## Facts

- Ahmad S. Homami and Mansoor Iranzadi (brothers-in-law) engaged in business dealings and a real-estate-related loan transaction.
- Homami funded $250,000 for Iranzadi’s transaction; the debt was documented by two identical promissory notes for $125,000 each, due in two years.
- Each note stated it would “bear no interest”; one note was secured by the Pinehill property and the other by the Outlook property.
- Iranzadi had given Homami a power of attorney, and Homami routinely wrote checks on Iranzadi’s behalf.
- Shortly after funding, Homami wrote himself a check from Iranzadi’s account labeled (in Persian) as “interest,” and similar monthly payments continued for about a year, totaling roughly $39,000–$40,000.
- The parties later executed written modification agreements providing no interest until a specified date and then 18% annual interest thereafter, payable monthly; Iranzadi later defaulted.
- After foreclosure activity and property sales, Homami was paid full principal (and interest) on one note; a dispute remained whether the prior $39,000–$40,000 reduced principal on the second note or was interest.
- Homami testified there was a separate oral agreement for 12% interest and that the “no interest” note language was used so he could avoid reporting interest income for state and federal tax purposes.

## Issues

1. Whether a lender may obtain relief that depends on proving an oral interest agreement whose admitted purpose was to evade state and federal income tax laws.
2. Whether a court may deny enforcement on illegality/public policy grounds even if illegality was not pleaded as a defense.

## Decision

- The Court of Appeal reversed the judgment for Homami and remanded.
- It held Homami’s claim was unenforceable because it depended on an agreement with an illegal object: concealing taxable interest to avoid income taxes.
- The court concluded it could not grant relief that required giving effect to the illegal oral arrangement, including treating the disputed payments as “interest only” rather than principal.

## Legal Principles

- A contract must have a lawful object; an agreement is unlawful if it is contrary to express law or the policy of express law.
- Courts will not aid a party seeking to enforce rights where the claim requires pleading and proving an illegal purpose as the basis for recovery.
- Illegality implicates public policy and may be considered by the court even if not raised in the pleadings.
- When parties are in pari delicto in an illegal scheme, the court generally leaves them where it finds them and will not adjust equities based on the illegal bargain.
- A writing that is neutral on its face will not be enforced in a manner that depends on a separate illegal agreement to define payment characterizations or the parties’ rights.

## Conclusion

Because Homami’s effort to deny Iranzadi a principal credit required proof of an oral interest arrangement designed to evade income taxes, the court refused enforcement on public policy grounds, reversed the judgment, and remanded for further proceedings not reliant on the illegal agreement.


Homami v. Iranzadi, 211 Cal. App. 3d 1104 (Cal. Ct. App. 1989)