Ghirardo v. Antonioli

Citation8 Cal.4th 791,883 P.2d 960,35 Cal.Rptr.2d 418
Decision Date28 November 1994
Docket NumberNo. S032435,S032435
CourtUnited States State Supreme Court (California)
Parties, 883 P.2d 960 Edward T. GHIRARDO et al., Plaintiffs, Cross-defendants and Respondents, v. Ronald F. ANTONIOLI et al., Defendants, Cross-complainants and Appellants.
Richard A. Hirsch, Novato, for defendants, cross-complainants and appellants

Howard, Rice, Nemerovski, Canady, Robertson & Falk, Steven E. Schon, Laurence F. Pulgram, San Francisco, Bowles & Verna, Richard T. Bowles, K.P. Dean Harper and Thomas G.F. Del Beccaro, Walnut Creek, for plaintiffs, cross-defendants and respondents.

BAXTER, Justice.

This case demonstrates the complexity, uncertainty, and sometimes unexpected results of California's usury law. The owners of undeveloped real property sold it to a prospective developer and received a promissory note and deed of trust to the property. The new owner sold it to another buyer, who purchased it subject to that note and deed of trust. No one contends either of these transactions was usurious. A payment dispute arose, and the new buyer sued the first seller to prevent foreclosure. After extensive negotiations, the parties agreed to a debt restructuring. The buyer paid the new obligation (except for a portion still in dispute), then claimed usury and sued the first seller.

The trial court found that "the parties on both sides were sophisticated, familiar with the world of land transactions and financial dealings. One of the plaintiffs [buyers] is an attorney, another a certified public accountant. Defendants at all times during negotiations were represented by able counsel. Both sides fully participated in the negotiations which resulted in the settlement agreement. It is clear from the evidence that none of the parties on either side thought of the possibility of usury." The court concluded, however, that the usury law nonetheless applied and awarded the buyer all interest paid under the restructured debt plus attorney fees.

As we shall explain, we hold the usury law does not apply to this debt restructuring because there was no loan or forbearance, the prerequisite to application of the usury law. The transaction was a modification of a credit sale that was not subject to the usury proscription. The modification retained the exemption.

1. The transactions

Petitioners Ronald and Pamela Antonioli (hereafter collectively referred to as Antonioli) bought a 20-acre parcel of undeveloped real property in Novato, California in December 1981 from McPhail's, Inc. (McPhail), giving McPhail a purchase-money promissory note for $618,919 (the Antonioli note) secured by a first deed of trust on the property (the Antonioli deed of trust). The Antonioli note was due in December 1984.

In July 1984, Antonioli sold the property to Philip Gay Associates (Gay), receiving a promissory note for $1,745,000 (the Gay note) secured by a second deed of trust (the Gay deed of trust). The Gay note was an all-inclusive note, i.e., "wrap-around," that included in its principal the unpaid balance still due McPhail under the Antonioli note. Gay made payments to Antonioli under the Gay note, and Antonioli continued to pay McPhail under the Antonioli note. The Gay deed of trust was subordinate and subject to the Antonioli deed of trust.

Before escrow closed on his purchase of the property, Gay contracted to sell it to Edward Ghirardo and the other respondents (hereafter collectively referred to as Ghirardo). Ghirardo paid more than $650,000 in cash, executed a $200,000 promissory note (the Ghirardo note) and accompanying third deed of trust to Gay (the Ghirardo deed of trust), and took the property subject to the existing Gay note and deed of trust in its original sum of $1,745,000. No documents were executed between Antonioli and Ghirardo in connection with this sale. Ghirardo was not a party to either the Gay note and deed of trust or the Antonioli note and deed of trust.

2. The dispute and settlement

A dispute arose in 1986 between Antonioli and Ghirardo regarding payments allegedly owing to Antonioli on the Gay note. (After Ghirardo purchased the property from Gay, Ghirardo had begun paying directly to Antonioli the payments owed by Gay. This eliminated the need for Ghirardo to pay Gay, who would in turn have to remit the payment to Antonioli.) Antonioli began nonjudicial foreclosure proceedings. Ghirardo sued to enjoin the foreclosure and obtained a temporary restraining order. After a trial court hearing on Ghirardo's request for a preliminary injunction and before decision, the parties reached a settlement agreement that resulted in a restructuring of the debt and dismissal of Ghirardo's action to enjoin the foreclosure.

Under the settlement, Antonioli canceled the Gay note and reconveyed the Gay deed of trust. In exchange, Ghirardo agreed to pay $342,500 in cash and to execute two new secured notes payable to Antonioli in the amounts of $57,500 (the small note) and $1,072,867.47 (the large note). (For convenience we will hereafter occasionally refer to the two notes as "the settlement notes" or the "debt restructuring.") Ghirardo also agreed, "as and for consideration of this new Note," to pay a $100,000 fee, which the agreement stated was to be "added to the principal of the [large] note." 1 The small note bore interest at the stated rate of 13 percent. The large note stated a 10 percent interest rate, but with the $100,000 fee included in the principal, the effective rate of interest was 17.46 percent. When the notes were executed, the maximum permissible rate was 10.5 percent. Ghirardo also agreed to pay $45,000 in attorney fees to Antonioli.

Ghirardo paid the small note in full (including $4,362.12 in interest) and paid the total amount due under the large note (including $94,338.09 in interest), except for $151,566.82 that Antonioli inadvertently omitted from his payoff demand to the escrow holder. Antonioli's counsel promptly discovered this mistake and informed the escrow holder, but escrow had already closed. Antonioli informed Ghirardo of the error and requested payment of the additional amount. Ghirardo responded by stating his view, apparently for the first time, that both the large and the small notes were usurious. He demanded that Antonioli repay all interest paid on the notes. Antonioli declined.

3. The trial and appeal

Ghirardo filed this action, contending the settlement notes were usurious. He sought damages including treble the amount of interest paid, prejudgment interest, and attorney fees. Antonioli cross-complained for the balance allegedly due on the large note. After a bench trial, the court found the settlement transaction constituted both a loan and a forbearance and was usurious. More specifically, the small note ($57,500) was usurious on its face, and the large note ($1,072,867.47) became usurious when the $100,000 additional charge was added to the amount of that note. The trial court found the $100,000 charge was a "fee, bonus, commission or other compensation for forbearance and extension of credit" and was, therefore, interest despite its characterization in the parties' agreement as being principal.

The court awarded Ghirardo $98,700.26 in actual interest paid on the notes. The court also awarded Ghirardo $31,260.96 in prejudgment interest (Civ.Code, § 3287), and $76,350 in attorney fees (Civ.Code, § 1717). The court, however, declined to award treble damages. The court also entered judgment against Antonioli on his cross-complaint, finding: (1) that the amount sought was usurious interest rather than principal, and (2) that Antonioli had not complied with the one-form-of action rule set forth in Code of Civil Procedure section 726. The Court of Appeal affirmed.

1. The framework

The California Constitution, article XV, section 1, states "No person, association, copartnership or corporation shall by charging any fee, bonus, commission, discount or other compensation receive from a borrower more than the interest authorized by this section upon any loan or forbearance of any money, goods or things in action." 2 The essential elements of usury are: (1) The transaction must be a loan or forbearance; (2) the interest to be paid must exceed the statutory maximum; (3) the loan and interest must be absolutely repayable by the borrower; and (4) the lender must have a willful intent to enter into a usurious transaction. (See generally, 4 Miller & Starr, Cal.Real Estate Law (2d ed. 1989) § 10:2, p. 650 [hereafter Miller & Starr]; Comment, A Comprehensive View of California Usury Law (1974) 6 Sw.U.L.Rev. 166, 174.) The element of intent is narrow. "[T]he intent sufficient to support the judgment [of usury] does not require a conscious attempt, with knowledge of the law, to evade it. The conscious and voluntary taking of more than the legal rate of interest constitutes usury and the only intent necessary on the part of the lender is to take the amount of interest which he receives; if that amount is more than the law allows, the offense is complete." (Thomas v. Hunt Mfg. Co. (1954) 42 Cal.2d 734, 740, 269 P.2d 12.) Intent is relevant, however, in determining the true purpose of the transaction in question because "... the trier of fact must look to the substance of the transaction rather than to its form.... '[I]t 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.' " (West Pico Furniture Co. v. Pacific Finance Loans (1970) 2 Cal.3d 594, 603, 86 Cal.Rptr. 793, 469 P.2d 665, quoting Janisse v. Winston Investment Co. (1957) 154 Cal.App.2d 580, 582, 317 P.2d 48.) A transaction is rebuttably presumed not to be usurious. (Janisse v. Winston Investment Co., supra, 154 Cal.App.2d 580, 586, 317 P.2d 48; Rose v....

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