Dcm Partners v. Smith

• Decision Date: 06 March 1991
• Docket Number: No. D012685,D012685
• Citation: 278 Cal.Rptr. 778,228 Cal.App.3d 729
• Parties: DCM PARTNERS, Plaintiff and Respondent, v. Cherrill Ann SMITH, Defendant and Appellant.
• Court: California Court of Appeals Court of Appeals

Page 778

278 Cal.Rptr. 778

228 Cal.App.3d 729

DCM PARTNERS, Plaintiff and Respondent, v. Cherrill Ann SMITH, Defendant and Appellant.

No. D012685.

Court of Appeal, Fourth District, Division 1, California.

March 6, 1991.

Review Denied May 23, 1991.

E. Ludlow Keeney, Jr. and Mitchell, Keeney, Barry & Pike, San Diego, for defendant and appellant.

Thomas M. Monson, Patricia M. Bailey, and Miller, Ewald & Monson, San Diego, for plaintiff and respondent.

WIENER, Acting Presiding Justice.

In a municipal court non-jury trial plaintiff DCM Partners was awarded $11,912.50 representing the usurious interest paid to defendant Cherrill Ann Smith on a secured promissory note. After the appellate department of the superior court affirmed the judgment, the case was certified to this court under California Rules of Court, rule 63 so that we might decide whether the usury law applies to a modified purchase money secured note initially created in an exempt transaction, the bonafide sale and purchase of real property, where the modification, done at the request of the trustor, consisted solely of increasing the rate of interest to reflect market conditions in consideration of extending the due date of the note. We hold that in these circumstances the usury law does not apply and accordingly reverse the judgment with instructions to the superior court to enter judgment for Smith.

FACTUAL AND PROCEDURAL BACKGROUND

The following undisputed facts are taken from the parties' agreed statement on appeal.

On July 30, 1979, DCM bought improved real property on Front Street in El Cajon from Smith and her former husband. DCM paid $160,000 for the property: $52,000 cash with the balance in the form of a secured promissory note on the property bearing interest at 10 percent per annum. The note provided for monthly installments of interest only with the entire unpaid principal balance and accrued interest due on September 27, 1984.

In August 1984 DCM determined it could not pay the note when due and its representative asked Mr. Smith to extend the maturity date. When the request was made the Smiths knew they could invest the principal balance at an interest rate substantially greater than 10 percent. They therefore agreed to extend the note provided the annual interest was increased to 15 percent. Neither party was aware of the applicable usury laws and the Smiths had no intention of taking more money from DCM than that to which they were legally entitled. Pursuant to the parties' agreement Smith's counsel prepared a modification agreement increasing the interest rate and assigning Mr. Smith's interest in the note to his wife.

DCM made all payments in a timely manner and paid the note in full on its due date. After Smith reconveyed the deed of trust, DCM filed this action seeking to be reimbursed the 15 percent interest it paid as being usurious, plus attorney's fees. The trial court and later the appellate department agreed with DCM ultimately resulting in the legal issue noted above being presented to us for our review.

DISCUSSION

I

California Constitution, article XV, section I limits the interest rate for a "loan or forbearance" of money not primarily for personal, family or household purposes, to the higher of: (1) 10 percent per annum or (2) 5 percent plus the rate of interest prevailing on the 25th day of the month preceding the earlier of the date of the extension of the contract to make the loan or forbearance or the date of making the loan or forbearance, established by the Federal Reserve Bank of San Francisco on advances to member banks under section 13 and 13(1) of the Federal Reserve Act.

Here the rate prevailing on August 25, 1984, was 9 percent thereby making usurious anything in excess of 14 percent as of the date of the modification agreement. The 15 percent interest rate here is therefore usurious unless the modified secured note is exempt from the usury laws.

II

Whether a loan or forbearance of money is usurious depends on the nature of the transaction. Sensitive to the ingenuity and creativity of those entrepreneurs willing to engage in legal brinkmanship to maximize profits, courts have carefully scrutinized the form of seemingly innocuous commercial transactions to determine whether the substance amounts to a usurious arrangement. (Southwest Concrete Products v. Gosh Construction Corp. (1990) 51 Cal.3d 701, 705, 274 Cal.Rptr. 404, 798 P.2d 1247.) In doing so courts have distinguished between a "loan" or "forbearance" of money and a bonafide credit sale (Boerner v. Colwell Co. (1978) 21 Cal.3d 37, 43-51, 145 Cal.Rptr. 380, 577 P.2d 200; see also Verbeck v. Clymer (1927) 202 Cal. 557, 261 P. 1017) since the latter is not subject to the usury laws. The articulated rationale for this distinction is that the owner of property "... 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 principal, and declares that it shall draw interest at a rate which, were the transaction a borrowing and lending, would clearly be usurious...." (Verbeck v. Clymer, supra, at p. 563, 261 P. 1017.)

Underlying the judicial approval of what can best be described as the artificial distinction between a credit sale and a loan of money is the perception that the Legislature has given its broad approval to the credit sale principle as an exception to the usury law. ¹ It is deemed sufficient that the consumer receive the legislatively sanctioned benefits of flexible credit arrangements rather than being denied those benefits because of the rigidity of the usury laws. (Boerner v. Colwell, supra, at p. 46, 145 Cal.Rptr. 380, 577 P.2d 200.) Thus based on this principle the initial transaction between the Smiths and DCM was not usurious. (See also 62 Ops.Cal.Atty.Gen. 735 (1979).) The question presented here is whether it became usurious when the secured note was modified to provide for increased interest.

III

Initially we note our unwillingness to accede to Smith's request that we decide this case on the technical ground that the agreement to increase the rate of interest and extend the due date of the note occurred before the note was due and not afterward. Smith says the timing of this event is crucial claiming that where the agreement precedes the due date there can be no "forbearance." She supports her position by directing us to Eisenberg v. Greene (1959) 175 Cal.App.2d 326, 346 P.2d 60, where "forbearance" is defined as " 'the act by which a creditor waits for the payment of a debt due him by the debtor after it has become due' " (at p. 330, 346 P.2d 60, quoting Murphy v. Agen (1928) 92 Cal.App. 468, 469, 268 P. 480, emphasis added) and Crestwood Lumber Co. v. Citizens Sav. & Loan Assn. (1978) 83 Cal.App.3d 819, 148 Cal.Rptr. 129, where "forbearance" is said to be an "extension of time for payment of a debt due" (at p. 824, 148 Cal.Rptr. 129). These decisions, however, do not suggest their respective definitions of "forbearance" were intended to be all-inclusive. Moreover, we can not overlook other precedent where "forbearance" is simply defined as "an agreement not to enforce a claim at its due date." (Ibid.) (See e.g. Buck v. Dahlgren (1972) 23 Cal.App.3d 779, 785, 100 Cal.Rptr. 462; Calimpco, Inc. v. Warden (1950) 100 Cal.App.2d 429, 440, 224 P.2d 421 (disapproved on other grounds in Fazzi v. Peters (1968) 68 Cal.2d 590, 68 Cal.Rptr. 170, 440 P.2d 242.) The phrase "at its due date" qualifies when the claim will not be enforced, not the date on which the parties agreed to extend the time for payment. (See also 1 Witkin, Summary of Cal.Law, 9th ed., Contracts, § 482, p. 431.) This is consistent with the facts of Buck v. Dahlgren, supra, where the agreement constituting the forbearance and the obligor/trustor's payment of the alleged usurious premium was made before the foreclosure sale which the parties agreed to postpone. Thus forbearance within the meaning of the usury law is an agreement to extend the time for payment of the obligation due either before or after the obligation's due date. ² In light of our conclusion we are unable to use the date of the agreement modifying the note and trust deed in this case as the linchpin on which we can rest our decision.

IV

We frankly admit that absent legislative direction or persuasive precedent a factor underlying our conclusion that this transaction was not usurious is the discomforting unfairness if we were to conclude otherwise. This unfairness is best illustrated through the following hypothetical. Let us assume that when the parties in this case agreed to 10 percent interest the maximum allowable interest was 8 percent. Let us assume further that within a few days after the initial transaction they agreed to reduce the interest to 9 percent for no other reason than Smith's concern with DCM's financial well-being. If we were to accept DCM's argument, the reduced interest rate would be usurious even though the higher rate was not. It seems to us that the "law" should function in a rational manner to avoid a somewhat absurd and clearly inequitable result where the parties themselves are unable to distinguish between the bargains except for the date on which each was made. Powerful reasons should exist before the law transmutes a legal transaction into an illegal one, particularly where the illegality places the entire financial burden on one party with the other seemingly unjustly enriched having the benefit of an interest free loan. ³ In addition we are cognizant of the general principle that "a debtor by voluntary act cannot render an otherwise valid transaction usurious. '[A] debtor cannot bring his creditor to the...