SOUTHWEST CONCRETE PRODUCTS v. Armco, Inc., Cross–Defendant and Appellant.

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Court of Appeal, Fourth District, Division 2, California.

SOUTHWEST CONCRETE PRODUCTS, Plaintiff, Cross–Defendant and Respondent, v. GOSH CONSTRUCTION CORP. et al., Defendants, Cross–Complainants and Respondents. Armco, Inc., Cross–Defendant and Appellant.

No. E005310.

Decided: October 03, 1989

Feldsott & Lee and Martin L. Lee, Newport Beach, for cross-defendant and appellant Armco, Inc. Robert L. Kern, Pomona, for plaintiff, cross-defendant and respondent Southwest Concrete Products. Jones, Mahoney & Brayton and Paul M. Mahoney, Pomona, for defendants, cross-complainants and respondents Gosh Const. Corp., Lawrence A. Gosh, Commercial Union Ins. Co., and City of Palm Springs.

All parties appeal from the trial court's denial of post-trial motions for attorneys' fees, pre- and post-judgment interest and costs.   In the underlying action, Southwest Concrete Products sued to collect unpaid balances resulting from the sale of sewer pipe to Gosh Construction.   Gosh cross-complained against Southwest and Armco, manufactures of the pipe.   Armco was granted a nonsuit before the case went to the jury and the jury found in favor of Southwest and against Gosh on the complaint and the cross-complaint.   The parties stipulated that the unpaid balance was $66,407.69 less a subsequent payment of $37,215.41.

FACTS

Gosh Construction Corporation and Lawrence Gosh (collectively, “Gosh”) formed a joint venture to install sewer pipe in the City of Palm Springs.   The specifications for the project called for either clay pipe or composite truss pipe.   Gosh elected to purchase composite truss pipe from Southwest.   The pipe was manufactured by Armco, and shipped directly from Armco's plant to the jobsite.   Armco also supplied written and verbal instructions for installation of the pipe.   Gosh claimed that Armco representatives told him that it was not necessary to use primer in the installation process, that he did not use primer for a portion of the installation, and that, as a result, the pipe failed air-leak tests and had to be resealed.   Armco and Southwest claimed that the failures were due to poor workmanship.   The jury agreed.

The jury also found that delivery tickets and invoices that accompanied the pipe constituted a contract which included a provision for 11/212% interest per month on late payments and attorneys' fees for collection.   Accordingly, Southwest and Armco filed motions for attorneys' fees.   The trial court granted Southwest's motion in part and denied Armco's motion.   They each appeal.

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GOSH'S MOTIONS RE PRE–JUDGMENT INTEREST

Gosh filed motions for new trial and a motion for judgment notwithstanding the verdict on grounds, among others, that the pre-judgment interest of 18% claimed by Southwest was usurious.

Southwest's claim was based on the language of the delivery tickets and invoices which states that interest of 1–1/212% per month (18% per year) would be charged on late payments.   The jury made a special finding that this language was included in the contract between Southwest and Gosh.

The trial court computed pre-judgment interest at 18%.   Gosh contends that this was error because the interest rate was usurious.   Gosh relies on Crestwood Lumber Co. v. Citizens Sav. & Loan Assoc. (1978) 83 Cal.App.3d 819, 148 Cal.Rptr. 129.

In Crestwood, a lumber company sold lumber for real property improvements.   When the buyer did not pay, Crestwood filed a stop notice action against the construction lender.   The sales orders and invoices contained a provision that an annual finance charge of 18% would be charged on overdue amounts.   The trial court found the charge usurious, and the Court of Appeal affirmed.   The court found that the Unruh Act (Civ.Code, § 1801 et seq.) was inapplicable because the transaction was not a retail installment sale.   The court also found that the finance charge was a forbearance of money by the seller, and was also a void liquidated damages penalty.   In short, Crestwood supports Gosh's argument here.

In response, Southwest relies on Fox v. Federated Department Stores, Inc. (1979) 94 Cal.App.3d 867, 156 Cal.Rptr. 893 and Verbeck v. Clymer (1927) 202 Cal. 557, 261 P. 1017.   In Fox, service charges on retail department store and oil company charge accounts were held not to violate the usury laws, because (1) a finance charge is not interest and (2) a finance charge is imposed on an installment sale of goods which is proper under the time price doctrine.

As a result of these two decisions, some commentators have concluded that transactions involving nonconsumer goods are subject to the usury laws and transactions involving consumer goods are regulated under the Unruh Act.   (Rabin & Brownlie, Usury Law in California:  A Guide Through the Maze (1987) 20 U.C. Davis L.Rev. 397.)   As a result, businessmen may not be able to collect 18% service charges on overdue commercial accounts.  (Hogan, Is There a Cap on Service Charges? (1987) 7 Cal.Law. (1) 30.)   In addition, as Southwest points out, the Crestwood decision has been thoroughly criticized in Loomis, Crestwood Lumber Company v. Citizens Savings & Loan Association:  The Usury Law and Liquidated Damages in Sale of Goods Transactions (1980) 10 Golden Gate L.Rev. 553.

 California Constitution, article XV, section 1, subdivision (2) limits the interest payable “[f]or any loan or forbearance of money.” 7  The Crestwood court found that the service charge was a forbearance because it was a payment for the extension of time for payment of a due debt.   We disagree.  “A ‘forbearance’ of money is the giving of further time for the repayment of an obligation or an agreement not to enforce a claim at its due date.”  (Boerner v. Colwell Co. (1978) 21 Cal.3d 37, 44, fn. 7, 145 Cal.Rptr. 380, 577 P.2d 200.)   The sale here, like the sale in Crestwood, was a routine sale of goods at the wholesale level.   The seller's terms called for payment of the full amount within a period of time after delivery.   The seller did not give further time to repay the debt nor did it agree not to enforce its claim.   Instead, it was trying to collect the money owed it.   Southwest did not intend to extend credit but rather imposed the finance charge to encourage payment within the specified time, and to compensate it for the delay in payment.   Since there was no forbearance, this purchase and sale was not subject to the usury law.   Our conclusion is supported by the Attorney General's opinion rejected in Crestwood.   In that opinion, the Attorney General states that the usury law does not apply to a bona fide sale and purchase transaction.  (43 Ops.Cal.Atty.Gen. 196 (1964).)

As our Supreme Court instructed in Boerner v. Colwell Co., supra, 21 Cal.3d 37, 145 Cal.Rptr. 380, 577 P.2d 200:  “In all such cases the issue is whether or not the bargain of the parties, assessed in light of all the circumstances and with a view to substance rather than form, has as its true object the hire of money at an excessive rate of interest.”   In the case of a typical service charge or credit sale situation the transaction does not have any elements of a loan.   In Boerner, the court reaffirmed Verbeck and its time-price exception to the usury laws.  (Id., at p. 44, 145 Cal.Rptr. 380, 577 P.2d 200.)

Gosh contends that this case is different because no credit sale is involved, and that Crestwood therefore controls.   As indicated above, we disagree with Crestwood and think that the Fox rule should apply to sales between businessmen.   In Fox, appellants argued that the Unruh Act did not apply because the oil company defendants were not retailers, but rather sold through independent dealers.   The court said:  “The sales through their independent dealers are not exempt because the Unruh Act exempts them, but because the transactions are good faith credit sales of their products.   This good faith sale of products was recognized as not subject to the usury limitation before the enactment of the Unruh Act.”  (Fox v. Federated Department Stores, Inc., supra, 94 Cal.App.3d at p. 873, 156 Cal.Rptr. 893.)

Similarly, the sales here are not subject to the usury law because they were bona fide sales, not because the Unruh Act exempts them.   Application of this principle eliminates problems created by application of the usury laws to transactions that are technically wholesale business transactions and eliminates the inconsistency between Crestwood and Fox.   As the court emphasized in Boerner, we must look to the substance rather than the form of the transaction in assessing whether it is a bona fide sale of goods or merely a device to loan money at an excessive rate of interest.  (Boerner v. Colwell Co., supra, 21 Cal.3d at p. 44, 145 Cal.Rptr. 380, 577 P.2d 200.)

 We also agree with the commentators that Crestwood fails to consider the Commercial Code in its analysis of the substance of the transaction.   Here, for example, Gosh contends that the service charge was not part of his contract because he never agreed to it.   This argument is answered by Commercial Code section 2207, which provides that additional terms become part of a contract between merchants unless the person receiving them objects to them.   (Steiner v. Mobil Oil Corp. (1977) 20 Cal.3d 90, 141 Cal.Rptr. 157, 569 P.2d 751.)   The Comment to this section lists terms which are incorporated in the contract unless there is a timely objection made to include “a clause providing for interest on overdue invoices or fixing the seller's standard credit terms where they are within the range of trade practice and do not limit any credit bargained for․”  (Com.Code, § 2207, Uniform Com.Code com. 5.)   Thus, although Gosh contends otherwise, the clause providing for charges on overdue invoices is a typical clause which is not a material alteration to the contract.

 Similarly, Gosh's claim that he was not a merchant under the code must be rejected.   The evidence showed that Gosh had been buying goods from Southwest for many years, and that he has been in the construction business for many years.   A merchant is “a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction․”  (Com.Code, § 2104, subd. (1).)  As the Comment states, section 2–207 rests “on normal business practices which are or ought to be typical of and familiar to any person in business.   For purposes of [section 2–207] almost every person in business would, therefore, be deemed to be a ‘merchant’․”   (Com.Code, § 2104, Uniform Com.Code com. 2.)   In addition, since Gosh had been dealing with Southwest for many years, Commercial Code section 2208 acts to validate the terms here as part of the parties' course of performance.

Since the service charge here was not within the usury law, the trial court properly denied Gosh's motions based on this ground.

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DISPOSITION

The judgment is reversed and remanded for further proceedings in accordance with this opinion.   On remand, the trial court should (1) reconsider its award of attorneys' fees to Southwest, award reasonable attorneys' fees to Southwest, state the reasons for its award, and award additional reasonable attorneys' fees to Southwest for this appeal;  (2) award reasonable attorneys' fees to Armco, state the reasons for its award, and award additional reasonable attorneys' fees to Armco for this appeal;  (3) recompute post-judgment interest at 10%;  (4) enter a revised judgment which takes these changes and subsequent payments on the judgment into account;  and (5) delete the City of Palm Springs from the revised judgment.

FOOTNOTES

7.   The balance of the provision specifies the maximum rate as the higher of 10% or 5% per annum plus the Federal Reserve rate in effect on certain specified dates.   The parties here have assumed that the maximum rate applicable to their transaction is 10% and we accept this assumption for purposes of this opinion.

HOLLENHORST, Associate Justice.

CAMPBELL, P.J., and McDANIEL, J., concur.