Manufacturers Acceptance Corp. v. Irving Gelb Wholesale Jewelers, Inc., 1416-III

• Decision Date: 29 June 1977
• Docket Number: No. 1416-III,1416-III
• Citation: 17 Wn.App. 886,565 P.2d 1235
• Parties: MANUFACTURERS ACCEPTANCE CORPORATION, Appellant, v. IRVING GELB WHOLESALE JEWELERS, INC., Respondent.
• Court: Washington Court of Appeals

Page 886

17 Wn.App. 886

565 P.2d 1235

MANUFACTURERS ACCEPTANCE CORPORATION, Appellant, v. IRVING GELB WHOLESALE JEWELERS, INC., Respondent.

No. 1416-III.

Court of Appeals of Washington, Division 3.

June 29, 1977.

Robert G. Beaumier, Keith D. Rieckers, Lukins, Annis, Bastine, Spokane, McKay & Van Marter, P. S., for appellant.

William J. Powell, Spokane, for respondent.

MUNSON, Chief Judge.

Appellant, Manufacturers Acceptance Corporation (MAC), originally brought this action against Emanuel Gelb, his wife, and Irving Gelb Wholesale Jewelers, Inc., (corporation) to recover the outstanding balance of an inventory loan and to enforce the security agreement thereon. The Gelbs and the corporation counterclaimed contending that these transactions were usurious, seeking attorneys' fees and an offset for double the interest already paid on the loan. MAC dismissed Mr. and Mrs. Gelb at the outset of trial and now appeals the trial court's judgment awarding the corporation recovery under its counterclaim, discharging the security agreement and awarding attorneys' fees and costs. We affirm in part, reverse in part, and remand.

Prior to 1969, Emanuel Gelb had been employed by his cousin, Irving, as a traveling salesman in Irving's wholesale jewelry business. In August, 1969, Emanuel Gelb purchased the business from Irving. As part of the transaction, Emanuel and his wife formed Irving Gelb Wholesale Jewelers, Inc.; the corporation assumed all Irving Gelb's prior business obligations and MAC released Irving Gelb from liability.

On August 19, 1969, the corporation entered into the following agreements with MAC:

1. A security agreement;

2. A factoring agreement; and

3. A management service agreement.

In addition, a document attached to the factoring agreement entitled "guaranty" was executed by the Gelbs personally guaranteeing to MAC all liabilities of the corporation. By utilizing and effecting these agreements, MAC provided the corporation with financing and management services.

The security agreement designated the corporation's inventory as security for any existing or future indebtedness to MAC, including a promissory note for over $55,000, which was Irving Gelb's prior obligation to MAC. From August 1969 through July 1973 MAC made monthly cash advances totalling $521,600 (secured by the security agreement) to the corporation. Each time a cash advance was made, MAC prepared, and the corporation signed, a promissory note stating the amount of the cash advance and designating interest at 12 percent. Each note was due the first of the following month.

Under the factoring agreement, at the end of each month the corporation would furnish MAC with a list of all of its accounts receivable. MAC would then select from this list those accounts which it would buy. The agreement provided that MAC would remit to the corporation 80.25 percent of the purchase price of these accounts receivable, retaining 18.25 percent in a reserve account, and charging .875 percent as a factoring charge. ¹ On the first of each month, MAC would apply as credit against the jewelry corporation's loan balance approximately 80 percent of accounts receivable accepted for factoring that month. Payments would likewise be debited.

MAC assisted Mr. Gelb in attempts to collect the factored accounts receivable, if necessary. From August 1969 through December 1, 1973, MAC factored accounts receivable totalling $591,135.44 and received payment on these accounts totalling $667,281.23. Based upon these factored accounts receivable, MAC has credited $553,177.34 to the corporation's outstanding loan balance.

At the beginning of each month, after MAC had credited the factored accounts, it would prepare a new note reflecting the corporation's outstanding balance and the previous month's cash advances; plus interest and service charges for the loan, the factoring agreement, and the management service agreement.

Pursuant to the management service agreement, MAC provided substantial services to the jewelry corporation. These services included assistance to Emanuel Gelb in effecting the purchase of the jewelry business from Irving Gelb; assistance in hiring and interviewing of personnel assistance in the collection of accounts; assistance in accounting matters; assistance in sales programming; assistance in advertising; consultation as to his customers, particularly in determining whether to extend credit to such customers; consultation on matters affecting his suppliers, including the guaranty of payment to specific suppliers; and consultation when the corporation entered the retail business. The management service agreement provided that MAC's compensation for these services be based upon two different computations: (a) a monthly fee of .875 percent of the gross amount of the accounts receivable factored by MAC; plus (b) a monthly fee of 1.187 percent of the outstanding loan balance owed by the corporation.

Emanuel Gelb's business was relatively successful until the middle of 1972. From that point on, it began to decline. Attempts to restimulate business were ineffective, and in July of 1973, MAC ceased making cash advances. MAC ultimately commenced this action December 1, 1973, alleging an indebtedness owed it of $140,948.10.

The trial court concluded that the three separate agreements were valid, that they were not so interrelated that they must, by necessity, be construed as a single transaction, that the corporation owed the amount MAC sought, but, that only .875 percent of the gross factored accounts was a reasonable fee for services rendered under the management service agreement and that the 1.187 percent charge, based upon the outstanding loan balance, was unreasonable and usurious. MAC appeals, assigning error to the court's conclusion of usury.

The trial court made the following findings to which no assignment of error is made:

15. The court further finds that Emmanuel Gelb had prior business experience, had developed a familiarity with the business he purchased from his cousin during his previous work with the firm, that he had the benefit of the advice of counsel during all the period of negotiations for the purchase of the business, even though this counsel was also serving as counsel for Irving Gelb and MAC; that Emmanuel Gelb knew MAC had been functioning as a source of supply of money previous to his purchase and that he was not unaware of the ingredients of the documents he signed which specified the various service charges, factoring charges and the fact that there was a security agreement held by MAC on all inventory and proceeds.

16. The Court further finds that MAC provides a special and unique type of business financing, available to business people who may be starting without any operating capital and who otherwise could obtain no money from other lending institutions, either to purchase or operate a business. The Court further finds that Emmanuel Gelb could not have obtained funds from any other lending institutions nor have obtained management service assistance such as MAC offered and supplied in this instance. Under the circumstances the court finds that Emmanuel Gelb was not a captive borrower.

17. The Court finds that the total service charges collected by MAC were: factoring: $26,455.16 and notes: $61,788.07.

18. The Court further finds that the factoring of accounts receivable appears to be a reasonable method of business financing without which may businesses would not (sic ) operate, and that the discount charged in this case is reasonable in the industry.

19. The Court further finds that there was a great deal of activity in way of consultation management, advice and the like on the part of MAC which activity was of value, justifying MAC in making a reasonable charge as compensation therefor.

20. The Court further finds that in the case of the promissory notes, the total interest charged exceeded 12% per annum by a small amount.

21. The Court fails to find any reasonable relationship between the service charges made on the outstanding balance of the loan and the actual services rendered by MAC. ²

And further concluded in part:

2. The Court concludes as a matter of law that the three documents signed by the parties were not so interrelated that they must by necessity be construed as one single transaction, although there are cross-references in the agreement, the Court concludes that the factoring agreement and service agreement are separate transaction from the security agreement.

3. The Court further concludes as a matter of law that the factoring arrangement is not a cover for usury, that the factoring charges are reasonable and that it was within the contemplation of the parties though not specified in the factoring agreement that MAC should have the authority to make repeated discount charges and service charges monthly.

4. The Court further concludes as a matter of law that the services rendered by MAC to defendant were of a value commensurate with the service charge made under the factoring agreement.

. . .

6. The Court further concludes as a matter of law that the service charge under the management service agreement of 1.187% per month of the outstanding balance on the loan, was a charge made simply because of the existence of the inventory loan, resulted in an additional charge for the advance of those monies of 14.244% per year, and was likewise usurious.

7. The Court further concludes as a matter of law that the principal balance due MAC is the amount of the last note of December 1, 1973, namely $140,948.10, for which sum MAC is entitled to recover.

As the corporation accurately notes, no error having been assigned, the findings are treated as verities. Union Bank v. Kruger, 1 Wash.App. 622, 463 P.2d 273 (1969). Nonetheless, the findings must support the conclusions. No error has been assigned to the court's failure to enter any findings on the elements of usury, ³ which are:

1....