Case 12-02483 Filed 04/22/15 Doc 136
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`POSTED ON WEBSITE
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`22O15
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`NOT FOR PUBLICATION I ALED
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`TED STATES BANKRUPT
`fT r\r PA
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` - (cid:9)
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`21
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`UNITED STATES BANKRUPTCY COURW.
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`EASTERN DISTRICT OF CALIFORNIA
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`In re:
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`Case No. 10-42050-D-7
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`VINCENT THAKUR SINGH and
`MALANIE GAY SINGH
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`Debtors.
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`MICHAEL F. BURKART, Chapter 7
`Trustee,
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`Plaintiff,
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`V.
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`PADARATH BISESSAR (cid:9)
`PING ZOU
`SHIU PRASAD
`RIGOBERTO TORRES
`XIAOYAN WU
`ZHIBO WANG
`ASWEN SHARMA
`PARMILA PRASAD
`VIMLA BISESSAR
`ANN THACH
`SONNY STEELE
`JAMES SINGH
`RITA REDDY
`SHARON BELOLI
`ASHWINI SINGH
`SHAOHONG. WENG
`CAROLYN ALLEN
`ROSEBEL SINGH
`SANDHYA NARAYAN
`SUSHILA PRASAD
`MARIA MORA
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`12-02312
`12-02320
`12-02368
`12-02370
`12-02371
`12-02374
`12-02387
`12-02400
`12-02401
`12-02418
`12-02429
`12-02430
`12-02434
`12-02446
`12-02448
`12-02461
`12-02469
`12-02478
`12-02483
`12-02486
`12-02496
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`Adv. Pro.
`12-02312,
`12-02370,
`12-02387,
`12-024 18,
`12-024 34,
`12-024 61,
`12-02483,
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`12-D
`No. 12-23
`1 -02320,
`12-023 68,
`12-02 37 1,
`12-0237 4,
`12-02400,
`12-024 01,
`12-02430,
`12-0242 9,
`12-02448,
`12-0244 6,
`12-0247 8,
`12-024 69,
`12-0248 6,
`12 -02 4 96
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`Docket Control No. KBP-5
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`DATE: April 1, 2015
`TIME: (cid:9)
`10:30 a.m.
`DEPT: D
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`Defendants.
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`NORNDUN DECI S ION
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`This is the consolidated motion of the defendants in the
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`above-captioned adversary proceedings (the "defendants") to
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`Case 12-02483 Filed 04/22/15 Doc 136
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`dismiss certain of the plaintiff's claims and for summary
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`judgment and partial adjudication. The plaintiff, who is the
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`trustee in the underlying chapter 7 case (the "trustee"), has
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`filed opposition, the defendants have filed a reply, the trustee
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`has filed a sur-reply, and the court has heard oral argument.
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`For the following reasons, the motion will be granted in part.
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`I. Introduction
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`First, the court would emphasize the large number of
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`adversary proceedings pending in this chapter 7 case, whereas
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`rather than moving the cases forward efficiently, both parties
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`have spent a substantial amount of time on issues that are
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`distracting, as well as those that are dispositive. Thus, for
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`example, both parties have focused extensively on whether the
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`defendants made "loans" to the debtor or "investments" with him.
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`The question seems important at first glance because under
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`California law, on which the trustee relies for his usury claims,
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`a return on an investment that was not in reality a "loan" cannot
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`be recovered as a payment of usurious interest,' and also because
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`1.
`Numerous transactions involving the advance of money
`are structured in some form other than a loan. In some
`cases these ventures are actually investments and not
`loans, in the sense that the investor expects a return
`on the funds advanced but also risks a loss or receipt
`of no return. In these cases the courts reject the
`claim of usury even though the investor receives a
`return on investment which exceeds the maximum usury
`rate.
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`8 Miller & Starr, Cal. Real Estate (3d ed. 2001) § 21:3, pp.
`20-21 (fn. omitted) . This conclusion may be reached even in
`cases where the transaction was documented by a promissory note
`and thus, on its face, looked like a loan. See Wooton v.
`Coerber, 213 Cal. App. 2d 142, 146, 148 (1963); Giorpi v.
`Conradi, 199 Cal. App. 2d 82, 84-86 (1962); Atkinson v. Wilcken,
`142 Cal. App. 2d 246, 247-48 (1956); Fitzgerald v. Provines, 102
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`Case 12-02483 Filed 04/22/15 Doc 136
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`under both state and federal bankruptcy fraudulent transfer law,
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`a payment on an antecedent "debt" constitutes value for purposes
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`of the reasonably equivalent value defense. 2
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`However, the court need not decide whether the investments
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`I were loans or otherwise because, either way, (1) the fact of the
`I debtor's creation and operation of a Ponzi scheme placed the
`debtor and by succession the trustee in the position of being in
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`pari delicto -- "in equal fault" -- with the defendants, and in
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`fact, at greater fault than the defendants, such that the law of
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`in pari delicto precludes any recovery by the trustee on his
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`usury claims, and (2) for each defendant who was an innocent
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`investor (or "lender"), Ninth Circuit law precludes any recovery
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`by the trustee on his constructive fraudulent transfer claims
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`except to the extent the particular defendant received payments
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`from the debtor totaling more than the total amount of the
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`defendant's monies invested with (or "loaned to") the debtor.
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`For the efficient administration of these proceedings, the court
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`will attempt in these findings and conclusions to clear as much
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`of the underbrush as possible.
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`II. Motion to Dismiss Usury Claims -- Insufficiency of Pleadings
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`As to the trustee's usury claims, the defendants contend the
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`trustee's complaints fail to state a claim upon which relief can
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`be granted. The argument is difficult to follow, but in any
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`event, it does not hold up to scrutiny and, in addition, it comes
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`too late. As the court understands the argument, the problem
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`Cal. App. 2d 529, 536-38 (1951)
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`B
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`2. (cid:9)
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`Cal. Civ. Code § 3439.03; § 548(d) (2) (A) of the
`(cid:9) Code.
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`Case 12-02483 Filed 04/22/15 Doc 136
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`comes from the trustee's use of the words "if," "any," and "to
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`the extent that" in his usury allegations. For example, the
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`first allegation in the usury claim is this:
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`If Defendant asserts that some or all of the Payments
`were made pursuant to a loan or other type of borrowing
`arrangement between Vincent Singh and Defendant,
`Plaintiff alleges on information and belief that some
`or all of the Payments were for interest in excess of
`the statutory maximum of ten percent per annum, in a
`transaction where the loan and all interest thereon
`were absolutely repayable by Vincent Singh.
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`First Amended Complaint, filed Aug. 15, 2012 ("Compi."), at 6:5-9
`(emphasis added) . (cid:9)
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`The defendants conclude from the highlighted
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`language that the complaints do not "contain any language
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`alleging that there was a loan or other type of borrowing
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`arrangement between Singh and any of [the] defendants."
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`Defendants' Motion, filed Feb. 2, 2015 ("Mot."), at 7:6-7. In
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`the defendants' view, this language
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`beg[s] the [following] question[] : 1. Has any
`Defendant asserted "that some or all of the Payments
`were made pursuant to a loan or other type of borrowing
`arrangement"? From the face of the Complaints, the
`answer is no. The usury claims are based on the
`premise that some defendants may assert a lending
`relationship, not that such a lending relationship
`exists. No such assertion that a lending relationship
`exists has been made.
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`lId. at 15:21-26.
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`1/ / /
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`Page and line citations are from the trustee's amended
`complaint in AP No. 12-2312. The same allegations appear in the
`original or amended complaints in the 20 other proceedings. (In
`some of the adversary proceedings, the trustee filed amended
`complaints; in others, he did not.)
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`Phrased another way, in the defendants' view, "[t]he
`Complaints merely speculate that a defendant might assert that
`there was a lending arrangement. No such assertion has been made
`in the Complaints, or otherwise." Id. at 12:15-16.
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`Case 12-02483 Filed 04/22/15 Doc 136
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`Similarly, the complaints allege that "[amy portion of the
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`Payments which were for interest at a rate in excess of the
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`statutory maximum was usurious under the laws of the state of
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`California" (Compl. at 6:10-11, emphasis added by defendants),
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`and from that language the defendants raise this question:
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`2. Was any portion of the Payments for interest? From
`the face of the Complaints, no such allegation has been
`made. The Complaints merely allege "Any portion of the
`Payments which were for interest at a rate in excess of
`the statutory maximum" was usurious. Was any portion
`of the Payments even for interest? The Complaints do
`not so allege, nor do they allege that, even if the
`Payments were for interest, that such Payments were for
`a "rate in excess of the statutory maximum."
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`Mot. at 15:27-16:4. The defendants conclude that
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`it is impossible to discern from a reading of the
`Complaints exactly, or even generally, what the Trustee
`is trying to recover. In fact, the Complaints
`themselves even appear quite uncertain on their face.
`The uncertain language leaves the Defendants
`questioning whether the usury claim even has anything
`to do with them individually.
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`jId. at 14:28-15:4.
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`Although the use of the words "if," "any," and "to the
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`extent that" theoretically lends a certain speculative quality to
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`the allegations, the court does not agree that the language left
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`the defendants in any doubt as to what the trustee was alleging
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`or what he was seeking to recover. And even if the language did
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`create doubt, the defendants had the opportunity to seek a more
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`definite statement two and one-half years ago, before they filed
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`their answers to the complaints. 5 They did not do so. Instead,
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`5. "A party may move for a more definite statement of a
`pleading to which a responsive pleading is allowed but which is
`so vague or ambiguous that the party cannot reasonably prepare a
`response. The motion must be made before filing a responsive
`pleading . . . ." Fed. R. Civ. P. 12(e), incorporated herein by
`Fed. R. Bankr. P. 7012(b).
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`Case 12-02483 Filed 04/22/15 Doc 136
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`1 the defendants, except one, answered each paragraph of the.
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`2 trustee's usury allegations separately. (Defendant Carolyn
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`3 Allen, in AP No. 12-2469, filed a pro se general denial.) The
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`4 court concludes that the "if," "any," and "to the extent that"
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`5 language did not leave the defendants in any doubt that the
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`6 trustee would be seeking to recover payments made by the debtor
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`7 to the defendants as payments of usurious interest.
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`8
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`Also as part of this argument, the defendants cite certain
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`9 documents the trustee served on the defendants' counsel in
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`10 November and December of 2014 pursuant to the court's order
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`11 establishing procedures for the amendment of complaints. That
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`12 order permitted the trustee, in lieu of filing amended
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`13 complaints, to provide only revised paragraphs containing
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`14 changes. The trustee provided revised paragraphs in 18 of the
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`15 adversary proceedings, under cover of a caption page with a title
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`16 beginning "Excerpts," for example, "Excerpts from Amended
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`17 Complaint for Avoidance and Recovery of Fraudulent Transfer;
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`18 Recovery of Usurious Interest; Objection to Claim." In 11 of
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`19 those adversary proceedings, the title of the Excerpts did not
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`20 include the words "Recovery of Usurious Interest," which had been
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`21 included in the titles of the original or earlier amended
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`22 complaints in those proceedings. From that fact, the defendants
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`23 in those 11 proceedings conclude, and seek an order confirming,
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`24 that "no usury claims are included in the amended complaints
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`25 against them." Mot. at 17:7-8.
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`The argument is frivolous. The court's order permitted the
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`27 trustee to provide to the defendants' counsel, in lieu of amended
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`28 complaints, only revised paragraphs containing the changes the
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`(cid:9)
`(cid:9)
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`1 trustee would make if filing amended complaints. It was clear
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`2 from the order that those portions of the original and earlier
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`3 amended complaints not included with the revised paragraphs were
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`4 not to be seen as deleted from the complaints, as the defendants
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`5 now suggest. And although the trustee offers no explanation for
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`6 the discrepancies among the titles of the various excerpts, there
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`7 is no reason to conclude they were anything but accidental.
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`8 Indeed, the trustee included the prayer in his excerpts, and in
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`9 every instance where the title omitted the reference to Recovery
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`10 of Usurious Interest, the prayer included a request for the
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`11 recovery of usurious interest payments and treble damages.
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`12
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`III. Motion to Dismiss Usury Claims -- Judicial Estoppel
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`The defendants contend the trustee's usury claims must be
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`14 dismissed because they inherently conflict with his claim that
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`15 the debtor was running a Ponzi scheme. They argue that because
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`16 the trustee caused the court to rely on his Ponzi scheme theory
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`17 when it granted his motions for default judgments in related
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`18 adversary proceedings and his motions for leave to amend his
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`19 complaints, the trustee is judicially estopped from claiming that
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`20 the debtor was not running a Ponzi scheme and judicially estopped
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`21 from arguing that the defendants were not investors in that
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`22 scheme. The defendants frame their argument as follows:
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`(cid:9) (cid:9)(cid:9) (cid:9)(cid:9) (cid:9)
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`Case 12-02483 Filed 04/22/15 Doc 136
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`By pursuing usury theories in the face of the otherwise
`firmly established Ponzi scheme position that the
`Trustee has taken, the Trustee will, in litigating a
`usury claim, necessarily have to take a position that
`is totally inconsistent with his prior position. The
`Trustee has obtained judicial relief based on the
`allegation that this was a Ponzi scheme and that the
`Defendants were investors. A usury claim is based on a
`lending relationship, not an investor relationship. A
`usury claim assumes that the Defendants, whom the
`Trustee has labeled "investors" in every other
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`(cid:9)
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`Case 12-02483 Filed 04/22/15 Doc 136
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`pleading, suddenly become "lenders" when demanding
`usurious interest.
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`3 Mot. at 18:19-25.
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`4
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`The court rejects the argument. It is essential to the
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`5 application of judicial estoppel that the party to be estopped --
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`6 here, the trustee -- must have asserted inconsistent positions.
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`7 "[A] party's later position must be 'clearly inconsistent' with
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`8 its earlier position." New Hampshire v. Maine, 532 U.S. 742, 750
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`9 (2001) . Here, the court is not persuaded that a usury claim is
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`10 inconsistent with a Ponzi scheme, that a "lending relationship"
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`11 is inconsistent with an "investor relationship," or that being an
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`12 "investor" is inconsistent with being a "lender."
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`13
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`The defendants cite no authority for their assumption that a
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`14 Ponzi scheme cannot be based on a lending relationship, and there
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`15 is authority to the contrary. For example, in United States v.
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`16 Treadwell, 593 F.3d 990 (9th Cir. 2010), the Ninth Circuit
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`17 affirmed the criminal convictions of three operators of "a
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`18 massive four-year Ponzi scheme in which more than 1,700 investors
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`19 across the United States lost over $40 million." 593 F.3d at
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`20 992. Although the court repeatedly characterized the victims as
`I "investors," the evidence was that they had "loaned" money to the
`22 perpetrators. Id. at 993. The court referred to the
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`21
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`23 perpetrators as having told investors "the loans were 'zero
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`24 risk,' often paying returns of 50% interest per month and 2%
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`25 interest compounded monthly" (id.), and referred to the
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`26 "investors" as having "'loaned' over $50 million to the
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`27 defendants' companies." Id. at 994. The court repeatedly and
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`28 unequivocally characterized the operation as a Ponzi scheme
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`Case 12-02483 Filed 04/22/15 Doc 136
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`1
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`I despite the fact that the "investments" were in the form of
`2 I "loans
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`3
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`Similarly, in United States v. Sine, 493 F.3d 1021 (9th Cir.
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`4 2007), the Ninth Circuit affirmed the conviction and sentencing
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`5 of a lawyer who helped run what the Ninth Circuit characterized
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`6 as a "pyramid scheme." 493 F.3d at 1023. The court
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`7 characterized the victims as "lending money" to the perpetrators,
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`8 and the funds received by the perpetrators as "loans" for which
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`9 the "lenders" received promissory notes and were promised between
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`10 20% and 100% interest. See id. at 1024. "In fact, the money
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`11 provided by these 'lenders' funded no legitimate projects.
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`12 Instead, some of the money went to repay earlier 'lenders' so
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`13 that the pyramid scheme could continue, and some ended up in the
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`14 personal coffers of [the perpetrators] ." I d.
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`In another example, Auza v. United Dev., Inc. (In re United
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`15
`16 I Dev., Inc.), 2007 Bankr. LEXIS 4857 (9th Cir. BAP 2007), the
`17 Bankruptcy Appellate Panel found that the debtor was operating a
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`18 Ponzi scheme (at *29) in circumstances where
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`[the debtor] could not keep up with its loan payments
`to [an original lender] and others like him, which
`resulted in borrowing additional funds from existing
`and new investors to repay previous loans. As a result
`of UDI's insufficient assets or profits generated from
`its business activities from which to repay its
`lenders, UDI used the funds obtained from later lenders
`to repay the principal and above-market rates of return
`to earlier investors.
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`24 l Id. at *23 (emphasis added) . There was no indication in the
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`25 decision that the "investors" were anything other than lenders.
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`26
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`The court concludes from these decisions that the trustee's
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`27 I usury claims are not inconsistent with his position that the
`28 debtor was operating a Ponzi scheme, and therefore, that the
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`-9--.
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`trustee is not judicially estopped from asserting the usury
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`claims. As discussed below, however, this does not mean the
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`usury claims hold up as against the defendants' in pari delicto
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`defense.
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`IV. Motion to Dismiss / for Summary Judgment on Usury Claims --
`In Pari Delicto / Estoppel / Unclean Hands
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`The trustee does not dispute the underlying premise of the
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`defendants' in pari delicto argument, which is that if the debtor
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`would have been barred by the doctrine of in pari delicto from
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`recovering the allegedly usurious interest he paid the defendants
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`(if any), then the trustee is also barred. 6 What he does dispute
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`is that the issue can be resolved in advance of trial. The court
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`finds that the issue is subject to decision on a motion to
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`dismiss or a motion for summary judgment. The court also finds
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`that the defendants have made a prima facie showing that the
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`defense of in pari delicto applies, and the trustee has failed to
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`6. A bankruptcy trustee has the power to pursue, in
`general, two types of actions -- actions brought pursuant to his
`avoiding powers and actions based on the debtor's pre-petition
`rights of action that become property of the estate upon the
`filing of the case. See Official Comm. of Unsecured Creditors v.
`R.F. Lafferty & Co., 267 F.3d 340, 356 (3rd Cir. 2001). As to
`the latter, the trustee steps into the shoes of the debtor,
`taking such rights of action subject to any defenses a defendant
`would have had against the debtor, including in pari delicto.
`Grayson Consulting, Inc. v. Wachovia Sec., Inc. (In re Derivium
`Capital LLC), 716 F.3d 355, 367 (4th Cir. 2013); Official Comm.
`of Unsecured Creditors of PSA, Inc. v. Edwards, 437 F.3d 1145,
`1150 (11th Cir. 2006); R.F. Lafferty & Co., 267 F.3d at 356;
`Sender v. Buchanan (In re Hedged-Investments Assocs.), 84 F.3d
`1281, 1285 (10th Cir. 1996) . See also In re Bonham Recovery
`Actions, 229 B.R. 438, 442 (Bankr. D. Alaska 1999) (citations
`omitted) ["A bankruptcy trustee has long been able to assert a
`right to a usury claim which belonged to a debtor. The trustee,
`however, takes the property of the estate under 11 USC § 541(a)
`subject to any encumbrances or blemishes that existed against the
`debtor. . . . In the bankruptcy vernacular, the trustee stands
`in the shoes of the debtor."]
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`Case 12-02483 Filed 04/22/15 Doc 136
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`show there is a genuine issue of material fact that should
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`The court will begin with the sometimes conflicting policies
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`2 preclude summary adjudication of the issue.
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`3
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`4 underlying California's usury law and the doctrine of in pan
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`5 delicto. The purpose of the usury law is "to protect the
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`6 necessitous, impecunious borrower who is unable to acquire credit
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`7 from the usual sources and is forced by his economic
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`8 circumstances to resort to excessively costly funds to meet his
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`9 financial needs." Ghirardo v. Antonioli, 8 Cal. 4th 791, 804-05
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`10 (1994) . "The usury laws were enacted primarily to 'protect the
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`11 indigent, who are helpless to protect themselves in a practical
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`12 sense . . . .'" O'Connor v. Televideo Sys., 218 Cal. App. 3d
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`13 709, 718 (1990) (citation omitted) . Thus, the policy underlying
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`14 the usury law is the protection of the borrower, and in
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`15 particular, of the impecunious and helpless borrower.
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`(cid:9) (cid:9)(cid:9) (cid:9)
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`17 that the court is not to aid either party to an illegal contract.
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`The doctrine of in pari delicto derives from the principle
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`It is well established that no recovery can be had by
`either party to a contract having for its object the
`violation of law. The courts refuse to aid either
`party, not out of regard for his adversary but because
`of public policy. Where it appears that a contract has
`for its object the violation of law, the court should
`sua sponte deny any relief to either party.
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`21
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`22 Smith v. California Thorn Cordage, Inc., 129. Cal. App. 93, 99-100
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`23 (1933) (citation omitted, internal quotation marks omitted,
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`24 emphasis omitted) . The Latin "in pari delicto" means "in equal
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`25 fault"; that is, parties who are in pari delicto are equally at
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`26 fault. Kelly v. First Astri Corp., 72 Cal. App. 4th 462, 467 n.4
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`27 (1999) . In such a situation, the courts will leave the parties
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`28 as they find them, and will not award a recovery to either party.
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`1 jçL at 481 [on application of doctrine to illegal gambling
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`2 contracts]
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`There is no doubt that the general rule requires the
`courts to withhold relief under the terms of an illegal
`contract or agreement which is violative of public
`policy. It is also true that . . . "when the evidence
`shows that . . . [a party] in substance seeks to
`enforce an illegal contract or recover compensation for
`an illegal act, the court has both the power and duty
`to ascertain the true facts in order that it may not
`unwittingly lend its assistance to the consummation or
`encouragement of what public policy forbids." These
`rules are intended to prevent the guilty party from
`reaping the benefit of his wrongful conduct, or to
`protect the public from the future consequences of an
`illegal contract.
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`11 Jacobs v. Universal Dev. Corp., 53 Cal. App. 4th 692, 700 (1997),
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`12 quoting Tri-O, Inc. v. Sta-Hi Corp., 63 Cal. 2d 199, 218 (1965).
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`13 Thus, whereas the usury law is generally intended for the
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`14 protection of the borrower, the policy underlying the in pan
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`15 delicto doctrine may favor the lender, and the usury law and the
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`16 in pari delicto doctrine may come into conflict.
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`17
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`The trustee's theory is that California's usury law requires
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`18 the defendants, as lenders who loaned money to the debtor, to
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`19 repay to the estate the payments they received from the debtor,
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`20 which the trustee claims were usurious interest payments, plus
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`21 treble damages, as allowed under California's usury law. This
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`22 theory relies on the policy of protection of the borrower -- the
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`23 policy underlying the usury law. The defendants, on the other
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`24 hand, contend their borrower, debtor Vincent Singh, was "in pan
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`25 delicto" with the defendants; that is, of equal (or greater)
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`26 fault in entering into the contracts the trustee claims called
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`27 for illegal usurious interest, and thus, that the trustee,
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`28 standing in the shoes of the debtor, should not be able to
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`Case 12-02483 Filed 04/22/15 Doc 136
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`ii recover the payments (assuming he can establish they were made on
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`21 account of interest) . In contrast with the policy underlying the
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`3 usury law, the in pari delicto defense in this situation would
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`4 I favor the lenders; that is, the defendants.
`In apparent recognition of this policy conflict, earlier
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`5
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`6 I California cases stated that the doctrine of in pari delicto does
`7 not apply to usury claims. For example, the trustee cites
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`8 Westman v. Dye, 214 Cal. 28 (1931), in which the court stated
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`9 that "under the Usury Law of this state the parties to a usurious
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`10 transaction are not regarded as in pari delicto." 214 Cal. at
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`11 35; see also cases collected in Buck v. Dahigren, 23 Cal. App. 3d
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`12 779, 787 (1972) . The problem with the trustee's reliance on
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`13 Westman is that application of in pari delicto in that case would
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`14 have meant penalizing a borrower who had done nothing more
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`15 egregious than making the usurious interest payments voluntarily.
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`16
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`Previous cases under the particular constitutional provision
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`17 the court was construing had held that voluntary payments of
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`18 interest, even if made under a mistake of law, operated as a
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`19 waiver of the borrower's right to recover payments of usurious
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`20 interest or to have them applied to the principal balance of the
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`21 loan. See Westman, 214 Cal. at 32. The Westman court rejected
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`22 those cases, deciding instead it should follow cases in other
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`23 jurisdictions "if the same appear equitable and right." Id. at
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`24 37. Thus, the court adopted a "rule allowing payments of
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`25 usurious interest to be set off against the principal debt in
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`26 actions brought to collect the latter." Id. at 36. Application
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`27 of in pari delicto in that case would have prevented the borrower
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`28 from having his usurious interest payments applied to the
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`principal balance simply because he had paid them voluntarily.
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`It might be said that, as applied to the facts of that case, the
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`policy underlying the usury law -- protection of the borrower --
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`outweighed the policy underlying the in pari delicto doctrine --
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`not assisting either party to an illegal contract.
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`The court finds that the Westman case, including the
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`statement that "the parties to a usurious transaction are not
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`regarded as in pari delicto," should have little, if any, bearing
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`on the present case, involving as it does a borrower who did far
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`more than simply paying usurious interest voluntarily. Here, the
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`borrower, Vincent Singh, as mastermind of the Ponzi scheme,
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`solicited the loans and offered allegedly usurious interest on
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`them as an integral part of the Ponzi scheme. More on point here
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`is Buck v. Dahlren, 23 Cal. App. 3d 779 (1972), cited by the
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`defendants, in which the court did apply in pari delicto to a
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`usury claim. 7 In that case, an experienced real estate developer
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`advertised for a loan, and a Swedish immigrant with no experience
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`in real estate lending responded and agreed to make the loan.
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`The developer/borrower later sued the lender to recover the
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`usurious interest the developer/borrower had paid. The court
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`7. The court quoted and relied on language in a New Jersey
`case (see below) that used the phrase "in pari delicto"
`specifically (see Buck, 23 Cal. App. 3d at 791), but the Buck
`court cast its actual holding in terms of estoppel. "The
`particular and unusual equities of this case impel us to the
`conviction that the philosophy expressed by Ryan [discussing in
`pari delicto] is most appropriately invoked here. Accordingly,
`we conclude the trial court properly found appellant was estopped
`from claiming the loans from respondent were usurious." Id.
`This court believes the two doctrines -- in pari delicto and
`estoppel -- as applied to the defense of a usury claim, are one
`and the same. Neither party has suggested they should be
`distinguished from one another.
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`the courts have . . . regularly held a borrower and a
`lender are not in pari delicto in a usurious
`transaction and the lender may not assert an estoppel
`against the borrower simply because the borrower took
`the initiative in seeking the loan, knew of the
`usurious nature of the transaction, and paid usurious
`interest without protest.
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`The Buck court contrasted those cases with the facts before
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`10 JId. citing Westman among others.
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`(cid:9) (cid:9)(cid:9) (cid:9)
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`Case 12-02483 Filed 04/22/15 Doc 136
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`1 canvassed the California cases, including Westman, observing that
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`2 they had focused on furthering the goal of the usury law, that
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`3 being "to penalize lenders taking advantage of unwary and
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`4 necessitous borrowers." 23 Cal. App. 3d at 787. In furtherance
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`5 of this policy of protection, the court said,
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`12 it, observing that the developer/borrower had solicited the
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`13 loans, suggested and initiated the usurious terms, induced
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`14 additional loans by misrepresenting his intention of repaying
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`15 them, and concealed the true value of the land he put up as
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`16 collateral. The court found that
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`[a]t a minimum, the case before us is distinguishable
`from the foregoing cases on the basis of the fraudulent
`practices of the borrower, and on the extent of the
`involvement of [the borrower] in carrying out the
`entire scheme, as well as on the resulting substantial
`loss to the lender. [The borrower] now seeks not only
`to retain the results of his fraud but also to mulct
`[the lender] further.
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`21
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`22 Buck, 23 Cal. App. 3d at 790. Rejecting such an outcome, the
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`23 court held the developer/borrower was estopped from recovering
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`24 the usurious interest. Id. The Buck court cited Heald v.
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`25 Friishansen, 52 Cal. 2d 834, 837 (1959), in which the court
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`26 stated that "Fun the absence of fraud by the borrower, the
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`27 parties to a usurious transaction are not in pari delicto
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`28 and Stock v. Meek, 35 Cal. 2d 809, 817 (1950), stating that "[i]f
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`Case 12-02483 Filed 04/22/15 Doc 136
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`1 no loophole is provided for lenders, and all borrowers save
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`2 fraudulent ones are protected, usurious transactions will be
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`3 Idiscouraged." Buck, 23 Cal. App. 3d at 788.
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`4
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`5 ICredit Co., 130 N.J. Eq. 531, 559, 23 A.2d 607, 623 (1941), and
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`6 in particular, the following:
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`(cid:9) (cid:9)(cid:9) (cid:9)(cid:9) (cid:9)
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`The Buck court also quoted from and relied on Ryan v. Motor
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`It is true that the penalties of the [usury] act seem
`to be directed solely to the lender, and the advantages
`or benefits . . . reserved solely for the borrowers.
`But these penalties were designed to prevent oppression
`of the weak and poor; they were not designed as rewards
`for the perfidy of the borrower. Where no oppression
`is involved, no advantage taken by the lender of the
`borrower, the transaction being entered into with the
`deliberate purpose of defeating the [usury] statute,
`the parties are both particeps criminis and in pan
`delicto, and the rule and not the exception applies.
`Certainly it was not the intention of the legislature
`to preclude the courts, in such cases, from finding as
`a fact that the parties were in pari delicto.
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`15 Buck, 23 Cal. App. 3d at 790-91, quoting Ryan, 130 N.J. Eq. at
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`16 559, 23 A.2d at 623. The Buck court also found the facts of the
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`17 Ryan case to be significant. The case concerned a New Jersey law