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Bibi v. Elfrink

Supreme Court of Alaska

September 22, 2017

MARIAM BIBI, f/k/a MARIAM RAJA, Appellant,

         Appeal from the Superior Court of the State of Alaska No. 3AN-14-05970 CI, Third Judicial District, Anchorage, Gregory Miller, Judge.

          Gail M. Ballou, Law Office of Gail M. Ballou, Fairbanks, for Appellant.

          Theodora Accinelli, RCO Legal - Alaska, Inc., Anchorage, for Appellee Kevin Elfrink. No appearance by Appellee Javed Raja.

          Before: Stowers, Chief Justice, Winfree, Maassen, Bolger, and Carney, Justices.


          STOWERS, Chief Justice.


         Mariam Bibi and Javed Raj a married and later bought a home in Anchorage with loans from IndyMac Bank, F.S.B. (IndyMac). IndyMac's loans were secured by deeds of trust on their home. The couple later received an additional loan of around $10,000 from Kevin Elfrink. The loan from Elfrink charged 10% interest but also included a funding fee of $4,000 rolled into the rest of the loan for payment over time rather than charged and paid at the outset. Over the course of six years, the couple made irregular payments, increased the loan balance three times until it exceeded $25,000, and eventually defaulted. Elfrink initiated foreclosure proceedings and then bought the house at his own foreclosure sale by credit-bidding all money he asserted was due to him under the modified promissory note, satisfying the couple's debt to him.

         Following the foreclosure, Elfrink filed a complaint against Bibi and Raja for forcible entry and detainer to remove them from the home. Bibi moved out of her home but filed a counterclaim for usury, quiet title and possession, and surplus proceeds from the foreclosure sale. Raja confessed judgment to his removal from the home. As the lawsuit proceeded, IndyMac initiated a foreclosure on its senior deed of trust and Elfrink bought the house for a second time at IndyMac's foreclosure sale. The superior court ultimately denied Bibi's usury claim, determining that Bibi had no standing, her claim was time barred, and in any event, the loan did not violate Alaska's usury statute because the funding fee was not interest and the usury statute did not apply once the loan's principal rose over $25,000[1] The superior court also denied Bibi's claim for title, ruling that the foreclosure statutes gave Elfrink clear title.

         Bibi appeals. We hold that (1) Bibi has standing; (2) it was error for the superior court to deny Bibi's usury claim because the funding fee was disguised interest and violated the usury statute, which applied to at least the initial period of the loan's life; and (3) the superior court correctly denied Bibi's claim for title and possession of her prior home because IndyMac's foreclosure extinguished her claim to the property.


         Mariam Bibi married Javed Raja in Pakistan. The couple moved to Alaska and had two children. They eventually bought a house in Anchorage in August 2006. They financed the purchase of their home with two promissory notes to IndyMac for $216,000 and $54,000. The notes were secured by first and second deeds of trust on the couple's home. Approximately seven months after they purchased their home, the couple's pizza business, Pizza Omega and Luigi's Pizza, were struggling. They needed money, and Raja went to Kevin Elfrink for help. Elfrink was a real estate broker who had met Raj a briefly when Elfrink was selling property near the couple's pizza business.

         Elfrink started making loans in the 1990s and did a few per year, borrowing money against his credit cards to finance them. Elfrink met with Raja and Bibi and they executed a promissory note in the amount of $14,597, dated March 19,2007, to be paid back with 10% interest by March 15,2009. But Raja and Bibi only received $10,597 at the time: $9,950 plus money to pay for the $647 in closing costs. The extra $4,000 Raja and Bibi were obligated to pay back was a "funding fee" Elfrink charged. Elfrink testified that the fee was to compensate him for educating himself about the pizza businesses, inventorying their equipment, making calls, and generally ensuring that he was making a sound loan; he also testified that he only charges the fee when he decides to extend a loan, not when he declines. The loan was secured by a security agreement on the pizza businesses, as well as a third deed of trust on Bibi and Raja's home. The deed of trust contained language stating it was for the purpose of securing "[p]ayment of the indebtedness evidenced by the promissory note . . . including all renewals, extensions or modifications thereto."

         The loan was escrowed at First National Bank Alaska (FNBA). Over the next six years the couple made irregular payments and the account balance was increased three times through amendments to the escrow instructions, though Bibi claims these increases occurred without her knowledge. In September 2007 Raja and Elfrink signed an amendment to the escrow instructions increasing the account balance by $7,061. The amendment was not signed by Bibi. In February 2008 Raja and Elfrink increased the account balance a second time by $4,532.90 through an amendment to the escrow instructions. Again, Bibi did not sign the amendment. These two amendments together brought the account balance up to $23,467.51.

         Meanwhile in May 2007, Raja had hired Elfrink to sell Pizza Omega for $169,000 and signed a listing with a 10% commission. The pizza parlor later sold for about $90,000, and for the commission Raja signed an escrow instruction form in March 2008 making a third and final increase of $12,153.49 to the loan balance. Bibi's signature is on this amendment form, but she testified that she did not sign the form, and Raja testified he did not sign for her. Bibi testified that she knew nothing about these three balance increases until her attorney sent her documents obtained from Elfrink through discovery shortly before trial.

         With the loan increase in March 2008 the account balance rose to $35,621. The interest rate was increased at that time to 12%, the maturity date was extended by nine years, monthly payments were lowered to $500 per month, and Elfrink waived the existing delinquency. Between May and December 2008 Bibi and Raja made eight monthly payments of $500. In 2009 they made another five monthly payments of $500. In 2010 they made three payments totaling $1,300. Bibi and Raja's last two payments on the debt were each for $500, one in 2011 and one in 2012. In addition, Bibi claimed a $500 payment was made in June 2013, and Raja testified to making a $2,500 payment outside of the FNBA escrow account sometime after mid-2013.

         In June 2013 Elfrink closed the escrow account. FNBA calculated that interest had been paid only through July 2009 and that the principal balance was $35,275.72. All in all, Raja and Bibi had paid Elfrink $13,419.32 or $13,919.32 through the escrow account, depending on whether they are credited with the final June 2013 payment of $500.

         Elfrink commenced foreclosure proceedings in August 2013 and notice of default was sent to Raja and Bibi. Alaska Trustee, LLC conducted a trustee's sale in November 2013. Based on audit figures from FNBA, the trustee calculated the amount due under the deed of trust to be $56,629.65. This was the amount necessary to cover $35,275.72 in unpaid principal, $18,486.41 in interest accruing since July 2009 - the date Bibi and Raja had stopped paying on the interest - plus escrow fees, late fees, and fees charged by the trustee for conducting the foreclosure sale. Elfrink purchased the property at the foreclosure sale by offering this amount as an offset bid.[2] He was not required to pay any cash because he was entitled to the amount he bid as the beneficiary of the deed of trust.[3] Alaska Trustee issued a trustee's deed to Elfrink that was recorded in Anchorage in February 2014.

         While Elfrink was preparing to foreclose, Bibi filed for divorce. By the time the superior court presiding over the divorce divided Bibi and Raja's marital assets, Elfrink had already conducted his foreclosure sale and recorded his trustee's deed. In March 2014 the superior court decided not to award the couple's home to either party in the divorce because it had been lost through foreclosure.

         That same month Elfrink served Bibi and Raja with a notice to surrender possession of the premises. In April he filed a complaint for forcible entry and detainer,[4] seeking possession of the property. A few days later, Bibi and her children removed most of their personal property. They left to visit Pakistan and Elfrink took possession. That same month Bibi filed counterclaims for usury, quiet title and possession, and surplus proceeds from the foreclosure sale; her attorney subsequently recorded a lis pendens against the property. For his part, Raja confessed judgment to his removal from the property.

         While the lawsuit proceeded, IndyMac initiated foreclosure proceedings on its first deed of trust. The foreclosure sale was held in March 2015. Elfrink made the highest bid and bought the property a second time, paying $240,967.18. A trustee's deed conveying title to the property was recorded in April.

         The next month, a three-day non-jury trial was held before Superior Court Judge Gregory Miller, after which the court entered findings of facts on the record. The court found for Elfrink on his claim for title and possession and denied all of Bibi's counterclaims. Final judgment for quiet title, possession, and expungement of lis pendens was entered in August 2015. Bibi appeals.


         "Whether a party has standing to sue is a question of law that we review de novo."[5] Whether a fee is to be treated as an interest charge in computing an effective interest rate for purposes of Alaska's usury statute depends on a set of factual questions.[6]

          "A factual finding will be deemed clearly erroneous only if it leaves us 'with a definite and firm conviction on the entire record that a mistake has been made.' "[7] But we review a superior court's application of the usury statute to these facts,[8] as well as whether the superior court applied the correct legal standard, de novo.[9] "We review the interpretation of a statute de novo, adopting the rule of law most persuasive in light of precedent, reason, and policy."[10]

         The interpretation of contractual language is a question of law that we review de novo, but determining the intent of the parties when entering a contract is a question of fact and we therefore review it for clear error.[11]

         The application of Alaska foreclosure statutes is a question of law, and we apply our independent judgment in reviewing such decisions.[12]

          IV. DISCUSSION

         A. It Was Error To Deny Bibi's Usury Counterclaim.

         Alaska's general usury statute applies to loans of $25,000 or less.[13] The statute allows a borrower who has paid usurious interest to recover double the amount of interest she pays in excess of the statute's cap,[14] but the borrower's total payments have to exceed the loan principal plus legal interest before she can recover.[15]

         Bibi argues she is entitled to recover under the usury statute. First, she argues that Elfrink's original loan was usurious because (1) when one treats the funding fee as disguised interest its initial interest rate exceeded the usury statute's cap and (2) the third loan modification's interest rate of 12% violated the usury statute on its face. Second, she argues that the three modifications to the original loan were each separate loans, so every loan was under $25,000 and thus subject to the interest cap. Third, she argues that adding the escrow payments and the proceeds from Elfrink's foreclosure sale, she paid the principal amount plus interest - both usurious and legal - on each loan, and at least one of these payments - the foreclosure sale proceeds - was within the statute of limitations. Accordingly, Bibi contends she satisfies the requirements for recovery under the usury statute and should prevail on her claim.

         While we do not agree with all of Bibi's arguments, we conclude that Bibi is entitled to recover under the usury statute based on the following: (1) it was error to conclude that Bibi had no standing to bring her usury claim; (2) it was error to conclude the funding fee was not disguised interest; (3) the superior court correctly determined that the usury statute's cap on interest did not apply to most of the loan period, but it did apply before the loan's balance exceeded $25,000; (4) a borrower must make payments that exceed a usurious loan's principal plus lawful interest before she can recover under the usury statute; (5) it was error to conclude foreclosure sale proceeds do not constitute a payment for purposes of the usury statute; and (6) in light of the foreclosure sale it was error to conclude that Bibi's usury claim was time barred. We hold that Bibi may recover under the usury statute, and we provide instructions to guide the superior court in calculating her award on remand.

         1. It was error to conclude that Bibi lacked standing to bring her usury claim.

         a. Bibi has standing.

         The superior court ruled that Bibi had no standing to bring her action. It reasoned that because the loan from Elfrink was taken out to support Bibi and Raja's pizza business, and the pizza business was awarded to Raj a in the couple's divorce case, Bibi had no standing to bring claims that derived from the loan. Elfrink endorses this reasoning. He argues that Bibi lacks the adversity of interest required for standing and that any usury claim that may have existed belonged to Raja, who confessed judgment.

         Bibi responds in her reply brief that she has standing because she was an obligor on Elfrink's original loan, the superior court found that she ratified three additional debts to Elfrink, and she and her ex-husband had record title to the house on which Elfrink foreclosed, among other reasons. She therefore argues she has "sufficient stake in the house and related debts to make her a proper party to litigate issues relating to them."

         Standing is a "rule of judicial self-restraint based on the principle that courts should not resolve abstract questions or issue advisory opinions."[16] "The fundamental question raised by an objection to standing is whether the litigant is a proper party to seek adjudication of a particular issue."[17] "[A] basic requirement of standing is adversity of interests."[18] One way to satisfy the adversity of interests requirement is to "have a 'sufficient personal stake' in the outcome of a controversy and an 'interest which is adversely affected by the complained-of-conduct.' "[19]

         Bibi has standing to sue for usury. Elfrink foreclosed on Bibi's house to satisfy debts arising from allegedly usurious loans pursuant to agreements Bibi signed or later ratified. Bibi also made payments, along with her ex-husband, toward those allegedly usurious loans. She stands to either permanently lose or regain payments she made on allegedly usurious interest. She therefore has a "sufficient personal stake" in the outcome of this controversy,[20] and her interests have been adversely affected by Elfrink's allegedly unlawful and "complained-of-conduct."[21] The fact that the original loan was intended to support and was secured in part by a pizza business that Bibi no longer owns is irrelevant considering both that she paid on the debt and her home was sold to satisfy the debt.

         b. Bibi did not waive her standing argument.

         Elfrink additionally argues that because Bibi failed to challenge the superior court's standing decision in her opening brief or list it in her statement of points on appeal, she waived the argument. Normally, her failure to list standing in her points on appeal would constitute abandonment,[22] her failure to argue standing in her opening brief would result in waiver,[23] and her discussion of standing in her reply brief would not resuscitate the issue.[24] But we have occasionally chosen to review issues sua sponte that were not raised on appeal,[25] and we have at times made an exception to the general rule that an issue omitted from an appellant's statement of points on appeal will not be considered. For example, in Mullen v. Christiansen we excused the omission of an issue from the party's points on appeal because the issue was raised at the trial level, was adequately briefed, and opposing counsel was apprised of it.[26] As with the issue in Mullen, standing was raised at trial, was adequately briefed in Bibi's reply, and Elfrink, as the party arguing that Bibi lacks standing on appeal, is well apprised of the issue.[27]Further, Bibi listed the usury statute on appeal and made arguments about the usury statute in her opening brief; standing must necessarily be addressed before the court addresses substantive issues. In this context, we choose to review the superior court's conclusion and hold that it was error.

         2. It was error to conclude that Elfrink's funding fee was not interest.

         In March 2007, at the time of Elfrink's initial loan to Bibi and Raja, AS 45.45.010(b) established the maximum allowable interest rate for loans under $25,000 at 11.25 %.[28] Under AS 45.45.020, "[a] person may not, directly or indirectly, receive in money, goods, or things in action, or in any other manner, a greater sum or value for the loan or use of money . . . than is prescribed in AS 45.45.010."

         The superior court found that Elfrink's original loan to Bibi and Raja was not usurious because the additional $4,000 fee Bibi was obligated to pay over the life of the loan was a "service fee or funding fee" rather than disguised interest. It based its decision on the fact that Elfrink told the couple that the fee was to pay for the work necessary to make sure the loan was sound and that both parties testified they had a conversation to this effect. The court also relied on an escrow instructions addendum signed by Bibi stating that "the funding fee contained on the closing statement is to be considered a service fee and is not to be considered interest."

          Bibi argues Elfrink's funding fee is simply interest in disguise. While she concedes that the interest rate on the face of the deed of trust promissory note was 10%, she argues that when one looks at the underlying transaction, the interest rate was actually much higher. Her math is based on a principal of $ 10,597, the amount of money Bibi and Raja actually received from Elfrink, rather than $14,597, the amount received plus the $4,000 funding fee. Bibi argues that because she and Raj a received $ 10,597 and were obligated to pay back $14,597 plus 10% interest through 24 monthly payments of $673.58, she paid over $16,000 ($673.58 x 24) for a $10,597 loan, which she argues yields an effective interest rate far exceeding 11.25%, the maximum allowable interest rate at the time.[29]

         Bibi contends that the escrow instructions addendum stating "the funding fee on the closing statement is to be considered a service fee and is not to be considered interest" merely signals that Elfrink knew he had a usury problem, noting that we have previously explained that "[i]n usurious transactions the parties are usually trying to disguise what they have done"[30] and that "[a] court must look squarely at the real nature of the transaction."[31] Bibi argues that regardless of the fee's name, Elfrink's loan to Bibi and Raja violated the usury statute because Elfrink received almost 45% interest, an amount above the allowable maximum, "for the loan or use of money."[32] Bibi also argues that we should review the funding fee issue in this case de novo because she is challenging the superior court's application of law - AS 45.45.020 - to facts as the superior court found them.

          Elfrink, on the other hand, characterizes the funding fee issue as a question of fact and argues that we should give deference to the superior court's factual finding that the fee was not interest, but rather an earned service fee. In support of this argument he, like Bibi, cites our previous statement that "[a] court must look squarely at the real nature of the transaction,"[33] as well as a Texas case holding that the question whether a charge is merely a device to conceal usury is a question of fact.[34] From this starting point, Elfrink enumerates the various components of the record that provide support for the superior court's conclusion. They include Elfrink's testimony about the various tasks he performed to ensure the loan was sound before making it, the court's finding that Elfrink's testimony was credible on this point, and the loan documents stating that the fee was not interest. Elfrink also suggests that the court's view of Raja's and Bibi's credibility supports the court's finding that the fee was not interest.

         Our precedent demonstrates that determining whether a fee is considered interest under Alaska's usury laws involves an application of law to fact that we review de novo,[35] though factual questions underlie the determination.[36] We have previously identified the set of factual questions germane to this determination. In Fikes v. First Federal Savings &Loan Association of Anchorage we considered whether a loan fee of one-and-a-half percent was actually interest for purposes of a previous version of AS 45.45.010(b) that, like the version applicable here, prohibited interest rates exceeding the federal lending rate plus a fixed percentage.[37] The superior court had found that the one-and-a-half percent service charge did not constitute interest within the meaning of any relevant usury statute.[38] We concluded "that the usury issue [was] incapable of resolution without a more adequate factual basis"[39] and remanded, stating:

Among the factual questions which we think are germane are the following: what charges, if any, the loan fee is designed to defray; whether the loan fee is a one-time charge or assessed throughout the life of the loan; whether the amount of the loan fee is dependent on the amount of the loan or the risk of the enterprise being financed; whether the loan fee and interest rate are charged on the entire committed amount no matter what the size and period of the balances outstanding; and what difference, if any, there is between [the bank's] internal accounting treatment of the loan fee and that of interest. The superior court should consider these matters in determining, in the first instance, whether there has been usury.[40]

         We also explained that "[i]f the loan fee is either substantially similar to interest in all material respects or unreasonably large, the loan fee, or a portion thereof, could well be treated as an interest charge in computing the effective interest rate for purposes of AS 45.45.010(b)."[41]

         Later in Metcalf v. Bartrand we reviewed a superior court's finding that a set of real estate transactions constituted a loan with usurious interest.[42] We concluded that in "[l]ooking not to the form but to the substance of the transactions, there [could] be little doubt but that they [came] within the broad terms of the Alaska usury law."[43]

         These decisions establish two principles. First, while a loan transaction may facially comply with the cap on interest rates found in AS 45.45.010, it may nevertheless be charging an effective interest rate in violation of that cap because of disguised interest.[44] Second, whether this is the case requires a court to determine if, given the facts regarding the substance of a given transaction, the transaction "come[s] within the broad terms of the Alaska usury law"[45] or, stated alternatively, whether the service fee is "treated as an interest charge in computing the effective interest rate for purposes of AS 45.45.010(b)."[46] This determination is an application of law to fact.

         Here the superior court failed to consider some of the "factual questions... germane" to the funding fee issue we identified in Fikes.[[4]] We find two questions particularly relevant to the issue before us. First, the court did not consider whether the funding fee was "a one-time charge or assessed throughout the life of the loan."[48] The fee was rolled into the rest of the loan for payment over time rather than charged and paid at the outset. Thus it was assessed throughout the life of the loan, which favors concluding that it was interest.[49] Second, the court did not consider whether the funding fee was unreasonably large.[50] Elfrink claims his work investigating the pizza business assets, meeting with Bibi and Raja, and making calls was worth $4,000, all to ensure that a loan for around $ 10,000 was sound. But the funding fee was over 37% of the value of the loan Bibi and Raja received. In comparison, the loan fee in Fikes was only one-and-a-half percent, and we still required further inquiry into whether it was a vehicle for disguised interest.[51] This establishes that the funding fee was unreasonably large. Lastly, given the language of AS 45.45.020, which defines interest as value "for the loan or use of money," Elfrink's own testimony that his funding fee is charged only if the loan is made, rather than regardless of whether it is made, places the funding fee squarely "within the broad terms of the Alaska usury law"[52] because it is charged "for the loan or use of money," not for services.[53]

         While Elfrink argues that we should give the superior court's determination deference because it is consistent with how the loan documents characterized the fee and the court was in the best position to evaluate the credibility of the parties on this point, these arguments only go so far. Under Fikes and Metcalf, how a fee is characterized in a loan document is but one factor in determining whether a fee constitutes usurious interest, especially considering that parties to a usurious loan often attempt to disguise it.[54] And while the superior court gave considerable weight to Elfrink's testimony regarding the work he did to justify the funding fee, the court failed to consider the two relevant Fikes factors discussed above that are largely divorced from the credibility of the parties, factors that we believe would have led the court to apply the usury statute correctly.[55] In light of this analysis, we hold that Elfrink's funding fee was disguised interest for purposes of the usury statute and it was error to conclude otherwise.

         When this disguised interest is taken into account, it is clear that Elfrink's initial loan to Bibi was well above the maximum allowable interest rate of 11.25% at the time; the disguised interest alone was over 37% of the loan's principal.[56] We conclude that Elfrink's initial loan to Bibi was usurious.

         3. The superior court did not err in finding that the loan balance increases were modifications to a single loan that rendered the usury statute inapplicable once the loan principal rose over $25,000.

         The superior court found that the final interest rate of 12% established by the March 2008 modification, while above the statutory maximum for loans under $25,000 pursuant to AS 45.45.010, was not usurious because modifications to the original loan had brought the loan principal over $25,000 and the usury statute no longer applied.[57]

         Bibi argues that each modification constituted a separate loan under $25,000 subject to the usury statute's cap. According to Bibi, the four separate transactions included the original loan in March 2007, a second loan in September 2007, a third loan in February 2008, and the commission claimed in March 2008. Bibi also argues that each transaction was a separate loan not only because each was separate in time, but also because each was documented separately - the original loan with a promissory note and other documents; the second and third loans with separate FNBA forms for each; and the fourth (commission) transaction with a real estate listing.

         Bibi argues that each loan was usurious when viewed separately. Specifically, she argues that the original March 2007 loan was usurious because the funding fee raised its effective interest rate to near 45% - and was at least usurious by March 2008 when Elfrink increased the stated interest rate from 10% to 12% because AS 45.45.010 set the maximum rate at 7.5% at that time. She argues that the second and third loans were not usurious when made but also became usurious when Elfrink increased the interest rate to 12% in March 2008. Lastly, she asserts that the real estate sales commission Elfrink charged in March 2008 bore interest at a usurious 12% from the beginning.

         Bibi argues that our decision in Rockstad v. Erikson supports her view that each balance increase was in fact a separate loan.[58] In Rockstad we applied AS 45.45.010 and held that one note with two simultaneous disbursements each below $25,000 was just one loan in excess of $25,000.[59] While this tends to undermine Bibi's position, she insists that in Rockstadwe also suggested that when evidence demonstrates that there are really two different loans, "such a reading would necessarily imply that the note constitutes an unlawfully usurious contract."[60] But while Rockstad did contemplate a scenario in which sufficient evidence can demonstrate the existence of multiple usurious loans rather than a single larger loan with a legal interest rate, we found no such evidence in that case.[61] In Rockstad we relied in part on the language of the note, which spoke of a singular loan for $26,000, to conclude that there was only one non-usurious loan.[62]

         Elfrink argues that the superior court's finding of one loan modified three times is a factual finding that is supported by the record and thus not clearly erroneous. We agree. "Although the interpretation of contractual language is a question of law and reviewed de novo, '[t]he intent of the parties when entering a contract is a question of fact and is thus reviewed under the clearly erroneous standard.' "[63] "[A]nd we give' due regard to the trial court's opportunity to evaluate the credibility of witnesses.' "[64]Relying in part on its view of the credibility of the parties, the superior court found that Bibi signed or ratified all of the escrow amendments - a finding Bibi does not appeal.[65]Based on this finding and the testimony of the parties, the superior court found that the ...

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