Court Opinion

ID: 9615497
Source: CourtListenerOpinion
Date Created: 2023-08-22 04:37:42.17536+00
Date Added: 2024-06-11T09:00:04.135066
License: Public Domain

MOSK, J. —I dissent.
This case involved a complicated series of transactions involving petitioners (Antonioli), respondents (Ghirardo) and Philip Gay Associates (Gay). As the majority describe the transactions, Antonioli sold a parcel of property to Gay and received a promissory note secured by a second deed of trust; Gay contracted to sell the property to Ghirardo, subject to the existing Gay note and deed of trust. There was no agreement directly between Antonioli and Ghirardo. Nonetheless, as the trial court and the Court of Appeal found, Antonioli looked to Ghirardo for the payments on the Gay note, and when Ghirardo was unable to meet his payments, Antonioli agreed to extend the time for payment of the debt in exchange for an increase in the interest rate and an additional $100,000 fee. Indeed, Antonioli’s verified cross-complaint expressly states that the $100,000 fee was “in consideration for the extended term,” and the loan documents for the two promissory notes under the settlement specifically recite that they were executed in consideration of the “additional sum of $100,000.”
To avoid what it describes as the “sometimes unexpected results of California’s usury law,” the majority hold that the agreement between Antonioli and Ghirardo was the “functional equivalent of a modification to an originally exempt credit sale”—i.e., the sale transaction between Antonioli and Gay. (Maj. opn., ante, p. 807.) Thus, the majority conclude that Ghirardo stepped into Gay’s shoes. Relying on a Court of Appeal opinion, the majority hold that a modification to an originally exempt sale transaction is not usurious. (DCM Partners v. Smith (1991) 228 Cal.App.3d 729 [278 Cal.Rptr. 778] (DCM).)
I disagree with the majority’s analysis. I conclude, as did the trial court and the Court of Appeal below, that precisely because Ghirardo effectively *810stepped into the shoes of Gay, the $100,000 fee was, in substance, a forbearance, i.e., an extension of time for enforcing the debt on the property.1 As such, the new notes and $100,000 fee were subject to the usury laws.
As I declared in Southwest Concrete Products, a forbearance is sufficiently like the act of making a new loan that to ignore it would allow evasion of the interest limitations on the prime target of the usury law, i.e., loans as such. (Southwest Concrete Products v. Gosh Construction Corp., supra, 51 Cal.3d at p. 710, fn. 2 (cone. & dis. opn. of Mosk, J.).) The public policy of the usury law supports its application to forbearances, as the facts before us demonstrate. The usury law aims at protecting the borrower from being pressed by economic circumstances to accede to an excessively high interest rate. A forbearance, which involves the extension of time to pay a debt or an agreement not to enforce a claim at its due date, is likely to arise in a situation in which a debtor is having financial difficulty in meeting his debt. Accordingly, the application of the usury laws prevents the holder of a note who agrees to an extension of additional time for repayment from using his unequal bargaining power to impose an additional fee or interest rate that would result in an obligation in excess of the maximum usury limitations.
This case provides an illustration in point. Although Ghirardo was under no economic compulsion to purchase the property in the first instance, at the time of the foreclosure he was no longer bargaining at arm’s length. Contrary to the majority’s view, Ghirardo could not merely “walk away” without losing a substantial sum, i.e., approximately $1.5 million. Faced with the prospect of such a loss, Ghirardo was under economic pressure to agree to the $100,000 extension fee, even though it effectively resulted in an interest fee in excess of 17 percent, well above the usury rate. In effect, Ghirardo became the “necessitous, impecunious borrower the [usury] law intends to protect.” (4 Miller & Starr, Cal. Real Estate Law (2d ed. 1989) § 10.4, p. 659; Buck v. Dahlgren (1972) 23 Cal.App.3d 779, 787 [100 Cal.Rptr. 462].)
To the extent DCM can be understood to permit a forbearance that resulted in a usurious interest rate, I would disapprove the decision. In DCM the plaintiff had purchased real property in an exempt credit sale, which included a promissory note bearing an interest of 10 percent per annum. When the purchaser could not pay the debt when due, it requested an extension of the maturity date. The seller agreed to extend the note provided the annual interest was increased to 15 percent, the then prevailing market *811rate which exceeded the limit under the usury rate. Emphasizing that the parties had mutually agreed to the increase and were unaware of the usury laws, and that the seller “did not receive any additional charges, fees or consideration other than to increase the rate to reflect market conditions,” (228 Cal.App.3d at pp. 732, 737, fn. 5), the Court of Appeal concluded that the transaction was a modification of the exempt credit sale and was therefore not subject to the usury limits.
I believe DCM was wrongly decided. The court correctly found that the agreement to extend the loan was a forbearance. It erred, however, in concluding that the transaction was not usurious because the original loan was exempt and the parties did not knowingly violate the usury laws. As a leading commentator observes, “that reasoning might well excuse numerous types of transactions that would otherwise have been considered usurious.” (4 Miller & Starr, Cal. Real Estate Law (2d ed., 1993 pocket supp.) § 10:3, p. 96 [criticizing the decision in DCM as “disturbing”].) Moreover, as the majority opinion demonstrates, that reasoning cannot be limited to the specific facts in DCM; if a “little usury” that just increases interest to the market rate is exempt, then an additional charge, fee or consideration must be permitted on the same principle. In my view, DCM and its logical extension in the majority opinion herein effect serious judicial erosion of the usury law.
As I stated in Boemer v. Colwell Co., supra, 21 Cal.3d 37, the people of California have made it emphatically clear that they reject the exaction of usurious rates of interest as an acceptable commercial practice. {Id. at p. 54 (cone. & dis. opn. of Mosk, J.).) In response to the unmistakable legislative intent of the people, courts must be vigilant to pierce the veil of any transaction that in effect results in a loan or forbearance at an interest rate exceeding the legal maximum. I would apply this principle even when a forbearance extends a loan that was originally exempt from the usury law, and even if the parties did not set out to violate the usury law. As we observed in Burr v. Capital Reserve Corp. (1969) 71 Cal.2d 983, 989 [80 Cal.Rptr. 345, 458 P.2d 185], “a conscious attempt to evade the usury law is not necessary . . . .”
I would affirm the judgment.
Respondents’ petition for a rehearing was denied February 2, 1995, and the opinion was modified to read as printed above.

As the majority correctly concede, in determining whether a transaction constitutes a loan or forbearance, courts look to the substance rather than the form. (Southwest Concrete Products v. Gosh Construction Corp. (1990) 51 Cal.3d 701, 705 [274 Cal.Rptr. 404, 798 P.2d 1247]; Boerner v. Colwell Co. (1978) 21 Cal.3d 37, 44 [145 Cal.Rptr. 380, 577 P.2d 200].)