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

Bertie V. PATTERSON, Plaintiff and Respondent, v. Reed SPRINKEL et al., Defendant and Appellant.

Civ. 10945.

Decided: November 16, 1971

Coombs & Friel, and Hugh D. Friel, Rialto, for defendant and appellant. Berrien H. Findlay, San Bernardino, for plaintiff and respondent.


Respondent obtained judgment in an action to recover interest and penalties on an allegedly usurious transaction; appellant appeals.

On August 21, 1967, respondent borrowed $6,000 from appellant; the loan was evidenced by a promissory note and secured by a second deed of trust on real property owned by respondent. She subsequently defaulted in payments both on appellant's promissory note and the note held by the prior lien holder. As a result of these defaults, appellant made advances to the prior lien holder for respondent's benefit and in order to protect his second deed of trust.

Appellant thereafter gave respondent notice of default and intention to sell under the second deed of trust. Shortly before the scheduled trustee's sale, the parties entered into an agreement by which respondent was to pay appellant $931.00 as ‘costs for continuing foreclosure sale’, and appellant agreed to continue the foreclosure sale for approximately one month.1

Before the date of the rescheduled trustee's sale, respondent paid appellant the sum of $10,240.75, representing the principal, interest and attorney's costs, as well as the cost of continuing the trustee's sale, all as set out in the agreement between the parties.

Respondent thereafter commenced this action, alleged the interest charged was usurious and asked treble damages for the interest paid. The trial court found the $931.00 paid as costs for continuing the foreclosure sale was a free or bonus which charge was in fact interest upon a forbearance of money exceeding 12% Per annum; in addition, it found the total interest paid by respondent was $2,102.95 and was a charge greater than 12% Per annum.2 The court accordingly awarded treble damages to respondent in the sum of $6,308.85.

The exaction of more than 10% Interest per annum for the forbearance of money is prohibited by the California Constitution.3 The statutory penalty for usury in denial of recovery of interest which is in excess of 10% per year and damages of treble such amount. (Calif.Const., Article XX, section 22; Heald v. Friis-Hansen, 52 Cal.2d 834, 839, 345 P.2d 457.) The usury law and the California Constitution prohibit the taking of excessive interest in both of two situations; either upon a loan or upon a forbearance. A forbearance has been defined as the giving of further time for the repayment of an obligation or an agreement not to enforce a claim at its due date. (1 Witkin, Summary of California Law, pp. 183—184 (7th ed. 1960); Calimpco, Inc. v. Warden, 100 Cal.App.2d 429, 440, 224 P.2d 421 (disapproved on other grounds, Fazzi v. Peters, 68 Cal.2d 590, 68 Cal.Rptr. 170, 440 P.2d 242.); Eisenberg v. Greene, 175 Cal.App.2d 326, 330, 346 P.2d 60.)

The most common situation giving rise to a forbearance is illustrated by those cases where the debtor cannot pay his obligation upon its due date, and the creditor then agrees to extend the period of repayment of the debt for an additional consideration. (Lowell, ‘A Current Analysis of the Usury Laws: A National View’, 8 San Diego Law Review, 193, 198.) In the case at bench respondent based her claim upon the proposition that the cost of continuing the foreclosure sale was a forbearance within the meaning of the usury law. (Civ.Code, s 1916—2.)

We agree with the finding of the trial court that the $931.00 paid for the one month's forbearance of the foreclosure sale was a bonus over and above the amount due appellant for principal and interest under the terms of the promissory note given by respondent to appellant. As we shall later discuss, this sum properly was found by the trial court to have been an excessive charge under the usury law. We are not persuaded, however, that a correct computation of usurious charges was made upon which the treble damages of $6,308.85 were predicated.

Several items made up the total of ‘interest’ (i.e., $2,102.95) which the trial court considered. These were:

(a) $900.00 interest due appellant on the August 21, 1967 $6,000.00 note;

(b) $121.95 interest paid by appellant to the holder of the note secured by the first trust deed;

(c) $150.00 attorney fees; and

(d) $931.00 cost for continuing the foreclosure sale.

We consider each of these items seriatim.

Was the amount of interest which was due and payable to appellant on the original loan properly included for the purpose of computing treble damages? The respondent makes no claim the original note contained any provisions for usurious interest. The interest rate thereon was 10%. The only claim the usury law was violated was that of the subsequent transaction, and its relation to the items of interest to be used for the purpose of computing treble damages if such were allowable.

Whether a transaction is usurious must be determined at the time of the transaction. An agreement which is not usurious at its inception cannot become so by reason of the borrower's subsequent default. (Sharp v. Mortgage Security Corp., 215 Cal. 287, 290—291, 9 P.2d 819; Penzner v. Foster et al., 170 Cal.App.2d 106, 110, 338 P.2d 533; Knoll v. Schleussner, 112 Cal.App.2d 876, 881, 247 P.2d 370.) Nor is a contract which, at its inception, is unaffected by usury invalidated by the fact the parties enter into a later usurious transaction.

The later agreement in this case was for forbearance. The $931.00 paid for the one month continuance of the foreclosure sale, if it was usurious, was the overcharge for which respondent was entitled to recover treble the amount so paid. A reading of the statute itself shows that the legislative intent was to declare the interest paid for the particular usurious violation is the limit of recovery. Civil Code, section 1916—3, as applicable here, states, in part:

‘Every person * * * who for any * * * forbearance of money * * * shall have paid * * * any greater sum or value than is allowed to be received under the preceding sections, one and two, may * * * recover in an action at law against the person * * * who shall have taken or received the same * * * treble the amount of the money so paid or value delivered in violation of said sections. * * *’ (Emphasis added.)

The reference in the statute as applicable here is to the money so paid, i.e., for the forbearance. In the case before us the usurious amount was not the legal interest paid on the original loan. If there was usury it was on the amount paid for the forbearance. Thus, we hold the $900.00 paid as interest on the original loan should not have been included in the computation of treble damages.

The next item included in the total of interest used to compute treble damages was the sum of $121.95 paid by appellant to the holder of the note secured by the first trust deed. This sum was for interest on a separate and independent transaction. That transaction was not usurious on its face and no improper charges are claimed by respondent which, in any fashion, would make such payment usurious. In essence, appellant did not detain this sum; he was simply repaid for an advance made for the benefit of respondent as well as for himself. The economic benefit he received does not represent usury under these facts. Appellant did not retain any interest applicable to the original note held by the savings and loan association. We hold the inclusion of the sum of $121.95 in the items of total interest paid was improper.

We next consider whether the charge for attorney fees of $150.00 was properly included in the calculation of the treble damages awarded. We hold they were not.

The case was presented in the trial court on certain stipulations, the agreement referred to in this opinion in footnote 1, and without oral evidence. No evidence was introduced on the item of attorney fees. We do not know whether attorney fees were actually incurred or not. In the absence of any evidence on this matter, respondent did not carry her burden of establishing that these fees were, in truth and fact, charges in the nature of interest exacted for the forbearance. The defense of usury must be established by clear and satisfactory evidence. A defendant who asserts that an apparently valid agreement is actually a usurious loan bears the burden to show an evasion of the statute. (O. A. Graybeal Co. v. Cook, 111 Cal.App. 518, 529, 295 P. 1088; Sandell, Inc. v. Bailey, 212 Cal.App.2d 920, 931, 28 Cal.Rptr. 413, cert. den. 374 U.S. 831, 83 S.Ct. 1874, 10 L.Ed.2d 1054; Miley Petroleum Corp. Ltd. v. Amerada Petroleum Corp., 18 Cal.App.2d 182, 190, 63 P.2d 1210.

However, the same reasoning we have used in considering the item of attorney fees does not apply to the amount of $931.00 denominated as ‘costs for continuing foreclosure sale’. The portion of footnote 1 set out herein establishes such ‘costs' could only be an exaction for forbearance and not for any actual costs incurred by the parties in continuing the foreclosure sale. This is patently so because the agreement specifically provides $931.00 shall be paid In addition to costs charged by the trustee, by the institutional lender, by the county recorder, county tax collector, and Any other costs that would be charged or assessed against the foreclosure sale and which were to be paid by appellant. Thus, the substance of the transaction, rather then the terminology used by the parties, established that the $931.00 was a charge for forbearance within the meaning of the usury law. (Civil Code, s 1916—2.) Substance, not form, controls whether a transaction is usurious. (Shirley v. Britt, 152 Cal.App.2d 666, 669, 313 P.2d 875; Simmons v. Patrick, 211 Cal.App.2d 383, 388, 27 Cal.Rptr. 347; Whittemore Homes, Inc. v. Fleishman, 190 Cal.App.2d 554, 12 Cal.Rptr. 235.)

In the Whittemore Homes case, it is said.

‘In usury cases, as in others, courts may properly cut to the real truth and disregard terminology which the evidence shows was not the real substance of the agreement. As was said in Janisse v. Winston Investment Co., 154 Cal.App.2d 580, 582(1—3), 317 P.2d 48, 50, 67 A.L.R.2d 225:

‘If there is any substantial evidence or any reasonable inference from the evidence to support the findings, the appellate court cannot substitute its judgment for that of the trial court. (Citations.) It is a question of fact as to whether a particular transaction is or is not usurious. (Citation.) Where the form of the transaction makes it appear to be nonusurious, it is for the trier of the fact to determine whether the intent of the contracting parties was that disclosed by the form adopted, or whether such form was a mere sham and subterfuge to cover up a usurious transaction. (Citations.) The trial court may look beyond the form of the transaction and ascertain its substance.’

‘As stated in Milana v. Credit Discount Co., 27 Cal.2d 335, 340(5), 163 P.2d 869, 871, 165 A.L.R. 621: ’* * * 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.‘‘ (Whittemore Homes, Inc. v. Fleishman, 190 Cal.App.2d 554, 559, 12 Cal.Rptr. 235, 237.)

There was sufficient evidence in the agreement itself (footnote 1) to support the finding of an evasion of the usury statute.

We recognize the possibility a court might construe some charges, which are not called interest, to be interest in fact. The label the parties attach to the description of charges means little. The court must look to the substance of the charge. A serious problem for the trial court is to distinguish unjustified fictitious charges from those which are legitimate. It has been pointed out in a leading article on this subject:

‘When fees or charges—such as commitment fees, costs of examinating title to property before granting a mortgage loan, brokerage commissions and others assessed to the borrower in addition to the interest charged on a mortgage—are reasonable in amount and backed up with specific services actually rendered or the conferment of a real benefit upon the borrower, they are legitimate and not mere subterfuges to get around the usury laws. Under the general rule, such charges for services performed by or expenses incurred by the lender are not held to be interest either in name or in fact and will not be deemed to be usurious.’ (Prather, ‘Mortgage Loans and The Usury Laws,’ 16 Business Lawyer, 181, 187.)

Generally, any compensation, remuneration or other benefit exacted by a lender as a part of a loan or forbearance transaction is interest and will render usurious a loan made at the maximum interest rate. (Williston, 6 Contracts, section 1682, rev. ed. 1958; Bayne v. Jolley, 227 Cal.App.2d 630, 632—633, 38 Cal.Rptr. 873; Charlotte Guyer & Associates v. Franklin Factors, 211 Cal.App.2d 690, 694, 27 Cal.Rptr. 575; Janisse v. Winston Investment Co., 154 Cal.App.2d 580, 582, 317 P.2d 48; Wheeler v. Superior Mortgage Co., 196 Cal.App.2d 822, 829, 17 Cal.Rptr. 291. While a lender may make a reasonable charge for investigating, arranging, negotiating, brokering, making, servicing, collecting, and enforcing the obligation, such items must be confined to specific services or expenses incidental to the loan incurred in such a way to preclude them from being a device through which additional interest or profit on the loan may be exacted, and such a determination is a question of fact as to whether the additional charges are legitimate or represent an additional exaction of interest so as to make the loan transaction usurious. (Charlotte Guyer & Associates v. Franklin Factors, supra; Janisse v. Winston Investment Co., supra.)

For the one month forbearance respondent paid $931.00. This sum represented a payment of exactly 10% Of the total amount due if the payment was predicated on the sum of principal, interest and attorney costs of $9,309.75. If the payment was on the amount of principal due ($8,137.80) it equalled 11.44%. On an annual basis the payment, depending upon the specific figures used, represented a charge of from 120% To more than 137%. As such, the amount charged was clearly in excess of the maximum rate permissible under Civil Code, section 1916—2.

Appellant contends the court erred in granting judgment for respondent because the contract was not usurious at its inception and therefore could not be made usurious by any subsequent transaction. Appellant's position finds support in a number of cases which contain the general statement a contract must at its inception require payment of usury to violate the California Usury Law, and may not be invalidated by subsequent transactions. (See, e.g., First American Title Ins. & Trust Co. v. Cook, 12 Cal.App.3d 592, 90 Cal.Rptr. 645; Sharp v. Mortgage Security Corp., supra, 215 Cal. 287, 9 P.2d 819; Mong v. Bass, 248 Cal.App.2d 377, 56 Cal.Rptr. 579; Abbot v. Stevens, 133 Cal.App.2d 242, 284 P.2d 159; Knoll v. Schleussner, supra, 112 Cal.App.2d 876, 247 P.2d 370; Goldenzwig v. Shaddock, 31 Cal.App.2d 719, 88 P.2d 933; Penziner v. West American Finance Co., 133 Cal.App. 578, 24 P.2d 501.) These cases are not persuasive, however, since they each involve not a forbearance of money, but a loan. To hold that nothing subsequent to an initial transaction may render it usurious would eliminate ‘forbearance’ from the usury law, thus prohibiting only usurious loans but not usurious forbearances on originally valid loans, and would allow a creditor to extract any interest possible from a debtor seeking an extension of a loan. We are disinclined to give such a theory impetus here.4

The remaining argument of appellant is predicated upon the refusal of the trial court to grant certain of appellant's requests for special findings. In view of our resolution of the other issues raised, these contentions do not need to be further considered.

The record in the case before us demonstrates respondent paid $931.00 for a thirty day forbearance on an indebtedness of $9,309.75. This amounts to interest of more than 120% Per annum and is clearly usurious.

We thus find, under the circumstances of this case, the sum of $931.00 was the only item properly chargeable as an amount paid for the forbearance. Treble this sum is $2,793.00. The judgment is modified by reducing the judgment in favor of respondent to the sum of $2,793.00, and as so modified the judgment is affirmed. Each party to bear his or her respective costs.


1.  The written agreement (apparently drawn by the appellant) first listed a ‘Recap of payments made by Reed Sprinkel’ as $6,000.00 principal and $900.00 interest attributed to the August 21, 1967, note and second deed of trust. Added to these figures were a list of payments made by appellant for respondent's benefit on the first note and deed of trust amounting to principal of $2,137.80 and interest of $121.95. The agreement continued as follows:“Principal$8,137.80 Interest1,021.95 Attorney Costs150.00 Cost for CONTINUING FORECLOSURE SALE until February 10, 1969931.00$10,240.75‘Plus any additional costs that would be charged by the Trustee, successor trustee or substituted trustee (First American Title Insurance) and costs charged by Sierra Savings & Loan Association and costs charged by County Recorder and costs charged by San Bernardino County Tax Collector or any other costs that would be charged or assessed against this Trustee Sale or property and paid by Reed Sprinkel.‘Should Bertie V. Patterson, her heirs or her estate or other persons representing in behalf of Bertie V. Patterson, agree to pay to me (Reed Sprinkel) the cash dollar amount of $10,240.75 on or before February 10, 1969, I will agree to continue the sale until February 10, 1969 until 9:30 AM.‘Bertie V. Patterson or person representing her, shall deliver to me a signed copy of this agreement, which shall mean they have read and understood the terms and conditions of this agreement. This must be delivered to me at my office at 14556 W. Arrow Highway (N.E. corner Arrow & Cherry) before 9:30 AM, January 8, 1969.’ (Original emphasis.)

2.  The figure of $2,102.95 was the sum of the amounts representing $900.00 interest due on the August 21, 1967 transaction between appellant and respondent, plus $121.95 interest paid by appellant to the holder of the note secured by the first deed of trust, together with $150.00 attorney fees and $931.00, the stated cost for continuing the foreclosure sale.

3.  Article XX, section 22 of the California Constitution, enacted after the California Usury Law (Civil Code, sections 1916—1; 1916—2; 1916—3; 1916—4; 1916—5) specifies the permissible rate is ‘* * * 10 percent per annum upon any loan or forbearance of any money * * *’ The 10 percent rate specified by the later enacted constitutional provision is the rate to be applied in determining whether treble interest is to be awarded under the Usury Law. (Heald v. Friis-Hansen, 52 Cal.2d 834, 839, 345 P.2d 457.)‘No person * * * shall directly or indirectly take or receive in money, goods or things in action or in any other manner whatsoever, any greater sum or any greater value for the loan or forbearance of money, goods, or things in action than at the rate of twelve dollars upon one hundred dollars for one year. * * *’ (Civ.Code, s 1916—2 (Stats. 1919, p. lxxxiii; Deering's Gen.Laws, 1954, Act 3757).)

4.  For the same reasons, we reject appellant's contention that the cases cited above which also note a debtor cannot impose penalties of usury upon a creditor by a voluntary default are controlling here. In a case involving forbearance, the default of the debtor does not create the usurious transaction. The usurious transaction is created only by the exaction of a fee by the creditor for forbearance.

GABBERT, Associate Justice.

GARDNER, P.J., and KAUFMAN, J., concur.

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