White v. Sweeney

• Decision Date: 28 December 1955
• Citation: 138 Cal.App.2d 199,291 P.2d 77
• Court: California Court of Appeals Court of Appeals
• Parties: Adolph WHITE and Hattie White, Plaintiffs and Appellants, v. Dan SWEENEY, Jr., Defendant and Respondent. Civ. 16490.

Page 77

291 P.2d 77

138 Cal.App.2d 199

Adolph WHITE and Hattie White, Plaintiffs and Appellants, v. Dan SWEENEY, Jr., Defendant and Respondent.

Civ. 16490.

District Court of Appeal, First District, Division 1, California.

Dec. 28, 1955.

Donald M. Haet, San Francisco, for appellants.

Bernard B. Glickfeld, San Francisco, for respondent.

PETERS, Presiding Justice.

Plaintiffs appeal from an adverse judgment based on the sustaining without leave to amend of a demurrer to their first amended complaint.

The challenged pleading seeks a declaration that a certain promissory note is usurious, and also requests that the note be reformed to show the true amount borrowed. The pleading alleges that on March 22, 1950, plaintiffs borrowed $3,000 from defendant, executing and delivering to defendant their promissory note in the sum of $3,500, plus interest at 6 per cent on the unpaid balance, payable in 69.13 monthly installments of $60 each, commencing April 15, 1950; that plaintiffs have paid defendant $2,100; that the interest charged in this obligation is usurious, being 11.94 per cent; that the law fixes a maximum rate of 10 per cent.

The trial court apparently believed that, as a matter of law, the transaction was not usurious, and so sustained the demurrer without leave to amend.

The question presented is whether the interest here involved is in excess of the 10 per cent per annum limitation imposed by Art. XX, Sec. 22, of the state Constitution. The parties agree that the $500 differential between the amount loaned and the amount of the note must be treated as interest, that such interest should be spread over the entire period of the loan, and must be added to the 6 per cent per annum interest provided in the note. The cases so hold. Grall v. San Diego Bldg. & Loan Ass'n, 127 Cal.App. 250, 15 P.2d 797; Haines v. Commercial Mortgage Co., 200 Cal. 609, 254 P. 956, 255 P. 805, 53 A.L.R. 725; Connor v. Minier, 109 Cal.App.Supp. 770, 288 P. 23; Otis v. I. Eisner Co., 7 Cal.App.2d 496, 46 P.2d 235. The parties differ, however, as to how the $500 differential should be spread over the entire period of the loan.

The trial court amortized over the entire 69.13 month period the $500 bonus assuming that the full $3,000 was owed for all of that period. By this method of computation the interest rate chargeable to the $500 item is 2.8 per cent. When this is added to the 6 per cent provided in the note the result is 8.8 per cent, which, of course, is well under the 10 per cent constitutional limitation. Respondent cites French v. Mortgage Guarantee Co., 16 Cal.2d 26, 104 P.2d 655, 130 A.L.R. 67, and Grall v. San Diego Bldg. & Loan Ass'n, 127 Cal.App. 250, 15 P.2d 797, in support of this method of computation. These cases, although containing some general language which, when separated from the facts to which the language was intended to apply, supports respondent, actually stand for no such general proposition. In those cases the borrower had the power to prepay the loan. It was properly held that in determining whether the loan was usurious the full term of the loan should be considered rather than a shorter period created when the loan was prepaid. The basis of this common sense rule is that the borrower cannot be permitted to convert an otherwise legal loan into a usurious one by his own act of prepayment.

The two cases cited are of no help in determining the problem here involved. There is obviously a basic fallacy in the contention that the $500 bonus should be treated as interest on $3,000 over 69.13 months, when actually each month the principal is propertionately reduced by the $60 monthly payment. Where interest and principal payments are made periodically over a fixed period as set forth in the note, as in the instant case, it is a simple mathematical fact that each month the principal decreases. In the instant case the principal was $3,000 payable at $60 per month over 69.13 months. The $60 monthly payment substantially exceeded the monthly interest, so that each month the...