Creative Ventures, LLC (Creative) borrowed nearly $3 million from defendant Jim Ward & Associates (JWA) to buy property in California. Creative signed promissory notes, payable to JWA. Thereafter, JWA sold this entire loan to 54 individual investors (Investors). JWA kept possession of the notes but when Creative made payments under the loan to JWA, it paid the Investors their share. 

Under the California usury statute, the interest rate on a loan cannot be greater than eight percent, except in certain circumstances. Those circumstances include loans by a licensed real estate broker. JWA claimed that it was such a broker, but it was not. When Creative discovered this lie, it sued JWA and the Investors to obtain a refund of all interest it had paid under the loan, as is permitted under California law. The Investors argued that they were entitled to keep the interest because, as holders in due course, they had taken the note free of the claim against JWA.

Questions:

1. Were the Investors holders in due course? Were they entitled to keep the interest that Creative had paid on the illegal loan?

2. Why did Creative sue JWA and the Investors?

3. Was there any exception to the interest rate ceiling?

4. What was the defense of the Investors to Creative’s claim for a refund?

5. Did the court find that argument persuasive? Why or why not?