Southwest Concrete Products v. Gosh Construction Corp.

• Decision Date: 01 November 1990
• Docket Number: No. S012846,S012846
• Court: California Supreme Court
• Parties: , 798 P.2d 1247, 13 UCC Rep.Serv.2d 985 SOUTHWEST CONCRETE PRODUCTS, Plaintiff, Cross-defendant and Appellant, v. GOSH CONSTRUCTION CORPORATION., et al., Defendants, Cross-complainants and Appellants; Armco, Inc., Cross-defendant and Appellant.

Page 404

274 Cal.Rptr. 404

51 Cal.3d 701, 798 P.2d 1247, 13 UCC Rep.Serv.2d 985

SOUTHWEST CONCRETE PRODUCTS, Plaintiff, Cross-defendant and Appellant, v. GOSH CONSTRUCTION CORPORATION., et al., Defendants, Cross-complainants and Appellants Armco, Inc., Cross-defendant and Appellant.

No. S012846.

Supreme Court of California.

Nov. 1, 1990.

Feldsott & Lee and Martin L. Lee, Newport Beach, for cross-defendant and appellant, Armco, Inc.

Robert L. Kern, Pomona, for plaintiff, cross-defendant and appellant, Southwest Concrete Products.

Joseph M. Loomis, San Mateo, amicus curiae, on behalf of plaintiff, cross-defendant and appellant.

Jones, Mahoney & Brayton, Paul M. Mahoney and Richard A. Soll, Pomona, for defendants, cross-complainants and appellants, Gosh Const. Corp., et al.

PANELLI, Associate Justice.

We granted review in this matter to resolve a conflict among the Courts of Appeal on the issue of whether a provision in a commercial sales contract which calls for interest of 18 percent per year on late payments violates the usury law. Although the petition for review had raised other issues as well, our order limited review to the usury question.

We conclude that interest payments on overdue commercial accounts are not subject to the usury law and disapprove Crestwood Lumber Co. v. Citizens Sav. & Loan Assn. (1978) 83 Cal.App.3d 819, 148 Cal.Rptr. 129 and Mark McDowell Corp. v. LSM 128 (1989) 214 Cal.App.3d 1427, 263 Cal.Rptr. 310, which held to the contrary.

In the present case, Gosh Construction Corporation and Lawrence Gosh (collectively, Gosh) formed a joint venture to install sewer pipe in the City of Palm Springs. Gosh purchased the pipe from Southwest Concrete Products; the pipe was manufactured by Armco, Inc. A dispute arose about the quality of the pipe, and Gosh failed to pay for it. Southwest brought suit to recover the unpaid balance. Gosh cross-complained against Southwest and Armco for breach of contract and negligence, alleging that the pipe was defective. Armco was granted a nonsuit before the case went to the jury. The jury found in favor of Southwest and against Gosh on the complaint and the cross-complaint.

The jury found, on the basis of a special verdict, that the delivery tickets and invoices that accompanied the pipe constituted a contract with Southwest, that Gosh breached the contract, and that the contract contained an attorney fees clause and a provision for interest of 1 1/2 percent per month (18 percent per year) on late payments. The trial court awarded Southwest prejudgment interest at the rate of 18 percent per year based on the contract. It also awarded Southwest attorney fees of $13,077 under Civil Code section 1717. Armco's motion for attorney fees was denied on the ground it was not a party to the contract. Gosh moved for a new trial and for judgment notwithstanding the verdict on the ground that the prejudgment interest of 18 percent was usurious. The trial court denied the motion.

All parties appealed. The Court of Appeal, in the published portion of its opinion, affirmed the award of prejudgment interest at the rate of 18 percent, holding that the late charge was not subject to the usury law. In the unpublished portion of its opinion, the Court of Appeal reversed and remanded on other issues.

The law of usury in California is based upon California Constitution article XV, section 1, which limits the interest payable "[f]or any loan or forbearance of any money." ¹ A loan of money is the delivery of a sum of money to another under a contract to return at some future time an equivalent amount. A forbearance of money is the giving of further time for the payment of a debt or an agreement not to enforce a claim at its due date. (Boerner v. Colwell Co. (1978) 21 Cal.3d 37, 44, fn. 7, 145 Cal.Rptr. 380, 577 P.2d 200.) However, "both a loan of money and a forbearance are to be distinguished from a sale which is the 'transfer of property in a thing for a price in money.' " (O'Connor v. Televideo System, Inc. (1990) 218 Cal.App.3d 709, 713, 267 Cal.Rptr. 237.) In determining whether a transaction constitutes a loan or forbearance, we look to the substance rather than the form of the transaction. "In all such cases the issue is whether or not the bargain of the parties, assessed in light of all the circumstances and with a view to substance rather than form, has as its true object the hire of money at an excessive rate of interest." (Boerner v. Colwell Co., supra, 21 Cal.3d at p. 44, 145 Cal.Rptr. 380, 577 P.2d 200.)

There are many exceptions to the usury law. (See Rabin & Brownlie, Usury Law in California: A Guide Through the Maze (1987) 20 U.C. Davis L.Rev. 397.) Two of the exceptions are applicable here. One is the "time-price" doctrine. This doctrine applies when property is sold on credit as an advance over the cash price. In these circumstances, the seller finances the purchase of property by extending payments over time and charging a higher price for carrying the financing. This type of transaction, often called a bona fide credit sale, is not subject to the usury law because it does not involve a loan or forbearance. (Boerner v. Colwell Co., supra, 21 Cal.3d at p. 45, 145 Cal.Rptr. 380, 577 P.2d 200; Verbeck v. Clymer (1927) 202 Cal. 557, 563, 261 P. 1017; O'Connor v. Televideo System, Inc., supra, 218 Cal.App.3d at p. 714, 267 Cal.Rptr. 237.) As explained in Verbeck: " 'On principle and authority, the owner of property, whether real or personal, has a perfect right to name the price on which he is willing to sell, and to refuse to accede to any other. He may offer to sell at a designated price for cash or at a much higher price on credit, and a credit sale will not constitute usury however great the difference between the two prices, unless the buying and selling was a mere pretense....' " (Verbeck v. Clymer, supra, 202 Cal. at p. 563, 261 P. 1017.)

Another exception to the usury laws is the rule that a debtor by voluntary act cannot render an otherwise valid transaction usurious. "[A] debtor cannot bring his creditor to the penalties of the Usury Law by his voluntary default in respect to the obligation involved where no violation of law is present at the inception of the contract." (Sharp v. Mortgage Security Corp. (1932) 215 Cal. 287, 291, 9 P.2d 819.) Where the excessive interest is caused by a contingency under the debtor's control, the transaction will not be deemed usurious. (Ibid.; Penziner v. West American Finance Co. (1933) 133 Cal.App. 578, 590, 24 P.2d 501; Abbot v. Stevens (1955) 133 Cal.App.2d 242, 247, 284 P.2d 159.)

Gosh correctly contends that their position--that the late charge is usurious--is supported by Crestwood Lumber Co. v. Citizens Sav. & Loan Assn., supra, 83 Cal.App.3d 819, 148 Cal.Rptr. 129. In Crestwood, a lumber company sold lumber for real property improvements. The sales orders and invoices stated that payment was due within 10 days from date of invoice and that a finance charge of 1 1/2 percent per month (18 percent per year) would be charged on all overdue accounts. The buyer failed to pay, and the lumber company brought suit. The trial court found the interest rate usurious and void. The Court of Appeal affirmed, holding that the finance charge was interest upon a forbearance of money and was therefore subject to the usury laws.

Crestwood, supra, 83 Cal.App.3d 819, 148 Cal.Rptr. 129, was followed recently in Mark McDowell Corp. v. LSM 128, supra, 214 Cal.App.3d 1427, 263 Cal.Rptr. 310. ² In Mark McDowell, the plaintiff, a subcontractor, contracted with the defendant to do rough grading work on a construction project. Under the terms of the agreement, the plaintiff was to bill the defendant for work performed, and the defendant was to pay each bill within a specified number of days. The contract provided that sums not paid when due would thereafter bear interest at the rate of 1 1/2 percent per month. The defendant failed to pay, and the plaintiff sued for the unpaid balance and interest. The trial court found the interest rate usurious and awarded only 10 percent interest. The Court of Appeal affirmed, relying on Crestwood.

The Court of Appeal in the present case refused to follow Crestwood, supra, 83 Cal.App.3d 819, 148 Cal.Rptr. 129. It noted that Crestwood had been criticized by legal commentators (Hogan, Is There a Cap on Service Charges? (1987) 7 Cal.Law. 30; Loomis, Crestwood Lumber Company v. Citizens Savings & Loan Association: The Usury Law and Liquidated Damages in Sale of Goods Transactions (1980) 10 Golden Gate L.Rev. 553) and that its reasoning had been undercut by Fox v. Federated Department Stores, Inc. (1979) 94 Cal.App.3d 867, 156 Cal.Rptr. 893. ³ The court found no valid distinction between the present transaction and the service charges on retail department store and oil company charge accounts which were held in Fox not to violate the usury laws.

In Fox, retail department stores and oil companies imposed monthly charges of 1 to 1 1/2 percent on unpaid account balances. The plaintiffs, who were purchasers of goods and services, argued that such charges constituted usury and that the Unruh Act, which allowed finance charges in excess of the limit imposed by California Constitution article XV, was unconstitutional. ⁴ The court in Fox held that a "time-price" or a "finance charge" in a bona fide sale of goods or services is not a form of interest within the meaning of article XV of the California Constitution's proscription against usury. It further held that the sales by the defendants of their goods and services are bona fide sales to which the time-price doctrine applies. (Fox v. Federated Department Stores, Inc., supra, 94 Cal.App.3d at p. 872, 156 Cal.Rptr. 893.) It also upheld the constitutionality of the Unruh Act, which allows finance charges in excess of usury limits, on the ground that the transactions it regulates are within the time-price doctrine and thus not subject to the...