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Court of Appeal:
California Has Significant Policy Precluding Honoring Interest Rates That Are Usurious
Opinion Clashes With Earlier Decisions That Do Not Rule Out Bowing to Rates Permitted Under Laws of Other Jurisdictions
By a MetNews Staff Writer
A California business that borrowed money from an Arizona lender, under an agreement providing that any dispute would be governed by Arizona law and that any litigation would take place in a state or federal court in Arizona, is not bound by that clause in light of California strong policy against enforcing usurious interest rates, Div. Three of the Fourth District Court of Appeal declared yesterday, spurning contrary precedent.
Justice Thomas M. Goethals wrote the opinion. It reverses Orange Superior Court Judge Nathan R. Scott’s order staying an action pending resolution of the controversy in Arizona.
The loan agreement between G Companies Management, LLC, located in Newport Beach, and LREP Arizona, LLC recites that it “shall be construed and governed by the laws of the state of Arizona without regard to conflict of laws principles,” adding:
“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.”
The agreement provided for a 36 percent interest rate, boosted by 10 percent in the event of a default.
Despite that wording, Goethals remanded the case to the Orange Superior Court for further proceedings, explaining: “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.”
$4.6 Million Debt
G Companies purportedly owes more than $4.6 million on the debt. It was sued by the guarantors of the loan It was sued in Orange Superior Court by the guarantors on the loan, Dr. Shui Yee Lee and Sabeth Siddique, against whom LREP is proceeding.
LREP was named by G Companies as the defendant in a cross complaint, alleging that it is “collecting usurious interest against the Guarantor Plaintiffs (and indirectly but certainly against the Borrower G Companies as well),” which it asserts is “illegal, unconscionable, criminal and a breach of the implied covenant of good faith and fair dealing in the LREP Loan Documents.”
Goethals’s conclusion that California has a strong interest in enforcing its policy against interest at a higher amount than permitted under its own laws is contrary to the 2015 holding by this district’s Court of Appeal in Hyundai Securities Co., Ltd. v. Lee. There, Acting Presiding Justice Richard Mosk (since deceased) wrote that the law of another state permitting an interest rate that would be usurious under California law does not constitute “a law repugnant to the public policy of this state.”
Other Decisions
Mosk cited the 1964 decision by Div. Three of the First District Court of Appeal in Ury v. Jewelers Acceptance 76 Corp. That opinion, also relied on by Scott, says that it can be inferred from the various exemptions in the state constitutional usury provision that “California does not have… a strong public policy against any and all contracts which would be usurious if they were made and to be performed here.”
Also referred to by Scott was the 1987 decision by Div. One of the Fourth District Court of Appeal in Mencor Enterprises, Inc. v. Hets Equities Corp. which finds that a Colorado law allowing interest rates that do not exceed 45 percent is not necessarily unenforceable in California. That opinion says:
“The specific incorporation of Colorado’s 44 percent interest rate, which is usurious under California law, into the contract of the parties here does not as a matter of law validate the contract and immunize the parties to it from the rights and the penalties imposed by California law on parties to usurious transactions.” The opinion reverses a judgment of dismissal of an action following the sustaining of a demurrer, saying there must be an evidentiary hearing as to the parties’ relationship to Colorado.
Disagreement Expressed
Goethals said “[w]e disagree” with those decisions, commenting:
“California’s public policy is established by the provisions of our Constitution and (where allowed by the Constitution) such laws as our Legislature chooses to enact.”
Mencor, Hyundai Securities, and Ury, he said, do not “persuade us that the unwaivable usury law enshrined in our Constitution reflects something other than a fundamental public policy of this state.”
He embraced the 1976 decision by the Fourth District’s Div. One in Gamer v. duPont Glore Forgan, Inc. Goethals quoted it as saying (with italicizing he added that while California “has no strong public policy against a particular rate of interest so long as the charging of that rate is permitted by law to the specific lender,” it “has a strong public policy against usury, that is, the charging and receiving interest on the loan or forbearance of money in excess of the rate allowed by law.”
Goethals wrote:
“We therefore conclude the trial court abused its discretion when it concluded California’s usury law does not reflect a fundamental public policy.”
The case is G Companies Management, LLC v. LREP Arizona, LLC, G060992.
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