On February 15, 2023, the California Court of Appeals reversed the dismissal of a case against a lender, in which the trial court held that a forum selection clause required the claim to be brought in Arizona. The appeals court declined to enforce the forum selection clause on the ground that transfer to Arizona would result in the application of Arizona law, depriving the borrower of the benefit of California’s usury prohibitions.
Lender LREP Arizona, LLC loaned $4 million to borrower G Companies Management, LLC. The loan agreement provided for 36 % interest annually and 10% added interest upon default. In the loan agreement, the parties agreed that Arizona law would govern the loan, and submitted to exclusive jurisdiction of the state or federal courts in Maricopa County, Arizona. The borrower defaulted on the loan, and the lender pursued guarantors. The guarantors sued the borrower in California state court, and the borrower cross-claimed against the lender, alleging that LREP charged usurious interest under California law. The lender moved to dismiss on the ground that the forum selection clause mandated resolution of the claim in Arizona. The borrower opposed the motion to dismiss, arguing that to permit transfer to Arizona would deny a California resident the protections of California’s fundamental policy regarding usury. The trial court granted the motion to dismiss, finding that the forum selection clause bore a reasonable relationship to the loan, and that the borrower did not meet its burden to show that enforcement of the forum selection clause was unfair or unreasonable.
On appeal, the court held that the trial court erred in enforcing the forum selection clause because “California courts will refuse to defer to the selected forum if to do so would substantially diminish the rights of California residents in a way that violates our state’s public policy.” The court further held that, while a party opposing enforcement of a forum selection clause ordinarily bears a “substantial” burden of proving why it should not be enforce, the burden is reversed when the claims are based on unwaivable rights created by California statutes. In that case, the appropriate standard requires the party seeking to enforce a forum selection clause to show that litigating claims in the non-California forum “will not diminish in any way the substantive rights afforded under California law.” Having found that applying Arizona law would diminish the protection afforded the borrower by California’s usury statute and that California has “an important public policy” against usury, the court reversed. It concluded, “[S]ince 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 case is G Companies Management, LLC v. LREP Arizona, LLC, No. G060992 (Cal. Ct. App. Feb. 15, 2023). LREP is represented by Finlayson Toffer Roosevelt & Lilly LLP. G Companies is represented by Grant, Genovese and Baratta LLP. The opinion is available here.
