Unpublished Disposition, 865 F.2d 265 (9th Cir. 1988)

MEMORANDUM^** 

Nathan E. Calhoun appeals the district court's order imposing a constructive trust upon $90,000 in principal and interest which was repaid to him on an allegedly usurious loan. The Court ordered Calhoun to disgorge these funds to Richard G. Shaffer, the court appointed receiver for the corporation whose assets were used to repay the loan.

Calhoun contends that the district court erred in (1) applying Arkansas law to the issue of whether the loan was usurious; (2) holding that Calhoun was not a bona fide purchaser of the $90,000 he received from Peck, and therefore protected from the constructive trusteeship which the receiver seeks to impose; (3) requiring Calhoun to disgorge the entire $90,000, including the $15,000 principal of the loan. We affirm.

STANDARD OF REVIEW

The district court's choice of law decision is reviewed de novo. Ledesma v. Jack Stewart Produce, Inc., 816 F.2d 482, 484 (9th Cir. 1987). The district court's interpretation of state law is reviewed de novo. Matter of McLinn, 739 F.2d 1395, 1397 (9th Cir. 1984). The interpretation of a contract is a mixed question of law and fact subject to de novo review. Trentacosta v. Frontier Pac. Aircraft Indus., Inc., 813 F.2d 1553, 1557 (9th Cir. 1987).

ANALYSIS

The law applicable to the contract

The district court did not err in applying Arkansas law to the issue of usury. Calhoun agrees with the district court's application of Nevada choice of law rules. He further agrees that under Nevada choice of law rules the relevant standards are those contained in Restatement (second) of Conflicts Sec. 188 (1971).

Section 188 provides that certain key contacts must be analyzed to determine which state has the "most significant relationship" with the contract at issue:

(2) In the absence of an effective choice of law by the parties ..., the contacts to be taken into account to determine the law applicable to an issue include:

(a) the place of contracting

(b) the place of negotiation of the contract,

(c) the place of performance

(d) the location of the subject matter of the contract, and

(e) the domicile, residence, nationality, place of incorporation and place of business of the parties.

The place of contracting

The place of contracting is the place where the last act occurred necessary to give the contract binding effect under the forum's rules of offer and acceptance. On the record in this case, we conclude that the parties intended their oral agreement to constitute their contract. Neither of the two parties recalls signing the written instruments. Peck's signature was affixed by Russell Smith under a power of attorney. Calhoun does not recall signing the instruments; he forwarded the money on the strength of the oral agreement. The parties were not deferring their agreement until it was embodied in writing. We further hold that the contract was completed when Calhoun accepted Smith's offer in Arkansas, and that Arkansas is therefore the place of contracting. For the slight weight that it is worth, see Restatement (Second) of Conflicts Sec. 188 comment e (1971), the place of contracting militates toward a choice of Arkansas law.

The place of negotiation

The negotiations took place over the telephone between Calhoun and Smith in Arkansas and Texas respectively. Thus either state might be deemed the place of negotiation. The Restatement, however, indicates that little weight is to be accorded the place of negotiation where, as here, all negotiation takes place by telephone from different states. Restatement Sec. 188, comment e. That slight weight is as inclined toward Arkansas as it is toward Texas.

The place of performance

The place of performance can be determined from the intentions of the parties as recorded in their agreement, or through their actions. In a loan agreement, the place of performance is the place where the loan is repaid, Restatement (second) of Conflicts Sec. 203 comment c (1971). Here the agreement did not specify where the contract would be performed. Peck repaid $25,000 of principal and interest on the loan to Calhoun in Arkansas. He also paid the balance of $60,000 to Calhoun through bank accounts in Minnesota. The district court found that Arkansas and Minnesota were the states with the closest connection to performance. Since Minnesota was for all other purposes not involved in the loan, the district court was correct in holding that Arkansas should be deemed to place of performance. We accord that factor some weight in favor of Arkansas, although less than it would carry if it had been specified in the agreement. See Restatement Sec. 188 comment e.

The location of the subject matter of the performance

Calhoun contends that the district court erred in not considering this factor. He argues that the subject of the performance, the money loaned to Peck, was put into Peck's Nevada business. Calhoun argues that this was a significant factor favoring application of Nevada usury law.

The situs of the subject matter should be considered significant, however, only when "... the contract deals with a specific physical thing, such as land or a chattel, or affords protection against a localized risk, such as the dishonesty of an employee in a fixed place of employment ...", Sec. 188 comment e. No such property or risk is involved here. The district court did not err.

The domicile, residence, and place of business of the parties

Calhoun argues that his domicile and place of business (Nevada) are important because Arkansas would have no interest in regulating or deterring usurious contracts where the debtor resides out of state. He maintains that the district court erred in not considering this factor. The Supreme Court of Arkansas, however, has indicated that the state's usury laws "... are based upon a universally recognized public policy that protects necessitous borrowers from the exaction of exorbitant interest by unscrupulous lenders." Quinn-Moore v. Lambert, 272 Ark. 324, 614 S.W.2d 230, 232, appeal dismissed, 454 U.S. 805 (1981); see also In re Wakefield, 460 F.Supp 1224, 1226 (E.D. Ark. 1978) aff'd sub nom, Hawkins Equipment Co. v. Goldstein, 603 F.2d 222 (8th Cir. 1979). Thus Calhoun's argument that Arkansas concern for the contract would hinge on the domicile of the debtor is without merit.

All factors combined

We conclude that the district court was correct in finding that Arkansas was the state with the most significant relationship to the contract. While none of the specific elements recommended by the Restatement are dispositive, the interconnections between the place of making, negotiating, and performing, point to Arkansas. See Restatement (second) Conflicts Sec. 203 comment c (1971).

Application to usury

Restatement Sec. 203 provides;

The validity of a contract will be sustained against the charge of usury if it provides for a rate of interest that is permissible in a state to which the contract has a substantial relationship and is not greatly in excess of the rate permitted by the general usury law of the state of the otherwise applicable law under the rule of Sec. 188. Restatement (second) of Conflicts, (1971).

The district court was correct in holding that even if Nevada, which has no usury prohibition, had a substantial relationship with the contract, the contract provides for interest "greatly in excess of the rate permitted by the general usury law of [Arkansas]." The parties stipulated that the de facto rate of 500% (without annualizing) on the Calhoun/Peck loan was well in excess of the 13% allowed in Arkansas at the time. The contract accordingly was usurious.

The Constructive Trusteeship

Calhoun maintains that the district court erred in holding that the $90,000 paid to him by Peck was subject to a constructive trust. Although Calhoun concedes that these funds were misappropriated by Peck out of Elmas Trading Corporation trust funds, Calhoun argues that the district court should have found that he was a bona fide purchaser of the $90,000. Alternatively, he argues that he should be protected at least to the extent of the $15,000 principal of his loan. We disagree with both contentions.

The illegality of the contract between Peck and Calhoun deprives Calhoun of the status of a bona fide purchaser. Moreover, under the circumstances of this case, the interest of Elmas Trading Corporation is clearly superior to that of Calhoun, even with respect to the $15,000 principal. Peck wrongfully used the funds of a third party to pay both interest and principal. The common law rule of Arkansas that restricts the recovery of a borrower under a usurious loan to interest only is not applicable. See e.g., Ford Motor Credit Co. v. Hutcherson, 277 Ark. 102, 640 S.W.3d 96, 100 (1982); Harris v. McCann, 229 Ark. 972, 319 S.W.2d 832, 838 (1959). The result in this case should be no different than that which would be proper had Peck paid Calhoun by transferring to him $90,000 worth of stolen securities.

CONCLUSION

The judgment of the district court is AFFIRMED.