Court Opinion

ID: 9548115
Source: CourtListenerOpinion
Date Created: 2023-08-07 17:57:43.795937+00
Date Added: 2024-06-11T15:18:28.273042
License: Public Domain

CLARK, J.
I dissent. The second amended complaint states a cause of action neither for unlawful compounding of interest nor for usury. It is evident the complaint cannot be amended to state a cause of action. The judgment of dismissal should be affirmed.
Compound Interest
The trial court properly sustained demurrer to the compound interest causes of action of the second amended complaint.
Section 2 of the Usury Law provides that interest shall not be compounded unless an agreement to that effect is clearly expressed in writing. The second amended complaint alleges that plaintiffs and the members of the class executed an agreement providing: “The monthly debit balance in my account(s) shall be charged, in accordance with your usual custom with interest at a rate which shall include ....”
In Lewis v. Pacific States Sav. & Loan Co. (1934) 1 Cal.2d 691, 694-695 [37 P.2d 439], and Ricord v. Aragon (1952) 115 Cal.App.2d 176, 178-179 [251 P.2d 759], the principal stated in the loan included certain charges which were in fact interest, and the note provided for interest on the principal. In responses to claims that interest was being charged on interest without a statement to that effect in the note, the courts held that the note itself showed that interest was to be computed upon the principal amounts which included the interest charges.
Those cases make clear that the agreement need not use magic words, but is sufficient if the plain meaning of the terms used import interest is to be charged on interest.
*382The phrase the “monthly debit balance in my account(s) shall be charged ... with interest” literally means that interest will be added to the balance. When one charges an account, he adds to the account, and when one charges a debit balance, he adds to the debit balance. The only reasonable construction is that the debit balance will include interest charges, and since it is equally obvious that the interest is to be computed on the debit balance, the only reasonable construction of the phrase is that it provides for interest to be charged on the debit balance which will include prior interest charges.1
Moreover, the agreement expressly provided that the interest charge to the debit balance would be “in accordance with your usual custom.” The second amended complaint alleges that “at all times mentioned herein” (1966-1973) defendant charged compound interest to its California margin account customers. The majority inventively argue that defendant’s booklet “What is Margin?” was not properly before the court when it sustained the demurrers to the compound interest causes of action. The booklet, of course, is urged as establishing defendant’s custom. But the custom is established by the allegations of the second amended complaint. No citation of authority is necessary for the elementary proposition that, in ruling on demurrer to a complaint, the allegations of the complaint are before the trial court.
The defects in plaintilfs’ causes of action for unlawful compounding cannot be cured by amendment since they result from the agreements sued upon and the custom attacked.
Usury

A. Actus Reus

The trial court properly concluded that a variable interest rate loan agreement is not unlawful when the amount of interest charged pursuant to the agreement does not exceed the amount which might have been charged had the agreement provided for a flat rate of 10 percent per annum, the maximum permissible rate under article XV, section 1 of the California Constitution.
*383The usury laws are obviously penal in nature, providing for forfeitures and treble damages. (49 Cal.Jur.2d, pp. 675-676, 682-684.) Because of the laws’ penal nature, both an actus reus and a mens rea should be essential to establish a violation of the law. Mere bad intentions without excessive interest charges should not permit a borrower to recover a forfeiture or treble damages.
Variable interest rate agreements may inure to the benefit of either the borrower or lender. They provide a valuable means for both borrowers and lenders to adjust interest rates to the changing conditions of the economy to suit their needs. (Ante, pp. 377-378.) There is nothing immoral or illegal about such agreements when application of the variable rate provisions can and does result in interest charges less than the interest charges which would have resulted by application of the maximum lawful rate to the amounts borrowed. It is manifestly unjust to hold, as the majority would permit, that a lender must forfeit interest or pay treble damages when he, in fact, charged less than he could have lawfully charged.
The majority states that a rule “that interest should be averaged over the full term of the loan ... in the present context ... would prove unworkable.” (Ante, pp. 376-377.) The majority points out that plaintiffs’ margin account contemplates a credit arrangement of variable interest, of indefinite duration, and fluctuating balance. However, this furnishes no basis for refusing to uphold the trial court’s approach of looking to the realities. The test is not averaging interest rates; it is determining whether the maximum lawful interest charge was exceeded by the interest charge made under the variable agreement. This is a simple matter. Computing maximum lawful interest charges when the balance due is fluctuating is hardly complex. The interest charge is computed for each change. The other part of the comparison—the interest actually charged—must be determined in any event to establish damages.
I am satisfied that before a variable interest rate—which could produce a lawful interest charge—may be declared unlawful, not only must mens rea be shown but also actus reus. That is, the interest charged pursuant to the agreement must exceed the amount of interest that could have been lawfully charged under a fixed rate agreement.
Apart from Arneill Ranch v. Petit (1976) 64 Cal.App.3d 277 [134 Cal.Rptr. 456], I am aware of no case—and the majority has cited none—holding that a lender could be labelled a usurer, when the interest *384charged in accordance with a variable contract provision was less than the maximum interest permitted to be charged under the usury laws. Rather the cases involve situations where the interest charged pursuant to the agreement was excess interest. (See, e.g., Thomassen v. Carr (1967) 250 Cal.App.2d 341, 346-348 [58 Cal.Rptr. 297].) In such cases the proper rule—as pointed out by the majority—determines whether a variable interest agreement is usurious by asking if the agreement “was consummated in good faith without intent to avoid the usury laws.” (Ante, p. 377.) But this does not mean that we will inquire into good faith when the interest charged was below that permissible. To allow a borrower to avoid his obligation to pay interest when the interest charged pursuant to the variable rate is less than the lawful rate is to give a person who suffered no wrong a windfall. I would disapprove Arneill Ranch insofar as it permits such windfall.
B. Mens Rea
The majority’s own rule requires a conclusion that the complaint does not state a cause of action for usury.
The majority’s rule is: “3. Since the parties agreed to a variable-interest rate which could exceed the constitutional limits under certain contingencies, the lawfulness of the agreement depends on whether the parties contracted in good faith and without intent to avoid the usury laws.'” (Italics in orig.; ante, p. 375.)
The crucial issue being whether the parties contracted in good faith and without intent to avoid the usury laws, plaintiff to state a cause of action must allege that the parties contracted in bad faith with intent to avoid the usury laws. The burden of alleging bad faith must lie with the party claiming usuiy. Certainly a cause of action cannot be stated merely by alleging that the agreement provided for a variable rate. (Under the majority rules, the amount of interest charged is irrelevant.) In light of the majority’s recognition that variable interest rates find support “in practical good sense” (ante, p. 378), it would be anomalous, at best, to hold that a cause of action for usury is stated by merely alleging a variable rate transaction.
The second amended complaint contains no allegation—in either the individual or class causes of action—that defendant contracted in bad faith with intent to avoid the usury laws.
*385Furthermore, it is apparent that plaintiffs are in no position to allege that the contract or contracts were entered into in bad faith with intent to avoid the usuiy laws. According to the complaint, plaintiffs entered into their contract providing for the variable interest rate in 1966, and it was not until 1973 that the variable rate charged exceeded 10 percent. Nowhere has it been intimated that during the lower interest rates of the 1960’s defendant had a devious plan to avoid the usuiy laws and therefore adopted the variable rate system. The class is in no better position than the named plaintiffs because the allegations of the complaint make clear that defendant’s contracts were not changed over the years but remained constant as to the interest charge.
In the absence of any allegation that the contracts were entered into in bad faith with intent to avoid usury laws, and in absence of any claim by plaintiffs that the second amended complaint could be amended to allege bad faith, I conclude, contrary to the majority (ante, p. 369), that the counts charging excessive interest fail to state a cause of action.
I would affirm the judgment.
The petition of the plaintiffs and appellants for a rehearing was denied June 29, 1978, and the opinion was modified to read as printed above.

The instrument does not contain any promise to pay interest periodically or at any time except insofar as it contains an agreement to pay the “debit balance” upon demand. But even if there were a special provision for payment of interest periodically, I doubt whether the provision would create an ambiguity.