Carboni v. Arrospide - 2 Cal. App. 4th 76, 2 Cal. Rptr. 2d 845 (1991)

Rule:

The court recognizes that unconscionability has both a procedural and a substantive aspect. The procedural aspect is manifested by (1) oppression, which refers to an inequality of bargaining power resulting in no meaningful choice for the weaker party, or (2) surprise, which occurs when the supposedly agreed-upon terms are hidden in a prolix document. Substantive unconscionability, on the other hand, refers to an overly harsh allocation of risks or costs which is not justified by the circumstances under which the contract was made. Presumably, both procedural and substantive unconscionability must be present before a contract or clause will be held unenforceable. However, there is a sliding scale relationship between the two concepts: the greater the degree of substantive unconscionability, the less the degree of procedural unconscionability that is required to annul the contract or clause.

Facts:

Defendant borrower's son signed a $ 4000 note and deed of trust, as his attorney in fact, in favor of plaintiff lender, with an interest rate of 200 percent. The note was due in three months, but plaintiff continued to advance money to defendant. At trial, the principal was $ 99,346, with a total due of $ 390,000. When defendant failed to make payments, plaintiff sued for judicial foreclosure and a deficiency judgment. The trial court ruled that enforcing the 200 percent interest rate was against public policy. The trial court set the interest rate at 24 percent per annum and ordered foreclosure of the property. Plaintiff appealed.

Issue:

Was the 200 percent interest rate unconscionable and against public policy? 

Answer:

Yes.

Conclusion:

The court affirmed and held that the 200 percent interest rate was unconscionable under Cal. Civ. Code § 1670.5. The court concluded that the interest rate was substantively unconscionable. It imposed a cost on defendant that was overly harsh and not justified by the circumstances surrounding the contract. The note was procedurally unconscionable due to the unequal bargaining power of the parties. The court found that defendant was under emotional duress at the time the note was executed and had been unsuccessful in securing a loan from other sources.