Opinion ID: 775519
Heading Depth: 2
Heading Rank: 1

Heading: Plaintiffs' Usury Claim

Text: 10 To evaluate plaintiffs' claim that the rate of interest charged under the loan contracts is illegal because it is usurious under California law, we must determine whether California law applies. To determine the law governing a contract, California courts look to the relevant statute and, for further guidance, to the choice-of-law principles outlined in the Restatement. Henderson v. Superior Court, 77 Cal. App. 3d 583, 592 (Cal. Ct. App. 1978). 11 California Civil Code &#167 1646 states the traditional conflicts rule that, for matters pertaining to performance, [a] contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made. In this case, the loan funds were disbursed from Nevada and repayment was required in Nevada. Since Nevada is thus the place of performance of the loan contract, &#167 1646 appears to require that Nevada law be applied. 12 For a more particularized and nuanced analysis that ultimately reaches the same result, we turn to the Restatement. The parties argue over which of four possible sections of the Restatement apply. We discuss each of the sections in succession.
13 Section 187 of the Restatement provides that the law of the state chosen by the parties will govern. Parties can indicate this choice either through an express provision in the contract or by reference to legal doctrines that are peculiar to the law of a particular state and that thereby indicate the parties' preferred choice of law. Restatement &#167 187, cmt. a. 14 Defendants argue that the choice-of-law provision from Dobron's personal guarantees on plaintiffs' loan obligations should be integrated into the promissory notes of the plaintiff corporations. The relevant clause in the guarantees states: This Guarantee shall be governed by and construed in accordance with the law of the state of Nevada (emphasis added). However, the limiting language (This Guarantee .. .) of the clause reveals that the choice-of-law clause was intended to apply only to the guarantee itself. Moreover, by definition, a guarantee is a separate undertaking in which the principal obligor does not join, and a guarantee exists independent of the original obligations between the principal obligor and the obligee. This understanding is expressly reflected in the langauge of Dobron's guarantees: Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Borrower. Because none of the requisite choice-of-law indications are found in the promissory notes themselves, &#167 187 is inapplicable in this case.
15 Absent a clear agreement between the parties as to the governing law, Restatement &#167 188 is the general provision under which choice of law is determined for a contract. Section 188 provides that the local law of the state which, with respect to the disputed issue, has the most significant relationship to the transaction and the parties is the applicable law, and it lists five factors to guide this determination. 2 Immediately following &#167 188 are sections providing more specific criteria for particular types of contracts. See Restatement &#167 &#167 189-197. The Restatement contemplates that these subsequent sections will be used to decide choice of law in such contracts. See Restatement, Introductory Note, Ch. 8, Title B, at 586 (These contracts are given special attention because it is considered possible to state with respect to each that, in the absence of an effective choice of law by the parties, a particular contact plays an especially important role in the determination of the state of the applicable law.).
16 Section 195 specifically addresses Contracts for the Repayment of Money Lent. Under &#167 195, the basic rule is that the law of the state in which the money is to be repaid governs: The validity of a contract for the repayment of money lent and the rights created thereby are determined, in the absence of an effective choice of law by the parties, by the local law of the state where the contract requires that repayment be made . . . . Restatement &#167 195. The basic rule covers laws governing the interest rate at which the money is to be repaid, including usury laws: The local law of the state selected by application of the present rule governs such issues as the debtor's right to repay the loan before it matures, the creditor's right to proceed against the debtor without having exhausted his security, the time when the loan is to be repaid and the rate of interest that must be paid on the loan in the absence of a stipulation on the point in the contract. Restatement &#167 195, cmt. a (emphasis added). The comments also explain that there is a safety valve, or saving provision, contained in Restatement &#167 203 in the event that the usury law applied by virtue of this basic rule invalidates the contract: [A] contract invalid on the ground of usury under the local law of the state where the loan is to be repaid may nevertheless be upheld by application of the local law of another state with which it has a substantial relationship (see &#167 203). Id. In this case, the contract provides that the money is to be repaid in Nevada. Therefore, the law of Nevada--including usury provisions, if any--governs under the basic rule of &#167 195. 17 Plaintiffs rely on the second clause in &#167 195, which states that the local law of the state where the loan is to be repaid applies unless, with respect to the particular issue, some other state has a more significant relationship under the principles stated in &#167 6 to the transaction and the parties, in which event the local law of the other state will be applied. Restatement &#167 195. Before determining the applicability of this clause, it will be helpful to take a step back and determine its role in the Restatement's overall scheme for usury issues. 18 In light of the saving provision in &#167 203, the unless clause of &#167 195 should not be read as designed to save contracts that violate usury laws of the state of repayment, because &#167 203 already serves that very function. See infra Part II.A.4. Rather, the clause could be used to invalidate contracts with interest rates permitted under the law of the state of repayment if another state with more stringent usury laws is found to have a more significant relationship  to the issue than the state of repayment. However, in order to promote the predictability sought by &#167 195, see cmt. b, as well as to protect the justified expectations of the contracting parties, the unless clause should not ordinarily override the strong presumption of choice of law created by the chosen place of repayment. Comment b to &#167 195 explains that it can often be assumed that the parties, to the extent they thought about the matter at all, would expect that the local law of the state where repayment is to be made would be applied to determine many of the issues arising under the contract. Accordingly, in a usury case, a court has endorsed applying the law of the state of repayment as long as the place of performance bears a reasonable relationship to the promissory note and the parties. Finance America Corp. v. Moyler, 494 A.2d 926, 930 (D.C. 1985). 19 In usury cases, the invalidating power of the unless clause of &#167 195 should thus be limited to situations where the location of repayment is selected solely to circumvent a state's usury laws, or when the place of repayment otherwise has a very tangential relationship to the contract. For example, where both the borrower and lender are domiciled in State X, all negotiations and contracting for the loan occur in State X, and the intended use of the loan is in State X, but the contract provides for repayment in State Y to avoid State X's more stringent usury laws, State X has a more significant relationship worthy of protection under the unless  clause. 3 This is not a case where the parties and the contract had strong connections to California yet the parties structured the contract to evade California's usury law. Defendants Del and Ernestine Bunch, the lenders, are citizens of Nevada, as is Dobron, who negotiated the loans on behalf of the plaintiff corporations he owns. Furthermore, while the parties dispute where the loans were negotiated, the performance of the contract (funding and repayment of loans) was in Nevada. 20 If the foregoing were not the meaning of the unless clause, the bright-line rule of &#167 195 based on the place of repayment would become blurred, and we would risk defaulting to the general and somewhat indeterminate principles of &#167 188. This was precisely the result the Restatement sought to avoid by drafting &#167 195 and the other sections giving specific rules for particular types of contracts. 21 Plaintiffs nonetheless urge that the unless clause of &#167 195 trumps application of Nevada law in this case because California has a usury statute and Nevada has none. Nevada affirmatively repealed its usury law in 1981. Nev. Rev. Stat. &#167 99.050 (1981) (removing 18% per annum cap on interest rate for payment of money due under any contract). But the lack of a usury law does not mean that Nevada has a less substantial concern than California about interest rates; rather, it appears to reflect a choice to favor individual contract decisions and the free flow of capital. Cf. Cindy T. Beal, Recent Changes in the Texas Usury Statutes--Do They Affect Common Law Usury Claims?, 3 Tex. Wesleyan L. Rev. 421, 425 (1997) (Proponents of free enterprise . . . contended that although interest rate restrictions were intended to aid the poor in obtaining loans, the restrictions effectively created a shortage of capital. Furthermore, they argued, because the source of credit was diminishing, the interest rate restrictions actually operated to exclude the poor from obtaining loans.) We therefore do not believe that the absence of a usury statute in Nevada means that California has a more substantial relationship to the dispute, such that the basic rule of &#167 195 applying the law of the place of repayment should be overridden. 22 Given the ample connections to Nevada in this case, of which the foremost is the obligation to repay the loan in that state, we agree with the district court's conclusion that &#167 195 dictates that Nevada law must apply, and that plaintiffs' usury claims fail because Nevada has no usury law. 23
24 Because the application of &#167 195 ends the case by allowing the rate of interest charged, we do not need to resort to &#167 203. But because plaintiffs vigorously argue that &#167 203 requires the application of California law, we explain our view of &#167 203. Section 203 provides: 25 The validity of a contract will be sustained against the charge of usury if it provides for a rate of interest that is permissible in a state to which the contract has a substantial relationship and is not greatly in excess of the rate permitted by the general usury law of the state of the otherwise applicable law under the rule of &#167 188. 26 Restatement &#167 203. If the local law applicable under &#167 195 forbids the rate of interest charged as usurious, then &#167 203 provides a safety valve, thereby upholding the contract in certain cases. This reading of &#167 203 as a saving provision is supported by its stated rationale: 27 Upholding a contract against the charge of usury by the application of the local law of one state, which has a substantial relationship to the transaction and the parties, can hardly affect adversely the interest of another state when the stipulated interest is only a few percentage points higher than would be permitted by the local law of the other state. Under these circumstances, the courts deem it more important to sustain the validity of a contract, and thus to protect the expectations of the parties, than to apply the usury law of any particular state. 28 Restatement &#167 203, cmt. b. 29 Under &#167 203, a rate that would be usurious under the law of the state with the most substantial relationship may nevertheless be charged if (a) there is another state with a substantial relationship (emphasis added) that allows the higher rate of interest, and (b) the interest rate is not greatly in excess of the rate allowed by the law of the state with the most substantial relationship. Although &#167 203 refers to the state with the most substantial relationship as the state of the otherwise applicable law under the rule of &#167 188, the reference to the general rule of &#167 188 appears to incorporate the more particularized provisions of &#167 195. This interpretation of the reference to &#167 188 is supported by Introductory Note to Title B, quoted above, which explains that the sections following &#167 188 provide precise rules, based on the general principles of &#167 188, for determining choice of law for particular types of contracts. It is also supported by a cross reference from &#167 195 to &#167 203 in comment a to &#167 195, 4 and by a cross reference from &#167 203 to &#167 195 in Illustration 3 to &#167 203. 5 30 Under this reading of &#167 203, Nevada is the state with the most significant relationship to the contract under &#167 195, and is therefore the state of the otherwise applicable law under &#167 203 and &#167 195. Since Nevada has no usury statute, the rate of interest on the loans is permitted under Nevada law. And since the saving provision of &#167 203 is necessary only when the law of the state of the otherwise applicable law  invalidates the interest rate, &#167 203 is inapposite.