Paulman v. Filtercorp

• Court: Washington Supreme Court
• Writing for the Court: DOLLIVER; DURHAM, C.J., and SMITH, GUY and MADSEN, JJ., and UTTER; ALEXANDER; JOHNSON; TALMADGE
• Citation: Paulman v. Filtercorp, 899 P.2d 1259, 127 Wn.2d 387 (Wash. 1995)
• Decision Date: 10 August 1995
• Docket Number: No. 61857-7
• Parties: Henry PAULMAN, Respondent, v. FILTERCORP, a Washington Corporation, Petitioner.

Page 387

127 Wn.2d 387

899 P.2d 1259

Henry PAULMAN, Respondent, v. FILTERCORP, a Washington Corporation, Petitioner.

No. 61857-7.

Supreme Court of Washington En Banc.

Aug. 10, 1995.

Law Offices of Michael Charneski, Michael L. Charneski, Seattle, for petitioner.

Cairncross & Hempelmann, John McKay, Susan Meadowcroft, Seattle, for respondent.

Davis, Wright & Jones, Daniel B. Ritter, Seattle, amicus curiae, for Washington Bankers Ass'n.

DOLLIVER, Justice.

Defendant Filtercorp, Inc. challenges a Court of Appeals ruling that reverses a trial court order granting Filtercorp's partial summary judgment motion, which requested, inter alia, that the court terminate a collection action initiated by Plaintiff Henry Paulman because the interest rate on the loan that gave rise to the action is usurious. The Court of Appeals reversed because it concluded that under RCW 19.52.080 a corporate debtor who takes a loan for a business purpose is not entitled to raise the defense of usury.

Filtercorp, Inc. designs and manufactures restaurant equipment. Robin Bernard is the company's president and a shareholder, and John Gardner is a company officer and also a shareholder.

In November 1991, Henry Paulman loaned Filtercorp $200,000 for the purpose of paying its accounts payable. In exchange, Filtercorp agreed to repay the loan plus interest of 2 percent per month by February 21, 1992. The agreement was evidenced by a promissory note signed by both Bernard and Gardner personally, and by Bernard in his capacity as president of Filtercorp. Paulman also charged Filtercorp $24,000 as a "Loan and Consulting Fee", to be paid by December 31, 1991. Filtercorp paid all but $25,000 of the money owed to Paulman.

On February 14, 1992, the same parties executed another promissory note for $225,000, different portions of which represented principal, interest, and penalties owed on the previous note. All payments on this note, which like the prior note specified an interest rate of 2 percent per month, were due by April 15, 1992. When Filtercorp experienced difficulty meeting this deadline, Paulman agreed to a 2-week extension in exchange for an additional $27,000 "[l]oan and consulting fee". That extension was subsequently extended to June 30, 1992. When Filtercorp was unable to meet this deadline either, the parties executed yet a third promissory note. That note had a face value of $210,000, charged an interest rate of 5 percent per month, and indicated that all payments were due by September 30, 1992. The $210,000 consisted of the outstanding principal from the second note, the $27,000 "[l]oan and consulting fee" from the previous extension, and an additional $8,080 "loan fee".

After making a total of $21,000 in interest payments on this third note, Bernard notified Paulman that Filtercorp would not make any further payments because the interest rate on the loan was usurious. In response, Paulman filed an action against Filtercorp to collect moneys due on the note. Neither Robin Bernard nor John Gardner was named as a defendant in the lawsuit. In its answer to Paulman's complaint, Filtercorp asserted a usury defense and filed a counterclaim for penalties owing due to usury. Filtercorp then filed a motion for partial summary judgment on these issues. The trial court granted that motion.

Paulman appealed the order granting the summary judgment motion to Division One of the Court of Appeals. That court reversed the order, holding a corporation that has taken a loan for a business purpose cannot raise the defense of usury regardless of whether the loan is guaranteed by a natural person. Paulman v. Filtercorp, 73 Wash.App. 672, 870 P.2d 1011 (1994). Filtercorp has requested this court to review that ruling.

I

Enacted in 1967, RCW 19.52.030 sets forth the penalties available to a debtor who has borrowed money from a lender at a usurious interest rate. Provision (1) of that statute contains a proviso which reads as follows:

PROVIDED, That the debtor may not commence an action on the contract to apply the provisions of this section if a loan or forbearance is made to a corporation engaged in a trade or business for the purposes of carrying on said trade or business unless there is also, in connection with such loan or forbearance, the creation of liability on the part of a natural person or that person's property for an amount in excess of the principal plus interest allowed pursuant to RCW 19.52.020....

In 1969, 2 years after enacting RCW 19.52.030, the Legislature adopted RCW 19.52.080, which as amended in 1981 provides in relevant part:

Profit and nonprofit corporations, Massachusetts trusts, associations, trusts, general partnerships, joint ventures, limited partnerships, and governments and governmental subdivisions, agencies, or instrumentalities may not plead the defense of usury nor maintain any action thereon or therefor, and persons may not plead the defense of usury nor maintain any action thereon or therefor if the transaction was primarily for agricultural, commercial, investment, or business purposes....

The proviso to RCW 19.52.030(1) and RCW 19.52.080 are contradictory. While the former expressly permits a corporate debtor to bring a usury action if it takes a loan that is guaranteed by a natural person, the latter expressly prohibits that same debtor from either bringing a usury action or invoking usury as a defense whether or not the loan is guaranteed by a natural person.

In the present action, a corporate debtor, Filtercorp, invoked usury as an affirmative defense to an action brought against it by a lender, Paulman, to collect the outstanding payments due on a loan. Two natural persons, Bernard and Gardner, guaranteed that loan.

Filtercorp acknowledges that RCW 19.52.080 governs whether a usury defense is available to a corporate debtor who has taken a loan for a business purpose. However, it submits that the proviso to RCW 19.52.030(1) operates in conjunction with RCW 19.52.080 to temper its severity. Filtercorp contends the proviso to RCW 19.52.030(1) effectively carves out an exception to the blanket prohibition of RCW 19.52.080, thus enabling a corporate debtor to raise the defense of usury if a natural person has guaranteed its loan. We disagree.

To support its proposition, Filtercorp relies primarily upon Topline Equip., Inc. v. Stan Witty Land, Inc., 31 Wash.App. 86, 639 P.2d 825, review denied, 97 Wash.2d 1015 (1982). In Topline, a corporate debtor raised the defense of usury in an action by a lender to collect delinquent loan payments. The trial court declined to allow the jury to consider the defense. Despite this refusal, however, the corporate debtor prevailed at trial on other grounds.

Subsequently, the lender appealed and the corporate debtor cross-appealed, claiming that under RCW 19.52.030 it was permitted to recover additional relief in the form of penalties. Citing the proviso to RCW 19.52.030(1), the Court of Appeals concluded the corporate debtor was not entitled to penalties because the interest rate on the loan did not exceed the maximum rate permitted by RCW 19.52.020, as required by the proviso.

The Topline decision fails to lend any support to Filtercorp's contention that the proviso to RCW 19.52.030(1) carves out an exception to the prohibition of RCW 19.52.080. In Topline, the proviso to RCW 19.52.030(1) was not invoked by the Court of Appeals to justify its refusal to allow the corporate debtor to raise usury as a defense. Rather, the Court of Appeals invoked the proviso as a basis for denying the debtor penalties that he sought pursuant to RCW 19.52.030(1).

RCW 19.52.080 prohibits either a natural person or a corporate debtor who has borrowed money for a business purpose from maintaining a usury action. If RCW 19.52.080 and the proviso to RCW 19.52.030(1) interacted, the proviso to RCW 19.52.030(1) would serve to negate the prohibition of RCW 19.52.080 with respect to corporate debtors, but not with respect to natural persons. Consequently, a corporation whose business loan is guaranteed by a natural person would be permitted to bring a usury action, but a natural person who borrowed money for a business purpose would be forbidden from doing so. Not only is such a result untenable, but it is also contrary to the intent of the Legislature.

The evil at which the usury laws are aimed ... is oppression of the borrower "who by adversity and necessity of economic life [is] driven to borrow money at any cost." Baske [v. Russell, 67 Wash.2d 268, 273, 407 P.2d 434 (1965) ]. One who incurs a debt "primarily for agricultural, commercial, investment, or business purposes", RCW 19.52.080, is not subject to such oppression, as he does not borrow out of "adversity and necessity of economic life".

Brown v. Giger, 111 Wash.2d 76, 80-81, 757 P.2d 523 (1988). Therefore, in enacting the usury laws the Legislature's objective was to protect vulnerable borrowers from oppression. However, the enactment of RCW 19.52.080 represents a calculated legislative decision not to afford the protection of the usury laws to either a corporation or a natural person who borrows money for business purposes. In effect, this court would be overruling that legislative decision if it were to hold that a corporate debtor who has borrowed funds for a business purpose is permitted to maintain a usury action. This court will not commit such an act of sedition.

The opinion of the Court of Appeals in Pacesetter Real Estate, Inc. v. Fasules, 53 Wash.App. 463, 767 P.2d 961 (1989) also provides support for the conclusion that the proviso to RCW 19.52.030(1) does not carve out an exception to the blanket prohibition of RCW 19.52.080. In Fasules, a closely held corporation borrowed money from an individual to finance the completion of a building. Two shareholders of the corporation personally guaranteed the loan. After the loan became delinquent, the lender notified the corporation that he intended to foreclose on the...