Opinion
Rehearing Denied Feb. 17, 1930
Hearing Granted by Supreme Court March 17, 1930
Appeal from the Superior Court, Los Angeles County; John L. Fleming, Judge.
Actions by the Community Lumber Company of Baldwin Park and others, by George H. Whyte, Jr., by the Truscon Steel Company, and by C.W. Grizzelle and others, against W.H. Chute and others, and by the Weaver Roof Company against the West Coast Trimmings Company and others. From judgments establishing priorities respecting plaintiffs’ mechanics’ liens, plaintiffs appeal.
Affirmed. COUNSEL
Zach Lamar Cobb and Earl A. Littlejohns, both of Los Angeles, James B. Ogg, of Alhambra, and Musick, Burr & Pinney, Mitchell, Silberberg & Davis, and Hulme, Hastings & Bartlett, all of Los Angeles, for appellants.
Bush & Bush, of Los Angeles, M.W. Conkling, of San Diego, and Clarence E. Fleming, Fredericks & Hanna, Arthur L. Veitch, James Van Law, and A.G. MacRobbie, all of Los Angeles, for respondents.
OPINION
PULLEN, Justice pro tem.
The question here is one of priorities between appellants, who are mechanics’ lien claimants, and respondents, who are beneficiaries under certain liens, secured by deeds of trust. The trial court granted priorities to the holders of the trust deeds, and the mechanics’ lien claimants appeal. It will be necessary to set forth the facts in some detail.
W.H. Chute, one of the respondents, purchased the property in question from James A. Keeney, giving him as the entire purchase price a promissory note for $5,000, secured by a deed of trust, which recited that it was subsequent and subordinate to a deed of trust for $15,000 dated June 1, 1925, maturing six months from date in favor of the Union Engineering Company, Inc.
Chute, desiring to improve the property by the erection of a building thereon, entered into an agreement with respondent Union Engineering Company whereby Chute employed the Union Engineering Company as his agent or superintendent to erect such building and the Union Engineering Company was authorized to make all contracts relating to the construction of such building in the name of the owner, W.H. Chute.
In accordance with the further terms of such contract, Chute executed and delivered to Union Engineering Company promissory notes in the sum of $32,000, $15,000 of such notes being secured by a trust deed which was a first lien upon the property and immediately prior to the deed of trust in favor of Keeney for $5,000 already referred to, and the balance of the $32,000 in notes to be secured by a third deed of trust upon the property. In said agreements between the owner and the engineering company it was provided that the company should accept said notes "secured as aforesaid, as the agent of the owner and shall use said notes for the payment of all material and labor necessary to erect and construct to completion the above-mentioned building. The Superintendent shall have full authority to pay said subcontractors and materialmen performing the work or furnishing material in connection with the said building by said Trust Deed notes, by assignment thereof to said contractors and materialmen without recourse. The Superintendent shall also have full authority to sell such portion of said notes as it may deem necessary to obtain cash which may be necessary for the erection of said building," and "after said erection and construction of said building is completed and all costs of said erection and construction have been paid, the Superintendent shall be entitled to retain any and all of the above-mentioned notes which have not been used in defraying costs of said building as its full compensation for service rendered under this agreement."
Thereafter the Union Engineering Company entered into contracts with the various plaintiffs, in the name of W.H. Chute, and the materials and labor were furnished as agreed, and the building completed and notice of completion duly filed in the office of the recorder of Los Angeles county.
Shortly after the execution and delivery of the notes referred to, the Union Engineering Company borrowed from defendant Leonard L. Jones the sum of $6,000 and executed to Jones its promissory note in the sum of $6,500 and secured the repayment thereof by a transfer and assignment of the note and deed of trust of $15,000 already referred to. Thereafter Jones sold the note of $6,500 of the Union Engineering Company to the Western Discount Corporation and also assigned the collateral referred to which he had received from the Union Engineering Company, Jones receiving therefor $6,000 in cash.
Thereafter the engineering company borrowed from the Western Discount Corporation $950 and gave its note therefor in the sum of $1,000, and the engineering company assigned to the discount corporation all its equity in the note and deed of trust for $15,000 of Chute, which had been theretofore pledged by the engineering company to Jones and by Jones transferred to the Western Discount Corporation as heretofore set up.
The court found that the notes of $6,500 and $1,000 had not been paid and that there was due thereon to the Western Discount Corporation the sums of $6,000 and $950, respectively, with interest, according to the terms of the notes as the amounts found due. All of the deeds of trust were recorded June 12, 1925, and the first work and materials furnished was on June 13, 1925.
Appellants urge as their first specification of error that the court should not have allowed the Western Discount Corporation interest on the amounts advanced by them because both of the notes were usurious.
It is clearly established, and the court found, that on the note of the engineering company to Jones in the sum of $6,500 they were to receive and did receive only the sum of $6,000; that Jones in turn sold the $6,500 note of the engineering company to the discount corporation and received $6,000 cash. As to this transaction the court found:
"That in purchasing the note for $6,500 secured by the note and trust deed for $15,000 in these findings referred to, the defendant Western Discount Corporation had no knowledge whatsoever of the existence of the contract between W.H. Chute and the Union Engineering Company herein referred to and had no knowledge of the terms and conditions hereof."
And it is further found by the court:
"That subsequent to the execution of said promissory note by Union Engineering Company in favor of said Leonard L. Jones the defendant Western Discount Corporation purchased said promissory note in good faith for value and in the due course of business from said Leonard L. Jones, and said Leonard L. Jones by proper endorsement on the back of said promissory note duly assigned, transferred and set over the same and all of his right, title and interest therein to the defendant Western Discount Corporation, and did at the same time and as part of the same transaction assign, transfer and set over unto said defendant the collateral security on said promissory note consisting of said note and trust deed for $15,000 executed by W.H. Chute and Leotta Chute in favor of Union Engineering Company as hereinabove set forth, and that said Western Discount Corporation ever since has been and now is the owner of said promissory note and of said collateral security; that said promissory note was purchased by said defendant in good faith for value in the ordinary course of business and without notice of any offsets of any kind or nature and without notice of the existence of the contract between W.H. Chute, Leotta Chute, his wife, and Union Engineering Company hereinabove referred to."
As to the note of the engineering company of $1,000 in favor of the Western Discount Corporation, the court found:
"That on or about the 4th day of August, 1925, and subsequent to the purchase by defendant Western Discount Corporation of said note for $6,500 from Leonard L. Jones, together with collateral upon the same, the defendant Western Discount Corporation loaned to Union Engineering Company, one of the defendants herein, the sum of $950.00 for a period of thirty days with interest at the rate of 8% per annum, and said Union Engineering Company by its officers thereunto duly authorized did execute and deliver to said Western Discount Corporation its certain promissory note in writing in the principal sum of $1,000 dated August 4, 1925, and due thirty days after date with interest at the rate of 8% per annum; that said Union Engineering Company did then and there pledge, assign, transfer, hypothecate and deposit with said Western Discount Corporation all of its equity in and to said promissory note of $15,000, executed by W.H. Chute and Leotta Chute, his wife, in favor of Union Engineering Company as collateral security on the said promissory note for $6,500 in favor of Leonard L. Jones and which by said Leonard L. Jones had been assigned, transferred and set over to Western Discount Corporation, as hereinbefore found.
"The Court finds that said last mentioned loan of $950.00 to Union Engineering Company was made by Western Discount Corporation in the ordinary course of business and in good faith and without any knowledge on its part of the various agreements alleged by certain of the plaintiffs to have existed between said Union Engineering Company and said W.H. Chute and Leotta Chute, his wife."
The trial court gave judgment in favor of Western Discount Corporation for $6,000 with interest from date of the note on the note of $6,500, and also the sum of $950 on the note of $1,000 with interest from date of the note.
The provisions of the Usury Law as adopted by the electors at the general election November 5, 1918 (St.1919, p. lxxxiii), which are applicable to the case, are as follows:
Sec. 2. "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. *** Any agreement or contract of any nature in conflict with the provisions of this section shall be null and void as to any agreement or stipulation therein contained to pay interest and no action at law to recover interest in any sum shall be maintained and the debt can not be declared due until the full period of time it was contracted for has elapsed."
It will be noted that the act quoted above does not declare the note void, but only the portion of the agreement or contract as to the payment of interest shall be null and void, which is entirely different from declaring the entire instrument void.
It is true that there is a divergence of authority in other states, but many apparent conflicts may be reconciled by a reading of the acts themselves.
It is said in Tilden v. Blair, 21 Wall. 241, 22 L.Ed. 633, that unless a note is by statute made void in its inception it is valid in the hands of an innocent purchaser, and that when the law only makes the note void as to interest the note itself is not void and that neither lack of consideration nor illegality of consideration prevents a note being good in the hands of an innocent holder.
In the note to Union Trust Co. v. Preston N. Bank, 4 Ann.Cas. 347, California is placed in the list of states in which all illegalities are cured where negotiable paper passes into hands of an innocent purchaser for value.
In the note found in the case of Gate City Bank v. Thrall, Ann.Cas.1912D, 886, may be found an analysis of the cases and the reasons therefor.
The courts of New York, in discussing this matter, said:
"The business of the country is done so largely by means of commercial paper that the interests of commerce require that a promissory note, fair on its face, should be as negotiable as a government bond. Every restriction upon the circulation of negotiable paper is an injury to the state, for it tends to derange trade and hinder the transaction of business. *** It would be intolerable if every bank had to learn the true history of each piece of paper presented for discount before it could act in safety." Chemical Nat. Bank v. Kellogg, 183 N.Y. 92, 75 N.E. 1103, 1104, 2 L.R.A.(N.S.) 299, 111 Am.St.Rep. 717, 5 Ann.Cas. 158.
The Supreme Court of our own state, in the leading case of Haight v. Joyce, 2 Cal. 64, 56 Am.Dec. 311, which case has been many time approved, and particularly as late as Union Coll. Co. v. Buckman, 150 Cal. 166, 88 P. 708, 9 L.R.A.(N.S.) 568, 119 Am.St.Rep. 164, 11 Ann.Cas. 609, used substantially the same language, saying:
"A rule requiring the indorsee of every bill or note to inquire into the consideration, would retard commercial transactions, and, in the language of Lord Kenyon, ‘shake paper credit to its foundation.’ *** Any other decision would destroy confidence in commercial transactions, and open a wide door to fraud and perjury."
There is another reason why appellants may not urge their defense of usury. Usury is a special defense and as such must be pleaded, and the agreement to pay interest being separable from the agreement to pay the principal, they must, if due, tender the principal before they can rely upon the plea of usury. Innes v. Goldwater, 30 Cal.App. 101, 157 P. 18; Jackson v. Shawl, 29 Cal. 267; 14 Cal.Jur. 686, 687.
The court below gave judgment in favor of respondents for the amounts actually advanced, and therefore appellants cannot complain.
It will be noted also that the parties to the agreement here set forth are willing to comply with their agreement, and except for some exceptional reason a third party should not be permitted to complain. De Wolf v. Johnson, 10 Wheat. 392, 6 L.Ed. 343; In re Worth (D.C.) 130 F. 927, 930; Levy v. Hallager, 119 Misc. 695, 197 N.Y.S. 257.
In the case of Matthews v. Ormerd, 140 Cal. 578, 74 P. 136, 137, the court in discussing the constitutional provision prohibiting a contract for the payment of taxes on a mortgage debt by the debtor, as the law then stood, said:
"With respect to the constitutional provision in question, and the rights of parties under it, the principles are clearly applicable which have been judicially applied to the asserted rights of parties under general usury laws. It is in its essential elements a usury law. In Matthews v. Ormerd, 134 Cal. 87, 66 P. 67, 210, it is called by the court, ‘this provision against usury’; and in Harralson v. Barrett, 99 Cal. 611, 34 P. 342, and London Bank v. Bandmann, 120 Cal. 224, 52 P. 583, 65 Am.St.Rep. 179, the doctrine generally applied to usury laws, namely, that they are for the benefit of the borrower, and that he may waive the privilege, ***"
Appellants also claim that the court erred in excluding from evidence the permit issued by the commissioner of corporations to the Western Discount Corporation and in not adjudging the $6,500 note illegal and void because the note to the extent of $1,500 thereof was given in full payment of certain stock of the Western Discount Corporation, which stock it was only authorized to sell and issue when at least 40 per cent. of the purchase price was paid in cash.
The court found that the discount corporation paid Jones the sum of $6,000 in cash for said $6,500 note, and the evidence supports that finding. It appears that upon the consummation of the transaction $6,000 was credited to Mr. Jones’ account upon the books of the discount corporation, they agreeing to pay it out at stated intervals. A week later Jones purchased the stock in question and his account was charged with the amount thereof. It nowhere appears that the purchase of the stock was a part of the consideration at the time the money was placed to the credit of Jones. We therefore see no error in the ruling of the trial court.
Appellants also claim that the Western Discount Corporation was charged with notice of the contract between Chute and Union Engineering Company, and that it took the $15,000 collateral deed of trust and note subject to the provisions of that contract or agreement. The answer to that is that these appellants were not parties to this agreement in any way. Prior to the commencement of any work or the furnishing of any material by any of these appellants, the deed of trust referred to was of record. The amounts being definite and ascertained, nothing has been attempted by the discount company, by Chute, or the engineering company that would increase the amount of the prior obligation. If the parties to the agreement saw fit, they could waive the entire amount or proceed to pay in accordance with the terms thereof. When the discount corporation took the collateral referred to, the only persons who might object were the maker, the payee, and the indorser. They all assured the purchaser there were no secret equities. The evidence sustains the findings that the discount corporation took the notes in due course and without any notice of right of appellants.
Appellants also object to the findings of the trial court holding the lien of the deed of trust held by Keeney superior to the claims of the mechanics’ liens, but we cannot agree with appellants. Keeney’s deed of trust represented the entire purchase price of the lots in question, it was of record before commencement of any work or the furnishing of any materials, it recited it was subsequent to a certain specified deed of trust only, and there is nothing appearing in this case which would tend to deprive Keeney of his rights under the trust deed.
The judgment is affirmed.
We concur: PLUMMER, Acting P.J.; THOMPSON, J.