Thunderbird Investment Corp. v. Rothschild

Citations: 19 Cal. App. 3d 820; 97 Cal. Rptr. 112; 1971 Cal. App. LEXIS 1329Docket: Civ. 36996

Court: California Court of Appeal; September 1, 1971; California; State Appellate Court

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Plaintiffs, Thunderbird Investment Corporation and others, appealed an adverse judgment regarding a 1963 loan of $300,000 from defendants, Edward Rothschild and others, which they claimed involved usurious interest rates. The loan was documented by a promissory note and secured by a deed of trust on real property. The trial court found that the loan was not usurious, a conclusion that plaintiffs disputed, arguing that the findings lacked record support and that the court erred by not making requested findings. Defendants cross-appealed, contesting the trial court's denial of attorney's fees as stipulated in the promissory note.

The procedural history reveals that plaintiffs initially sought treble damages for alleged usury and a preliminary injunction against collection actions due to their default on the loan. In response, defendants denied the allegations and filed a counterclaim for the unpaid loan amount, interest, and foreclosure. Plaintiffs subsequently paid the owed amounts, while reserving their legal rights concerning the litigation. The case went to trial in November 1969, resulting in the trial court's judgment that upheld the non-usurious status of the loan and confirmed defendants' entitlement to attorney's fees. The appellate court found substantial evidence supported the trial court's findings and upheld the judgment.

Appellants are identified as Dor-Kap Investment Company, with Thunderbird Investment Corporation as the general partner and several individuals as limited partners. In the summer of 1963, Hal Wiseman, President of Thunderbird, sought financing to complete Glen Towers, an apartment building owned by Dor-Kap. He contacted Lorraine Weiler, the principal of Los Angeles Mortgage Company, to secure a $300,000 loan at 10% interest, which would be backed by a second deed of trust on the property. Dor-Kap agreed to pay a 5% commission, totaling $15,000, to the mortgage company for arranging the loan.

Weiler attempted to market the loan and offered attorney Mr. Nelson $7,500 from her commission for assisting in securing a lender. She indicated to Wiseman that she might have to pay attorney's fees and suggested he should provide a higher commission due to the loan's complexity, which Wiseman refused, stating she would cover any fees from her commission. Nelson had no direct discussions with Wiseman regarding the commission and did not act on behalf of the lenders to enforce payment of the commission to Los Angeles Mortgage Company. 

Nelson eventually contacted The Valley Company, Inc. and Edward Rothschild about the loan, with Rothschild expressing interest contingent on The Valley Company’s participation. Rothschild maintained a policy of not lending more than $100,000 per transaction and later arranged for T. S Realty to co-lend with The Valley Company.

Mr. Nelson was employed by The Valley Company, Inc. under a $20,000 annual retainer to identify real estate opportunities on the West Coast, receiving this amount in 1963 and 1964. He conducted all necessary work for the company’s loans, including making recommendations, assessing risks, and handling loan details such as escrow and property evaluations. Mr. Nelson was compensated for his services related to the Dor-Kap loan, which fell within his retainer agreement. Before this, he worked as general manager and house counsel for Gilbert and Rothschild until 1961 and maintained a personal friendship with Mr. Rothschild, occasionally providing informal advice but no formal services in 1963.

Mr. Nelson did not act as a lender or share ownership interests with any respondents. When he discussed the potential for Mr. Rothschild to lend money to Dor-Kap, Mr. Rothschild was aware that Mr. Nelson was being paid by The Valley Company, Inc. for his services, and thus felt no obligation to pay Mr. Nelson attorney's fees. Upon closing the escrow on November 5, 1963, Mr. Nelson received $7,500 from Miss Weiler’s commission, which was not disclosed to any respondents prior to the transaction's completion. Key figures from The Valley Company, including President William H. Muchnic, as well as Mr. Rothschild and the Rosenberg partners, were unaware of this payment until long after it occurred. 

None of the respondents received any part of the $7,500, nor did they credit this amount against any obligations to Mr. Nelson. He rendered no additional services to respondents due to receiving this payment. The Valley Company, Inc. only agreed to compensate Mr. Nelson as per the retainer agreement, and Mr. Rothschild did not recall discussing fees related to the Dor-Kap loan with Mr. Nelson nor agreeing to pay him any fees.

Mr. Rothschild was aware that Mr. Nelson received payment from The Valley Company, Inc. for his services, while T. S Realty Company had no obligation to compensate Mr. Nelson for any services related to the Dor-Kap loan transaction. Testimony indicated that none of the respondents intended to evade California's usury laws. The trial court's findings confirmed that Mr. Nelson acted for his own benefit, not as an agent for the defendants or cross-complainants. On October 7, 1963, Lorraine Weiler directed the escrow holder to allocate $15,000 in commissions between Los Angeles Mortgage Company and Mr. Nelson, but the defendants were unaware of these instructions until months after the complaint was filed. The defendants did not receive any portion of the funds from the loan proceeds, and neither did they benefit from any payments made to Mr. Nelson. They had no intention of violating usury laws and lacked knowledge of payments to Mr. Nelson until after the lawsuit began. The court found no merit in the appellants' claims that the trial court erred in refusing their requested findings, as these findings were unnecessary and would not affect the ultimate conclusions. Additionally, Thunderbird Investment Corporation was barred from appealing due to its suspension for nonpayment of franchise taxes. The other appellants, as limited partners, may also lack the capacity to appeal because of the general partner's legal status in the partnership.

Respondents acknowledge the complexity of a legal issue of first impression but maintain that the judgment must be affirmed on the merits without addressing the question of appeal dismissal. The loan transaction in question is not considered usurious despite the borrowers' payment of a commission to a third party, as the lenders did not receive any part of this commission and therefore did not benefit from it. According to Article XX, section 22 of the California Constitution, a loan is deemed usurious only if charges exceeding 10 percent per annum are received by the lender from the borrower. In this case, the lenders did not collect any payments exceeding the legal limit, and the commission paid to the brokers was not considered a payment to the lenders. 

Legal precedent establishes that while "interest" can encompass various forms of compensation, it does not include payments made to third parties unrelated to the lender. Previous cases, such as Niles v. Kavanagh and Vaughan v. Peoples Mortgage Co., support the principle that a loan is not usurious if a lender's agent charges a borrower a commission without the lender's knowledge or consent. Therefore, the transaction remains non-usurious as the lenders were unaware of the commission payment, did not share in it, and did not authorize it. Overall, the law is clear that a loan is not classified as usurious when the lender's agent collects a fee for personal gain without the lender's involvement.

Respondents are entitled to recover attorney's fees for legal services in both the trial court and the current appeal. The appellants initiated an action seeking treble damages for interest paid, claiming it was usurious, which necessitated examining the validity of the promissory note's interest provisions and respondents' right to the interest received. The note included a clause stating that if legal action is taken, the borrower will pay attorney's fees as determined by the court. The court concluded that the appellants' action is effectively an action on the note, thus activating the attorney's fees clause. On December 28, 1966, the appellants settled the principal and interest due, along with $1,417.65 for attorney's and trustee's fees from foreclosure proceedings, while reserving the right to pursue their usury claim. This payment did not cancel the promissory note, allowing respondents to claim attorney's fees for defending against the usury action. Given the necessity for respondents to incur additional attorney's fees, the judgment is affirmed except for the need to award reasonable attorney's fees for the defense of the usury claim. The case is remanded to determine the appropriate fees, and respondents will also recover their costs on appeal.