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


Civ. 12365

Decided: December 29, 1939

Kraft & Gray and Harold D. Kraft, all of Los Angeles, for appellants. Fleming & Robbins and C.S. Tinsman, all of Los Angeles, for respondents.

From a judgment in favor of defendant after trial before the court without a jury in an action to recover money and a penalty thereon alleged to have been paid in a usurious transaction, plaintiffs appeal.

The essential facts are:

December 11, 1936, plaintiffs executed in favor of defendant company a note reading as follows:

“Installment Note (Principal in Installments—Interest Separately)

“$27,500.00 Los Angeles, California, December 11th, 1936.

“In installments and at the times hereinafter stated, for value received, I promise to pay to Mortgage Guarantee Company, a corporation, or order, at its office in the City of Los Angeles, California, or at such other place, either within or without the State, as the holder of this note may from time to time designate, the principal sum of Twenty–Seven Thousand Five Hundred Dollars, with interest from date on deferred payments until paid at the rate of five per cent per annum, payable March 1st, 1937 and quarterly thereafter. Said principal sum payable in installments of Eight Hundred Twenty–Five Dollars ($825.00) each on the first day of September, 1937, to and including September 1st, 1946. The entire balance of the then unpaid principal and interest shall be due and payable March 1st, 1947.

“Should the interest not be so paid it shall become a part of the principal and thereafter bear like interest as the principal. Should default be made in the payment of any installment of principal or interest when due, then the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this note. Principal and interest payable in lawful money of the United States.

“Privilege is hereby reserved of paying this note on March 1st, 1938, or on any interest payment date thereafter prior to March 1st, 1942 maturity, by giving ninety days' written notice to the holder hereof and accompanying said notice with a sum of money equal to 90 days' unearned interest on the then unpaid principal as a bonus for such prepayment privilege.

“In the event that suit be brought hereon, or an attorney be employed or expenses be incurred to compel payment of this note or of any portion of the indebtedness evidenced hereby, the undersigned promises to pay a reasonable sum as attorney's fees.

“The makers, endorsers, guarantors and sureties of this note and each of them hereby waive diligence, demand, presentment for payment, notice of non-payment, protest and notice of protest and specifically consent to and waive notice of any renewals or extensions of this note, whether made to or in favor of the makers or any other person or persons. The pleading of any statute of limitations as a defense to any demand against makers, endorsers, guarantors and sureties, is expressly waived by each and all of said parties.

“This note is secured by a certain Deed of Trust to Title Guarantee and Trust Company, a California corporation.

“Privilege is also reserved of paying this note on March 1st, 1942 or on any interest payment date thereafter prior to maturity by giving 90 days' written notice, plus a sum equal to 1% of the then unpaid principal as a bonus for such privilege.

“Effie D. French

“J. Rollin French.”

At the same time plaintiffs filed an application for a building loan from defendant and executed a trust deed to secure payment of the aforesaid note. Defendant immediately allocated $27,500 for the plaintiffs' loan, which at all times was available to plaintiffs on their compliance with the building loan contract executed by them. Defendant in fact paid out on plaintiffs' order on the dates set opposite each sum the following amounts:

$4,125 February 24, 1937;

5,500 May 21, 1937;

5,500 July 31, 1937;

1,500 September 30, 1937;

4,000 November 30, 1937;

1,375 December 6, 1937.

The balance of the amount of the loan, $5,500, was available to plaintiffs at all times upon their compliance with the terms of their building loan application.

March 1, 1937, plaintiffs received a statement for $305.56, interest at 5 per cent per annum from December 11, 1936, to March 1, 1937, on the full amount of the loan. At this time plaintiffs claimed that they should be charged interest only on the amount of money actually advanced. However, upon it being pointed out to them that it was in accordance with the terms of their building and loan application, they paid on April 1, 1937, the sum to defendant, together with the sum of $4.34 for delinquent fees and office charges. April 9, 1937, as and for three per cent advance interest which was agreed to be prorated over the entire life of the loan, plaintiffs paid defendant the sum of $825. August 31, 1937, plaintiffs paid defendant $687.50 as five per cent interest on the note for the full amount thereof for the period from March 1, 1937, to September 1, 1937. August 31, 1937, plaintiffs paid defendant $825, as required by the note. January 21, 1938, plaintiffs paid defendant $666.88, as five per cent interest for the period from September 1, 1937, to March 1, 1938, as required by the note, this interest being figured on the full amount of the loan less the sum of $825 theretofore paid on account of the principal.

In December of 1937 differences arose between the plaintiffs and defendant. Thereupon plaintiffs requested defendant to permit them to pay and discharge their whole obligation to defendant in accordance with the prepayment option contained in the note. At this time there remained $5,500 which had not been advanced to plaintiffs. Although under the prepayment option contained in the note the option could not be exercised until March 1, 1938, defendant permitted plaintiffs to discharge their obligation January 21, 1938.

This is the sole question necessary to be determined:

Was the foregoing transaction usurious because when plaintiffs on January 21, 1938, paid their obligation to defendant they had received only $22,000 and had paid interest in the sum of $2,336.74?

This question must be answered in the negative and is governed by the following established principles of law:

(1) A contract which in its inception is unaffected by usury can never be invalidated by a subsequent usurious transaction. Goldenzwig v. Shaddock, 31 Cal.App.2d 719, 722, 88 P.2d 933.

(2) Where excessive interest is paid because of the occurrence of a contingency, which occurrence is under the control of the borrower, the transaction is not thereby made usurious. Penziner v. West American Finance Co., 133 Cal.App. 578, 590, 24 P.2d 501.

(3) A prepayment privilege in a note which if exercised by the borrower will make the amount paid a sum in excess of the legal rate of interest, does not render the transaction usurious. Grall v. San Diego Building & Loan Ass'n, 127 Cal.App. 250, 254, 15 P.2d 797.

(4) Interest is legally collectible upon the full amount of a sum agreed to be loaned, whether actually advanced or not, from the time the sum is actually allocated to the borrower's use, and the lender is legally obligated to deliver the full amount agreed to be loaned to the borrower. Hayward Lumber & Investment Co. v. Corbett, 138 Cal.App. 644, 649, 33 P.2d 41.

Applying the foregoing rules of law to the facts of the instant case, it is apparent that the transaction involved was not usurious, for the reason is that at the inception of the transaction there was no usury, that on and after December 11, 1936, there was allocated to plaintiffs' use by defendant the sum of $27,500, which was available to plaintiffs at their option at any and all times thereafter; and that any sums in excess of the legal rate of interest paid by plaintiffs to defendant were paid because of contingencies which occurred by reason of acts under the control of plaintiffs.

For the foregoing reasons the judgment is affirmed.

McCOMB, Justice.

We concur: MOORE, P.J.; WOOD, J.

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Docket No: Civ. 12365

Decided: December 29, 1939

Court: District Court of Appeal, Second District, Division 2, California.

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