Court Opinion

ID: 5661346
Source: CourtListenerOpinion
Date Created: 2022-01-12 00:50:36.656275+00
Date Added: 2024-06-11T08:37:48.636963
License: Public Domain

FLEMING, J., Concurring and Dissenting.
I agree that on the revivor of its corporate powers plaintiff La France Enterprises became eligible to obtain judgment, but I dissent from the court’s refusal to allow plaintiff to recover payment of usurious interest. I would direct judgment in favor of plaintiff for $6,503, the amount of interest paid within two years of suit (Code Civ. Proc., § 339, subd. 1).
The transaction at bench is relatively simple. The buyer of a business (plaintiff La France Enterprises) financed its purchase by borrowing $42,490 from third parties (defendants Van Der Lindens) who were secured creditors in that amount of the seller of the business (Pickard). To obtain this sum plaintiff gave the Van Der Lindens a promissory note for the full amount borrowed, $42,490 at 10 percent interest with repayment guaranteed by individual owners of plaintiff buyer and by the seller Pickard, and also delivered a second promissory note for $3,200, payable by individual owners of plaintiff buyer to the Van Der Lindens at the rate of $75 a month. Plaintiff La France Enterprises made payments on both notes by single monthly checks, whose amounts exactly totalled 12 percent interest on the sum borrowed.
*382The California Constitution prohibits any charge in excess of 10 percent per annum for the loan or forebearance of money or things in action (art. XV, § 1). At bench the trial court found, and the evidence fully established, that the two promissory notes constituted one transaction, that the second promissory note was executed and delivered as an additional 2 percent interest on money borrowed at 10 percent under the first note, that plaintiff La France Enterprises made all payments on both notes, and that the transaction amounted to a loan of money at 12 percent interest. The court concluded the loan was usurious and that interest paid on the notes within two years prior to suit would have been recoverable if plaintiff had been entitled to bring suit.
The device of a second note to supplement a first note given for the full amount of the debt at the maximum rate of interest is a clear violation of the usury law, whether or not the second note is directly payable by the principal debtor and whether or not the second note is directly payable to the principal creditor. The general legal principle is that devices of form, no matter how ingenious, cannot be used to circumvent the substance of the usury law. (Milana v. Credit Discount Co. (1945) 27 Cal.2d 335 [163 P.2d 869, 165 A.L.R. 621]; Terry Trading Corp. v. Barsky (1930) 210 Cal. 428 [292 P. 474]; Golden State Lanes v. Fox (1965) 232 Cal.App.2d 135 [42 Cal.Rptr. 568]; Clarke v. Horany (1963) 212 Cal.App.2d 307 [27 Cal.Rptr. 901, 4 A.L.R.3d 643].)
Defendants attempt to justify payments on the second note as exempt from the usury law on two grounds: (1) the second note was given in connection with the purchase of a business and hence was not interest but part of the purchase price; (2) the second note constituted a prepayment bonus by the debtor to his creditor for the privilege of accelerating payment of the debt and hence did not amount to interest.
The assertion that the note was given as part of the purchase price in connection with- the purchase of a business might have merit if the note had been given to Pickard, the seller of the business, as part of the purchase price for the business. But nothing of this sort happened, for the note was not given to the seller of the business or to one who possessed an equity in the business, but rather was given to secured creditors of the seller, and its sole consideration was the credit of $42,490, for which maximum interest had already been specified. The Van Der Lindens were not the owners of the business, were not entitled to sell the business, and were not in fact selling the business; their status was wholly that of secured creditors of Pickard. The facts clearly establish that the *383sole consideration for the second note was the loan of $42,490 and that payments of $75 a month under the note constituted additional interest, which raised defendants’ charge to plaintiff for borrowed money from 10 to 12 percent.
Defendants’ also assert the $3,200 note represented a prepayment bonus for accelerated payment of a debt and is therefore not interest. This argument falls of its own weight, in that before plaintiff La France Enterprises’ purchase of the business it owed no money to defendants Van Der Lindens and had no debt to prepay. Moreover, even after plaintiff’s purchase, its note for $42,490 specifically permitted prepayment at any time in that the note specified monthly payments in a given sum “or more.” Such terms in a note authorize repayment of the debt at any time. (Record etc. Co. v. Pageman Hold. Corp. (1954) 42 Cal.2d 227 [266 P.2d 1].)
Defendants seem to suggest that the $3,200 note given the Van Der Lindens should be considered a prepayment bonus paid by Pickard in connection with repayment of his debt to the Van Der Lindens on the consummation of his sale of the business to plaintiff. But no evidence appears in the record to establish that Pickard fell under any prepayment obligation for accelerated payment of his debt to the Van Der Lindens or even to show that payment, was in fact accelerated. Absent such an obligation, the Van Der Lindens would not have been entitled to exact usurious interest from Pickard to cancel his note any more than they were entitled to exact it from plaintiff. The transaction would be equally usurious whether $3,200 had been paid on behalf of plaintiff to Pickard and then by Pickard to defendants or, as here, was being paid directly to the Van Der Lindens. The sole difference would lie in the identity of the person who had the right to recover usurious interest.
I would reverse the judgment in favor of defendants and direct entry of judgment in favor of plaintiff for $6,503.
A petition for a rehearing was denied June 29, 1977. Fleming, J., was • of the opinion that the petition should be granted.