Title: Settlement Funding v. Von Neumann-Lillie

State: virginia

Issuer: Virginia Supreme Court

Document:

Present:  All the Justices 
 
SETTLEMENT FUNDING, LLC 
 
v.  Record No. 061373     OPINION BY JUSTICE ELIZABETH B. LACY 
 
 
 
June 8, 2007 
CARLA VON NEUMANN-LILLIE 
 
FROM THE CIRCUIT COURT OF FAIRFAX COUNTY 
M. Langhorne Keith, Judge 
 
 
In this appeal we consider whether the circuit court 
erred in refusing to apply the law of the jurisdiction 
stipulated in the choice of law provision of a contract and in 
its application of Virginia's usury law to the provisions of 
that contract. 
FACTS 
On November 12, 1996, Carla Von Neumann-Lillie (Lillie) 
redeemed a winning ticket in the "Money for Life" instant win 
game of the Virginia Lottery.  The prize was $1,000 per month 
for the duration of Lillie's life. 
Lillie entered into a loan agreement with WebBank 
Corporation (WebBank) for $29,000 plus interest.  Lillie was 
to repay the loan in monthly installments of $500 for a period 
of 178 months, commencing April 1999 and ending January 15, 
2014.  The loan agreement contained a choice of law provision, 
stating all disputes would be determined in accordance with 
the laws of the State of Utah. 
 
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Lillie also executed a secured promissory note in which 
she promised to pay WebBank, its successors and assigns, the 
principal amount of $29,000 plus interest and a UCC-1 
Financing Statement, which was filed in the Circuit Court of 
Prince William County on March 10, 1999.  WebBank assigned its 
right, title, and interest in the loan to Settlement Funding, 
L.L.C.  Lillie then submitted a change of address form to the 
Virginia Lottery directing the Lottery to send her award 
payments to a post office box in Georgia owned by Settlement 
Funding.  Settlement Funding collected the loan payments from 
the Virginia Lottery checks and refunded to Lillie any amount 
received over the loan payment due.  
After Lillie had paid $13,500 on the loan over 27 months, 
she contacted Settlement Funding to pay the balance of her 
loan.  Settlement Funding informed Lillie that, including 
interest and fees, the prepayment amount was $67,023.  Lillie 
claimed she was unaware that any interest was due under the 
loan and stopped all payments to Settlement Funding, thereby 
defaulting on the terms of the loan agreement.  Subsequently, 
Settlement Funding notified the Virginia Lottery of its 
security interest in Lillie's Lottery prize, that Lillie had 
defaulted on her loan, and that all payments due to Lillie 
"must be paid and delivered" to Settlement Funding. 
 
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On September 21, 2001, the Commonwealth of Virginia State 
Lottery Department filed a Bill of Complaint for Interpleader, 
asserting that pursuant to Code § 58.1-4013 Lottery prizes are 
not assignable.  The circuit court granted the interpleader, 
and directed all prize installments be paid to the Registry of 
the Court.1 
On October 31, 2001, Settlement Funding filed an answer 
in the interpleader action and a Cross-Bill against Lillie.  
The Cross-Bill requested equitable relief in the form of a 
court order declaring Settlement Funding's security interest 
in the Lottery payments valid and enforceable and ordering the 
Virginia Lottery to pay the Lottery Prize Payments to 
Settlement Funding.  
On May 15, 2002, Lillie filed an answer to Settlement 
Funding's Cross-Bill in which she asserted four affirmative 
defenses.  First, Lillie asserted that under Code § 58.1-4013, 
the security interest in and assignment of the Lottery 
winnings was unlawful, and therefore void and unenforceable.  
Second, Lillie asserted that the interest sought under the 
loan agreement was usurious.  Third, she claimed that the loan 
agreement, Security Agreement, Secured Promissory Note, and 
                     
1 The litigation was originally filed in the Circuit Court 
for the City of Richmond but subsequently transferred to the 
Circuit Court of Fairfax County. 
 
 
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UCC-1 Financing Statement were void and unenforceable under 
the federal Truth in Lending Act, 15 U.S.C. § 1601 et seq. 
(Truth in Lending Act).  Finally, she asserted that Settlement 
Funding could not recover in equity because it acted with 
unclean hands.  Lillie also filed a third party Bill of 
Complaint and Cross-Bill against Settlement Funding asserting 
breach of contract, usury, avoidance, and fraud actions. 
In an opinion letter dated November 7, 2005, the circuit  
court held that the assignment of Lottery proceeds was 
unlawful pursuant to Code § 58.1-4013 and thus Settlement 
Funding did not possess a valid security interest in Lillie's 
Lottery winnings.  The circuit court also granted Settlement 
Funding leave to file an amended pleading against Lillie 
seeking a money judgment for a specific sum due under the note 
and loan agreement. 
Settlement Funding filed an amended "Cross-Claim" seeking 
judgment against Lillie for the loan's principal balance plus 
accrued interest and penalties for a total of $253,727.89 plus 
interest and legal expenses.  Settlement Funding asserted four 
counts against Lillie:  breach of contract, quantum meruit, 
promissory estoppel, and unjust enrichment.  Lillie raised 
several affirmative defenses to the Cross-Claim including:  
usury, violations of the Truth in Lending Act, fraud, and 
unclean hands.  At the hearing on Settlement Funding's Cross-
 
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Claim, Settlement Funding argued that Lillie's fraud claim 
should be stricken, that the Truth in Lending Act did not 
apply, and that Lillie's usury defense based on Virginia law 
was improper because the loan agreement contained a choice of 
law provision designating Utah law as controlling, and Utah 
does not recognize usury protections.  The circuit court 
granted Settlement Funding's motion to strike Lillie's fraud 
count, but took the remaining matters under advisement.  
Following the hearing, Settlement Funding provided the court 
with supplemental memoranda detailing Utah law and the status 
of WebBank as a Utah industrial loan bank. 
On February 10, 2006, the circuit court issued a letter 
opinion in which it declined to apply Utah law on the grounds 
that Settlement Funding produced no proper proof as to Utah 
law at trial.  Without proof of Utah law, the circuit court 
reasoned it must presume Utah law to be identical to Virginia 
law and, under Virginia Code § 6.1-330.55, a loan with an 
interest rate in excess of twelve percent is usurious.  
Accordingly, the circuit court held Settlement Funding could 
collect only the principal sum of Lillie's loan, less credit 
for payments received, but could not recover interest or fees. 
The circuit court also held the loan agreement violated 
the Truth in Lending Act because WebBank failed to provide 
mandatory disclosures to Lillie.  The circuit court held that 
 
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because Lillie's statutory damages under the Truth in Lending 
Act would more than offset the amount Settlement Funding was 
entitled to recover under the loan agreement, Settlement 
Funding was not entitled to recover any amount from Lillie.  
The circuit court also awarded Lillie $47,164.60 plus interest 
in damages for usury under Virginia law, attorney's fees of 
$24,694.50 and costs.   
We awarded Settlement Funding an appeal limited to 
whether the circuit court erred in (1) failing to construe the 
loan agreement under Utah law in accordance with the choice of 
law provision in the loan agreement and (2) applying Virginia 
usury statutes and concluding the interest rate for the 
subject loan was usurious. 
DISCUSSION 
If a contract specifies that the substantive law of 
another jurisdiction governs its interpretation or 
application, the parties' choice of substantive law should be 
applied.  Paul Bus. Sys., Inc. v. Canon U.S.A., Inc., 240 Va. 
337, 342, 397 S.E.2d 804, 807 (1990) (citing Union Central 
Life Ins. Co. v. Pollard, 94 Va. 146, 151-52, 26 S.E. 421, 422 
(1896)).  Paragraph 13 of the loan agreement provides that the 
loan transaction was completed in Utah, that the lender, 
WebBank, was doing business in Utah, and that the borrower 
agrees that "any and all disputes arising from or concerning 
 
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this Agreement . . . shall be determined in accordance with 
the laws of the State of Utah."  
In its February 10, 2006 opinion letter, the circuit 
court acknowledged that Utah law would apply under this choice 
of law provision but declined to apply Utah law because "there 
was no proper proof produced at trial in respect to Utah law."  
The record in this case, however, does not support the circuit 
court's conclusion. 
At trial, when asked what the substance of Utah's usury 
law was, Settlement Funding's counsel responded that "[t]here 
is no usury in Utah" and that he would "have that statutory 
citation pulled" and "quickly sent over" to prove the absence 
of usury law in Utah.  Settlement Funding then submitted two 
post-hearing memoranda.  The circuit court, in its opinion 
letter specifically indicated that it considered the first 
memorandum.  In that memorandum, Settlement Funding again 
asserted that Utah has not established any limits on maximum 
rates of interest for consumer loans.  Rather, Settlement 
Funding pointed out, "the unconscionability provision at 
Section 70C-7-106 of the Utah Code provides that the ceiling 
interest rate be determined by the market conditions."  
Settlement Funding also cited Utah Code 1943, 44-0-2, and Utah 
case law regarding usury.  
 
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These citations to Utah law provided the circuit court 
with sufficient information regarding the substance of Utah 
law.  See also Code § 8.01-386.  Therefore, the circuit court 
erred in refusing to apply Utah law in the construction of the 
loan agreement.2 
Accordingly, we will reverse those portions of the 
judgments of the circuit court entering judgment in favor of 
Lillie based on her claim of usury under Code § 6.1-330.57 and 
awarding her damages, costs and attorneys' fees under that 
statute and remand the case for further proceedings. 
Reversed in part, and remanded. 
                     
2 In light of this holding, we need not address Settlement 
Funding's remaining assignment of error.