LFG National Capital LLC v. Gary, Williams, Finney, Lewis, Watson, and Sperando P.L. et al
MEMORANDUM-DECISION & ORDER: that Defendants Willie Gary and Lorenzo Williams' motion to dismiss the Second Claim (Breach of Guarantees) is DENIED; The Third Counterclaim (Violation of Florida Usury Law) is voluntarily DISMISSED; and Counter-def endants LFG National Capital, LLC; LawFinance Group, Inc.; and LFG Servicing, LLC's motion to dismiss the remaining counterclaims is GRANTED, and the following counterclaims are DISMISSED: (a) First Counterclaim (Breach of the Implied Covenant o f Good Faith and Fair Dealing); (b) Second Counterclaim (Interference with Contractual Relations); (c) Fourth Counterclaim (Violation of California Usury Law); and (d) Fifth Counterclaim (Unfair Business Practices) Signed by Judge David N. Hurd on 7/12/2012. (see)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
-------------------------------LFG NATIONAL CAPITAL, LLC,
GARY, WILLIAMS, FINNEY, LEWIS, WATSON,
AND SPERANDO P.L.; WILLIE GARY; and
--------------------------------------------------------------GARY, WILLIAMS, FINNEY, LEWIS, WATSON,
AND SPERANDO P.L.,
-vLFG NATIONAL CAPITAL, LLC; LAWFINANCE
GROUP, INC.; and LFG SERVICING, LLC,
CHADBOURNE & PARKE LLP
Attorneys for Plaintiff and Counter-defendants
30 Rockefeller Plaza
New York, NY 10112
SCOTT S. BALBER, ESQ.
JONATHAN C. CROSS, ESQ.
ANDREA L. VOELKER, ESQ.
SUSSMAN & WATKINS, LLP
Attorneys for Defendants and Counter-claimant
55 Main Street, Suite 6
P.O. Box 1005
Goshen, NY 10924
MICHAEL H. SUSSMAN, ESQ.1
DAVID N. HURD
United States District Judge
MEMORANDUM-DECISION and ORDER
Plaintiff LFG National Capital, LLC ("plaintiff" or "LFG National") brought suit2 against
Gary, Williams, Finney, Lewis, Watson, and Sperando P.L. (the "Firm" or "counter-claimant");
Defendants Gary, W illiam s, Finney, Lewis, W atson, and Sperando P.L.; W illie Gary; and Lorenzo
W illiam s were initially represented by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. ("Mintz Levin").
Harvey I. Saferstein, Esq., Nada I. Sham onki, Esq., and Sarah J. Robertson, Esq. of Mintz Levin's Los
Angeles, California office appeared on behalf of defendants— presum ably because this case was filed and
initially litigated in the Central District of California. After the case was transferred to the Northern District of
New York, see infra note 2, Michael H. Sussm an, Esq. appeared as local counsel for defendants for the sole
purpose of filing a m otion to transfer the case back to the Central District of California. The preceding
attorneys all rem ained as attorneys of record for defendants.
Prior to oral argum ent on the m otions which are the subject of this Mem orandum -Decision and
Order, attorney Sham onki requested an adjournm ent of the oral argum ent because attorney Sussm an, who is
located in and regularly practices in New York, was unavailable to argue the m otions in Utica, New York. The
request was denied and two days prior to oral argum ent, Narges M. Kakalia, Esq. of Mintz Levin's New York,
New York office entered a notice of appearance on behalf of defendants. Attorney Kakalia then argued the
m otions on May 23, 2012 in Utica, New York.
One m onth later, on June 22, 2012, Mintz Levin requested to withdraw as counsel for defendants
"because the m ajority of the Mintz Levin Counsel is based in Los Angeles and, now that the case has been
transferred to New York, the Mintz Levin Counsel's continued involvem ent in the case will significantly
increase Defendants' attorneys' fees and costs." Dkt. No. 126. That request was granted and attorneys
Saferstein, Sham onki, Robertson, and Kakalia were term inated from the docket. As a result, attorney
Sussm an rem ains as the only attorney of record for defendants.
Plaintiff LFG National m oved to am end the com plaint on Septem ber 30, 2011, to add allegations
regarding LFG National's entitlem ent to escrow funds in Sim pson v. New York State Departm ent of Civil
Service, Northern District of New York case num ber 1:04-cv-1182 ("Sim pson") and to add allegations of the
Firm 's defaults since the filing of the original com plaint. See Dkt. No. 44. The m otion to am end was granted
on March 8, 2012, by United States District Judge Philip S. Gutierrez in the Central District of California. The
following day, Judge Gutierrez granted LFG National's m otion to transfer venue to the Northern District of
New York. Although the docket does not indicate proof of service of the am ended com plaint, defendants filed
an answer to the am ended com plaint on April 5, 2012. Technically Gary and W illiam s' m otion to dism iss was
m ade on the original com plaint and the operative pleading is now an am ended com plaint. However, the
am ended com plaint includes no new allegations regarding the individual defendants, thus the filing of the
am ended com plaint does not alter the analysis of defendants' m otion to dism iss.
and individuals Willie Gary ("Gary") and Lorenzo Williams ("Williams") (collectively
"defendants") alleging: (1) Breach of Contract against the Firm; and (2) Breach of
Guarantees against Gary and Williams. Defendants answered and the Firm counterclaimed
against LFG National; LawFinance Group, Inc. ("LawFinance"); and LFG Servicing, LLC
("LFG Servicing") (collectively "counter-defendants") alleging: (1) Breach of the Implied
Covenant of Good Faith and Fair Dealing; (2) Interference with Contractual Relations;
(3) Violation of Florida Usury Law; (4) Violation of California Usury Law; and (5) Unfair
Business Practices under the California Code.
Individual defendants Gary and Williams moved to dismiss plaintiff's second cause of
action for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6).
Plaintiff opposed and the individual defendants replied.
Counter-defendants moved to dismiss all five counterclaims for failure to state a claim
pursuant to Federal Rule of Civil Procedure 12(b)(6). The counter-claimant Firm opposed
and counter-defendants replied.
Oral argument was heard on both motions in Utica, New York on May 23, 2012.
Decision was reserved.
The following facts, taken from the complaint and counterclaims, are undisputed
unless otherwise noted.
The defendant Firm is a law practice registered as a Florida professional limited
liability company. The Firm has a national reputation for large scale personal injury and civil
rights litigation, and its business is typically contingent fee work. Gary and Williams are trial
attorneys and partners of the Firm.
On March 19, 2007, the Firm borrowed approximately $10 million from LawFinance, a
California corporation. Zimmerman Decl., June 7, 2011, Ex. A, Dkt. No. 23-1 ("Loan
Agreement"). The Loan Agreement replaced, and provided funds to refinance amounts due
under an earlier, similar loan between the Firm and LawFinance. Gary and Williams each
executed personal guarantees in connection with the Loan Agreement. Zimmerman Decl.,
June 7, 2011, Exs. E, F, Dkt. Nos. 23-1, 23-2 ("Guarantees").
On March 22, 2007, three days after executing the Loan Agreement, LawFinance
assigned all of its interests in the loan to its affiliate LFG National, a Delaware limited liability
company with its principal place of business in Nevada.
The purpose of the loan was to enable the Firm to finance the payment of litigation
costs in its pending cases. The interest rate under the Loan Agreement was "[t]he Index plus
13.0% per annum"3 and the default interest rate was "[t]he Interest Rate plus 5% per
annum"; rendering the default interest rate to be at least 18%. Loan Agreement §§ 1.2.24,
1.2.16. In addition to mandated principal and interest payments, the Loan Agreement
required the Firm to remit "Case Costs" to LFG National within ten days of the end of the
calendar month in which the Firm received the funds. Id. § 126.96.36.199. "Case Costs" are
defined as "costs advanced by Borrower on Eligible Cases for which Borrower is legally
entitled under a fee agreement to be reimbursed out of the first Proceeds of a Case and any
interest payable to Borrower thereon." Id. § 1.2.9.
Further, under the terms of the Guarantees, any Firm indebtedness to Gary or
Williams is subordinated to the payment of the Firm's obligations to LFG National. See
The Index rate is determ ined by reference to the three-m onth London interbank rate. See Loan
Agreem ent § 1.2.22.
Guarantees § 7.2. Thus, no payment of any kind with respect to monies owed to Gary or
Williams could be made until all of the Firm's obligations to LFG National were satisfied. If
payments were made to Gary or Williams, they were to be held in trust for LFG National. Id.
Pursuant to the Loan Agreement, the Firm granted to LFG National a first-priority
security interest in the Firm's collateral. Loan Agreement § 5. The term "Collateral"
encompasses essentially all of the Firm's property and assets, including its cash, general
intangibles, rights to attorneys' fees and costs, and equipment. Id. § 1.2.15. LFG National
perfected its liens as of June 8, 2005, through the filing of a Florida Uniform Commercial
Code Financing Statement (with a subsequent continuation filed on June 8, 2010).
LFG National and the Firm amended the Loan Agreement for the third time on May
29, 2009. Loan Agreement Amendment No. 3 ("Amendment"). LFG National alleges that by
this date, the Firm defaulted under the terms of the Loan Agreement. The Amendment
provides that an "Event of Default" occurred and was continuing under section 11 of the Loan
Agreement because the Firm failed to make mandatory payments upon receipt of Case
Costs, and made other payments late in breach of the Loan Agreement. Id. ¶ 1. According
to the Amendment, LFG National agreed to waive the Firm's defaults, subject to its
compliance with the terms and conditions in the Amendment. Id. ¶ 2.
As consideration for LFG National's waiver of the Firm's defaults, the parties agreed to
alter the interest rate to a fixed rate of 16%, with an option to reduce the rate to the original
Index plus 13% per annum if the Firm paid the loan in full before the end of 2009. Id. ¶ 3
(replacing section 1.2.24 of Loan Agreement with "[t]he Index plus 13.0% percent annum;
provided, however, the Interest Rate for the period from January 1, 2009 through full
repayment of the Obligations shall not be less than 16.0%."). The modified 16% interest
rate, plus the original 5% default interest rate, resulted in a default interest rate as high as
The loan matured on June 30, 2010, and the Firm was notified on July 1, 2010, that
the maturity date would not be extended and that all sums were due and payable in full
immediately. As of October 5, 2011, the date the proposed amended complaint was filed,
the total amount due under the Loan Agreement, excluding costs and attorneys' fees for this
litigation (which the Loan Agreement dictates the Firm must pay), was $11,137,630.03.
Proposed Am. Compl. ¶ 36.
Plaintiff contends defendants have been in continuous default of their obligations
since at least July 16, 2009, when the Firm failed to remit a required interest payment. Id.
¶ 24. It is also alleged the Firm missed interest payments since that date. Id. Defendants
deny they breached the Loan Agreement and contend the Firm has made substantial
payments of both interest and principal since 2005. Countercl. ¶ 23. Defendants allege that
since May 29, 2009, the Firm has paid back $2,477,827.32 in interest; $801,575.08 in
principal; and $6,000.00 in fees. Id.
Plaintiff also contends the Firm breached the Loan Agreement when it failed to remit
Case Costs on numerous occasions including most recently on September 7, 2011, when
the Firm received a settlement payment as the plaintiff's counsel in the case of Pericles v.
Buyak, Middle District of Florida case number 6:11-cv-1269. Further, the Firm acted as cocounsel with Sussman & Watkins, LLP, representing the plaintiff in Simpson before the
undersigned. A stipulation of settlement in Simpson was approved on April 25, 2011, and
New York State was ordered to pay attorneys' fees to the Firm and Sussman & Watkins,
LLP. After LFG National and another creditor of the Firm asserted they held valid liens over
those attorneys' fees payments, a June 9, 2011, order was issued modifying the April 25,
2011, order and directing the payment of attorneys' fees to Sussman & Watkins, LLP in a
separate escrow account pending further order.
In attempting to collect amounts due under the Loan Agreement, LFG National and
LFG Servicing contacted several third parties with whom the Firm had business relationships.
LFG National and LFG Servicing informed those parties of LFG National's status as a
secured creditor of the Firm and advised that the Firm defaulted under the Loan Agreement.
On April 26, 2011, plaintiff's attorneys wrote Sussman & Watkins, LLP, the Firm’s local
counsel in Simpson, whom it was ordered should collect the Firm's fee from New York State.
Countercl. Ex. B ("Sussman letter"). The Sussman letter and its enclosed correspondence
from LFG Servicing demanded Sussman & Watkins, LLP forward those attorneys' fees due
to the Firm, directly to LFG Servicing for amounts owed under the Loan Agreement. Id.
On May 20, 2011, plaintiff's attorneys wrote Boies, Schiller, & Flexner LLP, the Firm's
co-counsel in Pokorny v. Quixtar Inc., Northern District of California case number
3:07-cv-201-SC ("Pokorny") in which settlement was pending. Countercl. Ex. C ("Boies
letter"). According to the Boies letter, Boies, Schiller, & Flexner LLP was in a position to
receive fees from the defendants in Pokorny and pay the Firm its share of such fees. Id.
The Boies letter also stated: "Be advised that LFG intends to advise Judge Conti [the
presiding United States District Judge in Pokorny] on Monday that LFG possesses a first lien
security interest over all sums due to the Firm." Id.
Also on May 20, 2011, plaintiff's attorneys wrote the New York State Attorney
General's Office, counsel for defendant New York State in Simpson, who owed the Firm and
Sussman & Watkins, LLP attorneys' fees. Countercl. Ex. D ("Attorney General letter").
The Attorney General letter and its enclosed correspondence from LFG Servicing demanded
New York State forward those attorneys' fees due to the Firm, directly to LFG Servicing for
amounts owed under the Loan Agreement. Id.
The Firm alleges these letters "seriously affected" and "possibly damaged" the Firm's
relationships with its clients and co-counsel. Countercl. ¶ 28. Further, the Firm accuses LFG
National of acting in bad faith and alleges its motive in demanding payment of funds pursuant
to the Loan Agreement was "to prevent to prompt repayment of amounts owed by the Firm"
and to collect exorbitant amounts of default interest. Id. ¶ 29.
In addition to the Sussman, Boies, and Attorney General letters, the Firm alleges
counter-defendants sent letters to "the Court in the Pokorny case and the Simpson case." Id.
¶¶ 33, 41, 63. Finally, although not alleged in the counterclaim,4 the Firm contends "LFG has
increased its aggressive and harassing collection efforts by threatening to send similar
[collection] letters to the Firm's clients." Counter-claimant's Opp'n to Mot. to Dismiss, Dkt.
No. 51 at 2. The Firm submitted a letter by LFG Servicing Chief Executive Officer Alan
Zimmerman ("CEO Zimmerman") to Gary and Williams. Robertson Decl., Oct. 3, 2011, Ex.
D ("Zimmerman letter"). The Zimmerman letter advised Gary and Williams that LFG National
learned that certain of the Firm's cases had recently settled. Accordingly, CEO Zimmerman
enclosed "letters of instruction under Section 9-406 of the UCC to your firm's clients, Eddie
Persons, Loveding Pericles, and Esther Pericles ("Plaintiffs"), directing that they pay to [LFG]
National Capital all sums representing fees and costs owed to your firm." Id. The
Zimmerman letter concluded by stating "I trust that you will forward the attached
The Firm noted that it plans to am end its counterclaim to add allegations regarding counterdefendants' m ost recent conduct; however it has not done so to date.
correspondence to Plaintiffs . . . ." Id. Pre-drafted letters from CEO Zimmerman and LFG
Servicing to the above-named plaintiffs were enclosed.
The parties agree that California law applies pursuant to the terms of the Loan
Agreement. Loan Agreement §§ 1.2.12, 22.
A. Motion to Dismiss—Legal Standard
When deciding a motion to dismiss pursuant to Rule 12(b)(6), a plaintiff's—as well as
here, a counter-claimant's—factual allegations must be accepted as true and all reasonable
inferences must be drawn in their favor to assess whether a plausible claim for relief has
been stated. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555–61, 127 S. Ct. 1955, 1964–67
(2007); Ashcroft v. Iqbal, 556 U.S. 662, 684, 129 S. Ct. 1937, 1953 (2009) (holding that the
pleading rule set forth in Twombly applies in all civil actions). The factual allegations must be
sufficient "to raise a right to relief above the speculative level," crossing the line from
conceivable to plausible. Twombly, 550 U.S. at 555, 127 S. Ct. at 1965. Additionally, "a
formulaic recitation of the elements of a cause of action will not do." Id. at 555, 127 S. Ct. at
1965. "A claim has facial plausibility when the plaintiff [or counter-claimant] pleads factual
content that allows the court to draw the reasonable inference that the defendant [or counterdefendant] is liable for the misconduct alleged." Iqbal, 556 U.S. at 678, 129 S. Ct. at 1949
(citing Twombly, 550 U.S. at 556, 127 S. Ct. at 1965).
Thus, in reviewing the sufficiency of the pleading, a court first may identify legal
conclusions that are not entitled to the assumption of truth. Id. at 679, 129 S. Ct. at 1950.
The court should then "assume [the] veracity" of well-pleaded factual allegations "and then
determine whether they plausibly give rise to an entitlement to relief." Id.
When deciding a motion to dismiss, a district court may consider documents attached
to the complaint (and counterclaim) as exhibits or incorporated by reference therein. DiFolco
v. MSNBC Cable L.L.C., 622 F.3d 104, 111 (2d Cir. 2010). Even if a document is not
incorporated by reference, a court may nevertheless consider it "where the complaint [or
counterclaim] relies heavily upon its terms and effect, thereby rendering the document
integral to the complaint [or counterclaim]." Id. (internal quotations omitted). However, even
if the document is integral, "it must be clear on the record that no dispute exists regarding the
authenticity or accuracy of the document." Id. (internal quotations omitted).
Surprisingly, the essential documents at issue here—the Loan Agreement,
Guarantees, and Amendment—are attached to neither the complaint nor counterclaim.
However, both the complaint and counterclaim rely heavily on these documents, rendering
them integral to the pleadings. Further, no dispute exists regarding the authenticity or
accuracy of the documents. All three documents were attached to the June 7, 2011,
Zimmerman declaration submitted in support of plaintiff's ex parte application for a temporary
restraining order and preliminary injunction.
B. Gary and Williams' Motion to Dismiss
Plaintiff's second claim alleges Gary and Williams breached the terms of their
respective Guarantees by failing, after receiving written demand from LFG, to make
payments to LFG National. LFG National contends Gary and Williams each received
payments from the Firm while the Firm owed sums to LFG. Gary and Williams argue this
claim should be dismissed as premature because LFG has not first exhausted its remedies
against the Firm as required.
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At the outset it should be noted that California abolished the distinction between
sureties and guarantors.5 Cal. Civ. Code § 2787 (West 2012). In California, "[a] surety or
guarantor is one who promises to answer for the debt, default, or miscarriage of another, or
hypothecates property as security therefor." Id. Thus, both the terms "surety" and
"guarantor" are appropriate to describe Gary and Williams' obligations to LFG National under
the Loan Agreement and Guarantees.
California law permits a surety or guarantor to insist that a creditor proceed against the
debtor, including exhausting any security, before bringing suit to enforce a guarantee. See
e.g., Pearl v. Gen. Motors Acceptance Corp., 13 Cal. App. 4th 1023, 1029 (Cal. Ct. App. 4th
Dist. 1993). California Civil Code section 2845 provides in part: "A surety may require the
creditor . . . to proceed against the principal, or to pursue any other remedy in the creditor's
power which the surety cannot pursue, and which would lighten the surety's burden." Cal.
Civ. Code § 2845. Further, section 2849 requires a creditor to exhaust the security given by
the principal debtor. Id. § 2849. That provision states: "A surety is entitled to the benefit of
every security for the performance of the principal obligation held by the creditor, or by a
co-surety at the time of entering into the contract of suretyship, or acquired by him
afterwards, whether the surety was aware of the security or not." Id.
However, section 2856(a) of the California Civil Code provides that the statutory
protections in sections 2845 and 2849 may be waived. Id. § 2856(a) ("Any guarantor . . .
Generally, the term s "surety" and "guarantor" have different m eanings. A surety is "[a] person who
is prim arily liable for paying another's debt or perform ing another's obligation." Black's Law Dictionary (9th
ed. 2009), surety. A guarantor is "[o]ne who m akes a guaranty or gives security for a debt." Id., guarantor.
"W hile a surety's liability begins with that of the principal, a guarantor's liability does not begin until the
principal debtor is in default." Id. Thus, a guarantor is only liable to the creditor if the debtor does not m eet
the duties owed to the creditor, while the surety is directly liable. Id., surety.
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may waive . . . any other rights and defenses that are or may become available to the
guarantor or other surety by reason of Sections 2787 to 2855, inclusive."); see also Pearl, 13
Cal. App. 4th at 1029 ("Sections 2845 and 2849 have often been found to have been waived
by language contained in documents."). Section 2856(b) further states:
A contractual provision that expresses an intent to waive any or all
of the rights and defenses described in subdivision (a) shall be
effective to waive these rights and defenses without regard to the
inclusion of any particular language or phrases in the contract to
waive any rights and defenses.
Id. § 2856(b). Upon a guarantor's waiver of these protections, a creditor may pursue the
guarantor directly without first proceeding against the principal debtor. At issue are whether
Gary and Williams waived the protections of section 2845 and 2849. If a valid waiver is
found, LFG National may proceed against Gary and Williams individually without regard to
LFG National's exhaustion of remedies and collateral against the Firm.
Plaintiff relies on section 2.4 of the Guarantees, entitled "Joint and Several Obligation;
Independent Obligation" to establish Gary and Williams' waiver of the section 2845 and 2849
defenses. That section provides in part:
The obligations of Guarantor hereunder are direct and primary
and are independent of the obligations of Debtor or any other
such guarantor, and a separate action may be brought against
Guarantor irrespective of whether an action is brought against
Debtor . . . . Guarantor's liability hereunder shall not be contingent
upon the exercise or enforcement by Creditor of any remedies it
may have against Debtor . . . or the enforcement of any lien or
realization upon any security Creditor may at any time possess.
Guarantees § 2.4. LFG National urges that this language is just as strong as, or stronger,
than the contractual language found sufficient for a waiver by several California courts. In
opposition, Gary and Williams contend they did not waive their rights via section 2.4 because
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nothing about that section "would alert someone that Section 2.4 allegedly contains a
knowing and intentional waiver of a critical and important right." Defs.' Reply in Supp. of Mot.
to Dismiss, Dkt. No. 57 at 5.
Instead, Gary and Williams rely on section 6, entitled "Waivers by Guarantors of
Suretyship Defenses" to argue they did not waive the statutory protections. Section 6 states
"Guarantor waives any and all suretyship defenses, whether arising by contract, statute or by
operation of law." Id. § 6. Following that statement are five enumerated rights which
guarantors waive. Id. §§ 6.1–6.5. The section 2845 and 2849 exhaustion requirements are
not listed. Gary and Williams contend that a waiver of sections 2845 and 2849 cannot be
found because the waiver section does not enumerate those defenses. At oral argument,
plaintiff responded that the section 2845 and 2849 defenses are not suretyship defenses but
instead an "election of remedies" and thus they need not be listed in section 6 of the
First, with respect to section 2.4 of the Guarantees, similar language has been found
to be a waiver of the section 2845 and 2849 protections. In Guild Wineries & Distilleries v.
Land Dynamics, 103 Cal. App. 3d 966 (Cal. Ct. App. 1st Dist. 1980), the guaranty stated that
the guarantor's obligations were joint and several, and independent of the obligations of the
borrower, and that a separate action may be brought against the guarantor whether an action
is brought against the borrower. Id. at 973. The guaranty also included the following
language: "Guarantor waives any right to require [appellant] to (a) proceed against Borrower;
(b) proceed against or exhaust any security held from Borrower; or (c) pursue any other
remedy in [appellant's] power whatsoever." Id. The Court found that the guarantor waived
the section 2845 and 2849 defenses. Id.
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Similarly, in Wiener v. Van Winkle, 273 Cal. App. 2d 774 (Cal. Ct. App. 2d Dist. 1969),
the Court examined a guaranty which stated "[t]he [creditor] need not take any action against
Debtor, any other guarantor, or any other person, firm or corporation or resort to any security
held by it at any time before proceeding against the [guarantor]." Id. at 786–87 (internal
quotations omitted). The Court concluded the guarantors' rights under sections 2845 and
2849 were waived. Id. at 787. Notably, this guaranty did not contain the term "waiver," but
the Court interpreted the language "as expressing an intention to waive any and all rights
arising out of or incidental to the existence of the security." Id. (internal quotations omitted).
Finally, in Engelman v. Bookasta, 264 Cal. App. 2d 915 (Cal. Ct. App. 2d Dist. 1968),
the Court found a waiver of sections 2845 and 2849 where the guaranty stated:
I hereby waive, for myself and for all other persons . . . (c) any
right to require the holder of the within instrument to proceed
against the maker or against any other person or to apply any
security it may hold, or to proceed to first exhaust any security it
may hold or to pursue any other remedy.
Id. at 916.
The language here stating the guarantors' obligations are independent of the debtor's
obligations, see Guarantees § 2.4, is nearly identical to that found to constitute a waiver in
Guild Wineries & Distilleries, 103 Cal. App. 3d at 973. Moreover, section 2.4 of the
Guarantees provides that a separate action may be brought against the guarantor whether
an action is brought against the debtor and that the creditor need not exhaust security held
by the debtor before seeking to collect from the guarantor—language found in each of the
Guild Wineries & Distilleries, Van Winkle, and Engelman waivers. While the Guild Wineries
& Distilleries and Engelman guarantees also include the term "waive," "the inclusion of any
particular language or phrases in the contract" is not required "to waive any rights and
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defenses," Cal. Civ. Code § 2856(b). Read as a whole, the language in section 2.4
expresses an intent to waive the rights provided by sections 2845 and 2949.
Despite Gary and Williams' contention, section 6 of the Guarantees does not alter this
conclusion. However, section 6's inapplicability is not for the reason cited by LFG National at
oral argument. "Suretyship" is defined as "[t]he legal relation that arises when one party
assumes liability for a debt, default, or other failing of a second party." Black's Law
Dictionary, suretyship. There is no reason why the section 2845 and 2849 defenses would
not constitute "suretyship defenses" as that term is used in section 6. Instead, Gary and
Williams' argument fails because nothing in section 6 suggests that it contains an exhaustive
list of waived suretyship defenses. To the contrary, section 6 provides that "Guarantor
waives any and all suretyship defenses, whether arising by contract, statute or by operation
of law." Guarantees § 6. That general waiver is followed by the statement, "[s]pecifically
Guarantor waives," and then five defenses are enumerated. Id. Nothing in section 6
indicates that the five enumerated defenses are the only suretyship defenses waived. Thus,
section 6 does not preclude a finding that section 2.4 contains a valid waiver.
Accordingly, Gary and Williams waived the protections of California Civil Code
sections 2845 and 2849 by contract, and their motion to dismiss the second claim will be
C. Counter-defendants' Motion to Dismiss
1. Counterclaims Related to Collection Activities
The first, second, and fifth counterclaims relate to counter-defendants' conduct in
attempting to collect sums owed to LFG National under the Loan Agreement. As detailed
above, the parties do not dispute that LFG National sent letters to the following recipients:
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(1) Sussman & Watkins, LLP, the Firm's local counsel in Simpson; (2) Boies, Schiller, &
Flexner LLP, the Firm's co-counsel in Pokorny; and (3) New York State, the defendant in
Simpson. The Firm also contends counter-defendants impermissibly contacted Judge Conti
regarding Pokorny and the Firm's clients.
Counter-defendants argue these three counterclaims must be dismissed because the
Firm ignores the nature of LFG National's rights as a secured creditor of the Firm. They
contend the mailing of the Sussman, Boies, and Attorney General letters were expressly
permitted by both the Loan Agreement and the Uniform Commercial Code ("UCC").
Furthermore, they argue the Firm failed to plead enough facts to support the fifth
counterclaim for unfair business practices. The Firm responds that it has sufficiently pleaded
these counterclaims and that counter-defendants are merely attacking the facts and arguing
their conduct does not rise to the level of a breach, an interference, or an unfair business
practice, and that such determinations are not to be made at the motion to dismiss stage.
The Loan Agreement conveyed to LFG National a first lien security interest in most of
the Firm's assets, including attorneys' fees. Loan Agreement § 5. Section 12 of the Loan
Agreement entitled "Remedies," states that upon the occurrence of default, LFG National
may "[t]ake or bring, in the name of Lender or Borrower, all steps, actions, suits or
proceedings deemed by Lender necessary or desirable to effect collection of or other
realization upon any Collateral." Id. § 12.1, 12.1.3. The parties also agreed in advance the
standards for exercising remedies in the event of default.
Specifically, the Loan Agreement states:
To the extent that applicable law imposes duties on the Lender to
exercise remedies in a commercially reasonable manner, the
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Borrower acknowledges and agrees that it is not commercially
unreasonable for the Lender:
to exercise collection remedies against account debtors and other
persons obligated on Collateral directly or through the use of
attorneys, collection agencies and other collection specialists[.]
Id. §§ 13, 13.2 (emphasis added).6 Section 13 also indicates its purpose:
[T]o provide non-exhaustive indications of what actions or
omissions by the Lender would not be commercially unreasonable
in the Lender's exercise of remedies against the Collateral and
that other actions or omissions by the Lender shall not be deemed
commercially unreasonable solely on account of not being
indicated in this Section.
Id. § 13.9. Finally, nothing contained in section 13 "shall be construed to grant any rights to
the Borrower or to impose any duties on the Lender that would not have been granted or
imposed by this Agreement or by applicable law in the absence of this Section 13." Id.
Thus, in addition to the above mentioned remedies, the Loan Agreement does not restrict
those collection remedies provided for by the UCC. The UCC provides that "[i]f so agreed,
and in any event after default, a secured party . . . may notify an account debtor or other
person obligated on collateral to make payment or otherwise render performance to or for the
benefit of the secured party." U.C.C. § 9-607(a)(1) (amended 2010).
The Loan Agreement provides that it would not be commercially unreasonable for LFG
National, in the event of default, to exercise remedies under the UCC including collection
remedies against debtors and others obligated on collateral (i.e. people who owed the Firm
The Loan Agreem ent does not define "account debtors," but provides that all term s contained in the
Loan Agreem ent that are not specifically defined shall have the m eanings provided in the UCC. Loan
Agreem ent § 1.2. The UCC defines "account debtor" as "a person obligated on an account, chattel paper, or
general intangible." U.C.C. § 9-102(3) (am ended 2010).
- 17 -
legal fees). It is undisputed that the Firm defaulted. The Amendment dated May 29, 2009,
Borrower acknowledges and agrees that: (i) an Event of Default
has occurred and is continuing under Section 11 of the
Agreement because: (i) Borrower has failed to make mandatory
loan payments upon receipt of Eligible Case Costs recovered on
any of Borrower's Cases . . . and (ii) certain other payments were
made late in breach of the terms of the Agreement.
Amendment ¶ 1. Therefore, counter-defendants' letters to account debtors—those people
obligated to the Firm on collateral, such as Sussman & Watkins, LLP; Boies, Schiller, &
Flexner LLP; and New York State—seeking to collect sums upon the Firm's default, were
permitted under the terms of the Loan Agreement and the UCC.
a. First Counterclaim: Breach of Implied Covenant of Good Faith and Fair
This counterclaim alleges LFG National violated its duty to act fairly and in good faith
by sending letters to "the Firm's co-counsel, opposing counsel and/or the Court in the
Pokorny and the Simpson case." Countercl. ¶ 33. It further alleges LFG National acted in
bad faith to declare a default under the Loan Agreement so that it could collect exorbitant
amounts of default interest. Id. ¶ 34. Although not alleged in the counterclaim, the Firm also
contends counter-defendants threatened to contact the Firm's clients.
"[E]very contract imposes upon each party to the contract a duty of good faith and fair
dealing in the performance of the contract such that neither shall do anything that will destroy
or injure the right of the other party to receive the benefits of the contract." Seth Dallob
Enters. v. Pomona Unified Sch. Dist., No. B197976, 2008 WL 2807230, at *5 (Cal. Ct. App.
2d Dist. July 22, 2008) (citing Waller v. Truck Ins. Exch., Inc., 900 P.2d 619, 639, 11 Cal. 4th
1, 36 (1995)). However, an implied covenant of good faith and fair dealing cannot contradict
- 18 -
the express terms of a contract. See Carma Developers (Cal.), Inc. v. Marathon Dev. Cal.,
Inc., 826 P.2d 710, 728, 2 Cal. 4th 342, 374 (1992) ("We are aware of no reported case in
which a court has held the covenant of good faith may be read to prohibit a party from doing
that which is expressly permitted by an agreement."). Thus, "the implied covenant of good
faith and fair dealing does not impose an affirmative duty on a party to refrain from enforcing
rights expressly given under the contract." Seth Dallob Enters., 2008 WL 2807230, at *5.
As previously explained, the Loan Agreement and UCC permit LFG National to
exercise collection remedies against account debtors such as the Firm's co-counsel and
opposing counsel, directly or through the use of attorneys. Because the implied covenant of
good faith and fair dealing does not require LFG National to refrain from exercising those
rights expressly given to it under the Loan Agreement and the UCC, the Firm cannot sustain
a counterclaim for breach of the implied covenant of good faith and fair dealing based on the
Sussman, Boies, and Attorney General Letters.
The Firm fares no better with respect to counter-defendants' alleged communications
with Judge Conti. Although the veracity of well-pleaded factual allegations must be assumed
for purposes of a motion to dismiss, the Firm's bare allegation that letters were sent to "cocounsel, opposing counsel and/or the Court" is hardly a well-pleaded factual allegation.
Countercl. ¶¶ 33, 41 (emphasis added). Moreover, the Boies letter stated: "Be advised that
LFG intends to advise Judge Conti on Monday that LFG possesses a first lien security
interest over all sums due to the Firm." Boies letter (emphasis added). The Firm has not
referenced or attached any correspondence between LFG National or LFG Servicing and
Judge Conti. Counter-defendants insist they never communicated with Judge Conti
regarding the Firm or any debt owed by the Firm. See Zimmerman Decl., Oct. 7, 2011,
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¶¶ 3–4, Dkt. No. 58-1. In light of the Firm's conclusory allegation and the actual language of
the Boies letter, it has not raised its right to relief above a speculative level. The alleged
communications with Judge Conti cannot support a cause of action.
Likewise, even if the Firm pleaded that counter-defendants threatened to, or did
contact the Firm's clients, such conclusory allegations would not withstand a motion to
dismiss. The Firm has not alleged that LFG National or LFG Servicing actually mailed CEO
Zimmerman's pre-drafted letters to the Firm's clients. To the contrary, the plain language of
the Zimmerman letter indicates CEO Zimmerman requested the Firm mail the letters to its
clients. The Firm cannot maintain a cause of action for breach of the implied covenant of
good faith and fair dealing based on alleged communications with the Firm's clients.
Accordingly, counter-defendants' motion to dismiss will be granted and the first
counterclaim will be dismissed.
b. Second Counterclaim: Interference with Contractual Relations
This counterclaim arises from the same facts as the first counterclaim and involves the
Sussman, Boies, and Attorney General letters and the alleged communications with Judge
Conti and the Firm's clients. It alleges the Firm "entered into a written legal service
agreement with its clients and a contractual co-counsel agreement in the Pokorny case and
the Simpson case" and that counter-defendants "had knowledge of the Firm's financial
statements for its pending cases, as well as the identity of its co-counsel." Countercl. ¶¶ 39,
40. The Firm contends counter-defendants sent the letters to intentionally interfere with the
contractual relations between the Firm and its clients, and the Firm and its co-counsel. Id.
¶ 41. The counterclaim alleges the letters were sent in bad faith and that LFG National's
motive was to sabotage the potential settlements in Pokorny and Simpson so that the Firm
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would default under the Loan Agreement and LFG National could collect exorbitant amounts
of default interest. Id. ¶ 42. Finally, the counterclaim asserts "LFG National and LFG
Servicing have attempted to interfere with the Firm's fiduciary duties to its clients." Id. ¶ 45.
The elements of an action for tortious interference with contract are "'(1) a valid
contract between plaintiff and a third party; (2) defendant's knowledge of this contract;
(3) defendant's intentional acts designed to induce a breach or disruption of the contractual
relationship; (4) actual breach or disruption of the contractual relationship; and (5) resulting
damage.'" Hahn v. Diaz-Barba, 194 Cal. App. 4th 1177, 1196 (Cal. Ct. App. 4th Dist. 2011)
(quoting Quelimane Co. v. Stewart Title Guaranty Co., 960 P.2d 513, 530, 19 Cal. 4th 26, 55
The Firm has sufficiently alleged the first two elements, namely that it had written
agreements with clients and co-counsel and that counter-defendants were aware of those
agreements. With respect to the third element, the Firm must plead the facts of interference,
"such as [counter-]defendants' advising, counseling, or persuading the third party to
terminate the contract." Bent v. Rivergate Commons, No. C049917, 2006 WL 3531425, at *7
(Cal. Ct. App. 3d Dist. Dec. 8, 2006). There are no allegations that LFG National or LFG
Servicing advised, counseled, or persuaded the Firm's co-counsel, opposing counsel, clients,
or Judge Conti to terminate their contractual relations with the Firm. Nor do the Sussman,
Boies, or Attorney General letters advise such. The Firm has not alleged facts to show LFG
National and LFG Servicing engaged in intentional acts designed to induce a breach or
disruption of the Firm's contractual relationships. The Firm must plead the interference was
wrongful "'by some measure beyond the fact of the interference itself.'" Id. (quoting Della
Penna v. Toyota Motor Sales, U.S.A., Inc., 902 P.2d 740, 751, 11 Cal. 4th 376, 393 (1995)).
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Instead, counter-defendants' admitted motive in sending the letters was to collect on the debt
owed to them by the Firm. The Firm's contention that LFG National actually intended to
sabotage payments owed to the Firm so it could declare a default under the Loan Agreement
As to the fourth and fifth elements, the Firm has failed to allege other than in a
conclusory manner, that counter-defendants' mailing of the Sussman, Boies, and Attorney
General letters caused the breach or actual disruption of any contractual relationship. The
counterclaim alleges the "acts may have jeopardized the potential recovery of the Firm and
the Firm's clients" and "hindered the Firm's performance under its agreements with its clients
and co-counsel." Countercl. ¶¶ 43, 44 (emphasis added). Mere speculation that the alleged
conduct breached or disrupted the Firm's contractual relationships and that damages may
result are insufficient to survive a motion to dismiss. Finally, as previously explained, the
alleged communications with Judge Conti and the Firm's clients are baseless and insufficient
to sustain a claim.
Therefore counter-defendants' motion to dismiss will be granted and the second
counterclaim will be dismissed.
c. Fifth Counterclaim: Unfair Business Practices
This counterclaim alleges LFG National, LFG Servicing, and LawFinance engaged in
conduct in violation of California Business and Professions Code section 17200. Specifically,
the counterclaim cites information on LawFinance's website; LFG National and LFG
Servicing's collection efforts; and the terms of the Loan Agreement. See Countercl.
¶¶ 63–71. The Firm alleges counter-defendants acted unlawfully, unfairly, and engaged in
fraudulent business practices and false advertising. Id.
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California Business and Professions Code section 17200, known as the unfair
competition law ("UCL"), prohibits business practices which are unlawful, unfair, or
fraudulent. Cal. Bus. & Prof. Code § 17200 (West 2012). The statute "is written in the
disjunctive, establishing three varieties of unfair competition." Shroyer v. New Cingular
Wireless Servs., Inc., 622 F.3d 1035, 1043 (9th Cir. 2010) (internal quotations omitted).
i. "Unlawful" Prong
Regarding "unlawful" claims, section 17200 "borrows violations from other laws by
making them independently actionable as unfair competitive practices." Korea Supply Co. v.
Lockheed Martin Corp., 63 P.3d 937, 943, 29 Cal. 4th 1134, 1143 (2003) (internal quotations
omitted). To plead a claim based on unlawful activity, a party must identify some other law
and "state with reasonable particularity the facts supporting the statutory elements" of the
alleged violation. Stearns v. Select Comfort Retail Corp., 763 F. Supp. 2d 1128, 1150 (N.D.
Cal. 2010) (internal quotations omitted).
Here, the counterclaim alleges the interest rates in the Loan Agreement are usurious
and violate Florida and California law. Countercl. ¶¶ 68–69. The Firm further alleges "terms
in the Agreement relating to the compounding of interest, waiver and jurisdiction are
unconscionable under California and/or Florida law." Id. ¶ 70. As explained below in section
two, the interest rates do not violate Florida or California law; therefore the Firm cannot plead
a claim for an unlawful business practice based on these facts. With respect to the
compounding of interest, waiver, and jurisdiction, the counterclaim does not identify which
laws the loan terms allegedly violate, thus the Firm has not "state[d] with reasonable
particularity the facts supporting the statutory elements" of the alleged violation. Stearns,
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763 F. Supp. 2d at 1150. Accordingly, any claims of unlawful business practices based on
terms in the Loan Agreement must be dismissed.
ii. "Unfair" Prong
The state of the law on what constitutes an "unfair" business practice in consumer
actions under the UCL is somewhat unsettled.7 Neither the Ninth Circuit nor the California
Supreme Court have endorsed the test articulated in Camacho v. Automobile Club of
Southern California, but it is the test used by the majority of federal and state trial courts in
California. See e.g., Kilgore v. Keybank, Nat'l Ass'n, 712 F. Supp. 2d 939, 951–52 (N.D. Cal.
2010) vacated on other grounds, appeal dismissed by, 673 F.3d 947 (9th Cir. 2012);
Davis v. Ford Motor Credit Co., 179 Cal. App. 4th 581, 596–98 (Cal. Ct. App. 2d Dist. 2009).
Under Camacho, the elements of an unfair act or practice claim are: "(1) a substantial
consumer injury; (2) the injury outweighs any countervailing benefits to consumers or
competition; and (3) the injury could not reasonably have been avoided." See Peel v.
BrooksAmerica Mortg. Corp., 788 F. Supp. 2d 1149, 1165 (C.D. Cal. 2011).
The counterclaim alleges LFG National and LFG Servicing engaged in unfair business
practices by virtue of their overly aggressive and harassing collection efforts. Countercl.
¶¶ 64–67. With respect to the first element, at best the Firm alleges its clients' potential
recovery has been jeopardized and its fiduciary duties to its clients have been interfered with.
In 1999 the California Suprem e Court devised a "precise test" for unfairness, to avoid reliance on
"purely subjective notions of fairness." Cel-Tech Com m c'ns, Inc. v. L.A. Cellular Tele. Co., 973 P.2d 527,
564, 20 Cal. 4th 163, 184–85 (1999). However in a footnote, the Court lim ited the test to actions "by a
com petitor alleging anticom petitive practices," and thus left for another day whether the test applies to
consum er cases as well. Id. at 565 n.12, 20 Cal. 4th at 187 n.12. Cel-Tech was followed by a long line of
cases disputing whether the new definition of "unfair" did in fact apply to consum er cases. To resolve the
conflict, one California appellate court looked to section 5 of the Federal Trade Com m ission Act to create a
new three-factor test for determ ining unfairness in consum er actions. Cam acho v. Auto. Club of So. Cal.,
142 Cal. App. 4th 1394, 1403 (Cal. Ct. App. 2d Dist. 2006).
- 24 -
Assuming those facts constitute a substantial consumer injury, the Firm fails to plead that the
alleged injury outweighs any countervailing benefit to consumers or competition, or that the
alleged injury could not reasonably have been avoided. In the absence of facts supporting
the second and third elements, the Firm has not raised its right to relief above a speculative
level and this claim must be dismissed.
iii. "Fraudulent" Prong
To state a claim under the "fraudulent" prong based on false advertising, "it is
necessary only to show that members of the public are likely to be deceived." In re Tobacco
II Cases, 207 P.3d 20, 29, 46 Cal. 4th 298, 312 (2009) (internal quotations omitted).
Although fraud is not an essential element of a section 17200 claim, "allegations of
fraudulent conduct must nevertheless satisfy the heightened pleading requirements of
[Federal] Rule [of Civil Procedure] 9(b)." Claridge v. RockYou, Inc., 785 F. Supp. 2d 855,
862 (N.D. Cal. 2011) (citing Vess v. Ciba–Geigy Corp. USA, 317 F.3d 1097, 1103–05 (9th
Cir. 2003) (finding the heightened pleading standards of Rule 9(b) apply to allegations of
fraud and allegations that sound in fraud, including false misrepresentations)).
Here, the counterclaim alleges "LawFinance advertises on the Ethics and Law page of
its website that it does not offer legal advice, assume control of the case, or interfere in the
attorney-client relationship. All details of the case are held in strictest confidence. At no time
does LawFinance Group interfere in the handling of the case." Countercl. ¶ 63 (internal
quotations omitted). Despite this representation, the Firm contends LFG National and LFG
Servicing sent the Sussman, Boies, and Attorney General letters to intentionally interfere with
the Firm's contractual relationships with its clients and co-counsel. Id. Thus, counter-
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defendants falsely advertised that they would not interfere with the attorney client
relationship, but did so anyway.
Any claim based upon fraudulent business practices or false advertising must fail.
The Firm has not alleged that members of the public are likely to be deceived. Nor can the
Firm demonstrate that it (or its attorneys) were likely to be deceived into believing
LawFinance and/or LFG Servicing would not engage in collection efforts, particularly since
the Loan Agreement permitted collection efforts upon the Firm's default. Accordingly, the
Firm cannot maintain a claim under the "fraudulent" prong.
Because the Firm cannot sustain a cause of action under any of the three varieties of
unfair competition provided for by section 17200, counter-defendants' motion to dismiss will
be granted and the fifth counterclaim will be dismissed.
2. Counterclaims Related to Interest Rate
The third and fourth counterclaims relate to the loan's interest rate. The interest rate
under the Loan Agreement was originally the Index plus 13% per annum, and the default rate
was the interest rate plus 5% per annum. Loan Agreement §§ 1.2.24, 1.2.16. Assuming the
loan was not paid in full by the end of 2009, the Amendment provided for a 16% interest rate,
rendering the default interest rate to be 21%. Amendment ¶ 1.
a. Third Counterclaim: Violation of Florida Usury Law
In reply, the Firm agrees to voluntarily dismiss this claim.
b. Fourth Counterclaim: Violation of California Usury Law
This counterclaim alleges the Loan Agreement violates California usury law. The Firm
contends the Loan Agreement became usurious when LawFinance assigned its interests to
LFG National, an out-of-state company, who later increased the interest rates.
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Usury is defined as the charging of interest in excess of that allowed by law. See e.g.,
Junkin v. Golden West Foreclosure Serv., Inc.,180 Cal. App. 4th 1150, 1155 (Cal. Ct. App.
1st Dist. 2010). The basic usury laws in California are found in Article XV of the California
Constitution. Generally, a lender cannot charge more than 10% interest per year, unless an
exemption applies. See Cal. Const. art. XV, § 1. None of the usury law's restrictions apply to
"persons authorized by statute, or to any successor in interest to any loan or forbearance
exempted under this article." Id. (emphasis added). The California Finance Lenders Law
exempts California commercial lenders from the constitutional restrictions on interest. Cal.
Fin. Code § 22002 (West 2012).
The parties agree the Loan Agreement was not usurious when made because
LawFinance is a California licensed lender and thus exempt from the usury laws. Article XV,
Section 1 of the California Constitution states that such exemptions shall apply to successors
in interest to a loan, such as LFG National. To conclude otherwise would contravene the
purpose behind the exemption; the Firm's argument "would in effect prohibit—make
uneconomic—the assignment or sale by banks of their commercial property to a secondary
market. This would be disastrous in terms of bank operations and not conformable to the
public policy exempting banks in the first instance." Strike v. Trans-West Discount Corp., 92
Cal. App. 3d 735, 745 (Cal. Ct. App. 4th Dist. 1979); see also 8 Cal. Real Est. (Miller & Starr)
21:33 (3d ed. 2003) ("The purpose of the exemption is to foster the free transferability of
loans in the marketplace, and, if the exemption did not pass with the assignment, there would
be serious consequences to lending institutions who might be prevented from selling their
loans in the secondary market."). Thus, the assignment by LawFinance to LFG National, a
- 27 -
Delaware limited liability company with its principal place of business in Nevada, did not
render the loan usurious.
The Firm attempts to distinguish Strike, 92 Cal. App. 3d at 745, because the interest
rate in that case remained the same upon assignment, whereas here, LFG National and the
Firm later negotiated a higher interest rate post-assignment. However, the Firm has cited no
authority indicating that an increase in the interest rate, due to the borrower's default,
immediately renders an otherwise lawful loan usurious. To the contrary, case law indicates
such action is entirely proper.
In Bobby D. Associates v. McDonald, 2004 WL 831179, No. B164609 (Cal. Ct. App.
2d Dist. Apr. 19, 2004), borrower John McDonald entered into a loan agreement with United
Mercantile Bank & Trust ("Mercantile"), a California licensed lender. 2004 WL 831179, at *1.
The loan provided for 12% interest which was lawful because Mercantile was exempt from
California usury laws. Id. Mercantile subsequently assigned its interests in the loan to Bobby
D. Associates, a non-California licensed lender, and at some point the interest rate increased
to 12.5%. Id. at *1, 3. The borrower made arguments similar to the Firm's contentions here.
Id. at *3. The Court held that "as respondent [Bobby D. Associates] was United Mercantile's
successor in interest, the exemption extended to it, too." Id. (citing Strike, 92 Cal. App. 3d at
745). The Court rejected the borrower's argument that "usury laws apply to a successor in
interest who changes the rate" and rebuffed the borrower's attempt to distinguish the facts
from Strike. Id.
Further, it is well-established that "a debtor by voluntary act cannot render an
otherwise valid transaction usurious." Sw. Concrete Prods. v. Gosh Constr. Corp., 798 P.2d
1247, 1250, 51 Cal. 3d 701, 706 (1990). "'A debtor cannot bring his creditor to the penalties
- 28 -
of the Usury Law by his voluntary default in respect to the obligation involved where no
violation of law is present at the inception of the contract.'" Id. (quoting Sharp v. Mortg. Sec.
Corp., 9 P.2d 819, 820, 215 Cal. 287, 291 (1932)).
Finally, the Firm takes issue with the timing of the assignment. While the Firm implies
impropriety with the fact that the assignment was made only three days after the Loan
Agreement was executed, it has pointed to no case law suggesting this practice is illegal or
The Loan Agreement was not usurious when executed with LawFinance, an exempt
lender. The transfer of the Loan Agreement to LFG National did not render it usurious
because exemptions to the usury laws apply to successors in interest to a loan. Moreover,
the Amendment modified the interest rate as consideration for LFG National's waiver of the
Firm's defaults. The Firm cannot bring LFG National to the penalties of the usury law by its
Accordingly, the Loan Agreement does not violate California usury law. Counterdefendants' motion to dismiss will be granted and the fourth counterclaim will be dismissed.
Gary and Williams waived the protections of California Civil Code sections 2845 and
2849 by contract. LFG National is not required to first proceed against the Firm nor exhaust
the Firm's collateral before proceeding against guarantors Gary and Williams. Accordingly,
Gary and Williams' motion to dismiss plaintiff's second claim will be denied.
The Firm's first counterclaim will be dismissed because the implied covenant of good
faith and fair dealing cannot prohibit counter-defendants from doing what is expressly
permitted under the terms of the Loan Agreement. The second and fifth counterclaims will
- 29 -
also be dismissed because the Firm has failed to plead facts demonstrating it is entitled to
relief on either an interference with contractual relations or unfair business practices cause of
action. Finally, the Firm voluntarily dismisses the third counterclaim and the fourth
counterclaim will be dismissed because the Loan Agreement does not violate California
Therefore, it is
1. Defendants Willie Gary and Lorenzo Williams' motion to dismiss the Second Claim
(Breach of Guarantees) is DENIED;
2. The Third Counterclaim (Violation of Florida Usury Law) is voluntarily DISMISSED;
3. Counter-defendants LFG National Capital, LLC; LawFinance Group, Inc.; and LFG
Servicing, LLC's motion to dismiss the remaining counterclaims is GRANTED, and the
following counterclaims are DISMISSED:
(a) First Counterclaim (Breach of the Implied Covenant of Good Faith and Fair
(b) Second Counterclaim (Interference with Contractual Relations);
(c) Fourth Counterclaim (Violation of California Usury Law); and
(d) Fifth Counterclaim (Unfair Business Practices).8
IT IS SO ORDERED.
In view of the fact that all counterclaim s have been dism issed, the caption need no longer reflect
Gary, W illiam s, Finney, Lewis, W atson, and Sperando P.L. as counter-claim ant nor LFG National Capital,
LLC; LawFinance Group, Inc.; and LFG Servicing, LLC as counter-defendants.
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Dated: July 12, 2012
Utica, New York.
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