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District Court of Appeal, Third District, California.


Civ. 7765.

Decided: November 01, 1950

Horace E. Dunning, Sacramento, for appellant. H. Nelson French, Gordon A. Fleury, and Sherman C. Wilke, all of Sacramento, for respondents.

Plaintiff and appellant, engaged in the sale of household furniture, brought this action against defendants and respondents, appellant's complaint containing two counts. By the first count appellant sought recovery of alleged usurious interest which he claimed to have paid in connection with a series of loans made to him by respondents. He sought also to recover certain penalties and forfeitures accruing, as he claimed, by the provisions of the usury laws and the Personal property Brokers Act. 2 Deering's General Laws, Act 5825. By the second count he sought recovery for conversion of certain furniture. By this count he also sought additional damages under various allegations, including punitive damages. The case was tried to a jury which returned verdicts in favor of respondents. From the judgment entered upon said verdicts appellant has appealed.

The facts, briefly stated, are as follows: Appellant on or about December 4, 1945, needing financial assistance to enable him to stock goods for sale, contacted respondent Security Acceptance Company, a corporation, hereafter called the ‘company,’ through Kenneth Forrest, one of its officers and with him discussed the possibility of obtaining the desired assistance. The parties discussed methods whereby furniture could be placed in appellant's store for sale. They further discussed selling to the company conditional contracts of sale covering furniture sold by appellant in the course of his business. After considerable discussion it was orally agreed that the company would finance the placing of furniture in appellant's store to the extent of $5,000 under ‘trust receipt transactions' and that appellant, when the furniture was sold, would pay to the company the principal involved, plus 1% a month thereon for each month for the time the principal sum was outstanding. The limit of financing was later increased to $7,500. Upon such furniture as was so handled the company would put up 90% of the purchase price and the appellant 10% thereof. As to the contracts the company agreed to purchase those which were satisfactory upon investigation, but appellant was told that they would have to be bought non-recourse, as the company had no loan license. The purchase price was to be 17% less than the amount woing on each contract. A method was adopted for preserving the identity of furniture placed in appellant's store and distinguishing it at all times from other stock in trade which appellant might have. Pursuant to these oral discussions a notice of intention to engage in trust receipt financing was filed by respondent company with the Secretary of State in the form set out in Section 3016.9, subdivison 2, of the Civil Code, which section is a part of the co-called Uniform Trust Receipts Act, orginally adopted by the Legislature in 1935. Shortly thereafter the parties began carrying out their oral understanding and as furniture was brought to appellant's store documents entitled ‘trust receipts' were executed by appellant and the company. These documents were dated as of their execution and contained a specific description of the articles of furniture, including the model, serial number, the dealer's cost and a statement of the amount secured, with a due date, generally fixed at thirty days after the document was executed. The document declared that the appellant as trustee held in trust for the company as entruster the described property as security for payment of the amounts set forth upon the specified due date; that the entruster had a security interest; that a security interest in the proiperty remained in or was by the instrument transferred to the entruster as security for such payments; that the trustee was to hold the property for purpose of sale or exchange and would deliver it to the entruster upon demand; that the trustee should neither land, rent, mortgage, pledge, encumber or use the property, but could sell it for cash or on approved terms for not less than the amount due the entruster, including insurance costs and charges; that if the entruster repossessed the property it could after default give notice of intention to sell and might sell within not less than five days after such notice; that proceeds of such sale should be applied to the expenses thereof, the expenses of repossession and keeping, with reasonable attorney's fees, to the ‘satisfaction of the Trustee's indebtedness hereby secured’; and lastly ‘to the payment of any other obligation owed by Trustee to Entruster.’ Any surplus from such sale was to be paid to the trustee who agreed also to pay upon demand any deficiency. The document further provided that in the event of default the entruster could at its option, in lieu of sale, declare a forfeiture of the trustee's interest in the property against cancellation of the then remaining indebtedness ‘in accordance with the provisions of Section 3016.2 of the Civil Code.’ In addition to the transactions described above the company, further following out the oral agreement, bought contracts of sale as contemplated, the contracts being assigned to the company without recourse.

Shortly before December 27, 1947, appellant having sold certain articles covered by documents, such as described above, sent a check to the respondent company which was returned for lack of funds when presented to the bank on which it was drawn and the company, on examining into the situation, doscovered other sales had been made without any payment of funds as agreed. Negotiations ensued and the company on said date took possession of all articles which had been so placed in appellant's store. To make up for articles that had been sold and the money due the company not paid, appellant turned over to the company other articles out of general stock. While the furniture was being removed the appellant asked that it be held for five days to enable him to borrow money enough to pay all moneys owing to the company and this request was granted, but no payment was forthcoming. After repeated requests by appellant for further time had been granted, to no avail, and during the latter part of January, 1948, the company informed appellant that it was cancelling his indebtedness to it and selling the furniture, and the furniture was sold.

Stated with more detail, the transactions whereby furniture was placed in appellant's store were carried on as follows: The company in the beginning told appellant that it did not want to deal with the manufacturers from whom he purchased stock, but in the first few transactions did send its checks directly to such manufacturers. Three lots of furniture were so obtained, all of which had been sold and settled for before repossession. After that and during several months, lots of furniture were obtained by appellant from the manufacturers and brought by truck to appellant's store. His check for the amount of the cost thereof was given to the manufacturers, although he lacked funds in bank to meet the same. When the furniture arrived and before the checks could clear documents labeled ‘trust receipts' in the form above referred to were issued covering these lots and appellant banked the company's check for 90% of the cost, thus clearing the checks he had given the manufacturers. Thereafter when some credit had been established by appellant some lots were sold to him on credit, but when the same arrived in Sacramento he immediately placed them under the same type of document, received the common's check, banked it and used the proceeds to pay those from whom he had purchased. In effect, appellant was using money obtained from the company to pay for furniture up to 90% of the purchase price. With these minor variations the parties carried out the ogiginal plan agreed upon in their first discussion.

The theory of plaintiff's case conformable to his pleadings was as follows: The series of transactions hereinbefore referred to whereby from time to time and pursuant to the original agreement of the parties he received sums of money from the company were loans; the documents he executed were security instruments intended to afford security for his repayment of the loans; the loans were made at an usurious interest rate, thus affording him rights to recover the interest paid, together with penalties for the unlawful exaction thereof; the loans were within the terms of and governed by the provisions of the Personal Property Brokers Act; the company was not licensed to make loans covered by that act and as a result the loan agreements and the documents executed to secure the repayments of the loans were void so that the company had no right to collect the loans nor any right to enforce the provisions of the security instruments; therefore when purporting to act under these void instruments the company took possession of the property described therein and disposed of the same it converted plaintiff's property and became liable to plaintiff for damage so caused.

With respect to this theory it must be said that if the transactions amounted to the lending of money the usury laws applied thereto and that the form of the documents that may have been executed in connection with the loans could not change what was in fact a loan into some other form of transaction. ‘An loan * * *, is the delivery of a sum of money to another under a contract to return at some future time an equivalent amount with or without an additional sum agreed upon for its use; and if such be the intent of the parties the transaction will be deemed a loan regardless of its form.’ Milana v. Credit Discount Co., 27 Cal.2d 335, 339, 163 P.id 869, 871. ‘The courts have been alert to pierce the veil of any plan designed to evade the usury law and in doing so to disregard the form and consider the substance.’ 27 Cal.2d at page 340, 163 P.id at page 871. In the case cited the alleged borrower, having need of money in her business, acquainted the defendants with her situation and was told that they would render financial assistance. She owned accounts receivable arising from her business and was presented with a so-called ‘sales agreement’ whereunder defendants purported to buy acceptable current accounts and bills receivable at discount. The instrument contained her unconditional guaranty that each account would be paid within sixty days from assignment. She received eighty-five per cent of the amounts owing on making the assignment and was to receive the balance less the discounts when the accounts assigned were all fully paid. In practice, accounts not paid within sixty days from assignment were turned back to her and were ‘repurchased’ under the agreement, an additional discount being taken. While other facts not necessary here to relate are noted in the opinion, the Supreme Court held as to the claim that the transactions constituted loans of money at usurious interest that the trier of the facts could have reasonably concluded that the moneys given the plaintiff by the defendants were contemplated to be repaid within s specified time at a charge for the use of the money; that the essence of the agreements was the use by plaintiff of the funds at prescribed rates of interest in excess of the constitutional rate; that the transactions were secured by assignments of the accounts at usurious rates of interest; that the intent to accomplsih such result was discernible from the contracts themselves and that a finding that the sale form was used merely as a cover for the real intent would find support from the written contracts, the conduct of the parties and the surrounding circumstances.

The documents which we shall hereafter call ‘trust receipts', notwithstanding the contention of appellant that for technical reasons they were not truly such, were executed concurrently with the receipt by appellant of money from the company. They contained the recitals detailed above. Certainly, considering the provisions of the trust receipts and the transactions of the parties and the original discussions and agreement of the parties hereinbefore referred to, the least that could be said concerning the nature of these transactions as to whether the money received from time to time by appellant from the company were moneys loaned is that a finding by the jury that they were loans would be supported.

Concerning the additional contentions of appellant embraced in his theory of the case, as we have hereinbefore stated it, that if these transactions were loans they were the type of loans regulated by the Personal Property Brokers Act the following must be said: 8the type of loans regulated by that act is described and eefined in the definition which the act gives to the term ‘personal property broker’. 2 Deering's Gen.Laws, Act 5825, Sec. 2, Subd. 2. The Act provides: ‘The term ‘personal property broker,’ as used in this act, includes all who are engaged in the business of lending money and taking in the name of the lender, or in any other name, in whole or in part, as security for such loan, and contract or obligation involving the forfeiture of rights in or personal property, the use and possession of which property is retained by other than the mortgagee or lender, * * *.'

That Act also declares (Section 21) that: ‘Any contract of loan in the making or collection of which any violtion of this act shall have been committed, shall be void, and neither the licensee nor any other person shall have any right to collect or receive any principal, interest or charges whatsoever.’ See also Levinson v. Boas, 150 Cal. 185, 88 P. 825.

The foregoing is said on the assumption that the transactions between appellant and the company were not such as to fall within any of the exemptions to the Personal Property Brokers Act. It is contended by respondents that the act specifically exempts ‘flooring contracts'; and that the transactions here involved were flooring contracts. The act does not define the term ‘flooring contracts' and it is unnecessary, as will appear, for us to attempt such definition here, or to further discuss the claims of exemption.

From what we have said it becomes apparent that there was presented to the court and jury issues of fact for the jury's determination under proper instructions from the court which if all determined in appellant's favor would have justified verdicts favorable to him. And we will now consider appellant's objections to the court's instructions. The trial court gave to the jury an instruction which, although lengthy, we think must be quoted in full. It was as follows:

‘In determining whether the transactions were loans or whether they were under trust receipts, you must determine what the transactions were by a consideration of all the evidence, and not merely from what the parties or documents appear to be or the parties represent themselves to be.

‘It is necessary for you to determine whether the transactions were loans or were trust receipt transactions: [Emphasis ours]

‘If you find as follows: That parties, prior to their later transactions, understood and agreed that the defendants were to finance the plaintiff in his business, first to the extent of $5000 and later to the extent of $7500; that it was understood and agreed that the said agreement was to be carried out; that in carrying out the same the plaintiff made contact with several manufacturers in Los Angeles, who understood plaintiff was to be financed and that later the parties signed the agreements herein admitted in evidence and captioned ‘trust receipts'; that in carrying out their understanding the plaintiff did in all cases but three or four, (in which three or four cases the money was sent by plaintiff to the manufacturers) proceed to Los Angeles with his truck, or some truck under his control; that he did then order and secure delivery of various articles, from said manufacturers load the same on the trucks; and at the same time secure the invoices to the goods; that the trucks did deliver to his store at Sacramento; that he did at once take the invoices over to the defendants, and did present the same to defendants and that the parties did then and there sign a document such as admitted in evidence and designated trust receipt; that in that document there was a description and price of articles listed therein; that defendants did immediately give to the plaintiff a check to cover the amount thereof; that it was understood and agreed by the parties that they were, and it was the intent of each, that a trust receipt transaction was contemplated; and if you further find that the goods were placed in plaintiff's store, and that both parties so acted that thereby the goods were ‘floored’, and that both recognized that plaintiff was trustee as elsewhere described herein and did not have title thereto to dispose of the same, except under the terms of the trust receipt and that defendants as entruster; had a security interest, and each party understood and agreed that the interest of the plaintiff was that of a trustee, as referred to elsewhere herein, and in the trust agreement; that when plaintiff delivered the invoices to defendants and received a check in payment thereof both he, as trustee and defendants as entrusters intended that a security interest should thereby pass to entrusters and the check so given or money represented thereby was to be applied in payment to the manufacturers as per said bill of goods, and both parties then and there signed the various documents labeled trust receipts; that there was no understanding or agreement express or implied, other than the above, if you so find the facts to be, then I instruct you that it would be your duty to find that the transactions as between the parties were trust receipt transactions and not loans.' [Emphasis ours.]

It is apparent that in framing the foregoing instruction the trial court fell into the error of telling the jury that if the transactions between appellant and the company were trust receipt transactions they could not find that the sums passing to appellant were loaned. That is not so. In fact, trust receipt transactions are one of the common methods of lending money and the use of trust receipts as security instruments to secure the repayment of money loaned is of common occurrence. Their fitness for such purpose is manifest from a consideration of the terms of the documents themselves, as we have hereinbefore recited them. These provisions are all familiar provisions of security instruments generally in common use in the commercial world. The Trust Receipts Act itself is designed to facilitate the lending of money by those who desire to use this form of title retention and security document rather than other and more commonly-known devices such as chattel mortgages, pledges and the like. Lending money under trust receipt transactions and taking trust receipts as evidencing the contract of the parties has for a long time become increasingly the practice of those engaged in lending. By the instruction quoted the court told the jury it was necessary for them to determine whether the transactions were loans or were trust receipt transactions. No such necessity existed. They could have determined the main issues of this case by finding that the transactions were loans of money, whether they were trust receipt transactions or not. This instruction must have been understood by the jury as declaring that if they believed the transactions were trust receipt transactions they could stop their deliberations at that point and based upon that alone determine that they were not loans; that therefore there could be no usury charged; that therefore the transactions were valid and not such as were prohibited by the Personal Property Brokers Act; that therefore the repossession of the property was lawful and the sale and disposition thereof by appellant justified. For the error in the giving of this instruction the judgment herein as to both causes of action must be reversed, for the vice of it affected the disposition of the issues in both causes. Of course if the transactions were not loans there could be no interest as such, much less usurious interest and hence the first cause of action would fall as it is predicated upon the claim that loan were made. I they were not loans the transactions would not come under the prohibitory regulations and penalties of the Personal Property Brokers Act and the issues then remaining to be disposed of by the jury in respect of the cause of action dependent upon conversion would have been most materially different from what they would have been if the transactions were loans and were governed by the act.

The parties have filed extensive briefs herein, those of the appellant aggregating something over 400 pages and therein there are discussed many conflicting theories as to the varying rights and remedies of the parties hereto. It would we think serve no good purpose to follow counsel in these matters because, as we have said, we are confronted at the outset with the necessity for a retrial by reason of the fundamentally erroneous instruction given and since the matters so discussed in the briefs depend mainly upon factual matters it would not, we think, be proper for us to engage in a discussion thereof which might prove, upon retrial, to be largely academic.

The judgment is reversed, and a new trial is ordered as to all issues.

VAN DYKE, Justice.

ADAMS, P. J., and PEEK, J., concur.