The opinion of the court was delivered by: GESELL
This is an action by a number of homeowners against two savings and loan associations, Jefferson Federal Savings & Loan Association, and Montgomery Federal Savings and Loan Association; and a finance company, Atlas Subsidiaries of Delaware, Inc. Each plaintiff has a note and deed of trust held by one of the defendants. The Atlas trusts are second trusts and the trusts of the Association are first trust notes. Plaintiffs, who proceed individually and not as representatives of a class, are all homeowners in the District of Columbia who entered into separate home improvement contracts back in 1964 or 1965 with Monarch Construction Corporation and the notes in issue all arose out of Monarch's activities. Monarch is not a defendant. Jurisdiction is based on 11 D.C. Code § 501(1).
Plaintiffs seek recision and restitution of money paid on the notes. They claim fraud, unconscionability, and usury or illegal money lending against one or more defendants, as will hereafter appear in more detail. Defendants deny these allegations and assert they are holders in due course and that plaintiffs are guilty of laches. The case was tried to the Court and fully argued and briefed following extensive pretrial proceedings.
It is not disputed that Monarch was engaged in a scheme to defraud which began in 1964, although defendants contend that the proof fails to show that fraud was in all instances perpetrated on the particular plaintiffs before the Court. The Monarch home improvement scheme to defraud was described in general terms by Nathan Cohen, one of its architects, and supplemented by the testimony of other witnesses. Basically, the plan involved several steps. A group of salesmen, called "engineers," worked from leads developed by "boiler-room" telephoning or from door-to-door canvassing, concentrating on row houses in deteriorating areas of the inner city. The sales effort was of a high pressure variety, often accompanied by misrepresentation. Sales personnel using a pitch book called on individual homeowners and attempted to create the false impression that Monarch was Government-sponsored and that a prospective customer's house would be more valuable and less likely to be condemned if a town-house front and possibly other improvements were added. Homeowners, often already saddled with mortgage debt, were told that home improvements could be financed in such fashion that even with the cost of improvements, monthly payments would be no greater and possibly less than the homeowner was carrying to finance his home.
A credit application was obtained from the prospective customer to determine information concerning existing debt and income, and a contract for the work to be done was prepared and presented to the customer for signature. It was a crucial part of the plan to charge an excessive amount for the work, which was farmed out to an affiliate of Monarch. The charges were usually at least twice cost and often more. For example, $2,500 or more might be charged for work costing $1,250, even though the latter figure included a twenty percent profit for the affiliate doing the actual work. In fact, commencing in November, 1964, salesmen were encouraged to increase the over-charge whenever possible and received extra commission for overcharging.
A real estate broker, Lapin, who was thoroughly familiar with Monarch's methods, having previously worked in Monarch's employ, was used by Monarch to obtain first trust financing. A copy of the work contract and credit data were given to Lapin and upon his advice that a "satisfactory" first trust could be obtained from a lender, Monarch personnel often "spiked the job," that is, did some initial work, with or without formal permission of the homeowner, to prevent cancellation and to hold the customer in place.
Since it was not possible for Monarch to get a first trust on the property until the improvement work was completed, Monarch had difficulty financing the work. Monarch had excessive "promotional" expenses in all departments and was always short of cash. In order to raise immediate cash, second or third trust notes were sometimes arranged, often by ruse, and placed with lenders who bought the notes at substantial discount. The proof showed that some homeowners were brought to Monarch's office in Silver Spring, Maryland, and presented with papers, often in blank, to be signed on the false representation that an application for a Federal Housing Administration (FHA) loan was involved.
When the work was completed or approaching completion, Lapin would arrange a first trust loan with Jefferson or Montgomery, purporting to act for the homeowner as agent. The settlements on the first trust notes occurred at a title company chosen by Lapin. The homeowners' debts were usually consolidated at this stage if possible. Monarch received payment for its exorbitantly overcharged work; Lapin received a commission from the lender; and other charges were exacted. At the same settlement, occasionally, after paying off existing debts there was not enough left of the first trust to cover the contract price, the supposed original purpose of the transaction, and second trusts were also sometimes imposed on the property. The homeowners were often confused, uncertain as to their obligations and hurried through settlement with minimum explanation. Some signed papers they did not read and most were persuaded that the settlement was merely to pay for the home improvement work. Many homeowners were of limited education and some could neither read nor write. They were often not clear who they were borrowing money from, or how long payments would be required. Payments far exceeded representations made at time of contracting. Later, following settlement, when loan books were sent to them, they paid, often at great sacrifice, even when more than a payment to one lender proved to be involved, to avoid the threat of foreclosure on their homes brought forcibly to their attention in loan books.
The Proof Against all Defendants.
The proof as to each defendant differs and must be considered separately.
Jefferson loaned first trust money to 31 plaintiffs as well as many other Monarch customers.
No claim of usury or violation of loan shark laws is made as to Jefferson. Its loans were conservative and at standard interest rates. Plaintiffs assert against the notes fraud in the factum, fraud in the inducement and unconscionability.
A representative number of plaintiffs borrowing from Jefferson was called and their testimony was accepted by both sides as typical of all Jefferson plaintiffs in the suit. There was ample evidence that these plaintiff-homeowners were victims of the Monarch fraud. They were all charged unconscionable prices for the work and some were induced to sign trust papers and other contract documents by affirmative misrepresentations on which they relied to their detriment. Lapin's dealings with all borrowers were duplicitous.
Settlements all took place at Realty Title and Insurance Company in the District of Columbia and were handled by Rushing for the title company; Lapin was always present, sometimes with Cohen or someone else from Monarch. Jefferson never attended settlement but charged a settlement fee of $65 to $85 for its portion of the paperwork, together with a small appraisal fee. The settlement sheets were sent to Jefferson but Jefferson ignored them and their frequent indicia of irregularity or inconsistency with the underlying contract.
Jefferson knew nothing about Monarch and never investigated Monarch or Lapin. It was interested only in whether there was ample security for the loan and never considered whether or not Monarch's work was excessively charged. It never discussed the actual loan with the borrower and never cared where the loan money went so long as Jefferson "was covered."
On one occasion, Jefferson reported directly to Cohen of Monarch in response to his request as to the status of a group of loan applications pending. There was some additional direct contact between Jefferson and Cohen: Jefferson cancelled a loan commitment at Cohen's direction and at Lapin's suggestion sought to recover from Monarch its unpaid expenses from settlements not going through to closing.
No effort was made by Jefferson to prevent further encumbrance of the realty by subsequent or concurrent second and third trusts, although Jefferson, in regular course, learned of these trusts by notice from the lenders. No complaints by the homeowners were shown to have been made to Jefferson except some concern of an indefinite kind expressed by one plaintiff. First trust payments were received regularly from the borrowers, basically without complaint. All Jefferson officers directly involved stated that they were completely unaware of any wrongdoing and in no way had even their suspicions aroused. When visited on several occasions by a Government investigator looking into Monarch transactions in 1965, Jefferson continued lending on applications brought by Lapin without further inquiry.
Montgomery's factual situation in certain respects follows the same pattern as Jefferson's, with some indicated differences. Plaintiffs similarly defrauded by Monarch raise the same legal claims. Montgomery's loan charges ...