Brief Fact Summary. Ahmad Homani (Plaintiff) sued Mansoor Iranzadi (Defendant) to collect the balance due on a promissory note. Plaintiff received an amount from Defendant, which Defendant intended to pay down the principal balance but Plaintiff claimed that the payments represented interest. The trial court granted judgment for Plaintiff
Synopsis of Rule of Law. A party to a contract cannot ask the court to have his illegal objects of the contract carried out nor can he set up a case in which he must disclose an illegal purpose as the grounds of his claim.
Plaintiff and Defendant were brothers-in-law and had been involved in various business dealings together in Iran and the United States. On January 9, 1984, Plaintiff wrote a check for $250,000.00 to California Land Title to fund a real estate transaction on behalf of Defendant. The $250,000.00 loan was evidenced by two promissory notes in the amount of $125,000.00 each dated March 22, 1984. Each note provided that it was all due and payable in two years and it would bear no interest. One note was secured by property known as “Pinehill” and the other by property called “Outlook.” Defendant granted Plaintiff a power of attorney pursuant to which Plaintiff frequently wrote checks for Defendant. On March 25, 1984, Plaintiff signed a check to himself for $2,104.68 on Defendant’s account, which stated that it was for interest to March. According to the Plaintiff, this amount represented the interest lost to him by keeping the $250,000.00 accessible for two and a half months. He said
that Defendant had agreed to pay him the difference between the interest he was earning in his regular bank account and the 12% he would be receiving from Defendant. These checks continued for about a year. The total amount paid to Plaintiff by Defendant was $39,324.68. On March 18, 1985, Plaintiff and Defendant signed an agreement modifying each of the promissory notes. The modification stated that the notes should be paid on or before September 22, 1985 and should bear no interest until June 22, 1985. On June 22, 1985 interest shall commence at the rate of 18% and the interest shall be payable monthly commencing on July 22, 1985 and continue monthly thereafter. Two more payments were made and then no further payments were made. On August 14, 1985, Plaintiff filed notices of default and foreclosures were commenced on both the properties. Defendant found a buyer for the Pinehill property and Plaintiff was paid through that escrow the full principle balance of $125,000.00 plus interes
t. Defendant reserved the right to claim a credit for $40,000.00 against the second note. The Outlook property sold and Plaintiff submitted a demand for the full $125,000.00 plus interest. Defendant claimed that he had paid $39,324.68 on the principle balance. Plaintiff filed suit, alleging breach of contract. Defendant filed a cross complaint for declaratory relief alleging that he paid $39,324.68 towards the principle and seeking a determination of rights as to the money held in trust. Defendant also pleaded a cause of action for conversion of the $39,324.68 and prayed for compensatory relief and punitive damages against Plaintiff. Plaintiff testified at trial that he and Defendant orally agreed on an interest rate of 12% and that Defendant would not report interest paid and Plaintiff would not have to report receiving the income. Defendant claimed that he and Plaintiff had never discussed interest on the loan and that interest was not charged in family dealings. The trial court fou
nd that the payment represented interest, therefore Defendant still owed Plaintiff the amount on the loan.
Issue. Whether a contract, which has as its object an illegal purpose is contrary to public policy and void?
Held. Yes. Judgment is reversed.
A contract must have a lawful object, which is the thing that is agreed to by the parties to do or not to do. The object must be lawful when the contract is made and the part of the contract that is unlawful is void. The test to determine whether the object of the contract is unlawful is whether the plaintiff requires the aid of the illegal transaction to establish his case. If the question of illegality develops during trial the court must consider it whether the defense was pleaded or not. Case law demonstrated that a party cannot come to court and ask to have his illegal objects carried out; nor can he set up a case in which he must disclose an illegal purpose as the grounds of the claim.
Here, Plaintiff entered into a contract that provided that he would not be paid interest. The purpose of this provision was to avoid compliance with state and federal income tax regulations. Plaintiff then secretly collected interest income which he had no intention of reporting and then when the dispute arose he asked the court to enforce the agreement so he could keep the money he collected. It is clear that Plaintiff can only establish his case through the medium of an illegal transaction, which he was a party. Therefore, Plaintiff is not entitled to the $39,324.68 he collected as unreported interest.
Discussion. Illegality may not prevent some contracts from being enforced if the court construes the illegality not to be serious. Some constitutionally valid statutes may provide explicitly that a particular contract is illegal and then the task of the court is rather easy.