Hardwick v. Wilcox: Release Ineffective for Usury Claims
by Andrew K. Alper September/October 2017
Andrew Alper examines usury and discusses paths to exemption available for lenders using the Hardwick case as an example to demonstrate that having a borrower sign a general release may not always release the borrower’s right to file a usury claim against a lender.
Usury is the exacting, taking or receiving of a greater rate than allowed by law for the use or loan of money or a forbearance. A transaction is usurious if a loan is made at greater than the legal rate of interest, an exaction at more than the legal rate or for the forbearance of a debt or sum of money due.
The interest rate considered to be usurious varies from state to state. Some states have no usury rates, while others only have criminal and not civil usury statutes.
Usury laws and public policy are intended to protect borrowers unable to acquire credit from usual sources who are forced to resort to excessively costly loans to meet financial needs.1 Usury laws protect debtors from the oppression of excessive rates, imposing strict liability on lenders. Whether the lender intends to make a usurious loan is, for the most part, irrelevant.2
Exemptions From Usury
Various classes of lenders and certain types of loans are exempt from usury law. In California, the chief exemptions apply to regulated entities, like banks or savings and loans, and to entities licensed by the California Department of Business Oversight with a California Finance Lender’s License (or a broker’s license). Obtaining an exemption to ursury is one of the main reasons lenders become licensed in California. Most other states have no such licensing requirements. Leases that are not true leases are loans subject to usury limitations, and lenders that are not entering into true leases must comply with the California Finance Lender’s License law.
When a loan is usurious, the lender is entitled to repayment of the principal sum only and the loan bears no interest. The payments of usurious interest may be set off against the principal debt in actions to collect the amounts due under a loan. For example, if a borrower has paid usurious interest of $100,000 and no principal on a $1 million loan, the interest paid will be applied to make the loan $900,000, and the loan will accrue no interest until maturity. A borrower who pays interest at a usurious rate may also recover treble damages as to the amount paid, providing the action is brought within one year after payment or delivery of the interest payments.3 This treble damages award is discretionary and permissive. Using the previous example, if a court found the conduct of the lender to require treble damages, then the $100,000 would become $300,000 and the loan would be reduced to $700,000 not $900,000. A borrower would also be entitled to recovery of all interest paid within two years and not simply an offset to principal when the borrower attempts to recover the interest.4
Since usury is based on strict liability, the amount of usury does not matter. If usury exists because an interest rate is 11%, the entire amount of interest can be recovered, not simply the 1% over the legal limitation.
Hardwick v. Wilcox
The case of Hardwick v. Wilcox involved a series of usurious loans by a non-exempt lender at rates of 11% and 12% interest. 5 The loans, secured by real property, were ultimately renewed and paid by other loans. When the lender initiated non-judicial foreclosure proceedings, Hardwick, the borrower, requested additional time to bring the loan current. A forbearance agreement was executed granting an extension to make payments, and, if timely payments were not made, the lender could proceed with foreclosure. The key to the forbearance agreement was the fact that the lender also obtained a release of liability of all of the borrower’s past and future claims against the lender. The release, however, did not mention the release of potential claims for usury but, was a general release of all claims now known or arising out of those matters that were unknown both now and in the future.
The borrower ultimately filed a lawsuit to recover usurious interest and to protect the property that was collateral for the loans from being foreclosed on by the lender. The initial issue in the case was whether or not the release of claims became a waiver of the borrower’s right to claim usury or whether the release was void as it violated public policy. Citing Civil Code §1668 and Tiedje v. Aluminum Taper Milling,6 the court found that construing the release as a waiver of usury claims would violate public policy. The court found the forbearance agreement was a “descendant obligation growing out of the original usurious loans, an extension of that original usurious transaction and usurious in and of itself.”
Under these circumstances, the court found interpreting the release as a waiver of a usury claim would exempt the lender from the consequences of violating usury law. The court also found that, even if the borrower’s usury claim could be waived in a forbearance agreement, the release was not a knowing waiver of a usury claim but rather a perpetuation of a violation of the usury law. The court cited what it called “dated case law” relied on by the lender, which involved settlements of a known usury claim.7 In Hardwick, the forbearance agreement did not settle or otherwise substantively dispose of a usury claim. Instead, by all accounts, it was an agreement to extend the due date of the loan (which in and of itself creates a forbearance). Civil Code §1668 states:
All contracts which have for their object, directly or indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, or against the policy of law.
The court found that construing the unilateral general release as a waiver of usury would allow the lender to escape the consequences of violating the law, permitting the lender to benefit from the illegal contract and retain the usurious interest extracted from the borrower. As a last gasp, the lender argued that the forbearance agreement was an out-of-court settlement and, as the law encourages out-of-court settlements, it should be enforced. The court did not agree citing Winet v. Price.8
The bottom line was, if a transaction is usurious from its inception, it remains usurious until purged by a new contract. All future transactions connected with and growing from the original are usurious and without valid consideration. The original taint of usury attaches to the whole family of consecutive obligations and securities growing from the original vicious transaction, and none of the descendant obligations, however remote, can be free from the taint of their descent.
This is not the only case where a court would not allow usury claims to be released. In the Arce Riverside case,9 there was release of claim in a modification agreement that increased the rate of interest from an original non-usurious rate to the usurious rate of 12%. However, in connection with entering into the modification agreement, the parties specifically waived and released any claims of usury. There were many other issues involved in Arce Riverside, but the court ultimately would not enforce the release of the usury claims.
Takeaways from Hardwick are:
If a lender is not exempt, it must check state law where the borrower is located with respect to usury limitations before entering a loan to be sure the loan is not usurious or, if it is usurious, whether that state has an usury exemption the lender will fall under. If the lender in Hardwick knew that a rate of 11% or 12% was usurious, it most likely would have only charged 10%.
In California, lenders should obtain a California Finance Lender’s License to become usury exempt if they are not otherwise exempt.
Usury claims should be spelled out specifically, not generally. This holds true with other public policy-related claims and issues as well. In Hardwick, if the lender had specifically stated that any usury claims held by the debtor were released, there could have been a different result. That is not to say this language would have absolutely saved the day for the lender, but the failure to state that usury claims were not specifically released was one of the two reasons why the court held that the release was not valid.
It seems unfair that the entire amount of interest charged is deemed invalid and penalties imposed rather than only the usurious amount. If interest is being charged at 12% rather than 10% (the California limitation), only 2% of it should be deemed invalid and not the entire amount of interest. But that is the punitive nature of the law; if the usury law is violated, the lender will be punished. A usury savings clause in a loan or forbearance agreement may help avoid a claim for treble damages since it demonstrates no intent to willfully charge usurious interest, but since usury is a strict liability issue, it will not save the day when it comes to the entire usury claim.
Another aspect of a usurious transaction is that the lender can recover only the principal but not any interest that accrues during the term of the loan and before the debt has matured. However, after the debt has matured, a debtor who wrongfully withholds payment of the loan at maturity is obligated to pay prejudgment interest at the legal rate (generally 7% or 10% in California, depending on the loan) from the date of maturity until the date of judgment or until the date of payment.10 Therefore, if post-maturity interest is recoverable, then it stands to reason that legal interest at 10% or below should be recoverable on the loan during the pre-maturity period and only the part of the loan that is usurious should be void. But that is not the law, and the entire amount of interest will be void in a usurious transaction.
See Ghirardo v. Antonioli, 8 Cal. 4th 91, 804-805 (1994).
See In re Dominguez, 995 F.2d 883, 886 (9th Cir. 1993).
Civil Code §1916-3(a).
See Whittemore Homes, Inc. v. Fleishman, 190 Cal.App.2d 554, 561 (1961).
11 Cal.App.5th 975 (2017).
46 Cal.2d 450 (1956).
Credit Finance Corp. v. Mox (1932) 125 Cal.App. 583.
Winet v. Price 4 Cal.App.4th 1159, 1167 (1992).
In re Arce Riverside, LLC, 538 B.R. 563 (2015),
See Epstein v. Frank, 125 Cal.App.3d 111, 122-23 (1981); Fox v. Peck Iron & Metal Co., 25 B.R. 674, 693 (Bankr. S.D. Cal. 1982).
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