Liebergesell v. Evans

• Decision Date: 10 July 1980
• Docket Number: No. 46450,46450
• Citation: 93 Wn.2d 881,613 P.2d 1170
• Parties: Virginia B. LIEBERGESELL, Petitioner, v. Franklin W. EVANS, Individually, and Franklin W. Evans and Marilyn Evans, husband and wife; and Donale E. Kotowski, Individually, and Donale E. Kotowski and Haru Kotowski, husband and wife, Respondents.
• Court: Washington Supreme Court

Page 881

93 Wn.2d 881

613 P.2d 1170

Virginia B. LIEBERGESELL, Petitioner, v. Franklin W. EVANS, Individually, and Franklin W. Evans and Marilyn Evans, husband and wife; and Donale E. Kotowski Individually, and Donale E. Kotowski and Haru Kotowski husband and wife, Respondents.

No. 46450.

Supreme Court of Washington, En Banc.

July 10, 1980.

Sinnitt, Teitge & Sinnitt, Paul Sinnitt, Tacoma, for petitioner.

Gordon, Thomas, Honeywell, Malanca, Peterson & O'Hern, Valen H. Honeywell, Tacoma, for respondents.

HOROWITZ, Justice.

Plaintiff seeks review of an appellate court decision that defendants could not be estopped from asserting the defense of usury to plaintiff's action for recovery of amounts due on notes made by defendants. We reverse the Court of Appeals, Division II, and remand the case, 23 Wash.App. 357, 597 P.2d 908, to Pierce County Superior Court for trial on the merits. We take these actions because a borrower under a duty to speak who fails to disclose the illegality of a proposed rate of interest is estopped from asserting the defense of usury against his lender if she rightfully relied on the borrower's advice in making the otherwise usurious loan.

I.

For purposes of considering the appropriateness of summary judgment for the defendants, the facts and reasonable inferences therefrom are set forth in the light most favorable to the plaintiff, as reflected in her pleadings and affidavit. Morris v. McNicol, 83 Wash.2d 491, 519 P.2d 7 (1974). The defendants offered no evidence of the circumstances surrounding the loans on their motion for partial summary judgment. In light of the foregoing we state the facts of the case as the trial court had the right to find them in light of the plaintiff's uncontroverted affidavit and reasonable inferences therefrom.

Mrs. Virginia Liebergesell was asked by defendant Donale Kotowski to invest moneys belonging to her and to her children in a business operated by Kotowski and co-defendant Franklin Evans. Defendants Kotowski and Evans bought, renovated, and then rented or sold old houses as a sideline. On Kotowski's request and advice, plaintiff originally loaned defendants several thousand dollars at 12 percent interest, on the understanding that she also would receive 20 percent of the profits realized on resale or rental of the homes.

Mrs. Liebergesell and Mr. Kotowski originally became acquainted through the friendship of their daughters. Plaintiff, a widowed school teacher with neither expertise in business nor any knowledge of the concept of usury or that interest rates higher than 12 percent were illegal, relied on Mr. Kotowski for investment advice and regarded him as a financial counselor and guide. Mr. Kotowski was aware of and encouraged that reliance. He urged Mrs. Liebergesell to invest in his business. Mr. Kotowski's fulltime job was as a field auditor for the State of Washington; the job description for all auditing positions with the State requires a thorough knowledge of accounting and a Bachelor's degree with a major in that subject. Mrs. Liebergesell appreciated Mr. Kotowski's superior knowledge of financial affairs and considered his advice important in arranging her family's finances.

Several months after the series of loans made by Mrs. Liebergesell to the defendants at an interest rate of 12 percent, in September 1975, Mr. Kotowski told plaintiff that bookkeeping on the notes was too complicated to compute her 20 percent profit share, and that as an alternative the notes evidencing Mrs. Liebergesell's loans to the defendants could be written with higher rates of interest. Subsequently, the defendants prepared and signed a series of notes, written on standard promissory note forms, bearing interest at rates from 36 percent, on two notes later consolidated and not sued on here, to 18 percent, on the notes which Mrs. Liebergesell seeks to enforce in this action. Some of the notes were made payable to Mrs. Liebergesell individually; some to her as custodian for her minor children. Mrs. Liebergesell accepted the notes as drawn by defendants; no negotiation with regard to payable interest or terms took place between the parties. Defendants knew the interest rates were usurious and further knew that the plaintiff was unaware of their illegal nature. However, they did not inform her of their usurious character or of the adverse consequences of usury.

Mrs. Liebergesell collected a total of $5,207.63 in interest at usurious rates on a total principal of.$23,500 on these illegal notes. In early 1977, approximately one and a half years after Mr. Kotowski had first proposed usurious notes in lieu of a share of profits for Mrs. Liebergesell's investment, he proposed a second change in the parties' financial arrangements. Mr. Kotowski told Mrs. Liebergesell that until more houses were sold, he wanted to reduce the interest due on the amounts loaned by plaintiff to 12 percent. Mrs. Liebergesell, still trusting the business advice offered by Kotowski, did not object, and a note was drawn by Mr. Kotowski consolidating the amounts due and setting the interest rate at 12 percent.

Unlike the earlier "form" notes used by Mr. Kotowski, the substitute note did not provide for attorney's fees in the event of a lawsuit. The defendants did not inform the plaintiff of this omission; she discovered it herself only after reading the proposed note. In view of the adverse business outlook cited by the defendants in urging her to accept a note with a lesser return, plaintiff objected to the omission of a provision for attorney's fees and refused to accept the note.

Mrs. Liebergesell stated that Mr. Kotowski told her that defendant Evans, who works fulltime at the University of Washington, had threatened to "yell usury." She further stated that these threats were made to force her to agree to the consolidating note at 12 percent. Mr. Kotowski also told her that the rates were not illegal if set by the borrower, as in this case. Finally, Mrs. Liebergesell alleged in her undisputed affidavit that the defendants made it a practice to obtain funds for their business in this manner: by borrowing substantial sums from "unmarried ladies" who presumably are not aware of financial arrangements or usury laws, to set illegal interest rates, and then to threaten to defend suits brought for recovery on notes evidencing the loans with charges of usury instead of paying off the notes.

The Court of Appeals granted discretionary review of the trial court's denial of defendants' motion for partial summary judgment. The defendants in their motion had sought to deduct $10,415.24 from the.$23,500 due, relying on usury as an affirmative defense pursuant to RCW 19.52.030, which provides a penalty of double the amount paid in illegal interest. Following the rule that the burden is on the moving party to show the absence of a material issue of fact, the trial court had denied the motion because the judge believed from the showing made by the plaintiff that she might be able to prove at trial that the defendants should be estopped from asserting the usury defense. The Court of Appeals reversed, holding that the elements of the defense of usury were present, that the transaction could not be characterized as a joint venture between plaintiff and defendants, and that defendants were not estopped to raise the defense of usury. For the reasons set forth below, we now reverse and remand the case to the trial court for trial on the merits.

II.

ESTABLISHMENT OF USURY DEFENSE. To establish the defense of usury, a defendant must show: (1) a loan or forbearance, express or implied, of money or other negotiable tender; (2) an understanding between the parties that the principal must be repaid; (3) the exaction of a greater rate of interest than is allowed by law; and (4) an intention to violate the law. Flannery v. Bishop, 81 Wash.2d 696, 504 P.2d 778 (1972). In this case, there was a loan made by plaintiff, to be absolutely repaid by the defendants, at interest rates greater than 12 percent.

The Court of Appeals has held that the intent necessary to satisfy requirement (4) is the parties' intention merely to enter into the transaction. The intent thus need not be wrongful or calculated to violate the usury law. Tacoma Commercial Bank v. Elmore, 18 Wash.App. 775, 781, 573 P.2d 798 (1977). The parties have not addressed this issue and we therefore do not decide if Mrs. Liebergesell had the requisite intent to fulfill the requirements of the defense of usury. We assume, without deciding, that defendants have the right to assert the affirmative defense that the transactions were usurious if they are not otherwise estopped from doing so.

The plaintiff contends, however, that even though the four elements necessary to establishment of the defense may have been met, the defendants should be precluded from asserting usury because of the parties' relationship in this case.

III.

ESTOPPEL FROM ASSERTING USURY DEFENSE. We have never before examined the effect of the defendant borrower's role in initiating or controlling a loan transaction on his ability to later raise the defense of usury. However, in the great majority of states in which the question has been considered, the courts have estopped a borrower who initiated a transaction at an illegal rate of interest from setting up the defense of usury. Annot., 16 A.L.R.3d 510, 513-16 (1967). At the very least, the borrower has been precluded from recovering statutory penalties for usury. Id., supra at 516-17. We are convinced that the general doctrines of estoppel compel us to join the majority of jurisdictions in refusing to allow the defendant to assert usury in cases in which the elements of estoppel exist.

This court has refused in the past to estop a usury defense because of exculpatory actions, such as a disclaimer of the right to any usurious interest, taken by the borrower after the making of the illegal loan. Home Savings & Loan Ass'n v....