Maze v. Sycamore Homes, Inc.

Defendant Sycamore Homes, Inc., is engaged in housing development and its activities included the development of a housing project in Torba Linda, Orange County. Plaintiffs are husband and wife, the husband being a paving contractor in Ventura, California. Defendant secured $24,000 from plaintiffs pursuant to the following agreement:

“Investment Agreement

“This agreement, executed on February 23, 1960, by and between Edward F. Maze and Edna Mae Maze, as tenants in common, hereinafter called Maze, and Sycamore Homes, Inc., hereinafter called Sycamore.

“Sycamore hereby acknowledges receipt from Maze of the sum of $24,000.00, (Twenty-four Thousand Dollars), and agrees to repay same on or before one year from date hereof, and in addition, the sum of $4,800.00, (Four Thousand Eight Hundred Dollars) representing a return based on a profit participation concerning the construction and sale of lots 6, 7, 8, 9, 34, 33, 32, 30, 29, 17, 21 and 22 of Tract 2024, in the City of Torba Linda, County of Orange, State of California as shown on a map thereof recorded in Book 108, pages 4 and 5, Miscellaneous Maps, records of said Orange County.

“The total sum so payable, $28,800.00, (Twenty-eight thousand Eight Plundred Dollars) is to be secured by an assignment delivered to Security Title Insurance and Trust Company on this date, who shall issue the title policies on these lots; and to Keystone Savings & Loan Association of Anaheim, Calif, who will be conducting the sale escrows, and will be holding the funds on same.

“Dated: February 23,1960 Sycamore Homes, Inc.

By: /s/ Jack Conrad

Jack Conrad, Vice President

“Agreed to and Accepted:

“/s/ Edward F. Maze

Edward F. Maze

“/s/ Edna Mae Maze

Edna Mae Maze

Upon failure to repay the entire sum due under said agreement, which was extended for one year, plaintiffs sued for the balance due on the contract and were awarded judgment against defendant in the sum of $11,600 with interest from February 23, 1962. Defendant appeals from such judgment,

The trial court was of the opinion that the “Investment Agreement” was ambiguous and needed oral testimony for clarification and that it did not embody the entire contract of the parties. Accordingly, the agreement was construed in accordance with what the court concluded from the evidence were the intentions of the parties when they entered into the agreement.

The “Investment Agreement” was entered into after the accounting firm of Fuhler and Baker contacted plaintiffs and solicited their participation. The accounting firm had been engaged in its accounting capacity by both parties to the action previous to its solicitation of plaintiffs in this matter. Part of its assigned functions for defendant was to contact potential sources of investment capital for defendant’s ventures, which the firm had done on at least one previous occasion. In the instant case, the firm was paid $2,400, being 10 per cent of the amount secured from plaintiffs, as a “finder’s fee” for making the contact with plaintiffs. By reason of the employment of the firm by plaintiffs, as well as defendants, a fiduciary relationship existed between the accounting firm and plaintiffs.

In February 1960 defendant desired to expand its operations. The money involved in this action was not needed for the specific purpose of developing tract 2024, mentioned in the agreement. However, as “security” for repayment of plaintiffs’ “investment” an additional instrument was executed in the following form:

“Assignment

“For and In Consideration of the sum of Twenty-four Thousand Dollars, ($24,000.00), receipt of which is acknowledged, Sycamore Homes, Inc., does hereby assign irrevocably to Edward F. Maze and Edna Mae Maze, as tenants in common, of P.O. Box 689, Wagon Wheel Junction, Oxnard, California, the sum of $2,400.00 per lot on the following described property, the same to be paid to them on an escrow release basis at the rate of $2,400.00 per lot sold and payable out of the monies due to the undersigned out of each respective sales escrow. The property on which said assignment is made is described as follows:

“ ‘Beal Property in the City of Yorba Linda, County of Orange, State of California, Lots 6, 7, 8, 9, 34, 33, 32, 30, 29,17, 21 and 22 of Tract No. 2024, as shown on a map thereof

recorded in Book 108, Pages 4 and 5, Miscellaneous Maps, records of said Orange County.’

“It is agreed that a full release will be executed on this assignment when a total of $28,800.00 has been fully paid to Edward F. Maze and Edna Mae Maze.

Dated: February 23, 1960

“Sycamore Homes, Inc.

‘ ‘ Approved:

/s/ Edward F. Maze Edward F. Maze

/s/ Edna Mae Maze Edna Mae Maze

By: /s/ Jack Conrad Jack Conrad, Vice President

Copy Received:

Security Title Insurance Co. By: /s/ Lloyd G. Peterson”

Between February 23, 1960, and February 23, 1961, plaintiffs were repaid $12,000 pursuant to such assignment and escrow releases. At the due date of the “Investment Agreement” defendant requested an extension and a written agreement dated March 13, 1961, was executed by plaintiffs which provided for the one-year extension but included the provision that “all terms and conditions shall remain the same. ’ ’ Defendant paid plaintiffs $2,800 as consideration for such extension. During the following year only one additional payment of $2,400 was made to plaintiffs. Plaintiffs’ action was brought for $14,400. The trial court found the $2,800 paid for the extension was usurious and reduced plaintiffs’ claim by that amount, rendering judgment for $11,600 plus interest at 7 per cent from February 23, 1962.

Defendant concedes an obligation to plaintiffs in the amount of $6,000 computed, generally, by deducting from plaintiffs’ claim of $14,400 the following sums: (a) the $2,800 usurious payment for the extension, (b) $2,400 as usurious interest of $400 per lot as to each lot for which payment was made, and (c) $2,400 for alleged usurious interest in the like amount for six lots included in plaintiffs’ claim for which payment was not yet made.

Defendant’s principal argument on appeal in support of its general contention that the transaction was usurious is that the findings of fact do not as a matter of law support the conclusions of law and judgment of the trial court. The judgment of the trial court was based not only upon the written instruments, the “Investment Agreement” and the “Assign

The basic usury law is set forth in article XX, section 22, of the California Constitution: “No person, association, co-partnership or corporation shall by charging any fee, bonus, commission, discount or other compensation receive from a borrower more than 10 percent per annum upon any loan or forbearance of any money, goods or things in action.”

In Milana v. Credit Discount Co., 27 Cal.2d 335 , 339-340 [ 163 P.2d 869 , 165 A.L.R. 621 ], a loan is defined as follows: “A loan, on the other hand, 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. (In re Grand Union Co., 219 F. 353 , 356 [ 135 C.C.A. 237 ] ; O. A. Graybeal Co. v. Cook, 111 Cal.App. 518 , 528 [ 295 P. 1088 ].)”

Regarding the intent of the parties the authorities hold that “the conscious and voluntary taking of more than the legal rate of interest constitutes usury and the only intent necessary on the part of the lender is to take the amount of interest which he receives; if that amount is more than the law allows, the offense is complete.” (Thomas v. Hunt Mfg. Corp., 42 Cal.2d 734 , 740 [ 269 P.2d 12 ].) When the transaction violates the usury law the intent of neither of the parties is material. (Martin v. Kuchler, 212 Cal. 536 [ 299 P. 52 ].)

In Wood v. Angeles Mesa Land Co., 120 Cal.App. 313 , 324, 326-327 [ 7 P.2d 748 ], the court stated: “If the character of a transaction were in doubt much aid would be had in determining its true nature by discovering the intent behind the

The case of Martin v. Ajax Constr. Co., 124 Cal.App.2d 425 , 428 [ 269 P.2d 132 ], involved transactions almost identical to those in the instant case. The Martins signed a written instrument containing the following: “Ajax ‘is about to engage in a larger, more active program of construction. ’ Martins are ‘willing to loan’ Ajax money to assist this program. The Martins do ‘hereby loan the first party the sum of $5,000. ’ Ajax represents that ‘it is about to commence a construction program of 150 duplex or double bungalows, together with 40 single family residences’ on certain tracts if available, or ‘such other tract or tracts as might be selected’ by Ajax ‘until 150 duplex . . . and 40 single residences shall have been built.’ Ajax ‘agrees that upon completion of each building ... it will execute and deliver ... an irrevocable assignment’ of $100 or $50 upon each duplex or single so completed. Ajax agreed that the Martins ‘shall be entitled to have and receive, in consideration of said loan . . . the total sum of $10,000.00 payable ... on or before one year from the date hereof. ’

“Pursuant to such agreement and coeval therewith, Ajax executed its promissory note in the sum of $10,000 in favor of respondents and caused its principal stockholders, C. W. Beck and W. H. Beck, to execute a guaranty of the note on the reverse side thereof.

“When one year had elapsed and appellants were unable

The similarities to the instant case are noted: (1) A definite sum was to be paid in one year; (2) an assignment of funds was made as purported security; (3) a partial prepayment system was set up payable out of escroAvs; (4) a usurious payment was agreed upon for an extension; (5) the transaction was not a joint venture and plaintiffs did not participate or have any control over the operations; and (6) the promise to pay was unconditional and guaranteed by the principal stockholders of Ajax.

The trial court, in Martin, had made a finding “ ‘that the transaction herein was in a fair sense a joint adventure rather than a loan, ’ ” but the appellate court reversed the trial court and stated: “. . . the record reveals no substantial evidence to support such finding. Neither does the term ‘advance’ nor the word ‘invest’ have such a significance as will indicate that the contracting parties intended to form a partnership or to engage in a joint venture. Both words are ambiguous. Each applies equally to a loan or a joint venture. The same may be said of the statement of the purpose for which the money was to pass from respondents to appellants. To determine the issue, one must look to those elements of a transaction which exist in a loan but not in a joint adventure and vice versa.

“In the case of a loan, the lender does not share in the profits of the enterprise; neither does he run any risk of loss of his capital other than that of insolvency of the borrower, attendant upon all loans. Here there is an unconditional promise to pay on the part of Ajax and its guarantors. Respondents had no control over the management of the building enterprise; they could not designate the lands on which the houses should be built, the materials to be used, the laborers that should be employed. They had no voice in arranging terms for the sales of the neAV homes. There aauis no responsibility on their part for any tort or contract liabilities appellants might incur. ’ ’

While there are several exceptions, qualifications and defenses to the application of the usury doctrine none apply to the instant case. There was no sale involved. (E.g. Rose v. Wheeler, 140 Cal.App. 217 , 220 [ 35 P.2d 220 ].) There was no property subject to a mortgage. (E.g. Zimmerman v. Boyd, 97 Cal.App. 406 [ 275 P. 509 ].) There was no purchase of an obligation at a discount. (E.g. C. F. Janisse v. Winston Investment Co., 154 Cal.App.2d 580 , 585 [ 317 P.2d 48 , 67 A.L.R.2d 225 ].) There was no partnership or joint venture. (E.g. Moore v. Dealy, 117 Cal.App.2d 89 , 95 [ 254 P.2d 888 ]; Sedia v. Elkins, 201 Cal.App.2d 440 , 450 [ 20 Cal.Rptr. 278 ].) There was no contingent interest payment. (E.g. Jameson v. Warren, 91 Cal.App. 590 , 595 [ 267 P. 372 ].) There was no hazardous investment. In Wooton v. Coerber, 213 Cal.App.2d 142 , at page 157 [ 28 Cal.Rptr. 635 ], the court cites 91 Corpus Juris Secundum, section 25, page 599, as stating: “ ‘When, for any cause whatever, the principal sum lent or any part thereof is put in hazard, the lender may lawfully require for the risk incurred as large a sum as may be agreed on in good faith. . . . When the loan is absolutely repayable and only the security for its repayment is at hazard, an interest charge in excess of legal rates is usurious. ’ ’ ’

An examination of the record does not disclose one iota of evidence to the effect that monies received from the sale of the subject houses constituted “profits” in which plaintiffs could “participate.” The findings of fact, number 3, state: “In consideration of said investment of the Mazes, at said time, Sycamore agreed to and did grant to the Mazes

Furthermore, the evidence disclosed that the money was not used in the construction of the houses from the sale of which plaintiffs were to receive their “return.” The money was considered “invested” in defendant’s general business, the method of repayment, by the assignment of monies from sales, being considered some security against dissipation of such funds otherwise by defendant. The assignment in no manner constituted a lien against the properties and as such was not a true “security.” for the repayment. The parties stipulated at trial that the transaction was not a joint venture. The testimony admittedly established that plaintiffs acquired no interest of any kind in defendant’s business, that they had no control whatsoever in its management or in the manner in which the money they supposedly invested was to be used. They were to receive “their” guaranteed profit regardless of any profit or loss resulting from defendant’s business or from the sale of the particular houses involved. The obligation of defendant was viewed as an unconditional agreement to return the money invested plus $4,800 on such investment, not as a fractional sharing in any “actual” profit resulting from defendant’s operations. In fact, such “profit” was payable, under the view taken by the trial court, even though defendant might actually sustain loss in its operations. Hence, the “investment” feature, or “profit participation” aspect of the “Investment Agreement” can properly be considered window dressing in an attempt to circumvent the usury proscriptions.

The nature of the transaction is disclosed by the testimony and exhibits as one providing for a return of 20 per cent on the investment, at $400 per lot, and as being secured. The trial court’s interpretation provides the “security” in the form of contractual enforceability of a contract of guaranty. No actual security was provided by the “assignment” of funds that were not forthcoming. Nor did such purported security affect the unconditional nature of the construed guaranty.

Here, the interpretation of the facts by the trial court to justify a “guaranteed return” on plaintiffs’ “investment” appears incompatible with the wording of the written instruments and their application to the facts in evidence.

There was no “profit” from any sales established by any

When an instrument is usurious no interest whatsoever is recoverable by the usurious lender. (Stephans v. Herman, 225 Cal.App.2d 671 , 673 [ 37 Cal.Rptr. 746 ].) The $2,800 paid to plaintiffs for the one-year extension agreement which contained the wording “all terms and conditions shall remain the same” was properly held usurious by the trial court and it further tainted the entire transaction including the original “Investment Agreement.” The fact that the trial court disallowed such payment as usurious and credited it against the actual principal loaned did not efface the taint. (Williams v. Reed, 48 Cal.2d 57 , 68 [ 307 P.2d 353 ].)

The present transaction was an agreement for the use of money and for the payment of a usurious consideration therefor. The judgment is reversed in part and the cause is remanded to the trial court with instructions to modify and reduce the judgment in favor of plaintiffs to $6,000, without interest to date of judgment.

Burke, P. J., and Kingsley, J., concurred.

A petition for a rehearing was denied December 8, 1964, and respondents’ petition for a hearing by the Supreme Court was denied January 13, 1965. Burke, J., did not participate therein.