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Court of Appeal, Second District, Division 1, California.

WEST PICO FURNITURE COMPANY OF LOS ANGELES, a California corporation, Plaintiff and Appellant, v. PACIFIC FINANCE LOANS, a California corporation, Defendant and Appellant.

Civ. 31944.

Decided: March 12, 1969

Ralph H. Winkler, Ellis J. Horvitz and Ted T. Ward, Los Angeles, for plaintiff and appellant. Sheppard, Mullin, Richter & Hampton and Frank Simpson III, Los Angeles, for defendant and appellant.

In this action sounding in usury and for treble damages and an accounting, plaintiff appeals from portions of the judgment denying it any relief in its complaint and counterclaim to the cross-complaint, and awarding defendant court costs; defendant has cross-appealed from that portion of the judgment decreeing that it take nothing by its cross-complaint.

In reaching the conclusion denying either party any relief, the trial court found that the transactions were loans and not, as claimed by defendant, purchases and sales of conditional sale contracts, and that they violated the applicable provisions of the Personal Property Brokers Law (Fin.Code, § 22000 et seq.) and were void under sections 22650, 22651 and 22652 of said code.1 Before reaching the above formal conclusion, the court filed a written memorandum of decision, stating inter alia: ‘* * * the provisions of sections 22650–2 take the case out of the exception that a borrower at usurious rates is not in pari delicto with the lender and therefore may recover interest paid.’ Continuing, ‘It may well be that the Legislature determined that the voiding merely of interest charges was not a sufficient deterrent and it was necessary to apply a penalty to the borrower as well as the lender. It appears that the Legislature has determined to place borrowers and lenders violating the Personal Property Brokers Law with gamblers and leave them wherever they find themselves.’ The court's eventual determination is thus rationalized.

Plaintiff's appeal, while understandably defending the findings that the transactions were loans bearing interest charges which exceeded the maximum legal limit, challenges the further conclusion that any recovery at bar is foreclosed by the provisions of the sections referred to in footnote 1, supra, which assertedly were enacted for the benefit and protection of borrowers who cannot in such capacity be in pari delicto with a lender who has violated such statutes. On the other hand, defendant's cross-appeal contends that the transactions were sales, not loans, that the trial court erroneously found otherwise and that a correct determination of such issue would have been dispositive of the entire controversy including defendant's right to recovery on its cross-complaint of a sum equal to ten per cent of the losses suffered through its purchase of the subject contracts; with respect to the ruling challenged by plaintiff's appeal, defendant simply invokes the appellate principle that where a lower court rules correctly but gives a wrong reason therefor, its action must nevertheless be upheld. (Davey v. Southern Pacific Co., 116 Cal. 325, 329, 48 P. 117.)

Plaintiff (referred to hereinafter as the ‘new company’) is the successor to West Pico Furniture Company (referred to as the ‘old company’). Prior to its dealings with defendant, the old company had established a line of credit with Bank of America; thereunder loans were made by the bank, the security therefor being conditional sale contracts which that company pledged to the bank. In 1952 an assistant divisional manager of defendant (Arthur Woessner), its supervisor of furniture and appliance contracts (Carl Lindquist) and other representatives of defendant had several meetings with the old company's president (Beachie Walpole); arrangements were thereafter made for defendant to purchase some of the old company's contracts previously pledged to Bank of America. Three agreements to that end were executed by the parties in the months of January and March, 1953.2 In June of that year Walpole and Woessner discussed a revision of the arrangements previously reached; since the first three agreements were expressly ‘without recourse,'3 Woessner stated that his company wanted some protection in its future dealings. An agreement, dated June 2, 1953, was then executed, which included an additional paragraph binding the old company to collect all sums due under the contracts and to remit such sums daily to defendant (in contrast to provisions in the earlier contracts whereunder time of payment was less rigid). Simultaneously both parties executed a so-called ‘side letter’ which recited that notwithstanding the terms of the agreement executed that same day, the old company agreed to repurchase any of the conditional sale contracts which became delinquent for 60 or more days ‘or to substitute therefor other contracts which shall be acceptable to’ defendant. Thereafter two other agreements, with similar side letters, were executed on June 18 and August 18 of the same year.4

In a memorandum decision, interim in nature and additional to that already mentioned, the trial court commented on these side letters as follows: ‘If the transaction was a bona fide sale of contracts and not a pledge thereof to secure a loan, the following questions arise: Why were these terms set out in a separate document on the same day? Why would the seller be given an ‘option’ to repurchase that which he has sold or substitute other property for that sold? What seller would want to repurchase any contract sold when it was delinquent and he would not receive back any portion of the ‘discount’? Why should the seller be required to repurchase a conditional sale contract or substitute another acceptable to the buyer, if absolute title to the first had passed, as distinguished from a mere pledging thereof?' The court in the same memorandum also commented on the format of subsequent agreements, executed in September and October of 1953, which (in the court's view) refuted the explanation first attempted by an officer of defendant that the subject contracts were a ‘standard form’— later this same officer admitted that a typical agreement with which he was confronted was specifically prepared for West Pico. It was also noted in the memorandum that in some of these subsequent agreements the provisions of earlier side letters were incorporated into the body of the contract, while in others they were again relegated to a separate agreement.

The first of the ‘subsequent agreements' just mentioned was also the first agreement between defendant and the new company (plaintiff herein) which was organized in January of 1953. The tax attorney for both companies, Marvin Goodson, testified that the organization of a new company could more feasibly accomplish a changeover in accounting and tax reporting methods by him then recommended; thus, while the old company used the accrual method under which 100% of income from sales was reported when made irrespective of the ultimate fate of each conditional sale contract, by converting to the installment method it could ‘defer the payment of income taxes to a future year and, in effect, borrow the use of the income taxes without interest.’ Accordingly, at a meeting with defendant's Woessner and Lindquist, Goodson pointed out that a loan-pledge transaction (similar to that used by the old company in dealing with Bank of America) was compatible with the new tax reporting system, whereas a sale agreement was not—a loan would give the benefit of tax deferment, while a sale would accelerate income. That the parties apparently effected a compromise is reflected by the agreements of September and October, 1953, all of which (as stated above) were with the new company.

While none of the foregoing contracts was made the subject of the instant action, they were referred to in the agreement of March 19, 1954, the instrument herein sued upon; too, ‘All of the negotiations, circumstances and conduct of the parties surrounding and connected with their contracts may be material in determining whether the form thereof covered an intent to violate the usury law * * *.’ (Milana v. Credit Discount Co., 27 Cal.2d 335, 341, 163 P.2d 869, 872, 165 A.L.R. 621.)

We come now to the March 19 agreement. It was preceded by further meetings (in late February and early March) between Walpole and Goodson for the new company and Woessner, Lindquist and other representatives of defendant. According to Goodson, defendant again rejected his proposal of an outright sale of conditional sale contracts; as a result, the parties finally agreed to continue on the old basis, namely, the transactions would be cast in the form of an outright sale with a contemporaneous side agreement providing for full recourse and repurchase of conditional sale contracts.5 It was a ‘master agreement’ covering all future sales and amending all prior sales by making them subject to the same asserted guarantee: ‘* * * since there have been prior purchases on various and diverse occasions, the parties hereto agree that the contracts of sale made and entered into at any time heretofore shall be, and the same are hereby, amended so that the terms and provisions of this Contract of Sale in its entirety, including the purchase price provisions (discount and guarantee) shall apply.’ In paragraph 2, after reciting a purchase price representing the total of the aggregate principal installment balances of the subject contracts ‘less a further sum by way of guarantee equal to 10% of [such] aggregate unpaid principal balances,’ the agreement provided: ‘Seller shall have no further or other liability under his repurchase obligations hereinafter contained except as hereinabove set forth with regard to his said guarantee * * * Pacific shall make every effort to collect the sums due on any accounts purchased from Seller, but * * * in the event that Pacific is unsuccessful in the collection of one or more accounts, then it is agreed that the Seller may, at its election, repurchase said accounts for the net unpaid principal balance (the full unpaid balance less a prorate refund for unearned discount) of such obligations. Should Seller, however, not elect to repurchase said accounts for the net unpaid principal balance, then Pacific, should it suffer a loss thereon, may demand of Seller that Seller reimburse Pacific for said loss, which Seller agrees to pay upon demand, except that Seller shall not be liable or obligated to reimburse Pacific for losses, should Seller have already reimbursed Pacific on losses to an extent in excess of 10% of the aggregate unpaid principal balance of assets sold hereunder, all in accordance with the guarantee by Seller assumed under the purchase price hereinabove set forth.’ Continuing, ‘Any losses which may result from a breach of any of the warranties contained in Paragraph 4 hereof shall be a direct liability of Seller and shall not be charged to or offset against Seller's obligation under its guarantee, as more specifically hereinabove described.’ In paragraph 6 it is provided in pertinent part that ‘Seller further agrees to collect any and all sums due pursuant to the terms and provisions of the contracts sold hereunder and to remit all sums so collected to Pacific daily.’

As it had a duty to do, the court gave judicial scrutiny to certain of the above provisions, it being a question of fact whether a particular transaction is or is not usurious. (Janisse v. Winston Investment Co., 154 Cal.App.2d 580, 582, 317 P.2d 48, 67 A.L.R.2d 225.) Properly noted, therefore, were the inconsistent provisions applying to collections procedures. Thus, under paragraph 2 defendant agreed to ‘make every effort to collect the sums due,’ while in paragraph 6 plaintiff agreed to collect all sums due and remit the same daily to defendant. As the court observed, such arrangements are more indicative of a loan that a sale—certainly if the ‘buyer’ collects the debts, a loan may be found. (Milana v. Credit Discount Co., supra, 27 Cal.2d 335, 342, 163 P.2d 869, 165 A.L.R. 621.) Additionally, and also noted by the court, were the provisions which purport to provide for a reserve fund and to limit the dollar amount of repurchases to approximately 10% of the total ‘purchase price’ before the discount is taken; the evidence, however, showed that defendant never withheld any money for a reserve fund (Linquist admitted that no such fund was maintained) and presented for ‘repurchase’ contracts without regard to any 10% limitation. In this regard, we note parenthetically that the actions just mentioned sufficiently establish an executed oral modification contrary to defendant's contentions otherwise (fn. 5, supra). There was other evidence, either noted by the court in its pertinent memorandum or supporting the findings on such matters, that the agreement was a loan violating governing statutes and not a sale—defendant did not check the credit standing of the retail customer; when a repossession was made, it was made by plaintiff and not defendant; the charge for each loan was not computed as a percentage per month and was not so expressed either in the subject agreement or any other document signed by plaintiff; defendant did not at the time of loan deliver to plaintiff a statement showing defendant's license number, the address of defendant and the amount and terms of the agreement. (Fin. Code, § 22474.)

Other findings and evidentiary items need not be discussed it being sufficient for us to conclude that since the usual appellate rules prevail (Janisse v. Winston Investment Co., supra), there is substantial evidence or reasonable inferences therefrom deducible supporting the finding that the transactions were loans and not sales, also, that said finding sustains the conclusion of law drawn therefrom that none of such loans were bona fide.6 Each case, defendant concedes, must be determined by its peculiar circumstances (Shelley v. Byers, 73 Cal.App. 44, 54–55, 238 P. 177); and so it is here.

The court also made findings, drawing appropriate conclusions therefrom, that the charges made by defendant exceeded the permissible limits set forth in sections 22451 and 22453, Financial Code. The cross-appeal expressly does not challenge these findings as such; rather, it contends that there are no restrictions on the amount of interest which may be charged by a duly licensed personal property broker since sections 22451 and 22453 are inapplicable to bona fide loans of $5,000.00 or more. (Fin. Code, § 22053.) Reference therein being made to 25 sections of the same code, including sections 22451 and 22453, section 22053 reads as follows: ‘The following sections of this division do not apply to any bona fide loan of a principal amount of five thousand dollars ($5,000) or more or to a duly licensed personal property broker in connection with any such loan, if the provisions of this section are not used for the purpose of evading this division * * *.’—the sections in question are immediately thereinafter listed. The trial court found upon substantial evidence that the loans here involved were not bona fide; accordingly, defendant cannot claim the exemption provided by section 22053 since that statute applies only to bona fide loans. Reading such statute, it is clear that the term ‘bona fide’ qualifies the word ‘loan’ which it immediately precedes. Thus, ‘bona fide’ relates to the character of the loan. Further support for this interpretation is found in the provision appearing at the end of the section, namely, that bona fide loans are exempt from certain provisions of the law governing personal property brokers. Too, ‘any bona fide loan’ being the antecedent of ‘any such loan,’ a purpose would be served by the second clause even if the latter was partially repetitive of the first. Such purpose would be to extend the exemption from restrictions to personal property brokers as to loans over $5,000 if they were bona fide, an exception which the first clause did not grant to anyone. Nor is the foregoing determination altered by the 1967 enactment of section 22054(c) which provides, in part, that if a loan is $5,000 or more ‘the fact that the transaction is in the form of a sale of accounts, chattel paper, contract rights * * * shall not be deemed to affect the bona fides of the loan or the amount thereof or to indicate that the provisions of Section 22053 are used for the purpose of evading this division.’ It is not merely the fact, as noted above, that the transaction was cast in the form of a sale rather than a loan which supports the determination that the loans were not bona fide. In the present case not only were the transactions cast as sales rather than loans, but they were disguised as such for the purpose and intent of concealing their true nature.

This brings us to the final point that the trial court erred in holding that plaintiff was barred from recovery in view of the provisions of sections 22650, 22651 and 22652, Financial Code. In a supporting memorandum the court took note of the general usury law (Gen.Laws, Act 3757; Civil Code, § 1916–1 et seq.) providing that any agreement in conflict therewith shall be null and void in particulars therein stated, noting further that the Legislature, some years later, exercised the power conferred by constitutional amendment (Art. XX, § 22) and enacted the Personal Property Brokers Law as part of the Financial Code, including the three sections above mentioned. It is contended by plaintiff that any penalty provided for in such sections is cumulative and in addition to remedies for usury provided for at common law and under section 1916–3, the penalty provision of the general usury law. Thus, ‘The Usury Law provides that any person who pays interest at a usurious rate may recover treble the amount paid, ‘providing such action shall be brought within one year after such payment or delivery.’ * * * It is settled that this section did not abrogate any common law rights of borrowers as parties to an illegal contract, but merely added a statutory remedy to aid the borrower and penalize the lender. [Citations.] Borrowers may therefore bring an action for money had and received to recover usurious interest paid within two years of the suit.' (Stock v. Meek, 35 Cal.2d 809, 816–817, 221 P.2d 15, 20.) Cited in Stock is Westman v. Dye, 214 Cal. 28, 4 P.2d 134, which holds that ‘In some jurisdictions, where a remedy is given by the statute, as there is in the Usury Act of this state, the statutory remedy is exclusive, and the borrower is relegated to the pursuit of that remedy and is precluded from any further or additional recovery. However, the better opinion and that supported by the weight of authority is that the statutory remedy is cumulative only and as not abrogating the common-law remedy.’ (P. 37, 4 P.2d p. 137.) Nor does it appear that the above remedies were repealed by the constitutional amendment, supra. In Penziner v. West American Finance Co., 10 Cal.2d 160, 173–174, 74 P.2d 252, the Supreme Court reached the conclusion that the provisions of the usury law and those of the constitutional amendment were not so inconsistent or repugnant that the latter repeals the former by implication; further, there is nothing in the constitutional provision to indicate that it was intended as a revision of the entire subject covered by the usury law. According to Penziner, all that the amendment does is reduce the maximum permissible rate of interest from 12% to 10%, exempt certain classes of lenders from some of its provisions and place in the Legislature a certain degree of control over the charges made by the exempted group.

In view of the above holdings, it must be concluded that the trial court erred in its application of sections 22650, 22651 and 22652 to the facts at bar. After all, the subject law was created for the benefit of borrowers (In re Fuller, 15 Cal.2d 425, 428–429, 102 P.2d 321) and it has been consistently held that a party for whose benefit a statute has been enacted cannot be in pari delicto with one who has violated it. (Carter v. Seaboard Finance Co., 33 Cal.2d 564, 574, 203 P.2d 758.) Plaintiff confesses its inability to find any appellate decision squarely interpreting the provisions of the instant statutes insofar as any determination is made respecting the remedies and penalties applicable in the event of a violation thereof. Reference is made to General Motors Accept. Corp. v. Kyle, 54 Cal.2d 101, 110–112, 4 Cal.Rptr. 496, 351 P.2d 768), which involved a violation of section 2982, Civil Code, protecting buyers of motor vehicles against excessive charges by requiring full disclosure of all items of cost. In that case a judgment in Kyle's favor on his cross-complaint, alleging a violation of the statute, was reversed with directions that he be permitted to seek recovery upon a restitutive rather than a punitive theory. The court distinguished so-called ‘formal’ violations from those which are ‘intentional substantive.’ In the first case, the seller is entitled to an offset in an amount representing the depreciation in the value of the car through its use by the buyer while in his possession; in the second case, the seller is penalized by not allowing him an offset. Plaintiff properly points out that defendant must be classified as a lender who is guilty of ‘intentional substantial’ violations of the subject law. As noted in Kyle, the usurer can recover only the amount of the principal loaned, less an offset for illegal interest and trebled damages for payments of usurious interest made within the period of the statute of limitations.

We can only conclude, in light of the decisional law above discussed, that the portions of the judgment appealed from must be reversed. In our opinion, plaintiff is entitled to an award of damages equal to the full amount of all sums received by defendant less the actual principal amounts of the loans; further, that pursuant to section 1916–3, Civil Code, plaintiff is entitled by way of penalty to treble the amount of all payments received by defendant by way of interest for one year preceding the filing of the instant action and thereafter.

The portions of the judgment appealed from are reversed for further proceedings consistent with this opinion.


1.  Section 22650, after declaring that no loan made in California for which a greater interest rate is charged than permitted by the subject law shall be enforced in this state, provides that ‘every person participating in the making * * * of such loan * * * is subject to the provisions of this division.’ Sections 22651 and 22652, certain exceptions being therein set forth, provide that no person has any right to collect or receive any principal, charges, or recompense in connection with the transaction.

2.  Under the first, 65 contracts were involved on which the aggregate sum due was $29,112.12, the ‘discount’ was $4,358.02. The second covered 204 accounts on which $75,742.09 was due, the ‘discount’ being $9,313.86. The third related to 165 accounts on which $68,688.27 was due, the ‘discount’ being $8,570.33.

3.  The only recourse thereinafter provided was in the event of breach of the following warranties: amounts due, passage of title to defendant, validity of the obligations, address of the obligors and the absence of any set-off.

4.  According to defendant's Lindquist, the contracts concerned in the three agreements last mentioned were not, so he was informed, ‘eligible for pledging. * * *’

5.  Defendant vigorously disputes the claim that there was any side agreement which changed the 10% limited recourse to full recourse; it argues that while the complaint alleged a simultaneous oral modification, at the trial plaintiff sought to prove a written modification but failed to produce any evidence thereof. Perhaps so, but there is no merit to defendant's claim that the evidence does not support an executed oral modification.

6.  In this latter regard we need only mention the concession by defendant that it did not report any of the instant transactions as ‘loans' when it made its annual report to the Commissioner of Corporations (Fin. Code, § 22408), thus persisting in the view that bona fide sales took place despite ample evidence that the document prepared by defendant was designed to evade the usury laws—part of the testimony given by one of its officers being described by the court as ‘more than questionable.’

LILLIE, Associate Justice.

FOURT, Acting P. J., and THOMPSON, J., concur. Hearing granted; McCOMB, J., did not participate.

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