Riebe v. Budget Financial Corp.

• Decision Date: 01 August 1968
• Docket Number: No. 1,MOODY-M,1
• Citation: 264 Cal.App.2d 576,70 Cal.Rptr. 654
• Parties: , 5 UCC Rep.Serv. 907 Norris F. RIEBE, Plaintiff and Appellant, v. BUDGET FINANCIAL CORPORATION, a California corporation, Does I through X, inclusive, Defendant and Respondent.cCLOUD, INC., a California corporation, Moody-McCloud Ltd., a limited partnership, Glen E. McCloud, Arthur B. Moody and Sylvia A. Moody, Plaintiffs and Appellants, v. BUDGET FINANCIAL CORPORATION, a California corporation, Does I through X, inclusive, Defendant and Respondent. Civ. 31391, 31392.
• Court: California Court of Appeals Court of Appeals

Page 654

70 Cal.Rptr. 654

264 Cal.App.2d 576, 5 UCC Rep.Serv. 907

Norris F. RIEBE, Plaintiff and Appellant, v. BUDGET FINANCIAL CORPORATION, a California corporation, Does I through X, inclusive, Defendant and Respondent.

MOODY-McCLOUD, INC., a California corporation, Moody-McCloud Ltd. No. 1, a limited partnership, Glen E. McCloud, Arthur B. Moody and Sylvia A. Moody, Plaintiffs and Appellants, v. BUDGET FINANCIAL CORPORATION, a California corporation, Does I through X, inclusive, Defendant and Respondent.

Civ. 31391, 31392.

Court of Appeal, Second District, Division 3, California.

Aug. 1, 1968.

Joseph R. Laird, Jr., Torrance, for appellants.

David M. Turner, Los Angeles, for respondents.

MOSS, Associate Justice.

Plaintiffs appeal from judgments on the pleadings rendered in favor of defendant and cross-complainant Budget Financial Corporation ('Budget'). In this opinion we consider whether a loan made by a personal property broker to a home builder is void as usurious because the security upon which the lender relied consists of notes secured by deeds of trust which represent a portion of the purchase price of homes sold by the borrower. The complaints allege: On August 1, 1963, Budget, a licensed personal property broker, made a loan to plaintiffs Moody-McCloud, et al., ('the borrowers') of $59,567.76 bearing interest at the rate of 12 per cent per year and secured by a chattel mortgage covering furniture and furnishings having a value of less than $1500, an assignment of promissory notes secured by second deeds of trust on real property, and an assignment of the payments due on the assigned notes. The notes represented a portion of the sales price of houses sold by the borrowers in the course of their business of building and selling houses. ¹ The amount of the loan was equal to 50 per cent of the unpaid balance of the collateral notes assigned to secure the loan. The loan agreement pursuant to which the loan was made provided that the borrowers were eligible to borrow additional sums at the same rate of interest upon the assignment to Budget of additional collateral notes having an unpaid principal amount due equal to twice the amount of the additional loan. The agreement provided that should any additional loan be made the borrowers would execute a new note in an amount equal to the unpaid balance of the then existing obligation to defendant. The borrowers agreed to maintain the loan balance at an amount equal to not more than 50 per cent of the unpaid balance of the collateral notes assigned as security. The agreement provided that the borrowers should continue to collect the installments due on the collateral notes, deposit the payments received in a trust account in Budget's name, and render a monthly accounting to Budget of the amounts so collected. The borrowers agreed to cause their records pertaining to the collateral notes to reflect the assignment of the notes and second deeds of trust to Budget. Budget recorded the instruments of assignment in the office of the County Recorder. On February 17, 1964, the borrowers executed and delivered a new note to Budget in the sum of $94,725.40, which represented the principal amount then due on the loan, and as additional collateral gave to Budget a chattel mortgage on household furniture and furnishings worth $4000. Plaintiff Riebe is the assignee of the collateral notes and deeds of trust. Plaintiffs allege that in making the loan and additions thereto Budget relied solely on the security of the deeds of trust underlying the notes assigned as collaterial security.

Plaintiffs Moody-McCloud, et al., the borrowers, prayed for rescission, return of the interest paid and treble damages on the ground that the transaction was usurious. Plaintiff Riebe sought a declaration on the same ground that he is entitled to have the collateral notes and deeds of trust assigned to him and an injunction forbidding Budget from selling the collateral notes for an amount less than the principal amount thereof.

In its cross-complaint Budget alleged that the borrowers were in default on their note, and that the principal amount then due was $54,033.30. ² Budget prayed for judgment in this amount and possession of the property described in the two chattel mortgages.

Appellants contend that the contract of loan is void on the ground that the loan violated the usury provisions contained in Article XX, section 22 of the California Constitution ³ and the Personal Property Brokers Law, (Financial Code, Division 9, §§ 22000--22653 (unless otherwise specified, all statutory references will be to the Financial Code)) ⁴ by reason of the fact that the loan was secured by personal property having only nominal value and that the only security for the loan in reality consisted of liens on real property. Appellants argue more particularly that section 22053 of the Financial Code, which exempts from certain restrictions of the Personal Property Brokers Law, bona fide loans in excess of $5000, was used by Budget for the purpose of evading the restriction against lending on the security of real property.

Personal property brokers are restricted generally from taking liens upon real estate as security for a loan by section 22466. ⁵ Section 22053 provides that certain sections of the Personal Property Brokers Law, including section 22466, 'do not apply to any bona fide loan of a principal amount of five thousand dollars ($5,000) or more or to a duly licensed personal property broker in connection with any such loan, if the provisions of this section are not used for the purpose of evading this division. * * *'

Section 22054, enacted in 1967, ⁶ makes clear that the terms 'bons fide' and 'purpose of evading this division' used in section 22053 refer to the determination of the amount of the loan and not the character of the security given therefor. Section 22054 is consistent with a prior judicial interpretation of a provision similar to section 22053 contained in the Industrial Loan Law. (See Peoples Finance & Thrift Co. of Beverly Hills v. Mike-Ron Corp., Inc., 236 Cal.App.2d 897, 46 Cal.Rptr. 497, interpreting § 18649.) The pleadings establish without dispute that the borrowers applied for and received from Budget a loan and additions thereto greatly in excess of $5000. Appellants do not suggest and have not in their complaints or otherwise at any time in these proceedings suggested that the amount of the loan here involved was determined by other than economic considerations.

Furthermore, section 22054(c) provides that 'the fact that the transaction is in the form of a sale of * * * instruments * * * shall not be deemed to affect the bona fides of the loan or the amount thereof or to indicate that the provisions of section 22053 are used for the purpose of evading this division. As used herein * * * 'instruments' shall have the same meaning as in the Commercial Code.' Division 9 of the Commercial Code does not apply to liens on real estate (Commercial Code, § 9104(j)), but it does apply to a security interest in a secured obligation which in turn is secured by a lien on real estate. (Commercial Code, § 9102(3).) ⁷ The Commercial Code applies, therefore, to the security interest of Budget in the collateral notes. That being so, no inference of lack of bona fides can be made from the fact that the notes assigned to Budget as security were in turn secured by liens on real property. No significance can be attached to the fact that section 22054(c) refers to a 'sale' of instruments whereas this case involves an assignment of instruments. The form of the transaction here is more like that of the customary bona fide loan than it would have been had the transaction taken the form of a sale of the collateral notes to Budget with corollary guarantees, buy-back, or similar agreements by the borrowers. Therefore, the pleadings establish as a matter of law that the restrictive provisions of the Personal Property Brokers Law made inapplicable to loans of $5000 or more by section 22053 are inapplicable to the loan here considered.

Appellants argue further that because the security relied upon by Budget consisted of liens on real property and because the tangible personal property given as security for the loan had only a nominal value in relation to the amount of the loan, Budget cannot rely on its status as a personal property broker to exempt it from the usury law with respect to this transaction. This argument misconceives the nature of the security taken by Budget. Although part of the security consisted of the assignment to Budget of deeds of trust on houses sold by the borrowers to their customers, another part of the security consisted of the assignment of the purchase money notes of the purchasers of the houses. These notes are personal property (Civ.Code, §§ 14(3), 658, 663; Code Civ.Proc. § 17(3)) and, as we shall explain, since they represented income of the borrowers, were properly taken by Budget as security for a loan made in the course of its business as a personal property broker.

Article XX, section 22 of the California Constitution exempts from the operation of the usury law various classes of lenders including 'duly licensed * * * personal property brokers.' The term 'personal property brokers' used in the constitution refers to the class of lenders which was defined in the Personal Property Brokers Act of 1933 at the time the constitutional provision was adopted. (Budget Finance Plan v. Gamson, 34 Cal.2d 95, 97, 207 P.2d 825.) The definition in that act is substantially the same as that found in the original Personal Property Brokers Act of 1909 ⁸ and identical with the definition found in section 22009 which declares, "Personal property broker,' includes all was are engaged in the business of lending money and taking in the name of the lender, or in any other name, in whole or in part, as security for such loan, (1) any contract or obligation involving the...