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)

 

U.S. Court of Appeals for the Seventh Circuit, Servotronics, Inc. v. Rolls-Royce PLC and The Boeing Company, Docket No. 19-1847

Discovery

 

Evidence

Application to Obtain Discovery for Use in Foreign Proceedings

In Private Foreign Arbitrations?

Ex Parte Application

Letter Rogatory

Letter of Request

Subpoena

Motion to Quash

 

Circuit Split: Section 1782(a) of Title 28 does not authorize the district courts to compel discovery for use in private foreign arbitrations (Second, Fifth and Seventh Circuit).

 

 

Section 1782(a) of Title 28 authorizes the district court to order a person within the district to give testimony or produce documents “for use in a proceeding in a foreign or international tribunal.” This case asks whether a private foreign arbitration is “a proceeding in a foreign or international tribunal” within the meaning of the statute.

 

Two decades ago, the Second and Fifth Circuits answered this question “no,” holding that § 1782(a) authorizes the district court to provide discovery assistance only to state-sponsored foreign tribunals, not private foreign arbitrations. Nat’l Broad. Co. v. Bear Stearns & Co., 165 F.3d 184, 191 (2d Cir. 1999); Republic of Kazakhstan v. Biedermann Int’l, 168 F.3d 880, 883 (5th Cir. 1999).

 

More recently, the Sixth Circuit reached the opposite conclusion, Abdul Latif Jameel Transp. Co. v. FedEx Corp. (In re Application to Obtain Discovery for Use in Foreign Proceedings), 939 F.3d 710, 714 (6th Cir. 2019), and the Fourth Circuit agreed, Servotronics, Inc. v. Boeing Co., 954 F.3d 209, 214 (4th Cir. 2020). We join the Second and Fifth Circuits and hold that § 1782(a) does not authorize the district court to compel discovery for use in a private foreign arbitration.

 

(…) The parties agreed to conduct the arbitration in London.

 

Servotronics thereafter filed an ex parte application in the U.S. District Court for the Northern District of Illinois asking the court to issue a subpoena compelling Boeing to produce documents for use in the London arbitration. The application invoked 28 U.S.C. § 1782(a), and the judge initially granted it and issued the requested subpoena. Rolls-Royce intervened and moved to quash the subpoena, arguing that § 1782(a) does not permit a district court to order discovery for use in a private foreign commercial arbitration. Boeing intervened and joined the motion to quash. The judge reversed course and quashed the subpoena. She agreed with Rolls-Royce and Boeing that § 1782(a) does not authorize the court to provide discovery assistance in private foreign arbitrations. Servotronics appealed. Rolls-Royce and Boeing jointly defend the judge’s ruling.

 

Sections 1781 and 1782 of Title 28 govern the district court’s authority to provide discovery assistance in litigation in foreign and international tribunals. Section 1781 describes a formal judicial instrument known as a “letter rogatory”—a letter of request “issued by one court to a foreign court, requesting that the foreign court (1) take evidence from a specific person within the foreign jurisdiction ... and (2) return [it] ... for use in a pending case.” Letter of Request, BLACK’S LAW DICTIONARY (11th ed. 2019).

 

Letters rogatory are transmitted through diplomatic agencies; the statute provides that the State Department may, either “directly, or through suitable channels, ... receive a letter rogatory issued, or request made, by a foreign or international tribunal, to transmit it to the tribunal, officer, or agency in the United States to whom it is addressed,” and “receive and return it after execution.” 28 U.S.C. § 1781(a)(1). The assistance is reciprocal; tribunals in the United States may issue letters rogatory through the State Department to a “foreign or international tribunal, officer, or agency.” Id. § 1781(a)(2).

 

(…) The order may be made pursuant to a letter rogatory issued, or request made, by a foreign or international tribunal or upon the applica- tion of any interested person and may direct that the testimony or statement be given, or the document or other thing be produced, before a person appointed by the court.

 

(…) For several reasons, we side with the Second and Fifth Circuits in this interpretive debate. First, the word “tribunal” is not defined in the statute, and dictionary definitions do not unambiguously resolve whether private arbitral panels are included in the specific sense in which the term is used here. (…) In short, canvassing dictionary definitions is inconclusive. In both common and legal parlance, the phrase “foreign or international tribunal” can be understood to mean only state-sponsored tribunals, but it also can be understood to include private arbitration panels. Both interpretations are plausible.

 

(…) Harmonizing this statutory language and reading it as a coherent whole suggests that a more limited reading of § 1782(a) is probably the correct one: a “foreign tribunal” in this context means a governmental, administrative, or quasi-governmental tribunal operating pursuant to the foreign country’s “practice and procedure.” Private foreign arbitrations, in other words, are not included.

 

(…) The discovery assistance authorized by § 1782(a) is notably broader than that authorized by the FAA. Most significantly, the FAA permits the arbitration panel—but not the parties—to summon witnesses before the panel to testify and produce documents and to petition the district court to enforce the summons. 9 U.S.C. § 7. Section 1782(a), in contrast, permits both foreign tribunals and litigants (as well as other “interested persons”) to obtain discovery orders from district courts. If § 1782(a) were construed to permit federal courts to provide discovery assistance in private foreign arbitrations, then litigants in foreign arbitrations would have access to much more expansive discovery than litigants in domestic arbitrations. It’s hard to conjure a rationale for giving parties to private foreign arbitrations such broad access to federal-court discovery assistance in the United States while precluding such discovery assistance for litigants in domestic arbitrations.

 

(…) For the foregoing reasons, we join the Second and Fifth Circuits in concluding that § 1782(a) does not authorize the district courts to compel discovery for use in private foreign arbitrations.

 

 

(U.S. Court of Appeals for the Seventh Circuit, September 22, 2020, Servotronics, Inc. v. Rolls-Royce PLC and The Boeing Company, Docket No. 19-1847)

California Court of Appeal, T.A.W. Performance, LLC v. Brembo, S.P.A., Docket No. A157400, A157841

 

Personal Jurisdiction

 

California Law

 

Contract Drafting

 

Exclusive Distribution Agreement

 

Role of the Choice of Law Provision

 

California Franchise Act

 

Export

 

Motion to Quash Service of the Summons

 

 

On July 1, 2014, Brembo, an Italian joint stock corporation with its headquarters in Italy, and TAW, a California limited liability company with its principal office in North Carolina, entered into a written “Exclusive Distribution Agreement” (hereinafter the agreement).  Brembo manufactured brake systems for vehicles (hereinafter referred to as products), which were exported for international sale.  Under the agreement, TAW was appointed as the sole and exclusive distributor of Brembo’s products to be resold by TAW to third parties within the “Territory” of the United States, Canada, and Mexico.

 

The agreement had a five-year term, from July 1, 2014 to June 30, 2019. Early termination could be effectuated by either party giving at least one (1) year’s notice in writing. In the event of a dispute not resolved by mediation, the parties consented “to the exclusive jurisdiction of the state and federal courts of the State of New York for all disputes or controversies which may arise between the Parties out or in connection with this Agreement or its construction, interpretation, effect, performance or non-performance, or the consequences thereof. Each Party agrees that such courts, to the exclusion of all other courts, tribunals and administrative bodies, shall have exclusive jurisdiction with respect to any and all such disputes and controversies and that any and all such disputes and controversies shall be determined only by litigation in one of such courts . . ..” The parties also agreed that the agreement and “any dispute or claim arising out of or in connection with it or its subject matter or formation” would be governed by the laws of the State of New York.

 

In 2018, while Brembo’s New York state lawsuit was pending, TAW filed this California lawsuit seeking monetary damages based on Brembo’s alleged wrongful termination of the agreement without cause. In its first amended complaint (FAC), TAW alleged it was a “California limited liability Company, formerly headquartered in Sonoma California, currently located in Cramerton, North Carolina with offices in Sonoma, California” and that “Richard Martin is the principal and controlling member of TAW. He is a United Kingdom citizen and non- immigrant alien, living in the United States pursuant to a valid E-2 Visa, who at all relevant times has been residing in Sonoma, California.” TAW further alleged Brembo was “an Italian corporation located in Italy that does business in the State of California by and through subsidiaries and California based distributors.”

 

The FAC included causes of action for breach of contract and violations of California’s Franchise Relations Act (Bus. & Prof. Code
§ 20001(a)-(c)) (Franchise Act).

 

Brembo moved to quash service of summons on the ground it did not have sufficient contacts with California for the court to exercise either general or specific jurisdiction.

 

“A court may assert general jurisdiction over foreign (sister-state or foreign-country) corporations to hear any and all claims against them when their affiliations with the State are so ‘continuous and systematic’ as to render them essentially at home in the forum State. [Citation.]” (Goodyear Dunlop Tires Operations, S.A. v. Brown (2011) 564 U.S. 915, 919 (Goodyear).)

 

In contrast to general jurisdiction, specific jurisdiction “depends on an ‘affiliation between the forum and the underlying controversy,’ principally, activity or an occurrence that takes place in the forum State and is therefore subject to the State’s regulation. [Citations.] In contrast to general, all-purpose jurisdiction, specific jurisdiction is confined to adjudication of ‘issues deriving from, or connected with, the very controversy that establishes jurisdiction.’ [Citation.]” (Goodyear, supra, 564 U.S. at p. 919.) In other words, “when determining whether specific jurisdiction exists, courts consider the ‘ “ ‘relationship among the defendant, the forum, and the litigation.’ ” ’ ” (Pavlovich v. Superior Court (2002) 29 Cal.4th 262, 269 (Pavlovich), quoting Helicopteros Nacionales de Colombia, S.A. v. Hall (1984) 466 U.S. 408, 414 (Helicopteros), quoting Shaffer v. Heitner (1977) 433 U.S. 186, 204 (Shaffer).)

 

Thus, “a court may exercise specific jurisdiction over a nonresident defendant only if: (1) ‘the defendant has purposefully availed himself or herself of the forum benefits’ (Vons, supra, 14 Cal.4th at p. 446); (2) ‘the “controversy is related to or ‘arises out of’ the defendant’s contacts with the forum” ’ (ibid., quoting Helicopteros, supra, 466 U.S. at p. 414); and (3) ‘ “the assertion of personal jurisdiction would be reasonable in that it would comport with ‘fair play and substantial justice.’ ” ’ (Vons, supra, 14 Cal.4th at p. 447, quoting Burger King Corp. v. Rudzewicz (1985) 471 U.S. 462, 472-473 [85 L.Ed. 528, 105 S. Ct. 2174] (Burger King)).” (Pavlovich, supra, 29 Cal.4th p. 269.)

 

Pertinent to the matter before us, the Burger King court specifically found that a choice of law provision by which the parties stipulated “in advance to submit their controversies for resolution” in a specific jurisdiction may be germane to the jurisdictional analysis. (Id. at p. 472, fn. 14; see Id. at pp. 482-483 [Burger King court admonished Court of Appeals for failure to give adequate consideration to choice of law provision in parties’ franchise agreement in determining question of personal jurisdiction over defendant franchisee].)

 

While the parties had a prior relationship in California, six months before and at the time of the execution of the 2014 agreement the parties’ relationship was no longer “California-directed in any meaningful sense.” (Halyard Health, supra, 43 Cal.App.5th at p. 1076.) TAW had moved its principal place of business to North Carolina and the distribution agreement was not limited to California but included the entirety of the United States, Canada, and Mexico. Under the agreement, Brembo shipped its products to TAW’s principal place of business in North Carolina. Of particular significance given the 2014 agreement’s anticipation of nationwide and international distribution of Brembo products through resales by TAW, Brembo made a commercially reasonable effort “to alleviate the risk of burdensome litigation” in any portion of the designated distribution territory by including choice of law and forum selection clauses limiting the forum in which TAW could file a lawsuit to New York. (World-Wide Volkswagen, supra, 444 U.S. at p. 297.)

 

We see no merit to TAW’s assertion that Brembo’s shipment of its products to North Carolina is insignificant, compared to where the products were eventually resold by TAW (i.e. California), because pursuant to the Uniform Commercial Code title to the goods passed to TAW in California where TAW was required to pay state excise taxes on the products it resold in the state. As our high court has admonished, we do not look at TAW’s contacts with California, but instead limit our analysis to an evaluation of Brembo’s contacts with the state. Even assuming title to the goods passed to TAW in California, we fail to see how that circumstance demonstrates that Brembo purposefully availed itself of the benefits and protections of the laws of California. Simply put, TAW’s unilateral resale of Brembo’s products in California is not sufficient to demonstrate that Brembo purposefully availed itself of the privilege of conducting business in California.

 

Choice-of-law and forum selection clauses, “standing alone”, are not dispositive, and may be discounted where a foreign corporation’s other minimum contacts establish jurisdiction in the forum state. However, they may “reinforce” whether or not a foreign corporation has made such “a deliberate affiliation with the forum state” as to support a conclusion that it should have reasonably foreseen “possible litigation there.”

 

Here, Brembo’s contacts with the United States were already directed away from California before the parties entered into the agreement. TAW had moved its principal place of business to North Carolina, Brembo was shipping its products to North Carolina, and TAW’s resale of Brembo’s products was expanded to include the entirety of the United States, Canada, and Mexico. Given these circumstances, Brembo made a concerted effort to “alleviate the risk of burdensome litigation” (World-Wide Volkswagen, supra, 444 U.S. at p. 297) by limiting dispute resolution to New York.

 

(…) Whether or not the enforceability of the parties’ 2014 agreement is governed by California law has nothing to do with whether enforceability may be determined by a California court.

 

Lastly, we are not persuaded by TAW’s assertions that the trial court abused its discretion by refusing to consider Brembo’s direct sales, marketing, advertising, and issuance of warranties for its products that were resold by TAW to California consumers as relevant factors. Such evidence would not be relevant, let alone material, to the subject of this lawsuit, Brembo’s alleged wrongful termination of the agreement. The controversy therefore lacks any substantial connection to Brembo’s purported contacts with California through its direct sales, marketing and advertising activities and its issuance of warranties for its products sold in California.

 

(Halyard Health, supra, 43 Cal.App.5th at p. 1073; see Id. at p. 1069 [specific jurisdiction not demonstrated where, among other factors, defendant foreign corporation’s California “sales” in the millions were not sufficiently connected to the gist of plaintiff’s declaratory relief action concerning the meaning and enforceability of an indemnification clause in the parties’ agreement].)

 

 

(California Court of Appeal, August 17, 2020, T.A.W. Performance, LLC v. Brembo, S.P.A., Docket No. A157400, A157841, Certified for Partial Publication)