Bock v. California Capital Loans, Inc.
In an interesting case recently decided by the Third District Court of Appeals, the court upheld the lower court’s decision that a broker who negotiated a loan and was the sole owner of the lending company was exempt from California’s ban on usury under Civil Code §1916.1.
Lenders are familiar with §1916.1, which exempts loans from the usury ban when the loan is arranged for another by a person licensed as a real estate broker and the broker acts for compensation or in expectation of compensation for soliciting, negotiating, or arranging the loan. Real estate loans made by traditional lenders in the normal course of business usually fall within the exemption.
In this case, the plaintiff, Gregory W. Bock, trustee of the Bock Family Trust, needed a loan. A third party put him in contact with defendant Leo Speckert, a licensed real estate broker and the sole shareholder of defendant California Capital Loans, Inc. Speckert made out disclosure statements regarding the loan for Bock and loaned Bock $1.2 million through his company, California Capital. The promissory note for the loan provided for an interest rate of 15 percent. Speckert did not take a commission on the transaction.
When Bock defaulted on the loan, California Capital foreclosed on certain real property of the Bock Family Trust held as collateral for the loan. Bock responded by filing suit against California Capital and Speckert, claiming (among other things) that the interest rate on the loan exceeded the maximum allowed by the California Constitution. The trial court found the note was exempt from the constitutional usury prohibition and entered judgment in favor of the defendants. Bock appealed.
The court analyzed the facts presented to the trial court and found the trial court reasonably reached its conclusion that the usury ban did not apply to the loan between Bock and California Capital.
In arriving at its conclusion, the court addressed two important questions, as follows:
- Whether a real estate broker can be deemed to have arranged a loan “for another” when the lender is a corporation wholly owned by the broker.
- Even though Speckert performed broker services for both Bock and for California Capital, Bock pointed to no authority suggesting that a broker can only be deemed to have performed such services for either the lender or the borrower and not for both sides in the transaction. Thus, the court concluded that even if Speckert can be deemed to have arranged the loan for his wholly owned corporation, California Capital, he can also be deemed to have arranged the loan for Bock, who certainly qualifies as “another.”
- Even when only considering the relationship between Speckert and California Capital, the court concluded Speckert arranged the loan “for another” within the meaning of section 1916.1, citing prior case law. (It is fundamental that a corporation is a legal entity that is distinct from its shareholders — Grosset v. Wenaas (2008) 42 Cal.4th 1100, 1108.))
- The separate corporate identity rule prevails, even though Speckert was the sole shareholder of the corporation. A person and his corporation are distinct legal entities.
- Whether the §1916.1 usury exemption applies if the broker did not act in expectation of receiving a commission on the transaction — specifically, in this case, whether the interest California Capital was to have earned on the loan amounted to compensation to Speckert for purposes of the section 1916.1.
- Compensation is a concept with an extremely broad definition sufficient to encompass the receipt of just about any form of monetary or tangible benefit that is not self-bestowed. The nature of compensation under the law is as variable as the particular facts involved. Interest earnings have been treated with a similar expansiveness. (Stickel v. Harris, 196 Cal.App.3d 575 (1987).)
- Anticipated profits qualify as compensation.
- The court found substantial evidence that Speckert “act[ed] . . . in expectation of compensation” in arranging the loan from California Capital to Bock because, as the sole shareholder of California Capital, Speckert could have expected to reap the benefits of the interest his corporation was supposed to earn on the loan: 15 percent per year for three years on a loan principal of $1.2 million — i.e., $540,000.
- The court saw no logical reason to require Speckert to have earned, or expected to earn, compensation solely in the form of a commission from his corporation for section 1916.1 to apply.
- Whether Speckert took his compensation for the deal by drawing a dividend from the corporation or by receiving a commission from the corporation makes no difference under Stickel v. Harris.
- The profit California Capital expected to earn from the interest payments on the loan was sufficient to satisfy the compensation requirement of the statute.
At first blush the court’s decision may seem contradictory because on one hand the court acknowledged the legal distinction between a person and his corporation, while on the other hand it considered a corporation’s prospective interest income to be compensation reasonably expected by the shareholders.
The court’s decision, however, aligns with the practical realities of corporate ownership. A corporation possesses its own legal identity, but it is perfectly reasonable to assume corporate profits will flow to the owners. Those in the business of making loans secured by real estate should take note of this case.
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