receivable and business advisory service.'

The trial court held that payments made under the first agreement were usurious and assessed the amount of payments at $172.37. Although the service charge was not mentioned in the findings of fact, the trial judge stated in the record respecting the first agreement, 'I believe as set forth there the service charge percentages were subterfuges and were not bona fide charges for substantial services in that period.' The record does not disclose how the amount of usurious payments was determined but since the amount of payments set forth above is in excess of the amounts paid as interest, the balance could only be made up of service charges and therefore a finding to that effect must be implied. The trial court's memorandum of decision so indicates.

The second agreement was held to be nonusurious. Since the service charge under this agreement, if added to the interest charge, would result in usurious payments, there is an implied finding that the 2 1/2 per cent service charge under the second agreement was for substantial services. Statements of the judge in the record substantiate this conclusion. He said: 'I think that the question is one of construction of the operations. Under the second contract the interest rate was cut down, of course, and the service charge was upped; but under the second contract, even though I think the distinction is only skin deep, perhaps, there is testimony which supports the giving of some services in the line of these things which might qualify under the definition for it, and the fact that the parties entered into the agreement indicates to me when they mentioned that they had these services that they did both contemplate that sort of thing.'

On appeal plaintiff objects to the finding that the second agreement was nonusurious, complains of error in the computation of damages for usury under the first agreement, alleges error in refusal to award interest upon usurious payments commencing at the time the payments were made, and seeks to establish a right to specific and punitive damages for unjustifiable stoppage of payment on certain checks. Since the claim of damages for stoppage of check payment is not closely related by facts to the usury questions, it will be considered separately below.

The record contains substantial evidence to support a finding that the second agreement was nonusurious. The maximum amount of interest that may be exacted for a loan or forbearance of money is limited to 10 per cent (Cal.Const., art. XX, § 22). 'Interest is the compensation allowed by law or fixed by the parties for the use, or forbearance, or detention of money.' (§ 1915, Civ.Code.) But the usury law does not purport to fix or limit the amount of legitimate expenses or service charges to be borne by the borrower. (See Beneficial Loan Society, Ltd. v. Haight, 215 Cal. 506, 517, 11 P.2d 857.) As said in Klett v. Security Acceptance Co., 38 Cal.2d 770, 787, 242 P.2d 873, 884:

'A lender is not prohibited from charging an extra and reasonable amount for incidental services, expenses or risk additional to the lawful interest, other than for the loan of money. He may make a reasonable charge for investigating, arranging, negotiating, brokering, making servicing, Collecting and enforcing his obligation.

'Such items, however, must be confined to specific service or expense incidental to the loan incurred in such a way as to preclude it being a device through which additional interest or profit on the loan may be exacted.'

It is a question of fact as to whether a particular transaction is or is not usurious. 'Where the form of the transaction makes it appear to be non-usurious, it is for the trier of the fact to determine whether the intent of the contracting parties was that disclosed by the form adopted, or whether such form was a mere sham and subterfuge to cover up a usurious transaction.' (Janisse v. Winston Investment Co., 154 Cal.App.2d 580, 582, 317 P.2d 48, 50, 67 A.L.R.2d 225.)

In the present case there is abundant testimony upon which the trial judge could rely to find the rendition of substantial services beyond a loan or forbearance of money. The testimony indicates that services rendered under the business advisory service category would vary in each instance; that while the services basically contemplated under the first agreement were the same as those under the...