Filed 1/12/15 W&Z Development v. Aztec Group CA4/3




                      NOT TO BE PUBLISHED IN OFFICIAL REPORTS
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              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     FOURTH APPELLATE DISTRICT

                                                DIVISION THREE


W&Z DEVELOPMENT CORPORATION,

     Plaintiff and Respondent,                                         G048517, G048647, G049071

         v.                                                            (Super. Ct. No. 30-2011-00533981)

AZTEC GROUP, INC.,                                                     OPINION

     Defendant and Appellant.



                   Appeal from a judgment and an order of the Superior Court of Orange
County, Richard Luesebrink, Judge. (Retired judge of the Orange Super. Ct. assigned by
the Chief Justice pursuant to VI, § 6 of the Cal. Const.) Reversed.
                   Greenwald & Hoffmann, Paul E. Greenwald; Snell & Wilmer, Richard A.
Derevan and Todd E. Lundell for Defendant and Appellant.
                   Baker & Baker, William E. Baker; John L. Dodd & Associates, John L.
Dodd and Benjamin Ekenes for Plaintiff and Respondent.
                                          *                  *                  *
              Plaintiff W&Z Development Corporation (W&Z), which is in the business
of buying, refurbishing, and reselling houses, entered into an agreement with Defendant
Aztec Group, Inc. (Aztec) to jointly purchase a property in Santa Ana. Rather than use a
third party lender, Aztec offered a loan to W&Z on exactly the same terms. W&Z
accepted. The project did not go well and ultimately lost money for both parties. W&Z
then sued Aztec for usury on the loan. The jury agreed with Aztec and awarded W&Z
the total amount stipulated as interest, which the court then doubled. W&Z was also
awarded attorney fees and costs.
              We conclude, after careful review, that the jury erroneously found that an
important exception to the usury statutes — the joint venture exception — did not apply.
Accordingly, we reverse.
                                              I
                                          FACTS
              W&Z is in the business of acquiring, improving, and selling homes for a
profit. George Zeber is W&Z’s president, and the company is owned by a family trust
established by his parents. Zeber has been working at W&Z in some capacity since at
least the 1980’s. Aztec engages in various business activities, primarily related to the oil
industry, but also including investing in real estate. Richard McAuley is Aztec’s owner
and president.
              As of late 2009, Zeber and McAuley were neighbors. They began
discussing investment opportunities shortly after they met. Zeber eventually told
McAuley about a property on Edgeview Drive in Santa Ana, describing it as a good fit
for what McAuley wanted to do. At this point in time, Aztec had never purchased any
homes for the purpose of rehabilitation and eventual sale.
              Zeber, McAuley, and McAuley’s son Alan McAuley (Alan) met together at
the property, conducting a walkthrough and discussing work that needed to be done,



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among other things. Zeber prepared a budget, which the parties referred to as a “pro
forma,” estimating the costs and anticipated profits from the deal. The total costs of the
project were estimated at $1,265,000, with profits of $204,900. The pro forma stated the
project would be funded by a loan of $820,000 at an assumed annual percentage rate
(APR) of 12 percent plus three points, plus an equity investment of $166,500 from Aztec
and $18,500 from W&Z. McAuley and Alan, who is a licensed real estate broker,
reviewed the pro forma and decided it would be a good project to work on with Zeber.
              Zeber drafted a Property Holding and Development Agreement (PHA). He
did so by adapting documents that his attorney, William Baker, had prepared for Zeber to
use in other real estate projects. After some changes, the parties entered into the PHA on
January 14, 2014.
              Under the PHA, Aztec was to contribute $166,500 in capital in exchange
for 50 percent “of the net sale proceeds . . . after the distribution of capital/investment is
made to each of the parties.” W&Z was to contribute $18,500 in capital, and have full
responsibility for renovation and improvements in return for 50 percent of the profits. A
loan from third party Anchor Loans (Anchor) was to fund the remaining $820,000
needed. Anchor would hold a deed of trust on the property, and Aztec’s capital
investment would be secured by a deed of trust in second position to Anchor’s. Only
W&Z would be obligated under the construction loan and on the grant deed, with Aztec
as a lienholder.
              The PHA also established the priority for distributing the proceeds of any
eventual sale. First priority was given to any additional investments made by the parties
(though none were required); second priority was given to initial capital investments on a
pro rata basis; finally, any profits were to be distributed equally. The PHA referred to
and attached three documents as exhibits — the pro forma, a performance deed of trust in




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favor of Aztec, and a management services agreement, designed to govern W&Z’s work
on the property.
               Zeber, as stated in the PHA, had intended to use Anchor as the lender for
the property.1 Before W&Z purchased the property, McAuley approached Zeber about
the possibility of Aztec, rather than Anchor, acting as the lender. According to Zeber,
McAuley offered to provide the loan on the same terms as Anchor. By acting as lender
and holder of the first trust deed, McAuley told Zeber, Aztec would be protected from
foreclosure.
               Zeber agreed, and Alan prepared a note for $820,000 secured by a first deed
of trust on the property. The note was very short, constituting less than one-half of a
printed page. The note, in its entirety, stated as follows: “$820,000.00, California
January 20, 2010 [¶] In installments as herein stated, for value received, I promise to pay
to AZTEC GROUP or order the principal sum of Eight Hundred Twenty Thousand
dollars with interest from 01.20.10 on unpaid principal at the rate of twelve (12%)
percent per annum. [¶] Each payment shall be credited first on interest then due; and the
remainder on principal; and the interest shall thereupon cease upon the principal so
credited. Should default be made in payment of any installment of principal and interest,
the whole sum of principal and interest shall, at the option of the holder of this note,
become immediately due. Principal and interest payable in lawful money of the United
States. If action be instituted on this note, the undersigned promise to pay such sum to
the Court may adjudge as attorney’s fees. This note is secured by a DEED OF TRUST to
FIDELITY NATIONAL TITLE, a California corporation, as Trustee.”2

1 McAuley and Alan testified to somewhat different events at trial. For the purposes of
this appeal, however, Aztec does not contest Zeber’s version of the facts.

2 The problematic nature of this note is apparent. Among other things, the parties entered
into a note that referred to installment payments without ever specifying when
installments were due.


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                 On January 20, Zeber and Alan met at a notary’s office. Alan handed
Zeber the note, and Zeber signed it for W&Z, along with the deed of trust. Alan
thereafter recorded the trust deed and the performance trust deed.
                 W&Z then purchased the property. The funds remaining after the purchase
were insufficient to complete the remodel, so each party contributed approximately
$30,000 in additional capital.
                 In May 2010, W&Z listed the property for sale through an affiliate, Premier
Real Estate. Unfortunately, the property did not sell quickly, and by October, the
relationship between McAuley and Zeber was becoming unfriendly. Aztec had, at some
point, made a demand for monthly payments on the note, but Zeber felt no payments
were due. Aztec apparently considered foreclosure, and at one point offered to buy out
W&Z in lieu of foreclosure.
                 The property eventually sold in March 2011 for $1,045,000 — a price
significantly less than the $1,265,000 Zeber had predicted in the pro forma. After costs,
$881,773,28 to Aztec for the loan, including accrued interest, which Zeber calculated at
$145,241,71. $56,115.98 was paid to Aztec for an amount listed on the closing statement
as a “second loan.” The remaining funds were then used to partly pay back the parties’
capital contributions. Aztec received $19,540.25 and W&Z received $2,171.14, with
both parties obviously taking significant losses on their investments, and neither party
receiving any profit.
                 In December 2011, W&Z sued Aztec for usury.3 The complaint alleged the
interest paid ($145,241.71 on the purchase loan of $736,258.29) exceeded the maximum
10 percent allowed by law. W&Z sought return of all interest plus treble damages and
attorney fees.



3   Aztec filed a cross-complaint, which is not pertinent to this appeal.


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              The case eventually proceeded to jury trial. During deliberations, the jury
asked two questions related to the interest on the loan — the total amount of interest paid
and whether damages less than “the full interest amount of $145,241.71” could be
awarded. After discussion, the parties stipulated the total interest paid was indeed
$145,241.71, and the answer to the second question was “no.” The jury returned a
verdict in favor of W&Z, and awarded $145,241.71.
              After the jury rendered its decision, W&Z asked the trial court to impose
treble damages. The court considered briefing and argument, and ultimately concluded
that double damages were appropriate under the circumstances. The total award was thus
$290,483. The court also awarded W&Z contractual attorney fees of $188,150 and
$19,520.40 in costs. The court denied Aztec’s motion for new trial. An amended
judgment incorporated the attorney fee and costs order. Aztec now appeals.
                                             II
                                      DISCUSSION
A. General Principles of Law
              The California Constitution, article XV, section 1, states: “No person,
association, copartnership or corporation shall by charging any fee, bonus, commission,
discount or other compensation receive from a borrower more than the interest authorized
by this section upon any loan or forbearance of any money, goods or things in action.”
Under current law, that amount is 10 percent. (321 Henderson Receivables Origination
LLC v. Sioteco (2009) 173 Cal.App.4th 1059, 1076.)
              The elements of usury are: “(1) The transaction must be a loan or
forbearance; (2) the interest to be paid must exceed the statutory maximum; (3) the loan
and interest must be absolutely repayable by the borrower; and (4) the lender must have a
willful intent to enter into a usurious transaction. [Citations.]” (Ghirardo v. Antoniol
(1994) 8 Cal.4th 791, 798 (Ghirardo).)



                                             6
               A number of exceptions, however, exist. One of these is known as the joint
venture exception. (Junkin v. Golden West Foreclosure Service, Inc. (2009) 180
Cal.App.4th 1150, 1155 (Junkin).) “‘Where the relationship between the parties is a bona
fide joint venture or partnership, the advance by the partners or joint venturers is an
investment and not a loan, and the profit or return earned by the investor is not subject to
the statutory maximum limitations of the Usury Law.’ [Citation.]” (Ibid.)


B. Standard of Review
               The parties do not agree about the standard of review. Our Supreme Court
has stated “the question of whether a transaction is usurious is generally a mixed question
of fact and law.” (Ghirardo, supra, 8 Cal.4th at p. 800.) “‘There are three steps involved
in deciding a mixed fact/law question. The first step is the establishment of basic,
primary or historical facts. The second is the selection of the applicable law. The third is
the application of law to the facts. All three trial court determinations are subject to
appellate review. Questions of fact are reviewed by giving deference to the trial court’s
decision. Questions of law are reviewed under a nondeferential standard, affording
plenary review. [Citation.]’” (Ibid.) With respect to the application of the law to the
facts, if the inquiry is one that is essentially factual, we review the trial court’s
determination for substantial evidence. But if the question requires consideration of legal
concepts, and to exercise judgment about the values that animate legal principles, then
the question is one of law and will be considered de novo. W&Z’s attempts to
distinguish Ghirardo are simply unavailing.
               The same applies to the exceptions to the usury statute. While W&Z argues
Junkin, supra, 180 Cal.App.4th at page 1156, supports the substantial evidence standard
of review, the case does not actually stand for that proposition. “Whether a transaction is
a joint venture or a loan is a question of fact to be decided by the trier of fact. [Citation.]



                                                7
Generally, a conclusion reached by the trier of fact will be affirmed on appeal if it is
supported by substantial evidence. [Citation.] But where the relevant facts are
undisputed, the proper characterization of a transaction presents a question of law that
this court reviews de novo on appeal. [Citation.]” (Ibid.) Thus, the same test as
Ghirardo applies — substantial evidence regarding the underlying facts, and de novo
review of the law’s application if those facts are undisputed.


C. The Joint Venture Exception
              “The usury laws protect against the oppression of debtors through excessive
interest rates charged by lenders. [Citation.] Usury laws ‘protect the public from sharp
operators who would take advantage of “unwary and necessitous borrowers.”’
[Citation.]” (Agapitov v. Lerner (2003) 108 Cal.App.4th 830, 838.) “‘The usury law is
to be used as a shield and not as a sword.’ [Citation.]” (Wooton v. Coerber (1963) 213
Cal.App.2d 142, 150.) Usury laws “‘may not be used as an engine to perpetrate an
injustice.’ [Citation.]” (Ibid.)
              There is a “‘reasonable line of demarkation between a legitimate business
venture with the parties unequal in the extent of their risk but equally eager in their
anticipation of profit, and a situation in which a necessitous borrower is victimized by a
designing usurious lender.’” (Batchelor v. Mandigo (1950) 95 Cal.App.2d 816, 823.)
“‘The advancing of money as a hazardous investment in an enterprise must be
distinguished from the advancing of money as a loan, and the former is outside the
purview of the usury law.’” (Wooton v. Coerber, supra, 213 Cal.App.2d at p. 148.)
Thus, when the parties act together in a joint venture or partnership, the usury laws do not
apply. (Junkin, supra, 180 Cal.App.4th at p. 1155.)
              “There is no precise formula for determining whether a particular
transaction is a bona fide joint venture. However, several factors have been identified as



                                              8
relevant when deciding that question. One is whether there is an absolute obligation of
repayment. [Citation.] Another is whether the investor may suffer a risk of loss.
[Citation.] Another factor courts consider is whether the investor has any right to
participate in management. [Citation.] The identity of the seller is also a factor. ‘If the
venture between the parties involves the acquisition of property from a third party, the
courts tend to conclude that the arrangement between the parties was a risk capital
venture and not a loan.’ [Citation.]” (Junkin, supra, 180 Cal.App.4th at pp. 1155-1156.)
              The relevant facts here are essentially undisputed, but whether one looks at
this as a matter of substantial evidence or as a question of law, the trial court erred in
determining the joint venture exception did not apply. Junkin is directly on point here.
In that case, Junkin, a real estate agent, and Bennett, a “‘hard money’ lender” purchased a
commercial property for $1.975 million. (Junkin, supra, 180 Cal.App.4th at pp. 1152-
1153.) “$1.185 million of that amount came from an institutional lender. Junkin and
Bennett were both jointly obligated on that loan. The remainder of the purchase price
was provided by Bennett who contributed $856,000. In exchange for Bennett’s
contribution, Junkin prepared and signed a $960,000 promissory note secured by a deed
of trust in favor of Bennett. The note carried an interest rate of 12 percent and required
monthly payments of $9,600.” (Id. at p. 1153.) Both were on the property’s title. (Ibid.)
              Junkin failed to make payments, and Bennett, afraid of foreclosure, made
them himself. Bennett, deciding the building was no longer a good investment,
eventually quitclaimed his interest to Junkin, who refinanced with another lender.
(Junkin, supra, 180 Cal.App.4th at p. 1153.) After Junkin continued to fail to pay on the
note to Bennett, Bennett decided to foreclose, hiring Golden West Foreclosure Service,
Inc. to hold a nonjudicial foreclosure sale. (Ibid.) Junkin then filed a complaint alleging
the $960,000 note was usurious, and sought to restrain the foreclosure sale. (Id. at
pp. 1153-1154.)



                                               9
              Among other things, at trial Bennett argued the joint venture exception to
the usury laws applied. (Junkin, supra, 180 Cal.App.4th at pp. 1154-1155.) The trial
court agreed, and so did the Court of Appeal. (Id. at p. 1152.)
              We use the same factors the Junkin court did to determine whether the joint
venture exception applies. The first factor is whether there is an absolute obligation of
repayment. (Junkin, supra, 180 Cal.App.4th at p. 1155.) W&Z argues it had an
unconditional obligation to pay the $820,000 plus 12 percent. This is perhaps
questionable, because, unlike the note in Junkin, the language of the note at issue here did
not specify when payments were due or when a default was deemed to have occurred.
Had Aztec brought an action on the note directly, a court could reasonably have found the
loan was only meant to be repaid from the proceeds of the ultimate sale on the property.
But given this is the only factor that supports W&Z’s argument, we assume, without
deciding, that W&Z had an absolute obligation to pay. The presence or absence of any
one factor, however, is not conclusive. (Martin v. Ajax Construction Co. (1954) 124
Cal.App.2d 425, 433.)
              The second factor is whether the investor might suffer a risk of loss. It is
undisputed that Aztec, like W&Z, lost money on the venture. W&Z claims this case is
different than Junkin because there, the risk of loss was to a third party lender. W&Z
claims that by acting as lender, “Aztec severed itself from the venture’s risk of loss and
provided itself a new secured investment — completely independent of the initial
venture.”
              That assertion requires a bit of unpacking. First, W&Z misunderstands the
facts in Junkin. The allegedly usurious loan in that case was the one between Junkin and
Bennett. (Junkin, supra, 180 Cal.App.4th at p. 1153.) There was no issue of a third party
lender on that note. Asking whether Bennett suffered a risk of loss, the Junkin court
answered: “The answer is clearly yes. Bennett was on the title to this property and under



                                             10
his agreement with Bennett he owned 10 percent of the property. If the venture failed,
Bennett’s investment could be worth nothing. Clearly, Bennett assumed a risk that he
might suffer a loss.” (Id. at p. 1156.) The same is true here. Second, by acting as the
primary lender, Aztec’s risk actually increased rather than decreased. If the property had
taken longer to sell, if the ultimate sales price had been even lower, or if the costs had
been higher, Aztec stood not only to lose its capital investment, but its investment on the
loan as well. It is somewhat absurd to claim that the more money an investor puts into a
project, the lower the risk, when indeed the reverse is true.4
              The next factor is whether the investor has any right to participate in
management. (Junkin, supra, 180 Cal.App.4th at p. 1156.) W&Z brushes this aside,
claiming it is irrelevant because management was connected with the PHA, not the loan.
This, unfortunately, misses the point entirely. Aztec’s active participation in the project
is precisely the difference between a passive third party lender and a joint venturer. This
is a point that distinguishes this case from Junkin, as Bennett offered no evidence he
participated in the management of the venture. (Id. at p. 1157.) Here, the PHA
specifically stated that “[Aztec] desires to participate, as a non-title holding partner, in the
renovation and remodeling of the Property and to share in any profit resulting from the
sale.” It is undisputed that either contractually or factually, Aztec was part of the
decisionmaking process at a number of points during the renovation and sale of the
property. A showing that one party “took an active part in the management and operation
of the business in order that it might become a mutually profitable business enterprise”
weighs in favor of funding a joint venture. (Hersum v. Latham (1953) 120 Cal.App.2d


4 W&Z also claims that unlike in Junkin, where both parties were on the title and on the
loan to the third party lender, here, only W&Z was on the title and only W&Z was
obligated on the loan. This is true, but due to the lack of a third party lender here, that is
simply a distinction without a meaningful difference given the surrounding
circumstances.


                                              11
325, 328.) This is also a key point distinguishing this case from one on which W&Z
relies, Martin v. Ajax Construction Co., supra,124 Cal.App.2d at page 433 [lender had no
control over the building enterprise or in arranging sales].)
              Next, the identity of the seller is also a factor. “‘If the venture between the
parties involves the acquisition of property from a third party, the courts tend to conclude
that the arrangement between the parties was a risk capital venture and not a loan.’
[Citation.]” (Junkin, supra, 180 Cal.App.4th at p. 1156.) This undisputed fact strongly
supports Aztec’s argument that a joint venture existed. This was not a loan made out of
necessity — it was a speculative venture to flip a house.
              W&Z offers a number of other arguments, but unfortunately, those claims
do not require the outcome W&Z believes. W&Z claims the loan was labeled as a loan
and treated as such from its inception. The same, of course, was true in Junkin. Indeed,
the argument the funds in Junkin were indeed a loan was far stronger, considering
Bennett actually took steps to foreclose on the debt.
              W&Z also argues the parties did not consider themselves partners, pointing
to language in the management services agreement which stated W&Z’s relationship to
Aztec was one of independent contractor. But there is nothing indicating this relationship
extended outside the management services agreement; the PHA includes no such
language, and specifically refers to Aztec’s desire to be a “partner.” Taken as a whole,
there was simply no substantial evidence to support a finding the joint venture exception
did not apply here; or, looked at another way, judgment for Aztec should have been
granted as a matter of law.
              At the end of the day, this case is about a professional house-flipper who
lost money on one property, and rather than accepting that and moving on, he decided to
sue his partner for usury. He decided to do so despite the glaring fact that the loan
offered by Aztec was on the same terms as the loan Zeber was prepared to accept from



                                             12
Anchor. He is not the kind of borrower the usury laws were designed to protect, the
victim of a loan shark or a “‘sharp operator[] who would take advantage of “unwary and
necessitous borrowers.”’ [Citation.]” (Agapitov v. Lerner, supra, 108 Cal.App.4th at p.
838.) This is not a case of a predatory lender taking advantage of a desperate person; it
was a business transaction that wound up disappointing both parties. Indeed, even
seeking the protection of the usury laws in this case perpetrated the kind of injustice the
laws were meant to avoid, by using them as a sword rather than as a shield. (Wooton v.
Coerber, supra, 213 Cal.App.2d at p. 150.) Because the joint venture exception removes
this transaction from the scope of the usury laws, the jury’s verdict must be reversed on
this point. Accordingly, because this exception decisively extinguishes W&Z’s claim, we
need not consider the parties’ remaining arguments.


Disposition
              The only remaining question is whether we order a new trial or instruct the
trial court to direct a verdict in favor of Aztec. “The plaintiff was not suffering under any
improper court-imposed limitations on its ability to introduce evidence, nor was its
litigation theory erroneously based. We may consequently assume it marshalled the best
case it could at trial. Under these circumstances, it is proper for us to direct that
judgment be entered in favor of the defendant to avoid any additional expense.
[Citations.]” (Mid-Century Ins. Co. v. Gardner (1992) 9 Cal.App.4th 1205, 1220; see
also Paterno v. State of California (1999) 74 Cal.App.4th 68, 76.) Given the record here,
the same principle applies. The record does not support granting W&Z a new trial.




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                                             III
                                      DISPOSITION
              The judgment is reversed. The order granting W&Z attorney fees as
prevailing party is also reversed. The trial court is directed to enter judgment in favor of
Aztec after hearing any further motions regarding costs and attorney fees. Aztec is
entitled to its costs on appeal.




                                                   MOORE, ACTING P. J.

WE CONCUR:



ARONSON, J.



THOMPSON, J.




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