California Court of Appeal, G Companies Management, LLC v. LREP Arizona, LLC, Docket No. G060992

Interest Rates

 

Usury Law

 

Public Policy

 

Waiver

 

California Law

 

Forum Selection Clause

 

Loan Agreement

 

 

Procedure:

 

Third Party Cross-Complaint in Favor of Another Forum

 

Order Granting a Motion to Quash Service of Summons or Granting a Motion to Stay the Action on the Ground of Inconvenient Forum

 

 

Remedies:

 

Declaratory Relief

 

Equitable Indemnity

 

Reimbursement

 

Contribution

 

Equitable Apportionment

 

 

 

 

 

Appeal from an order of the Superior Court of Orange County, Nathan R. Scott, Judge. Reversed and remanded.

 

 

G Companies Management, LLC, a California limited liability company, appeals from an order staying its cross-complaint against LREP Arizona, LLC, based on the forum selection clause in a loan agreement between the parties. The cross-complaint alleges multiple causes of action, all based on the assertion that the interest rates charged in the loan agreement were usurious under California law, and G Companies contends the trial court erred because a forum selection clause is not enforceable if doing so would deprive a California resident of the protections of our fundamental public policy.1

 

 

1The order staying the third party cross-complaint in favor of another forum is appealable. (Code Civ Proc., §904.1, subd. (3) [an appeal may be taken “from an order granting a motion to quash service of summons or granting a motion to stay the action on the ground of inconvenient forum”].)

 

 

By virtue of its inclusion in article XV, section 1, of our Constitution, and because it cannot be waived, we find that California’s usury law does reflect a significant public policy. It prohibits money lending at rates higher than specified, even while recognizing numerous exceptions to those rate limitations. The complexity of the law does not imply a lack of commitment to the policy. To the contrary, such a fine-tuned approach suggests that significant effort has gone into determining the circumstances under which interest rate limitations are necessary for the protection of Californians.

 

 

If the circumstances of a loan transaction do not fit into one of the exceptions to California’s interest rate limitation, and the rate charged is higher than allowed, then the transaction violates California’s public policy against usury. And since California’s usury law reflects a significant public policy designed to protect its citizens, our law precludes enforcement of a forum selection clause that will deprive a California resident of that protection.

 

 

The loan agreement specified the use of an escrow agent located in Arizona and stated that the loan closing would take place at the agent’s office. The agreement also stated that it “shall be construed and governed by the laws of the state of Arizona without regard to conflict of laws principles. The Parties irrevocably submit to the exclusive jurisdiction of any federal or state court located within Maricopa County, Arizona over any dispute arising out of or related to this Agreement. Each party hereby irrevocably agrees that all claims with respect to such dispute or any suit, action or proceeding related thereto shall be heard and determined in such courts. G Companies defaulted on the loan, failing to make the first payment due in February 2016. In July 2016, LREP foreclosed on the real property given as security—obtaining it for a credit bid of $315,000—leaving an unpaid loan balance of over $4.6million.

 

 

G Companies, in turn, filed a cross-complaint against LREP, seeking declaratory relief, equitable indemnity and reimbursement, contribution, and equitable apportionment, all based on LREP’s alleged conduct of “collecting usurious interest against the Guarantor Plaintiffs (and indirectly but certainly against the Borrower G Companies as well), ”which is characterized as “illegal, unconscionable, criminal and a breach of the implied covenant of good faith and fair dealing in the LREP Loan Documents.”

 

 

LREP moved to dismiss or stay the cross-complaint, based upon the mandatory forum selection clause contained in the loan agreement. It argued that enforcement of the clause was not unfair or unreasonable because the chosen Arizona forum is closely tied to the transaction, the parties are sophisticated, and they agreed to it.

 

 

(Hyundai Securities, 232 Cal.App.4th at p. 1391). Hyundai Securities does not involve a motion to enforce a forum selection clause. It concerns the enforcement of an existing Japanese judgment under California’s Uniform Foreign-Country Money Judgments Recognition Act (Code Civ. Proc., §§1713-1725; the Act). The court concluded the existing Japanese judgment, which incorporated a 20 percent postjudgment interest rate allowed under Japanese law, was required to be recognized as a valid foreign country money judgment under the Act, but upon entry as a California judgment, the 20 percent rate would no longer be applied. Instead, the California judgment would accrue postjudgment interest at the 10 percent rate allowed under California law.

 

 

We explained in Hall that “while ‘California does not have any public policy against a choice of law provision, where it is otherwise appropriate’ [citation]. . . [citation], ‘an agreement designating a foreign law will not be given effect if it would violate a strong California public policy ... or “result in an evasion of ... a statute of the forum protecting its citizens.’”” (Hall, supra, 150 Cal.App.3d at pp. 416-417.) We then reasoned that if the pending litigation were transferred to Nevada where Nevada law would be applied, the investors would lose the benefit of California’s Corporate Securities Law of 1968 (Corp. Code, §25000 et seq.), which would otherwise govern the exchange. The investors would thus be denied California’s unwaivable protections against fraud and deception in securities matters. (Hall, supra, 150 Cal.App.3d at p.417.) Consequently, the trial court erred by enforcing the provision.

 

 

California’s Policy Against Usury

 

Usury in California is addressed in California Constitution, article XV, section 1, which sets interest rates, with exceptions. As explained in Bisno v. Kahn (2014) 225 Cal.App.4th 1087, 1098, “The usury law is based upon article XV, section 1 of the California Constitution as well as an initiative measure adopted in 1918. [Citations.] The initiative measure has not been codified but is published in Statutes and Amendments to the Codes and [West’s Annotated] Civil Code. [Citations.] The initiative measure remains in full force and effect except to the extent it conflicts with the constitutional usury provision. [Citations.] We refer to the constitutional and initiative provisions collectively as the ‘usury law.’” (See Civ. Code, §1916-5 [“This act whenever cited, referred to, or amended may be designated simply as the ‘usury law’”].

 

 

Our usury law does not set ironclad limitations on allowable interest rates. It allows different interest rates to be charged in different circumstances and exempts large categories of lenders while giving our Legislature the power to impose limitations on the exempt lenders. (Cal. Const., art XV, §1.) The law’s complexity has prompted our Supreme Court to remark that “the usury law is ...riddled with so many exceptions that the law’s application itself seems to be the exception rather than the rule.” (Ghirardo, supra, 8 Cal.4th at p. 807.) That may be true, but the inclusion of the usury law in our Constitution reflects it involves an important public policy. (Stevenson v. Superior Court (1997) 16 Cal.4th 880, 892 [“the California Constitution amply established the existence of a fundamental public policy”]; see Green v. Ralee Engineering Co. (1998) 19 Cal.4th 66, 71 [“aside from constitutional policy, the Legislature, and not the courts, is vested with the responsibility to declare the public policy of the state”].) We find it significant that the protections of our usury law cannot be waived. (WRI Opportunity Loans II, LLC v. Cooper (2007) 154 Cal.App.4th 525, 542-543 [because a usurious provision is void under California law, the prohibition against usury cannot be waived].) A public policy that cannot be waived qualifies as fundamental. (Brack v. Omni Loan Co., Ltd. (2008) 164 Cal.App.4^th 1312, 1323 [“The relative significance of a particular policy or statutory scheme can be determined by considering whether parties may, by agreement, avoid the policy or statutory requirement”].

 

 

Our usury law protects sophisticated borrowers as well as unsophisticated ones. (Ghirardo, supra, 8 Cal.4th at p. 807 [“There is . . . no exemption in the usury law for sophisticated borrowers. We decline to create one”].)

 

 

(…) We therefore conclude the trial court abused its discretion when it concluded California’s usury law does not reflect a fundamental public policy.

 

 

 

 

(California Court of Appeal, Feb. 15, 2023, G Companies Management, LLC v. LREP Arizona, LLC, Docket No. G060992, Certified for Publication)

 

Alvarado v. Dart Container Corp. of California, S232607

Retroactivity: Public policy: Administration of justice:

(…) At oral argument, defendant’s counsel urged that if we rule for plaintiff, our holding should be given prospective application only. We recently noted in Williams & Fickett v. County of Fresno (2017) 2 Cal.5th 1258, 1282, that fairness and public policy sometimes weigh against the general rule that judicial decisions apply retroactively. Prospective application might be appropriate, for example, “when a judicial decision changes a settled rule on which the parties below have relied.” (Ibid.) In this regard, the reasonableness of the parties’ reliance and the effect retroactivity will have on the administration of justice are key considerations. (Ibid.) (…) In short, defendant cannot claim reasonable reliance on settled law.

(Cal. S.C., March 5, 2018, Alvarado v. Dart Container Corp. of California, S232607)

La Cour n'acceptera de rendre un dispositif avec effet dans le futur plutôt qu'avec effet rétroactif que dans des circonstances restrictives. Le plus souvent, ces circonstances seront données si le Jugement consiste en un revirement de jurisprudence, mais pour autant que les parties se soient raisonnablement fiées à l'état de la jurisprudence jusqu'audit Jugement. L'intérêt public et l'administration de la justice sont également considérés.

General Dynamics Corp. v. U.S.

Secrets: state secrets: remedy: When, to protect state secrets, a court dismisses a Government contractor’s prima facie valid affirmative defense to the Government’s allegations of contractual breach, the proper remedy is to leave the parties where they were on the day they filed suit; In this situation, the Court must exercise its common-law authority to fashion contractual remedies in Government-contracting disputes; Where liability depends on the validity of a plausible superior knowledge defense, and when full litigation of that defense “would inevitably lead to the disclosure of” state secrets, Totten, supra, at 107, neither party can obtain judicial relief. It seems unrealistic to separate the claim from the defense, allowing the former to proceed while barring the latter. Claims and defenses together establish the justification, or lack of justification, for judicial relief; and when public policy precludes judicial intervention for the one it should also preclude judicial intervention for the other; The “position of the parties” at the time of suit is not their position with regard to legal burdens and the legal consequences of contract-related determinations, but their position with regard to possession of funds and property; nonjusticiable issue whether petitioners are in default. As in Totten, see 92 U. S., at 106, the Court’s refusal to enforce this contract captures what the ex ante expectations of the parties were or reasonably ought to have been. They must have assumed the risk that state secrets would prevent the adjudication of inadequate performance claims (U.S.S.Ct., 23.05.11, General Dynamics Corp. v. U.S., J. Scalia, unanimous).

Secrets d’état, remèdes dans une procédure qui les impliquent : quand, pour protéger un secret d’état, un Tribunal rejette un moyen de défense soulevé par une partie au procès lorsque cette partie est en litige avec son partenaire contractuel qui se trouve être le Gouvernement, le remède approprié que peut apporter le Tribunal est de laisser les parties dans la situation qui étaient la leur au moment de l’ouverture d’action. Dans de telles situations, le Tribunal doit exercer son autorité, découlant de la Common law, de façonner des remèdes dans les litiges contractuels impliquant le Gouvernement en tant que partie. Lorsque la question de la responsabilité que le Tribunal doit juger dépend de la validité d’un moyen de défense basé sur la meilleure connaissance d’un fait par la partie gouvernementale, et lorsque rendre une décision sur ce moyen de défense conduit inévitablement à la révélation d’un secret d’état, aucune partie ne peut obtenir un jugement au fond. Il n’est en effet pas réaliste de séparer la demande de celui qui a ouvert action du moyen de défense soulevé par le défendeur, de sorte que l’on ne saurait permettre à la demande de suivre son cours tout en prohibant le moyen de défense. Aussi bien les prétentions du demandeur que les moyens de défense du défendeur sont relevant pour décider du sort du procès. Et lorsque des considérations de politique publique empêchent l’intervention judiciaire s’agissant des moyens dont fait état une partie, elles doivent aussi l’empêcher s’agissant des moyens dont fait état l’autre partie. La « position des parties » dont il est fait état ci-dessus au moment de l’ouverture d’action n’est pas leur position s’agissant des exigences juridiques auxquelles elles font face ni leur position s’agissant des conséquences juridiques découlant de leurs relations contractuelles. Il s’agit de leur situation en relation avec la possession de fonds et de droits de propriété. Comme dans la jurisprudence Totten, le refus du Tribunal de condamner à l’exécution du contrat ne constitue que le reflet de ce que les parties avaient à l’esprit en contractant, connaissant la question délicate du secret d’état, ou ne constitue que le reflet de ce que les parties au contrat auraient dû connaître. Les parties assument le risque qu’un secret d’état pourrait empêcher le Tribunal de se prononcer en cas de litige contractuel.