Thursday, October 27, 2011
C.A.: Motion to Enforce Choice of Law Provision After 19 Months of Litigation Came Too Late
By SHERRI M. OKAMOTO, Staff Writer
A lender could not invoke a forum selection clause seeking to transfer a lawsuit to Illinois after the action had been litigated for the course of 19 months in California, the Court of Appeal for this district ruled yesterday.
Div. Eight concluded the circumstances of the dispute between Trident Labs Inc. and Merrill Lynch Commercial Finance Corp. made enforcement of the forum selection clause unreasonable as a matter of law.
The case had its genesis when Trident, a Hawthorne-based dental product manufacturer, took out a $1.8 million loan from Merrill Lynch’s predecessor in September 2007.
The terms of the loan required Trident to repay the outstanding principal plus interest, over 60 months; to provide annual financial statements; and to maintain a specified debt service coverage ratio. Trident’s chief executive officer, Laurence Fishman, personally guaranteed the loan.
Both the loan agreement and the guaranty were governed by Illinois law and contained forum selection clauses. A clause in the loan agreement stated that Merrill Lynch, “in its sole discretion,” could enforce the loan documents in Illinois, or in any other jurisdiction “where Customer or any Collateral may be located,” but bound Trident to bring any action in Illinois.
After Trident violated the terms of the loan by failing to comply with the loan’s specified debt service coverage ratio in 2008, the parties executed a letter agreement in which Merrill Lynch agreed to waive this violation, and allow Trident to remain in violation of the debt service coverage ratio covenant through September 2008, conditioned upon receipt of a covenant violation fee of $1,000, and an increase in the interest rate.
In October 2008, Merrill Lynch sent a demand notice to Trident alleging the company was in breach of the loan agreement again. When the breach was not cured, Merrill Lynch issued a notice of default and demanded full repayment on the loan.
Plaintiff then filed a complaint in the Los Angeles Superior Court, asserting causes of action against the lender for unfair business practices under the Business and Professions Code, fraud and deceit, and breach of contract.
The parties proceeded to vigorously litigate the suit in California, until Merrill Lynch moved to dismiss or stay the action based on the forum selection clause in the loan documents last June.
Los Angeles Superior Court Judge Alan S. Rosenfield granted the motion and ordered the case stayed.
Writing for the appellate court yesterday, Justice Elizabeth A. Grimes acknowledged that under California law, forum selection clauses are presumptively valid. But the presumption may be rebutted by a showing that enforcement would be unreasonable, which the justice concluded was the case here.
The justice emphasized that “[w]hen plaintiff filed its lawsuit in California, instead of in Illinois as required under the forum selection clause, defendant could have moved to enforce the forum selection clause, but it did not.”
Grimes reasoned Merrill Lynch “chose to litigate in California, which defendant repeatedly did, by choosing not to file a motion to dismiss or stay based on the forum selection clause for well over a year and a half, instead removing the case to federal court, and by answering, cross-complaining, and conducting discovery.”
She also rejected the lender’s argument that Code of Civil Procedure Sec.410.30, which is a codification of the doctrine of forum non conveniens, permitted it to reserve the right in its pleadings to make its motion at any time, indefinitely.
“Such a right does not exist,” Grimes said.
The statute provides that “[w]hen a court upon motion of a party or its own motion finds that in the interest of substantial justice an action should be heard in a forum outside this state, the court shall stay or dismiss the action in whole or in part on any conditions that may be just.”
Grimes pointed out that “defendant’s motion was not a forum non conveniens motion,” but one which sought enforcement of a forum selection clause,” and that “the principles governing enforcement of a forum selection clause are not the same as those applicable to motions based on forum non conveniens.”
She further noted that Sec.410.30,“does not say that the motion may be brought ‘at any time.’ ”
Where no limits are stated, she explained, “a reasonableness standard is necessarily inferred,” and “[a] delay of more than 19 months, for which no justification is offered, and during which the party who seeks to change venue has repeatedly invoked the rights available to California litigants, does not survive that test of reasonableness.”
Justices Laurence D. Rubin and Madeleine Flier joined Grimes in the opinion.
Trident was represented by Frank J. Lozoya IV of Lozoya & Lozoya while Robert B. Ericson of Palmer, Lombardi & Donohue was counsel for Merrill Lynch.
The case is Trident Labs, Inc. v. Merrill Lynch Commercial Finance Corp., 11 S.O.S. 5755.
Copyright 2011, Metropolitan News Company