West Pico Furniture Co. v. Pacific Finance Loans

• Decision Date: 01 June 1970
• Citation: 2 Cal.3d 594,469 P.2d 665,86 Cal.Rptr. 793
• Parties: , 469 P.2d 665 WEST PICO FURNITURE COMPANY OF LOS ANGELES, Plaintiff, Cross-Defendant and Appellant, v. PACIFIC FINANCE LOANS, Defendant, Cross-Complainant and Appellant. L.A. 29656.
• Court: California Supreme Court

Page 793

86 Cal.Rptr. 793

2 Cal.3d 594, 469 P.2d 665

WEST PICO FURNITURE COMPANY OF LOS ANGELES, Plaintiff, Cross-Defendant and Appellant, v. PACIFIC FINANCE LOANS, Defendant, Cross-Complainant and Appellant.

L.A. 29656.

Supreme Court of California,

In Bank.

June 1, 1970.

Ralph H. Winkler, Ellis J. Horvitz and Ted T. Ward, Los Angeles, for plaintiff, cross-defendant and appellant.

Sheppard, Mullin, Richter & Hampton, George R. Richter, Jr., and Frank Simpson III, Los Angeles, for defendant, cross-complainant and appellant.

David M. Turner, Santa Ana, Styskal, Wiese & Colman, Alvin O. Wiese, Jr., North Hollywood, Severson, Werson, Berke & Bull, James B. Werson, San Francisco, Buchalter, Nemer, Fields & Savitch, Jerry Nemer, Joseph Weissman, Los Angeles, Kupfer, Silberfeld, Nathan & Danziger, Eli S. Silberfeld, New York City, Dinkelspiel & Dinkelspiel, Norman Coliver and John F. Taylor, San Francisco, as amici curiae on behalf of defendant, cross-complainant and appellant.

Thomas C. Lynch, Atty. Gen., and Arthur deGoede, Deputy Atty. Gen., as amici curiae.

SULLIVAN, Justice.

In this action to recover statutory penalties for usury and to obtain an accounting we examine the financing methods of a personal property broker. We uphold the trial court's finding that the transactions under scrutiny did not constitute purchases by the broker of conditional sales contracts but were in fact loans by the broker secured by pledges of such contracts. As we explain Infra, we conclude that the loans were exempted from the provisions of the Personal Property Brokers Law prescribing maximum charges and rates, were not violative of specified provisions of that law so as to render them void and unenforceable, and were not usurious. Accordingly, we conclude that plaintiff is not entitled to relief under the above law, the general usury law, or the common law, and that defendant is entitled to relief on its cross-complaint. We reverse the judgment with directions.

Plaintiff West Pico Furniture Company of Los Angeles (West Pico) is a California corporation organized on January 2, 1953, and at all times material herein was engaged in the business of selling furniture at retail. West Pico (sometimes referred to herein as the new company) was the successor to the business of West Pico Furniture Company, the so-called original or old company. Defendant, Pacific Finance Loans (Pacific) at all times material herein was a California corporation engaged in the business of a personal property broker in Los Angeles County and under the provisions of the Personal Property Brokers Law (Fin.Code, §§ 22000--22653) ¹ duly licensed as such. (§§ 22008--22009; 22200.) ²

For some time prior to 1953 plaintiff's predecessor (the old company) had been selling furniture at retail on conditional sales contracts and had been financing its operation through a line of credit established with the Bank of America (Bank). Loans made by the Bank were secured by conditional sales contracts (hereafter 'contracts') pledged by the furniture company. Under this arrangement, the old company was obligated to make all collections on the pledged contracts and to remit them monthly to the Bank. Employees of the Bank audited these collections at the offices of the furniture company. Interest was computed on the unpaid balance of the contracts pledged to the Bank.

In early 1953, Walpole, president of the old company, began to discuss the financing of its operations with Pacific's representatives Woessner and Lindquist. As a result Pacific agreed to buy at a discount some of the contracts which had been pledged to the Bank but declined to take over the entire line of credit.

To effectuate this arrangement, Pacific's legal department prepared a standard form 'no recourse' sales agreement and on January 23, 1953, Pacific made an initial purchase from the furniture company of 'aged' contracts in the amount of $24,754.10. Two other purchases of pledged contracts followed: On January 29, 1953, in the sum of $66,428.23, and on March 27, 1953, in the sum of $60,117.94. Pacific paid the amounts directly to the Bank which in turn applied them as credits to the loan account.

After the purchase of these prime, aged contracts, negotiations turned to the purchasing of the furniture company's 'house accounts.' These represented conditional sales contracts which were not acceptable to the Bank because the purchaser had made no down payment, was a poor credit risk or was otherwise unsuitable. As to these, Pacific demanded 'protection.' Accordingly, Woessner and Walpole discussed revision of the existing form of agreement and stipulated that such contracts would be sold under a full recourse agreement. On June 2, 1953, the parties executed such an agreement. It was substantially the same as the prior agreements except that the old company was required to collect the installments and remit them daily to the finance company. However, notwithstanding the 'no recourse' provision carried over from the prior agreements, the parties agreed in a so-called 'side letter' that the old company would repurchase any of the contracts which were delinquent for 60 days or more or would substitute other contracts acceptable to defendant. Similar purchase agreements with 'side letters' were entered into on June 18, 1953 and August 18, 1953.

In the meantime, the furniture company had engaged one Goodson, a tax attorney and accountant, to review its operations. The latter made two recommendations: first that its financing arrangements be treated as loans; and second, that a new company be organized to take over the business. Accordingly, the new company, West Pico Furniture Company of Los Angeles was incorporated on January 2, 1953, about the time when the old company and Pacific were negotiating their first transaction.

In the summer of 1953, Goodson met with Lindquist and Woessner and explained his plan to defer taxes for West Pico by treating the financing arrangements as loans. Pacific's attorney rejected the plan. As a result the parties agreed that the sale-with-recourse documentation would be retained but that West Pico would report the transactions on its tax returns as 'pledges and borrowings' even though the tax treatment of the same transactions by the parties would be inconsistent.

On September 2, 1953, West Pico (new company) and Pacific carried out their first transaction. The previous documentation was retained except that the 'without recourse' term and certain warranties were eliminated, and a provision requiring West Pico to repurchase any contracts delinquent for 60 days was added. Pacific paid West Pico $49,558.76 for the contracts involved. On September 11, 1953, West Pico sold Pacific additional contracts for $52,542.30. Neither agreement, however, used the 'side letter' device.

On October 23, 1953, the parties executed a 'master' agreement covering all future transactions thus eliminating the necessity of a separate agreement for each. This new agreement required West Pico to repurchase any contracts delinquent for 60 days but gave it the option to attempt to collect on these contracts in lieu of repurchase. In other respects the agreement was the same as that entered into in September.

By the end of February 1954, West Pico had become dissatisfied with these arrangements because of the large payments it was obligated to make under the repurchase provisions. After negotiations during which West Pico threatened to terminate financing with Pacific, the parties agreed to make a new agreement limiting West Pico's liability in respect to repurchases to 10 percent of the aggregate unpaid principal balances. This was to be handled by means of a 10 percent deduction for a reserve in addition to the discounts taken on each 'sale.' The new 'master' agreement was entered into on March 19, 1954. At the same time, however, the parties apparently had an understanding that no reserve would in fact be established.

Pursuant to this agreement, West Pico delivered contracts to Pacific in bundles, and Pacific in turn issued checks to West Pico for the aggregate of the dollar amounts of the contracts in each bundle, less the aggregate of Pacific's discounts. Each contract was then individually endorsed with a statement that it was 'assigned, transferred and set over to Pacific * * * for value received.'

The record discloses that more than 371 bundles, comprising 5,600 contracts totalling $4,552,200.86 in principal amount, were 'sold' to defendant under this arrangement. ³ The total 'purchase price' paid by Pacific to West Pico was more than.$2,971,505.55.

Although Pacific relied solely on West Pico for a verification of the customer's (conditional vendee's) credit, it did notify such customers that their contracts had been assigned to it; in addition Pacific serviced all delinquent contracts, sending West Pico each month lists of those which were delinquent for 30 days and for 60 days respectively. The aggregate amount of those repurchased by West Pico did not exceed the 10 percent limitation. ⁴

In 1959 West Pico brought the instant action. Its first amended complaint set forth two separately stated causes of action sounding in usury, predicated upon the theory that the contract of March 19, 1954, was a device and scheme to evade the usury laws and that the transfers by plaintiff to defendant of conditional sales contracts were in fact made as security for usurious loans. The first cause of action sought recovery of treble the amount of interest paid by plaintiff to defendant within one year immediately preceding commencement of the action (Stats.1919, p. lxxxiii; Deering's Gen.Laws, 1919, Act 3757); the second cause of action sought damages equal to the amount of interest paid by plaintiff within two years immediately preceding the commencement of the action. (Stock v. Meek (1950) 35 Cal.2d 809, 816--817, 221 P.2d 15; Taylor v. Budd (1933) 217 Cal. 262, 266--267, 18 P.2d...