Homami v. Iranzadi

California Court of Appeal · 1989 · Contracts

211 Cal. App. 3d 1104 (1989)

Updated July 26, 2026

ContractsIllegalityPublic policyillegal contracttax evasionin pari delictofacially legal contractside agreement

Facts

Homami loaned Iranzadi $250,000 through two promissory notes stating that the notes would bear no interest. Homami nevertheless testified that the parties had an oral agreement requiring Iranzadi to pay 12 percent annual interest, and that the no-interest language was included so Homami could avoid reporting interest income for state and federal tax purposes. Iranzadi made payments totaling $39,324.68, which Homami claimed were interest payments under that secret arrangement. After later written modification agreements imposed 18 percent interest beginning June 22, 1985, a dispute arose over whether the earlier payments reduced principal, and escrowed sale proceeds were withheld pending resolution.

Issue

May a lender recover disputed funds when his claim depends on proving a secret oral interest agreement made so that he could evade state and federal income tax reporting, even though the written notes and modification agreements were not facially illegal? Must the court refuse relief once the illegality appears during trial?

Rule

A contract must have a lawful object, and any contract or contractual component having as its object the violation of law is unlawful and void. The controlling test is whether the plaintiff requires the aid of the illegal transaction to establish the case: if the plaintiff cannot make the claim without showing participation in illegality, the court will not assist, regardless of partial performance, whether illegality was pleaded, or whether the parties are in pari delicto. Evidence may be introduced to show the illegal character of a contract that appears lawful on its face.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In San Diego, Lena Moradi lent Omar Shah $180,000 under a signed note stating that no interest would accrue for two years. When Omar later disputed how prior monthly payments should be applied, Lena sued and testified that the parties had secretly agreed to 11 percent interest, but omitted it from the writing so she would not have to report the income on her tax returns.

If Lena can prove the monthly payments were intended as interest only only by establishing the secret tax-avoidance agreement, what is the most likely result?

Explanation. A court will not assist a plaintiff who must rely on an illegal agreement to prove the claim. Even if the written note is facially lawful, evidence may show that the real arrangement had an unlawful object—here, concealing taxable interest income. Partial performance and the defendant's voluntary payments do not save the claim, and illegality need not be pleaded if it appears from the evidence.