O'Connor v. Televideo System, Inc.

• Decision Date: 07 March 1990
• Docket Number: No. H004798,H004798
• Citation: 218 Cal.App.3d 709,267 Cal.Rptr. 237
• Court: California Court of Appeals Court of Appeals
• Parties: Mary Ellen O'CONNOR, as Trustee, etc., Plaintiff and Respondent, v. TELEVIDEO SYSTEM, INC., Defendant and Appellant.

Page 237

267 Cal.Rptr. 237

218 Cal.App.3d 709

Mary Ellen O'CONNOR, as Trustee, etc., Plaintiff and Respondent, v. TELEVIDEO SYSTEM, INC., Defendant and Appellant.

No. H004798.

Court of Appeal, Sixth District, California.

March 7, 1990.

Review Denied May 31, 1990.

Mark G. Bonino, Charles M. Marx, Ropers, Majeski, Kohn, Bentley, Wagner & Kane, Redwood City, for defendant and appellant.

James Paul Green, San Francisco, for plaintiff and respondent.

ELIA, Associate Justice.

Appellant Televideo System, Inc. appeals from a judgment awarding respondent Mary Ellen O'Connor, as assignee of the claim of Pousto Corporation, $43,800.00 plus finance charges of $21,024.00, calculated at 18 percent per annum from August 1985 through April 30, 1988. Televideo's sole point on appeal is that the finance charges violated the prohibition against usury. We affirm.

FACTS AND PROCEDURAL BACKGROUND

Pousto, a computer circuit board assembly house operating under the name of Unitronic, performed assembly work for Televideo, a computer manufacturer. After the work was complete, Pousto would send invoices to Televideo which stated that the amount due should be paid within 30 days. The invoices also provided that "All past due accounts are subject to a late charge of 1 1/2% per month or 18% per annum."

During the course of this business relationship, a dispute arose concerning the amount of money Televideo owed to Pousto. Accordingly, on August 30, 1985, Pousto filed a complaint against Televideo for damages, account stated, goods sold and delivered and open book account. The complaint alleged that Televideo was indebted to Pousto in the amount of $128,401.92, plus interest at the rate of 1 1/2 percent per month.

On February 28, 1986, Televideo filed an answer to the complaint generally denying the allegations and raising the affirmative defense of payment.

The matter was tried without a jury and on March 28, 1988, the court issued its decision. The court found that Televideo owed Pousto $43,800.00 for assembly work and also concluded that the parties had agreed to a charge of 1 1/2 percent per month on the amounts past due, that the Televideo filed a request for statement of decision to determine whether the finance charges assessed on the unpaid debt were usurious and barred by California law.

interest charge was reasonable, and thus Pousto was entitled to collect such interest.

On May 6, 1988, the court filed its statement of decision. The court concluded that the finance charge represented a "time-price" differential, that the parties had agreed that a 1 1/2 percent per month finance charge would be imposed on past due amounts, that the charge was commercially reasonable under the circumstances and that it was consistent with the existing practice between the parties.

At the August 5, 1988 hearing on Televideo's motion to tax costs, the court ordered that an amended judgment be filed nunc pro tunc to reflect that the finance charge was to be calculated at 18 percent per annum.

On September 1, 1988, an amended judgment was filed, finding Televideo indebted to Pousto for $43,800.00, along with finance charges at 18 percent per annum, totalling $21,024.00 This appeal ensued.

DISCUSSION

Televideo states that the 1 1/2 percent per month or 18 percent per annum charge assessed for late payment was usurious under Article XV section 1 of the California Constitution. ¹ For reasons we shall state, we conclude that the charge is not subject to the usury law but instead constitutes a valid liquidated damages provision.

"Usury is the exacting, taking or receiving of a greater rate than is allowed by law, for the use or loan of money." (Rose v. Wheeler (1934) 140 Cal.App. 217, 222, 35 P.2d 220.) A transaction is usurious if there is a loan at greater than the legal rate of interest or an exaction at more than the legal rate for the forbearance of a debt or sum of money due. (Id. at p. 223, 35 P.2d 220.)

A loan of money is "a contract by which one delivers a sum of money to another, and the latter agrees to return at a future time a sum equivalent to that which he borrowed." (Civ.Code, § 1912.) A forbearance, on the other hand, is the giving of further time for the payment of a debt or an agreement not to insist upon payment at the due date. (Calimpco, Inc. v. Warden (1950) 100 Cal.App.2d 429, 440, 224 P.2d 421, overruled on other grounds in Fazzi v. Peters (1968) 68 Cal.2d 590, 591, 68 Cal.Rptr. 170, 440 P.2d 242.) Both a loan of money and a forbearance are to be distinguished from a sale which is "the transfer of property in a thing for a price in money." (Milana v. Credit Discount Co. (1945) 27 Cal.2d 335, 339, 163 P.2d 869.)

To determine whether a transaction is usurious, we must look to the substance rather than the form of the transaction. (Boerner v. Colwell Co. (1978) 21 Cal.3d 37, 44, 145 Cal.Rptr. 380, 577 P.2d 200.) The pivotal question 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." (Ibid; Burr v. Capital Reserve Corp. (1969) 71 Cal.2d 983, 989, 80 Cal.Rptr. 345, 458 P.2d 185.)

One principle which may render the usury laws inapplicable is that a debtor by voluntary act cannot render an otherwise valid transaction usurious. "[A] debtor cannot bring his creditor to the penalties of the Usury Law by his voluntary default in respect to the obligation involved where no violation of law is present at the inception of the contract." (Sharp v. Mortgage Security Corp. (1932) 215 Cal. 287, 291, 9 P.2d 819.) As stated in Penziner v. West American Finance Co. (1933) 133 Cal.App. 578, 590, 24 P.2d 501, "Where the excessive interest is caused by a contingency under the lender's control, or not under the borrower's control, the transaction is usurious; [it is] otherwise when the contingency is under the borrower's control." (See also French v. Mortgage Guarantee Co. (1940) 16 Cal.2d 26, 33, 104 P.2d 655; Abbot v. Stevens (1955) 133 Cal.App.2d 242, 247, 284 P.2d 159; First American Title Ins. & Trust Co. v. Cook (1970) 12 Cal.App.3d 592, 596, 90 Cal.Rptr. 645.)

Another exception to the usury laws is the "time-price" doctrine. This doctrine applies when property is sold on credit as an advance over the cash price. In these circumstances, the seller finances the purchase of property by extending payments over time. This type of transaction, often called a bona fide credit sale, is not subject to the usury law because it does not involve a loan or forbearance. (Boerner v. Colwell Co., supra, 21 Cal.3d at p. 45, 145 Cal.Rptr. 380, 577 P.2d 200; Verbeck v. Clymer (1927) 202 Cal. 557, 563, 261 P. 1017.) The exception was explained in Verbeck: "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; ..." (Verbeck v. Clymer, supra, 202 Cal. at p. 563, 261 P. 1017, citing 27 R.C.L., pages 213-215, §§ 14, 15.)

In Fox v. Federated Department Stores, Inc. (1979) 94 Cal.App.3d 867, 156 Cal.Rptr. 893, the court relied upon both the time-price doctrine and the principle that a debtor's voluntary default cannot make an otherwise valid transaction usurious. In Fox, retail department stores and oil companies imposed monthly charges of 1 to 1 1/2 percent on unpaid account balances. The plaintiffs, who were purchasers of goods and services, argued that such charges constituted usury and that the Unruh Act, which allowed finance charges in excess of the limit imposed by Article XV, was unconstitutional.

The court decided that a "time-price" or "finance charge" in a bona fide sale of goods or services was not a form of interest within the meaning of Article XV section one. It further held that the sales by the defendants of their goods and services constituted bona fide sales to which the "time-price" doctrine applied. (Fox v. Federated Department Stores, Inc., supra, 94 Cal.App.3d at p. 872, 156 Cal.Rptr. 893.) The court also determined that the Unruh Act was constitutional.

The court determined that the nonrevolving credit plan for oil company credit card users was not usurious for a second reason. The plan, which required that the bill be paid when rendered, only imposed a finance charge if payment was late. As a consequence, "[s]ince the contract at its inception does not require a usurious payment, and it is only because of the customer's voluntary act in failing to make the payment when due that a finance charge is levied, under applicable law such charge cannot be usurious. [Citations.]" (Fox v. Federated Department Stores, Inc., supra, 94 Cal.App.3d at p. 884, 156 Cal.Rptr. 893.)

A contrary result was reached in Crestwood Lumber Co. v. Citizens Sav. & Loan Assn. (1978) 83 Cal.App.3d 819, 148 Cal.Rptr. 129, and Mark McDowell Corp. v. LSM 128 (1989) 214 Cal.App.3d 1427, 263 Cal.Rptr. 310. Both these cases determined that the charges assessed violated the prohibition against usury.

In Crestwood, the court concluded that an annual service charge of 18 percent in a nonconsumer goods transaction was usurious. The invoices and sales orders in Crestwood included a 2 percent discount for payments made within ten days and a finance charge of 1 1/2 percent (18 percent per year) on payments made after 10 days.

The court concluded that the charges were unenforceable. First, the billing practice constituted interest charged on the forbearance of money and was therefore subject to California's usury laws. Because the rate imposed exceeded the limits set forth in Article XV section 1, the charges were void. In particular,...