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District Court of Appeal, Fourth District, California.


Civ. 4703.

Decided: November 12, 1953

Todd W. Johnson, Donald C. McGovern, Edward D. Robertson and Gilbert E. Harris, Los Angeles, for appellant. Desser, Rau, Christensen & Hoffman (Robert Haves, Beverly Hills, of counsel), for respondents.

In this action to foreclose mortgages on real and personal property and to recover upon a guaranty, defendants, by answer, counterclaim and cross-complaint, allege that the loan and agreements connected therewith were usurious and seek treble damages for interest collected by plaintiff. The trial court rendered judgment in favor of defendants and cross-defendant and plaintiff appeals.

On May 30, 1950, plaintiff, Howard D. Thomas, Jr., entered into an agreement in writing with the defendants, Hunt Manufacturing Company and Willis E. Hunt, its president and owner of all of the stock in said corporation. It was agreed therein that Hunt would cause the corporation to issue 313 1/212 shares of the corporate stock to Thomas, the consideration therefor being $15,000 in cash, ‘or in discharge of a loan by Thomas to the corporation in the same amount in the event Thomas loans said sum to the corporation prior to its authorization to issue said stock to Thomas. In the event Thomas loans said sum of $15,000 to the corporation, said loan shall be evidenced by promissory note signed by the corporation and guaranteed by Hunt in favor of Thomas, which said promissory note shall be for a period of 90 days with interest at 6% per annum from and after maturity only.’ This note was executed by the corporation on May 30, 1950. The agreement recited that Thomas had theretofore loaned to the corporation the sum of $5,000, as evidenced by promissory note dated May 24, 1950, payable 6 months after date thereof, with interest at the rate of 1% per annum until maturity and thereafter at the rate of 10%. The agreement further provided that Hunt and Thomas should receive such salaries as the board of directors might from time to time determine; provided, however, that such salaries should at all times be equal and that Hunt and Thomas each should be permitted to draw not to exceed $4,000 per year as reimbursement of expenses incurred by them on behalf of said corporation. It was also agreed that Thomas would be a director, vice-president and treasurer of the corporation.

Hunt testified that Thomas was director, vice-president and treasurer of the corporation from May 24 to June 30, 1950, and during that time had charge of the corporate office business and was to be compensated for his services as vice-president and treasurer when and if the corporation made enough to compensate him.

The corporation was engaged in the manufacture of reinforced plastic products and at or about the time of the signing of the contract Hung left for Texas to deliver some unfinished boat hulls to a distributor and to arrange for distribution of corporate products in that and other states. While there Hunt received a telephone call from Thomas in which Thomas told Hunt to ‘brace himself’ because he, Thomas, wanted to ‘get out’, and that Hung should return as soon as possible. Hunt then returned from Texas in the latter part of June, 1950, and had a conversation with Thomas in which Thomas told him he was dissatisfied with his agreement and that he wanted return of his money immediately. Thomas then had his attorneys prepare a written agreement, which was signed by Hunt, the corporation, and Thomas on June 30, 1950. It was agreed therein that Thomas should have in his own right $4,305.49 then in his possession. Hunt and the corporation promised to pay Thomas $10,000 in weekly payments of $1,000 each beginning July 7, 1950, and in paragraph three of said agreement, promised to pay Thomas beginning September 15, 1950, $200 per month thereafter, plus 6% interest on any unpaid balance of the $20,000 which Thomas lent to the corporation until the full amount thereof was repaid to Thomas. The agreement then provides as follows:

‘4. That Hunt and the corporation do hereby jointly and severally promise to pay Thomas beginning September 15, 1950, $100.00 per month as a fee for Business Management Engineering services which have been rendered to the corporation and this $100.00 per month payment is to continue until Thomas has received his $20,000.00 principal plus interest provided for in paragraph 3, above. However, this Engineering service payment will not enter into the computations for reimbursement of the $20,000.00 principal.’

In an amendment to the agreement it was further agreed:

‘1—If payments are made as stipulated herein, there will be no interest on said loans except the interest commencing September 15th, 1950 as provided in paragraph #3 or the original agreement dated June 30, 1950.

‘3—When Hunt and/or the Corporation has paid $5,000.00 to Thomas, the note for this same amount will be returned to Hunt and/or the Corporation marked ‘paid in full’ and when the full balance of the $20,000.00 has been paid, plus interest, the note for $15,000. will be delivered marked ‘paid in full’.'

Mortgages were executed to secure the payment of the total indebtedness to Thomas of $20,000 and all the payments due on the contract of June 30, 1950, were made by Hunt and the corporation to and including June 15, 1951. Thereafter Hunt refused to make further payments thereon on the ground that the transaction was usurious and the present action was then filed by Thomas.

The trial court held ‘that the said loan and agreements were and are a usurious transaction violating the said usury law of the State of California, 2 Deering General Laws, Act, 3757, and Constitution XX, Section 22’ and that said loan and indebtedness bears no interest and that defendants and cross-complainants are entitled to recover on their counterclaim and cross-complaint and entitled to a credit of all payments for interest trebled.

Thomas seeks a reversal of the judgment, claiming that it is not supported by any evidence and because it is based on a finding of fact:

‘That in truth and in fact said plaintiff did not, had not, has not, and at no time did he ever render any services of any kind or nature whatsoever to said defendant corporation * * * that said provision [for payment] for alleged services was a subterfuge made for the purpose of evading and avoiding the Usury laws of the State of California * * * [Clk.Tr. 27, 28 and 71, wherein it is found that the foregoing allegations contained in paragraph VIII of Respondents' ‘Affirmative Defense and By-way of Counterclaim’ are true];' which finding, he claims, is not supported by any evidence because all of the evidence is that appellant did render services.

If the contract of June 30, 1950, is to be construed as usurious, it must be so construed by reason of the provisions of the quoted paragraph, number four, thereof, which provides for the payment of $100 per month for services rendered until the $20,000 loan was fully repaid. There is substantial uncontradicted evidence that plaintiff rendered services for the corporation between May 24 and June 30, 1950. Defendant Hunt testified that during this period Thomas had charge of the corporate office business and was to be compensated for his services as vice-president and treasurer when and if the corporation made enough to compensate him; that during the two weeks after the signing of the contract of June 30, Thomas kept office hours, went through the past accounts, set up a cost accounting system, revised the buying and supplying inventory and suggested revision of the payment of the workers. Thomas testified that he rendered the services specified in Hunt's testimony; that during this period he devoted a little over 200 hours to corporate affairs; that during his first two weeks he worked four or five days a week and put in 7 1/212 hours per day and that during the last three weeks he put in five days a week and some evenings. In view of the foregoing testimony of both Hunt and Thomas, which is uncontradicted, the finding that plaintiff did not render any services of any kind or nature to the corporation is contrary to and not supported by the evidence.

The finding that the provision of the contract for the payment of alleged services (paragraph four) was a subterfuge made for the purpose of evading and avoiding the usury laws of the State of California is likewise unsupported by substantial evidence. The language used in paragraph four of the agreement clearly states that the payments thereunder are for past services rendered. If the defendants had made the payments at the time specified in the agreement, Thomas would have received $2,800 for such services as he had rendered to the corporation. In this connection Thomas testified that he was a business management engineer; that he was formerly executive vice-president, general manager and director of the Packard-Bell Company, manufacturers of radio and television sets; that the work he did for the Hunt Manufacturing Company was similar to the work he did for the Packard-Bell Company at an annual compensation varying between $20,000 and $50,000, plus stock bonus; that he usually asked $25 per hour for his services as business management engineer and sometimes got more; that he and Hunt agreed that he, Thomas, was to be paid $2,800 for his services to the corporation and that this agreement was set forth in paragraph four of the contract of June 30, 1950. Under the provisions of said paragraph, defendants could have paid the indebtedness of $20,000 due to Thomas at any time after September 1, 1950, in which event defendants would have been discharged from further payments under said paragraph.

It is apparent that the contract of June 30 was drawn for the purpose of enabling Thomas to dispose of his interest in the corporation and to withdraw from the business. The loans, totaling $20,000, had been made some thirty days prior to the contract in question and no illegal interest appears to have been charged when the loans were made or in connection therewith. In the amendment to said contract it was agreed that if the payments were made as stipulated, there would be no interest charged on said loans except that provided in paragraph three of the agreement.

While the question of whether the contract involved was usurious was one of fact for the trial court, its determination must be based upon some substantial evidence. The burden of establishing the evasion of the usury statute rested upon the defendants. Terry Trading Corp. v. Barsky, 210 Cal. 428, 433, 292 P. 474; Miley Petroleum Corp., Ltd. v. Amerada Petroleum Corp., 18 Cal.App.2d 182, 190, 63 P.2d 1210. The test is whether there was an attempt to evade the law. As was said in Rose v. Wheeler, 140 Cal.App. 217, 219, 220, 35 P.2d 220, 221:

“In a usurious transaction, there must be a loan of money, which is to be repaid to the lender, with compensation for its use in an amount constituting a charge in excess of the highest permissible rate. And as a necessary concommitant there must exist the corrupt intent to exact the illegal charge for the use of the money lent. Lamb v. Herndon, 97 Cal.App. 193, 197, 275 P. 503.

“The presumptions of law are in favor of legality; and therefore if the transaction in question is open to two constructions, one making for legality, the other for illegality, then in the absence of evidence pointing clearly to usury, it is the duty of the court to adopt the construction in favor of lawfulness. Coley v. Wolcott, 103 Cal.App. 140, 284 P. 241; Shelley v. Byers, 73 Cal.App. 44, 57, 238 P. 177.” See also Moore v. Dealy, 117 Cal.App.2d 89, 93–95, 254 P.2d 888.

We conclude from a review of the entire record that the defendants failed to present evidence upon which the trial court could base a finding that the contract involved was usurious within the meaning of the cited usury law.

Judgment reversed.

MUSSELL, Justice.

BARNARD, P. J., and GRIFFIN, J., concur.

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