MILANA v. CREDIT DISCOUNT CO (1945)

This is an appeal by plaintiff from a judgment of nonsuit in an action based upon a claim of usury. Plaintiff, Rose C. Milana, was engaged in the manufacture of embroidered articles which she sold to many retail establishments. Being desirous of securing funds with which to carry on her business, she arranged with defendants Arthur Kramer and Charles Kramer, doing business as Credit Discount Company, to transfer to them current accounts owing by her customers. She entered into a written agreement with the defendants May 23, 1940, which designated plaintiff as seller and defendant Credit Discount Company as buyer, and provided in part as follows: ‘That seller agrees to sell, and buyer agrees to buy, from time to time, in separate schedules, all acceptable current accounts, bills receivable, trade acceptances, notes, and choses in action (all hereinafter for convenience sometimes designated as ‘accounts') tendered to buyer by seller, and buyer agrees to pay therefor the full face value thereof less any discount shown on invoices relating thereto, and less a further discount of 2 per cent, said purchase price to be payable as follows: 85 per cent thereof concurrently with the assignment of the schedule of accounts in which the account purchased is listed, and the balance immediately after all of accounts listed in said schedule shall have been fully paid.’ A second agreement was made September 5, 1941, upon the same terms as the first, except that the discount taken by defendants was raised from 2 per cent to 2 1/212 per cent. Between the date of the first contract and the institution of the action, plaintiff transferred many accounts to defendants pursuant to the agreements, of the face value of $63,649.83. She received from defendants in cash $44,731.29. Defendants charged as discount or profit the sum of $1,387.04. The difference between these two sums and the total face value of the invoices was made up of uncollectable accounts returned to plaintiff, customers' discounts, and a few minor charges. Defendants admitted that upon a settlement of accounts they owed plaintiff $107.48, payment of which had been tendered to plaintiff. It is not disputed that the sum of $1,387.04 was retained by defendants as the total of the discounts taken by them. Certain other charges for attorney's fees, postage, etc., which defendants deducted in their offered settlement, were in dispute, plaintiff contending that they were not authorized by the agreements. The latter items are not important, however, inasmuch as the total amount of the discounts taken by defendants would exceed the amount of interest which would have been earned at the rate of 10 per cent per annum upon the sums received by plaintiff from defendants covering the periods when defendants were out the use of their money. If the transactions amounted to loans, they were usurious; if they constituted sales of plaintiff's accounts, they were legitimate.

The agreements were made upon defendants' printed forms, filled in to make them complete, but without other interlineations or changes. It is unnecessary to quote them in full. Plaintiff warranted that all accounts would represent bona fide sales of her merchandise, that there were no offsets chargeable against them, that the customers were solvent, and that the accounts would all be paid by the customers within 60 days after receipt of the goods. It was provided as follows: ‘That in the event from time to time, the accounts listed in any particular schedule, or any of said accounts, shall not be fully paid on or before the date fixed in seller's said guaranty, the deferred portion of the purchase price of the accounts listed in such particular schedule shall be applied by buyer to the payment of said unpaid accounts listed in said particular schedule, or such of them as buyer may select, but such application of the deferred portion of the purchase price of the accounts listed in such schedule shall not prejudice buyer in the enforcement of seller's warranties and/or guaranties, herein, for any sum not liquidated by such application.’ There was nothing in the agreements which could be construed as creating the relation of debtor and creditor. A warranty as to the validity or worth of a negotiable instrument or account, upon a sale thereof by the payee, does not create that relation between the seller and buyer. And there was nothing, except the warranties, which would have obligated plaintiff to make good any losses which defendants might sustain. In brief, the agreements throughout were consistent with the relationship of buyer and seller of book accounts, warranted to be good and collectable, and inconsistent with the existence of a debtor-creditor relationship. The entire theory of plaintiff's case is that the writings did not express the true agreement of the parties; that plaintiff did not in fact sell any of her accounts but only borrowed money from defendants from time to time and assigned the accounts as security, and that the terms of the agreement which provided for the sale and purchase of the accounts were employed as a screen for the loan of money at usurious rates. In support of this claim, plaintiff testified to the circumstances of her meeting with defendant Arthur Kramer. She had been referred to Mr. Kramer as one from whom she might receive financial assistance in her business, and she gave the following account of her conversation with him at the first meeting: ‘A. I said I wanted to borrow some money and I had a lot of good accounts, shipping merchants, and he looked at the book and he agreed with me that they were all good accounts, and he said he would charge me 2 per cent on what I got out of the invoice and more me to send the statement through the mail. I told him that I needed some money right away to meet the payroll, and he said, ‘How much do you have on your books for which you did not get paid?’, and I told him and I told him, ‘I don't know but between $10,000.00 and $20,000.00’, and he said, ‘Make out the schedule and come to my office and you will get some of the money right away, and as soon as you sign the agreement you will get the balance.’' This testimony is referred to be appellant as ‘preliminary discussions which established the relationship of lender and borrower, rather than that of seller and buyer.’ It constituted all of the evidence of conversations between the parties preliminary to the execution of the written agreement, which followed immediately, and was manifestly insufficient of override the plain terms of the agreement, and thereby convict defendants of engaging in forbidden and fraudulent transactions. Plaintiff places further reliance upon the manner in which the business was transacted, to support her charge of usury, contending that the practices which were followed were inconsistent with defendants' ownership of the accounts. The practices upon which plaintiff places this construction were the following: that defendants at times ‘advanced’ plaintiff sums upon invoices which were issued shortly in advance of the shipment of goods. Defendants admitted having made such advances upon occasions when plaintiff needed money for the fulfillment of orders on hand, but they contended, and correctly so far as the record shows, that these sums were charged against the reserve which was always maintained in some amount and which was made up by deductions equal to 15 percent of all invoices, under the terms of the agreement. Appellant points out that defendants had charged plaintiff the sum of $203.09 for telegrams, postage, and attorney's fees on collections, which charges, it is said, were inconsistent with defendants' claim that the accounts receivable were purchased by defendants. The making of these charges, even though not authorized by the contract, having resulted, so far as shown, from a bona fide effort to make collections, was not inconsistent with defendants' ownership of the accounts, since it was obviously to the advantage of plaintiff, as well as of defendants, that the accounts be collected promptly. Our attention is called to a particular transaction of November 28, 1941, when a schedule of accounts was made up totaling $2,290.07 and which defendants ‘rebought,’ although they had previously been assigned to defendants. A point is made of the fact that upon this so-called repurchase there was a discount of 2 or 2 1/212 per cent and it is argued from this fact that title to the accounts had never been transferred to defendants; otherwise defendants could not have repurchased them from plaintiff. The record discloses that the trial court had before it evidence which purported to explain the nature of this and other similar transactions. It appears that there were many times when delinquent accounts were returned to plaintiff, at least as book transactions. There was evidence that she would be credited with the face value of these accounts without deduction for the discounts originally taken. At times some of the returned delinquent accounts would be rescheduled and resold to defendants at the usual discount. There was nothing in the contract which called for the reassignment to plaintiff of delinquent accounts nor was there anything to prevent it. Defendants would have had the right to call on plaintiff under her warranty to make good on all the accounts which were not collected within 60 days. They did not stand upon that right and the practice was developed of continuing to treat some of the delinquent accounts as live accounts, and it may be that this was done because they were generally still good accounts, although they had not been paid within 60 days. That they should have been treated as good accounts and should have been returned to plaintiff, rescheduled and resold to defendants as a book transaction appears as a mere detail of the business. It was a logical way of continuing the financing of plaintiff's business and it amounted to no more than a temporary waiver by defendants of their right to call upon plaintiff to make good her warranty. There was nothing in this practice which was necessarily inconsistent with the relationship of buyer and seller.

Plaintiff's entire argument is founded upon the matters which we have discussed, that is to say, she relies for her claim of usury not upon the written agreements which she made, but upon extrinsic evidence as to the construction placed upon them by the manner in which the parties operated under them. She contends that the true intentions of the parties, their understanding of the agreements, and the relationship which they created are to be inferred from the manner in which they carried on their business. The question presented to the trial court was as to the nature of the agreements under which the transactions were had. The construction of the writings involved a question of law. The trial court properly construed them as agreements for the purchase of plaintiff's accounts and not for loans of money. But the contention that the parties in reality made an agreement wholly different from the one which they expressed in writing, and the nature of which was to be inferred wholly from their conduct, presented a question of fact. The question on this appeal from a judgment of nonsuit is whether there was substantial evidence, in the view most favorable to plaintiff, which would have supported a judgment in her favor. It was, without doubt, permissible, under the evidence, for the court to construe the conduct of the parties as entirely consistent with the terms of the written agreements. It may be conceded that, as plaintiff contends, the manner in which the accounts were handled was not inconsistent with the existence of the debtor-creditor relationship which it would have been necessary for plaintiff to prove in order to support her claim of usury. But this conceded fact is negative in character and, standing alone, could not be accepted as sufficient to prove the making of a usurious contract. Plaintiff testified that she spoke to defendant Arthur Kramer about borrowing money. His response was to submit to her the written agreement which she signed. The written agreements were the only ones entered into by the parties; there was no evidence of any other. This is made perfectly clear if we suppose a case in which the defendant herein would be endeavoring to recover against plaintiff for money loaned. Upon the record which is before us there would not be a scintilla of evidence to prove an obligation of plaintiff herein to repay the sums received as loans made to her. Where a contract is susceptible of two constructions, one lawful, the other unlawful, the former is preferred. Civil Code, sec. 1643. It is, however, unnecessary to rely upon this rule because we think all of the substantial evidence tended to prove the making of a lawful agreement.

The trial court was justified in concluding that the transactions involved sales of accounts and not loans. There was not sufficient evidence to have justified a finding that the writings did not express the true agreement of the parties.

The claim of usury was the sole matter in issue and was not sustained. Plaintiff was not suing for any balance that might be found due her upon an accounting and no judgment could have been entered in her favor for any money that may be due her. The judgment of nonsuit was proper.

The judgment is affirmed.

SHINN, Justice.

DESMOND, P. J., and PARKER WOOD, J., concur.