[00:00:00] Speaker 02:
The last case on the calendar for argument this morning is Inrei E. Mark Moon.

[00:00:08] Speaker 02:
Actually, appellant is Milestone Financial LLC versus E. Mark Moon.

[00:00:51] Speaker 03:
May it please the Court?

[00:00:54] Speaker 03:
For my presentation today, I would like to reserve five minutes.

[00:00:58] Speaker 03:
For the first 10, I will focus essentially entirely on the appeal and not the cross-appeal, and I'll reserve the rest of the time to respond to the cross-appellant's arguments.

[00:01:10] Speaker 03:
Your Honors, I would like to start by presenting... Your appearance for the record.

[00:01:15] Speaker 03:
Sorry, Bernie Kornberg from Milestone Financial, LLC.

[00:01:20] Speaker 03:
I would like to start by highlighting what's at issue here.

[00:01:23] Speaker 03:
As the court is aware, this matter arises out of a commercial loan given by Milestone to the Moons in October of 2015 in exchange for a secured note.

[00:01:32] Speaker 03:
The loan was exempt from the usury laws because the Moons were represented by a licensed real estate broker of their own choosing for whom they paid.

[00:01:40] Speaker 03:
The Moons defaulted and, facing foreclosure, requested a forbearance to try to refinance or otherwise exit the loan.

[00:01:47] Speaker 03:
Milestone could have ignored the Moons, please.

[00:01:50] Speaker 03:
It could have exercised the 5% default rate of interest, and it could have foreclosed on the property.

[00:01:55] Speaker 03:
Or, Milestone could have agreed to the Moons' request for an extension, and by doing so, saved their property and hundreds of thousands in equity, at least for the period of the extension, which was two years in this case.

[00:02:07] Speaker 03:
Milestone, following California's express public policy to help borrowers in T-Fault, granted the extension for a written settlement agreement.

[00:02:17] Speaker 03:
Had Milestone taken the option to foreclose, it would not be in court today defending a user allegation.

[00:02:23] Speaker 03:
Instead, Milestone did what courts daily recommend, which is to help borrowers facing foreclosure and for parties to try to settle matter outside of court.

[00:02:30] Speaker 03:
Thus, the Moons were given a lifeline to save their property, and now they want an interest-free loan.

[00:02:36] Speaker 03:
If the decision of the bankruptcy court stands, California lenders will not grant the next borrower in the Moon's shoes an extension.

[00:02:44] Speaker 03:
Their borrowers, upon default, will be charged default interest until foreclosed on, with no available loss mitigation option that allows for retention of the property.

[00:02:53] Speaker 03:
Thousands of otherwise avoidable foreclosures will occur, and lenders not wishing to be put in this position will leave the market.

[00:03:01] Speaker 03:
In short, this decision will cause significant harm to any borrower not named Mark or Lori Moody.

[00:03:06] Speaker 04:
Well, council milestone just used a real estate agent and we would have been none of this would have happened.

[00:03:11] Speaker 03:
No, okay 1916.1 only allows as the bankruptcy court found and as the stat as 1916.1 Expresses it only would allow them to bring back the same real estate agent in the event that it was a purchase money loan This was a refinance loan The language the operative language would be part of

[00:03:34] Speaker 04:
Because there's no exchange of property, you're saying that's why?

[00:03:36] Speaker 03:
It has to be arranges a forbearance extension or refinancing of any loan in connection with that sale, purchase, lease, exchange, or improvement to real property under 1916.1 2B.

[00:03:50] Speaker 04:
So you're saying the forbearance would not have fit any of those categories?

[00:03:56] Speaker 03:
No.

[00:03:57] Speaker 03:
I mean, I will stress here.

[00:04:00] Speaker 03:
It's pretty hard to go bring back a real estate broker to do a forbearance.

[00:04:04] Speaker 03:
It's going to add a lot of cost.

[00:04:05] Speaker 03:
But beyond that, it's just not possible here.

[00:04:09] Speaker 03:
The statute by itself just simply precludes that, which I think, and as I've argued, is kind of evidence that we're in the right here, right?

[00:04:17] Speaker 03:
Why would you have a situation where somebody could not even get a forbearance?

[00:04:21] Speaker 03:
in any situation if they're going to keep the interest the same or in fact lower as occurred in this case.

[00:04:27] Speaker 01:
So apart from your policy argument, how do you get around the usury restrictions?

[00:04:33] Speaker 03:
We don't get around it, Your Honor.

[00:04:36] Speaker 01:
So one, the policy argument is... Well, I mean, what do you mean you don't get around it?

[00:04:44] Speaker 01:
In your view, this was not a usurious

[00:04:48] Speaker 03:
Yes, that is correct.

[00:04:52] Speaker 03:
That's your bottom line?

[00:04:52] Speaker 03:
Yeah, this was not usury.

[00:04:55] Speaker 03:
I think, you know, I mean, to be clear, because this has been a bit of a hang-up, but I think, one, you simply have to read the DCM and Gerardo cases, which we fully admit were out of the time-price doctrine.

[00:05:07] Speaker 03:
But they don't really just state the time-price doctrine controls forever.

[00:05:11] Speaker 03:
In fact, that was not the law at the time when the DCM court ruled, nor the Gerardo court, and they never

[00:05:17] Speaker 03:
tried to overrule prior precedent.

[00:05:20] Speaker 03:
And the Gerardo cases are, in fact, you know, DCM limited its holding only to cases where the exemption increased the rate of interest to reflect current market conditions, right?

[00:05:30] Speaker 03:
That's a pretty nuanced holding that isn't a black letter law decision.

[00:05:35] Speaker 03:
I just don't think you can read Article 15, and it doesn't jump out to me, scream to me, that a forbearance which doesn't, you know, say touch the rate

[00:05:46] Speaker 03:
right, is silent as to the rate of interest, is, you know, charging a rate of interest.

[00:05:51] Speaker 03:
It's not a rate of interest upon the forbearance.

[00:05:54] Speaker 03:
It's just carrying over a prior rate of interest.

[00:05:56] Speaker 03:
It's a contract doing something else to the law.

[00:06:00] Speaker 02:
What is your view on certification for the California Supreme Court to determine whether Gerardo or DCM Partners extends to this situation?

[00:06:09] Speaker 03:
Well, we asked for it.

[00:06:11] Speaker 03:
In our view, frankly,

[00:06:14] Speaker 03:
We don't think this is that hard, and that's what we thought from the beginning.

[00:06:18] Speaker 03:
We think that a reading of the Gerardo and DCM case, the only two cases on this issue, and the usury laws, pretty much compels the conclusion we're asking for, that the interpretation of the law... Well, I don't know if it's that easy, but in any event, usually we leave it to the state courts to figure out the extent of their own law.

[00:06:36] Speaker 03:
But that is correct, Your Honor.

[00:06:38] Speaker 03:
We have asked for it because this court may

[00:06:40] Speaker 03:
feel that it's unable to, or would prefer that the state court decides this issue because it is an entirely a California law issue.

[00:06:47] Speaker 03:
And if the court does believe that this is a matter where the state courts do need to jump in and answer, then yes, we would ask for certification.

[00:06:55] Speaker 03:
Well, they have plenty of work over there at the California Supreme Court, you know?

[00:06:59] Speaker 01:
Send them something and maybe two years later you might hear from them.

[00:07:03] Speaker 03:
We would love a very quick ruling reverse.

[00:07:05] Speaker 01:
That doesn't happen over there.

[00:07:07] Speaker 01:
So, well then, you know, try to help me understand why your argument should prevail, because apart from this policy concern.

[00:07:17] Speaker 03:
Well, Your Honor, because I don't think that if you read the usury laws, I don't think it states that a rate of interest, a forbearance agreement to extend a loan called a forbearance agreement.

[00:07:30] Speaker 03:
I mean, they called it a forbearance agreement under the usury laws of DCM and didn't find it usurious in that case.

[00:07:36] Speaker 03:
I don't think an agreement which doesn't rate the rate of interest, but in fact lowers it, is a forbearance regulated by the usury laws.

[00:07:46] Speaker 03:
If it raised the rate of interest, of course it would be, or at least that would be the consideration.

[00:07:50] Speaker 01:
But this seems like an odd way to distinguish between what is usurious and what is not usurious.

[00:07:58] Speaker 03:
I mean, the entire DCM case talks about not changing exempt loans to usurious loans, that that's something the court should not do, especially when it really doesn't benefit anyone.

[00:08:12] Speaker 03:
So why should that not apply here?

[00:08:15] Speaker 03:
This was a loan, a real estate broker came in and said, I will use my license and I will bless the interest rate of this loan and exempt it from the usury laws.

[00:08:25] Speaker 03:
Milestone Financial did not increase that rate.

[00:08:29] Speaker 03:
If Milestone had simply said, we're not doing anything here.

[00:08:32] Speaker 03:
We're just going to sit there and we are going to not foreclose.

[00:08:35] Speaker 03:
We're not going to talk to you.

[00:08:37] Speaker 03:
We're just, we'll wait a couple of years and see what happens.

[00:08:39] Speaker 03:
Same interest rate applies.

[00:08:41] Speaker 03:
In fact, Milestone has a 5% default rate of interest.

[00:08:44] Speaker 03:
So in fact, the interest rate goes up 5%.

[00:08:46] Speaker 03:
That is expressly exempted from the usury laws.

[00:08:49] Speaker 03:
Can't find that in the statutes either, but the Supreme Court of California had no problem ruling that multiple times.

[00:08:56] Speaker 03:
So the interest rate goes up.

[00:08:58] Speaker 03:
There's no benefit to anyone here except to Maury and Mark Moon, who got an interest-free loan, which, if you read D.C.

[00:09:05] Speaker 03:
McGrado, they say, we should not be blessing usury as just giving people free rates of interest to the detriment of every other borrower in California.

[00:09:14] Speaker 03:
I mean, California statutory interpretation is very clear.

[00:09:17] Speaker 03:
One does not simply bless an absurd result without at least trying to work for the legislation and ensuring that that is what the legislature intended.

[00:09:28] Speaker 03:
The usury laws are a little wonky.

[00:09:30] Speaker 03:
They're, you know, partially voter proposition.

[00:09:33] Speaker 03:
They're partially, you know, done by the legislature.

[00:09:37] Speaker 03:
In that 1916.1 was a legislative amendment.

[00:09:41] Speaker 03:
Article 15, I think, was entirely a proposition.

[00:09:44] Speaker 03:
But does anyone read it and go, wow, this results great.

[00:09:49] Speaker 03:
It's going to benefit anyone.

[00:09:51] Speaker 03:
It's not going to.

[00:09:52] Speaker 03:
And that's, I mean, DC and Magardo are just full of language.

[00:09:55] Speaker 03:
And we've cited a bunch of other cases.

[00:09:57] Speaker 03:
I think, frankly, I don't want to go too far off track, but the Upland case we cited is important.

[00:10:04] Speaker 03:
That one's on a totally different issue, but it's an issue of statutory interpretation.

[00:10:08] Speaker 03:
In one second, Your Honors.

[00:10:11] Speaker 03:
I'd like to quote it.

[00:10:14] Speaker 03:
It is a well-settled principle of statutory interpretation that language of a statute should not be given a literal meaning if doing so would result in an absurd consequence which the legislature did not attend.

[00:10:27] Speaker 03:
In the Upland case, it has nothing to do with usury, but that's where that decision comes from.

[00:10:32] Speaker 03:
There, the statute said that before a police officer can be questioned for misconduct, he's entitled to the representation of his choice.

[00:10:42] Speaker 03:
The police officer asserted, I forget exactly what it was, but essentially he asserted a representative that would never be possible, right?

[00:10:49] Speaker 03:
He does never be questioned.

[00:10:51] Speaker 03:
That's what the statute said.

[00:10:52] Speaker 03:
The California legislature said, uh, court said, no, that's a ridiculous position.

[00:10:57] Speaker 04:
But, but council, why wouldn't it, why is it impossible that California, uh, the legislator wanted you, if you're going to forbear, then you, and clearly the, the lender, uh, is under financial trouble.

[00:11:09] Speaker 04:
So therefore you should have charged interest rates.

[00:11:11] Speaker 04:
That's not you serious or under 10%.

[00:11:13] Speaker 03:
Why is it impossible?

[00:11:14] Speaker 03:
It's, I mean, I don't think it's impossible to legislature.

[00:11:18] Speaker 04:
I mean, that's the whole point.

[00:11:19] Speaker 04:
You're making policy arguments, but there is a policy argument on the other side.

[00:11:22] Speaker 04:
So how are we supposed to choose that?

[00:11:24] Speaker 03:
I'm sorry, Your Honor.

[00:11:25] Speaker 03:
Could you express your policy argument again?

[00:11:27] Speaker 04:
Well, so you're exempt from the first loan, but then clearly the borrower is under financial distress and needs the forbearance.

[00:11:36] Speaker 04:
And so why couldn't it be possible?

[00:11:39] Speaker 04:
The California legislature said, well, if the borrower is under financial distress, then that person should be charged a non-usurious rate.

[00:11:47] Speaker 03:
for forbearance and you don't obviously the lender doesn't have to take that they could just foreclose but it seems like that's a possible policy outcome that the California courts would have or a legislator would have wanted I think that that's not a realistic outcome why would anyone want that I mean what you're basically saying is that if we just don't let them do forbearances except for a lower than usurious rate of interest then they'll lower their rates of interest right if you look at many of the cases proposition to

[00:12:15] Speaker 03:
the Legislature of History for 1916.1, all of them are fairly grounded in practicality, and DC and McGrath are also.

[00:12:23] Speaker 03:
Lenders in competitive markets aren't gonna go and just cut interest rates willy-nilly because the courts say, especially when they have another option, which is just to charge default rate of interest in four clubs.

[00:12:35] Speaker 03:
Right.

[00:12:35] Speaker 03:
Neither is appealing.

[00:12:37] Speaker 03:
They would prefer to get borrowers in performance and on loans and get them to exit

[00:12:42] Speaker 03:
Normally, that's the best outcome for the lender.

[00:12:44] Speaker 03:
It's the best outcome for the borrower.

[00:12:46] Speaker 03:
But people don't go to take out 10%, 11%, 12% loans when they have access to 7%, 8%, or 9% loans.

[00:12:54] Speaker 03:
And there's a reason they don't have access.

[00:12:56] Speaker 03:
And that's because it's not worth giving those people loans at those rate of interest.

[00:13:00] Speaker 03:
And the California legislature clearly, by passing Prop 2, I think, whichever one it is that created Article 15,

[00:13:09] Speaker 03:
even passing 1916.1, intended to expand the user laws to allow more lending and to allow these types of loans to exist.

[00:13:18] Speaker 03:
The Moons were certainly very thankful that Milestone came along and gave them a refinance loan in the first case because they were facing financial difficulties beforehand and no one would lend to them.

[00:13:30] Speaker 03:
But you get my problem though.

[00:13:32] Speaker 04:
It just you're asking us to choose different policy between different policy potential policy outcomes and that's not what we're here to do Well, you're I mean, that's what the Gerardo and DCM courts did right?

[00:13:43] Speaker 03:
I mean they did exactly that You wanted to save time counsel.

[00:13:48] Speaker ?:
Yes

[00:14:04] Speaker 00:
Good morning, Your Honor, Your Honors.

[00:14:06] Speaker 00:
I'm John McDonnell, clumsily here representing the borrowers, Mark and Lori Moon.

[00:14:15] Speaker 00:
Judge Paez, you hit it on the nail on the head, and he admitted.

[00:14:20] Speaker 02:
Do you want to save time too, Counsel, on the cross appeal?

[00:14:22] Speaker 00:
Oh, excuse me, yes, Your Honor.

[00:14:24] Speaker 00:
There's an appeal and a cross appeal, so I'd like to save half my time to deal with the cross appeal.

[00:14:30] Speaker 00:
Or do I deal with that now?

[00:14:32] Speaker 02:
You deal with it now.

[00:14:34] Speaker 02:
If you want to save rebuttal time, then that's fine, but it's limited to the issues raised on the cross appeal.

[00:14:39] Speaker 02:
So I was confused as to how you plan to proceed.

[00:14:43] Speaker 00:
I'm sorry, Your Honor.

[00:14:44] Speaker 00:
I was confused too.

[00:14:46] Speaker 00:
I'd like to reserve seven minutes for rebuttal.

[00:14:52] Speaker 02:
All right.

[00:14:52] Speaker 02:
It's always aspirational.

[00:14:53] Speaker 02:
Keep your eye on the clock.

[00:14:54] Speaker 02:
I'll try to help you out.

[00:14:55] Speaker 00:
Thank you, Your Honor.

[00:14:57] Speaker 00:
And as I was saying, Judge Paez, you hit the nail on the head and Mr. Kornberg admitted the law is clear.

[00:15:06] Speaker 00:
The extension must be at a legal rate or else it violates the usury law.

[00:15:12] Speaker 00:
And that's a very specific statute.

[00:15:14] Speaker 00:
It covers the main provision that the broker loan, the original broker loan is exempt completely, but any

[00:15:24] Speaker 00:
extension must relate to a original loan that was for the purchase or sale of securities.

[00:15:31] Speaker 00:
And as the bankruptcy appellate panel outlined exactly how the statute worked, the original provision in the constitutional amendment only allows the broker exemption for the initial loan.

[00:15:48] Speaker 00:
1916.1.

[00:15:49] Speaker 02:
So assuming that that's true, counsel made the point that for a

[00:15:54] Speaker 02:
subsequent renegotiated forbearance, it's very unrealistic to then bring the broker in again.

[00:16:00] Speaker 02:
How do you respond to that?

[00:16:03] Speaker 02:
There's an exemption for broker, and I suppose theoretically, the legislature meant to provide the borrower with that protection.

[00:16:12] Speaker 02:
But realistically, does a broker ever get involved again?

[00:16:15] Speaker 00:
Why not?

[00:16:17] Speaker 00:
He did the original loan.

[00:16:18] Speaker 00:
That's the whole way it's structured.

[00:16:21] Speaker 00:
The broker who did the original loan, who helped them negotiate the purchase of the property, he comes back and helps them negotiate the extension.

[00:16:30] Speaker 01:
Well, Counselor had two responses to that, as I understood his argument.

[00:16:34] Speaker 01:
One, that situation is not contemplated by the statute, and two, it would just drive up the cost of any forbearance.

[00:16:45] Speaker 00:
Well, they had to pay the broker on the initial

[00:16:50] Speaker 01:
the initial loan.

[00:16:51] Speaker 01:
Well, so you assume that a broker is just going to say, oh, sure, I'll help you out with the forbearance.

[00:16:55] Speaker 00:
No, no.

[00:16:55] Speaker 01:
And there'll be no fee.

[00:16:57] Speaker 00:
No, he ends a fee.

[00:16:58] Speaker 00:
Sure.

[00:16:58] Speaker 00:
He ends a fee.

[00:16:59] Speaker 00:
Sure.

[00:16:59] Speaker 00:
Jacks up the cost.

[00:17:00] Speaker 00:
Yes.

[00:17:02] Speaker 00:
And the cost gets passed on to the borrower.

[00:17:05] Speaker 00:
So that's what happened in the initial loan.

[00:17:07] Speaker 00:
It happens in any lending arrangement.

[00:17:09] Speaker 04:
I thought your friend was saying that the broker could not be involved in the extension.

[00:17:15] Speaker 00:
No, the broker who made the initial loan must be involved in the extension.

[00:17:20] Speaker 00:
There are two requirements, must be the broker who was involved in the initial loan, must be arranging the extension, and the initial loan must have been for the purchase or sale of property.

[00:17:33] Speaker 04:
So you disagree with your friend saying that a broker could have been involved in the forbearance agreement?

[00:17:40] Speaker 04:
Could not have been?

[00:17:40] Speaker 00:
Could have.

[00:17:42] Speaker 00:
Yes, a broker could have been involved, but because the loan in this case does not relate to an original loan that was for the purchase or sale of property, the exemption in the statute does not apply.

[00:17:57] Speaker 00:
And I do want to address his major point that he was making here the entire time, which is he wants the court, and this has been their position all along, he wants the courts

[00:18:08] Speaker 00:
to nullify the California statute for policy reasons.

[00:18:13] Speaker 00:
And the policy reason that he gives is to prevent foreclosures.

[00:18:16] Speaker 00:
There's this big policy.

[00:18:17] Speaker 00:
Well, he never mentions where is that policy in the statutes.

[00:18:21] Speaker 00:
There are a lot of protections from foreclosure, but there are foreclosures going on literally today, probably in every county in California.

[00:18:30] Speaker 00:
Foreclosures are a part of the business cycle.

[00:18:32] Speaker 00:
And here's the key point.

[00:18:34] Speaker 00:
I want to take a minute to explain it.

[00:18:36] Speaker 00:
They don't want to foreclose because what he said was wrong.

[00:18:42] Speaker 00:
When the borrower

[00:18:43] Speaker 00:
defaults and there's a foreclosure sale, he doesn't lose his equity.

[00:18:48] Speaker 00:
Civil Code, if the lender has a million dollar loan and that foreclosure sells for two million, the lender doesn't get to keep two million.

[00:18:57] Speaker 00:
That's California Civil Code 2924K, items one through four, the priority of the money going out in a foreclosure sale.

[00:19:09] Speaker 00:
You pay the lender, you pay the junior lenders, you pay the costs,

[00:19:12] Speaker 00:
and everything that's left over goes to the moons.

[00:19:16] Speaker 00:
So, in this case, you can see the incentive that they have not to foreclose, but to extend.

[00:19:25] Speaker 00:
We know the numbers, a $795,000 loan, moons defaulted, they could have foreclosed.

[00:19:32] Speaker 00:
We know the foreclosure number because they came up with it.

[00:19:36] Speaker 00:
It's the 902,000 is the extension amount.

[00:19:41] Speaker 00:
They charged the 11% on the new $902,000 and now we go all the way to April of 2019 when Milestone says we are now owed $1.288 million for granting the extension.

[00:20:00] Speaker 00:
That's $386,000 more.

[00:20:01] Speaker 00:
Okay, I gotta go back.

[00:20:07] Speaker 00:
When they foreclose for $902,000, they get approximately $107,000 more than the 795 loan.

[00:20:17] Speaker 00:
Now they foreclose on the $902,000 extension, which cost them nothing.

[00:20:24] Speaker 00:
They don't have to put any new money out.

[00:20:25] Speaker 00:
In fact, they charged the moon $6,800.

[00:20:28] Speaker 00:
When they foreclose in 2019,

[00:20:33] Speaker 00:
and get the 1.288 million that they demand, that's $386,000 more than the 902 they would have gotten in the first place.

[00:20:45] Speaker 00:
Three times more than the 107 they would have gotten if they had foreclosed instead of granting an extension.

[00:20:54] Speaker 00:
Granting the extension is part of their business model.

[00:20:58] Speaker 00:
And here's the point that Judge Bumate hit on.

[00:21:03] Speaker 00:
They could make that extension at 9% and still make most of that $386,000.

[00:21:09] Speaker 00:
They're still making a killing at 9% by granting the extension

[00:21:18] Speaker 00:
and not foreclosing at the initial structure.

[00:21:20] Speaker 00:
And again, this is why most banks, credit unions, et cetera, they want to grant extensions.

[00:21:28] Speaker 00:
They'll continue to make more money.

[00:21:29] Speaker 00:
They're hoping they'll never have to foreclose and they'll get paid in full.

[00:21:34] Speaker 00:
But if they do have to foreclose, they'll make more money because they granted the extension than they would have if they foreclosed initially.

[00:21:45] Speaker 00:
That destroys their policy argument.

[00:21:48] Speaker 00:
They didn't do this out of the generosity of their heart.

[00:21:53] Speaker 00:
They did it to make more money.

[00:21:55] Speaker 00:
So the absurd result would be to foreclose initially, be almost irrational to foreclose initially instead of extending the loan and foreclosing two or three years later.

[00:22:07] Speaker 00:
So the statute works perfectly, the policy works perfectly, and they can make plenty of money granting an extension at a legal rate.

[00:22:20] Speaker 00:
I do want to switch now.

[00:22:22] Speaker 01:
So you have a cross appeal.

[00:22:24] Speaker 00:
We have a cross appeal.

[00:22:26] Speaker 00:
We are arguing that the law correctly applies, Epstein versus Frank, as we outlined in our brief.

[00:22:38] Speaker 00:
That law applies when the borrower doesn't attempt to repay the loan.

[00:22:48] Speaker 00:
The statutes that we refer to, 1501, 1504, 1511, in the Civil Code, they are there to require the lenders to deal fairly with the borrowers.

[00:23:03] Speaker 00:
When the borrower is attempting to repay the loan, the lender has the obligation to deal fairly and accept payment of the loan, and under 1511,

[00:23:14] Speaker 00:
the lender cannot act unfairly to prevent the borrower from repaying the loan.

[00:23:21] Speaker 00:
So both of those statutes say that once the borrower's standing there, and in this case the evidence showed the borrower was ready, willing, and able to repay the loan with a new substantial lender, network financial, network capital, in April of 2019,

[00:23:45] Speaker 00:
Milestones should have just accepted the payment.

[00:23:48] Speaker 00:
Well, they didn't offer it.

[00:23:49] Speaker 00:
They didn't offer them a check.

[00:23:51] Speaker 00:
No, what they did is they lined up a borrower and they did what the statute procedure says.

[00:23:57] Speaker 00:
They requested a payoff number.

[00:24:00] Speaker 00:
The lender was ready, said, as soon as we get that payoff number, we're ready to set a closing date and pay this thing off.

[00:24:06] Speaker 00:
And that's in the record.

[00:24:11] Speaker 04:
milestone said well no you don't know what the statute says in offer of payment not not a not a request for payment offer I mean not not just the requiem right you needed to have ready money ready to go the money was ready to go they would have

[00:24:28] Speaker 00:
in fact, put the money in, not just made an offer.

[00:24:31] Speaker 04:
But they never made the offer, though, to give them money.

[00:24:34] Speaker 00:
Right, because the demand was so exorbitantly illegal, they only had 1.06 available, which 1.065 to pay off the $902,000, so they just couldn't come up with that money.

[00:24:54] Speaker 00:
They could have paid the legal amount off,

[00:24:57] Speaker 00:
But Milestone prevented that by the illegal demands.

[00:25:00] Speaker 00:
And I see I'm hitting four minutes, so I better reserve that and stop now.

[00:25:06] Speaker 02:
All right.

[00:25:15] Speaker 03:
Your Honors, it says I have two minutes.

[00:25:19] Speaker 03:
OK, anyway.

[00:25:20] Speaker 03:
I'll start very quickly by saying I did not expect counsel to come up and state, well, your client you just foreclosed on my client.

[00:25:28] Speaker 03:
They clearly didn't want that to happen and they couldn't get a 9% loan at the, when they saw the loan from Milestone.

[00:25:35] Speaker 03:
And I'd also like to point out that borrowers in default, right, which is what will happen if Milestone's only goal is to collect interest, cannot refinance loans.

[00:25:43] Speaker 03:
It's virtually impossible, at least from conventional lenders.

[00:25:46] Speaker 03:
So that's just the idea that it's better for a borrower not to be able to get a forbearance is nonsensical.

[00:25:53] Speaker 03:
Lenders want performing loans.

[00:25:55] Speaker 03:
I also really want to stress, council and everyone here keeps on saying, we're trying to right right California law.

[00:26:01] Speaker 03:
We are not.

[00:26:04] Speaker 03:
We are simply saying, if you look at the statute, the rate of interest upon the loan of forbearance is not clear.

[00:26:11] Speaker 03:
What does it mean to be upon a forbearance?

[00:26:13] Speaker 03:
Does it mean it carries over a rate of interest, or does it mean that the forbearance charges a usurious rate of interest?

[00:26:19] Speaker 03:
I'd submit if you read this, the statute, sorry, Constitutional Section 15, and, you know,

[00:26:27] Speaker 03:
Jackson 816.1 in all the usury laws, the idea behind this is so that people cannot take, you know, lower interest rates of loans and get, you know, high forbearances be shoved into them.

[00:26:38] Speaker 03:
That consideration doesn't apply.

[00:26:40] Speaker 04:
But I can't speak for you right now.

[00:26:42] Speaker 04:
I just want to ask a question.

[00:26:43] Speaker 04:
What's your response to your friend's argument that a real straight broker could have been in used for the forbearance agreement?

[00:26:52] Speaker 03:
That is not what the statute says.

[00:26:53] Speaker 03:
We would have done it if we could.

[00:26:55] Speaker 04:
That would have solved all the problems, right?

[00:26:58] Speaker 03:
Yes, if a real estate broker could come in and do it.

[00:27:01] Speaker 03:
I mean, look, you're also going to strain borrowers under this one if the real estate broker can't come back in, right?

[00:27:06] Speaker 03:
And it's going to raise up the cost.

[00:27:08] Speaker 04:
So you've never tried bringing a real estate broker back in?

[00:27:10] Speaker 03:
Well, you couldn't do it in this case.

[00:27:12] Speaker 03:
The statute doesn't allow it.

[00:27:14] Speaker 02:
Well, even if it raises the cost to count your opponent on the other side, you could have still brought him in.

[00:27:21] Speaker 03:
You cannot do it.

[00:27:23] Speaker 03:
I mean, I'm just going to go back to... What section are you citing?

[00:27:26] Speaker 03:
If you look at it, there's only two sections.

[00:27:28] Speaker 03:
And this, by the way, the Bankruptcy Court came to the same conclusion in its opinion.

[00:27:33] Speaker 03:
Judge Montali was right about this.

[00:27:34] Speaker 03:
He had a whole thing in the Bankruptcy Court's opinion about how it was impossible that you couldn't do it.

[00:27:41] Speaker 03:
If you look at 1916-1, there's three parts, but there's really only... There's four parts because part... Sorry, two has an A and a B.

[00:27:52] Speaker 03:
Part one and part two A are only discussed loans, right?

[00:27:56] Speaker 03:
So if we presume this doesn't count as a loan, it's out.

[00:27:59] Speaker 03:
Three, sorry, two B allows for arranges or negotiates for another a forbearance, extension, or refinancing of any loan.

[00:28:09] Speaker 03:
Yeah, toward by real property in connection with a past transaction.

[00:28:12] Speaker 04:
Yeah, that's sales.

[00:28:13] Speaker 04:
So if the broker arranged the first one, then the broker can arrange a forbearance.

[00:28:19] Speaker 03:
It has to be in connection with a past transaction in which, sorry,

[00:28:22] Speaker 04:
Sorry, yeah with that sale which was referring to the sale in subsection a which is what happened here So I just don't know if I don't know Not a sale that sale refers to the previous sale But there was this was a refinance loan your honors there was no sale in connection with the past transaction and

[00:28:53] Speaker 04:
So you're saying it doesn't even fit under 2A, the first one?

[00:28:58] Speaker 03:
Yeah, no.

[00:28:58] Speaker 03:
To the extent to be keys off on 2A, no, it would not.

[00:29:01] Speaker 04:
I'm sorry?

[00:29:02] Speaker 04:
The initial transaction would not have fit under 2A?

[00:29:05] Speaker 03:
The initial transaction, the real estate broker was not involved with the purchase of the home by the Moons whenever they went and purchased it, the investment property.

[00:29:17] Speaker 03:
The broker was brought in solely to negotiate a refinance loan.

[00:29:21] Speaker 03:
And remember, the Moons bought, paid for their broker,

[00:29:24] Speaker 03:
Milestone never had any communication directly with the Moons themselves.

[00:29:27] Speaker 03:
The broker is the one who did it.

[00:29:29] Speaker 03:
They brought in Milestone solely to do a refinance transaction.

[00:29:33] Speaker 03:
So there was no sale, there was no exchange, there was no lease, there was nothing that- So how was the initial transaction non-usurious?

[00:29:40] Speaker 03:
Because- What exception did it apply under?

[00:29:43] Speaker 03:
Oh, sorry.

[00:29:43] Speaker 03:
Acts for compensation or inspection of compensation for soliciting, negotiating, or arranging a loan for another.

[00:29:52] Speaker 04:
You're saying in three?

[00:29:54] Speaker 03:
One.

[00:30:02] Speaker 02:
I mean, I will state.

[00:30:03] Speaker 02:
It's a broker negotiated loan.

[00:30:05] Speaker 03:
Yeah, it's a broker negotiated loan.

[00:30:07] Speaker 03:
I will state that while we disagree.

[00:30:08] Speaker 02:
And you're saying that it can't be a broker negotiated forbearance.

[00:30:11] Speaker 03:
It cannot.

[00:30:12] Speaker 03:
And that, I think, by the way, as I said, is very strong evidence that when they brought this in, they meant something else.

[00:30:20] Speaker 03:
They wanted to limit it.

[00:30:21] Speaker 03:
a situation where a borrower does a non-usurious loan and then brings in a broker to do a forbearance that they wanted to limit it to very specific circumstances.

[00:30:30] Speaker 03:
I can't totally tell you why the legislature would have thought

[00:30:33] Speaker 03:
You know, a purchase money one is better than a refinance one.

[00:30:36] Speaker 03:
But it makes some amount of sense.

[00:30:38] Speaker 02:
Well, I think from a policy standpoint, the legislature wanted to give the borrower that protection by having a broker involved.

[00:30:46] Speaker 02:
But I think with your argument, you're actually over time.

[00:30:48] Speaker 02:
Let me see if my colleagues have any additional questions.

[00:30:52] Speaker 02:
Thank you very much.

[00:30:53] Speaker 03:
Thank you, Your Honor.

[00:31:07] Speaker 00:
Your Honor, I believe it's proper to limit my rebuttal to my cross-appeal.

[00:31:13] Speaker 02:
And I simply want to point out... Give arguments that counsel raised, essentially.

[00:31:17] Speaker 00:
Or any... Well, again, he's misreading the statute.

[00:31:21] Speaker 00:
The statute requires for the extension two things.

[00:31:25] Speaker 00:
The broker on the original loan must negotiate the extension.

[00:31:32] Speaker 00:
and the original loan must have been for the purchase or sale of real estate.

[00:31:38] Speaker 00:
And both the bankruptcy court and the bankruptcy appellate panel pointed out this loan was not for the purchase of real estate, it was refinance of earlier loans.

[00:31:50] Speaker 00:
So this loan could never qualify under 1916.1 paragraph three,

[00:31:58] Speaker 00:
And I think when he was up here the first time, he admitted that.

[00:32:03] Speaker 00:
I know they admitted it in their papers, that without the policy argument, the statute hems him in, that statute makes the extension usurious, and the interest charge on the extension is illegal.

[00:32:24] Speaker 01:
His only, I just understand, putting aside the policy argument, as I understand counsel's argument, it was that Gerardo, is it Gerardo I can't, I'm not sure if I pronounced it.

[00:32:35] Speaker 00:
Gerardo, I think.

[00:32:36] Speaker 01:
Gerardo, whoever you should say it, is they would like to see that extended.

[00:32:42] Speaker 01:
Right.

[00:32:42] Speaker 00:
To this case.

[00:32:43] Speaker 00:
Right.

[00:32:44] Speaker 00:
To this situation.

[00:32:45] Speaker 00:
Right.

[00:32:46] Speaker 00:
That's been their argument from day one.

[00:32:48] Speaker 00:
They want to take,

[00:32:51] Speaker 00:
a non-loan situation.

[00:32:53] Speaker 00:
Remember, the statute applies to every loan or forbearance of money.

[00:32:59] Speaker 00:
In their brief, they said, well, this meets the technical definition of a loan.

[00:33:03] Speaker 00:
That's not true.

[00:33:04] Speaker 00:
As we said in our reply, or in our brief, the case law says a loan is a delivery of money to another with an agreement that it's going to be repaid, usually with interest.

[00:33:17] Speaker 00:
A sale of property is not a loan.

[00:33:22] Speaker 00:
Gerardo case itself said that.

[00:33:24] Speaker 00:
There was not a loan here, there was a sale of property, and for literally now 200 plus years, both the English common law and all the laws of the United States say that because it is not a loan, it is not subject to the usury laws.

[00:33:42] Speaker 00:
So now they wanna basically say, let's take the rules for the non-application of the usury laws

[00:33:52] Speaker 00:
and make all those rules apply.

[00:33:53] Speaker 02:
What is your view on certification, on the question of whether Gerardo and DCM partners should be extended?

[00:33:59] Speaker 00:
I think both the bankruptcy court judge and the bankruptcy appellate panel clearly outlined exactly what the California law provides in that, and there's no need for a certification.

[00:34:13] Speaker 02:
All right.

[00:34:15] Speaker 02:
Anything further, counsel?

[00:34:16] Speaker 00:
I just wanted to mention

[00:34:20] Speaker 00:
In their brief and in their presentation today, the lender really provided no response to our cross complaint that both

[00:34:29] Speaker 00:
for either the statute 1504 cuts off interest or the breach of the contract by milestone demanding the illegal payments, that cuts off the requirement to pay interest.

[00:34:42] Speaker 00:
Doesn't extinguish the loan, but it cuts off the requirement for interest.

[00:34:47] Speaker 01:
I just have one sort of informative question.

[00:34:50] Speaker 01:
It's maybe not even a proper question, but what's the status of the property today?

[00:34:55] Speaker 00:
After we won the case in the tax court, excuse me, in the bankruptcy court, the court, there was no stay on appeal.

[00:35:04] Speaker 00:
The property was refinanced.

[00:35:07] Speaker 00:
The Moons obtained a new 30-year loan from a regular borrower at I think it's 7.92%.

[00:35:16] Speaker 00:
Milestone was completely paid, everything they were legally owed in the course of that refinancing.

[00:35:22] Speaker 00:
That occurred long after the record in this case was put together.

[00:35:29] Speaker 02:
All right, thank you very much, counsel, for both sides, for your very helpful arguments today.

[00:35:34] Speaker 02:
The matter is submitted for decision by the court.

[00:35:37] Speaker 02:
That concludes the argument calendar this morning, so we'll be in recess until tomorrow morning.