Bank of America v. Lahave CA2/1 ( 2016 )

Filed 3/21/16 Bank of America v. Lahave CA2/1
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION ONE
BANK OF AMERICA, N.A., B253931, B256219
Plaintiff and Appellant,
(Los Angeles County
v. Super. Ct. No. BC415243)
DANNY LAHAVE et al.,
Defendants and Respondents.
APPEALS from orders of the Superior Court of Los Angeles County, Mary Ann
Murphy and Frederick C. Shaller, Judges. Affirmed.
Jeffer Mangels Butler & Mitchell, Robert B. Kaplan, Neil C. Erickson for Plaintiff
and Appellant.
Fisher & Wolfe, David R. Fisher, Jeffrey R. Klein for Defendants and
Respondents.
___________________________________
Bank of America, National Association, a multinational corporation, and Danny
Lahave, a California resident, are parties to a contract that (1) contains a unilateral
attorney fee provision favoring Bank of America and (2) specifies the contract is to be
interpreted according to New Mexico law. After Lahave prevailed in litigation, he sought
and was awarded attorney fees under a reciprocity provision found in California law (Civ.
Code, § 1717) but not New Mexico law. On appeal, Bank of America argues New
Mexico law applies, under which no fees should be awarded.
For the reasons set forth below, we affirm.
BACKGROUND
We relate a simplified version of the relevant financial transactions, omitting
extraneous parties and half a dozen assignments, successions and assumption agreements.
In essence, Lahave and Top Terraces, Inc., a California corporation (the guarantors),
guaranteed the payment and performance of obligations set forth in a deed of trust note in
favor of Bank of America. The obligor under the note was Market Center East Retail
Property, Inc., a New Mexico corporation, and the note was secured by real property in
New Mexico. Both the guaranty and note provided they were to be governed by and
construed in accordance with New Mexico law. Under the note, if any sum payable was
not paid by the fifth day of the month it was due, the borrower would be obligated to pay
an additional amount equal to 5 percent of the unpaid sum.
The borrower failed to make a monthly payment in January 2009, and in April
2009 sought voluntary Chapter 11 bankruptcy protection (see 11 U.S.C. §§ 1101-1174) in
New Mexico. The real property securing the note was ultimately sold in the bankruptcy
proceedings, and Bank of America was paid the balance of principal and interest due
under the note. One month later, in December 2009, Bank of America requested that the
bankruptcy court further authorize payment of a late fee equal to 5 percent of the
principal balance due when the borrower filed for bankruptcy. In August 2010, the
bankruptcy court denied the request, finding a late fee consisting of 5 percent of the entire
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principal balance, rather than merely of one monthly payment, would be an
unenforceable penalty under New Mexico law. That decision has become final.
Meanwhile, Bank of America treated the bankruptcy as a triggering event
obligating the guarantors for all payments due under the note, and on June 5, 2009, filed a
complaint for breach of guaranty against the guarantors in the Los Angeles Superior
Court. After the bankruptcy case in New Mexico was resolved, the parties in Los
Angeles stipulated that the only remaining issue to be adjudicated was whether under
New Mexico law the late fee found by the bankruptcy court to be unenforceable against
the borrower was nevertheless enforceable against the guarantors. The parties stipulated
the amount of any such fee, if enforceable, would be $377,438.82. Bank of America
argued the fee was enforceable against the guarantors notwithstanding its
unenforceability against the borrower because the guarantors, unlike the borrower, had
waived any illegality defense, as follows:
The guaranty provided that the guarantors’ obligations would “not be reduced,
discharged or released because or by reason of any . . . claim or defense of Borrower,”
and guarantors waived any “common law, equitable, statutory or other rights” they might
have as a result of “[t]he invalidity, illegality or unenforceability of all or any part of the
Guaranteed Obligations.” Specified waived illegalities included that the guaranteed
obligations exceeded the amount permitted by law, violated applicable usury laws, or
were otherwise uncollectible or unenforceable; that performance or repayment of the
guaranteed obligations was illegal; or that the borrower had valid defenses against them.
The guarantors agreed they would remain liable on the guaranteed obligations even if the
borrower was found not liable for any reason.
In opposition to Bank of America’s request for the late fee, the guarantors argued
the guaranty’s waiver was unenforceable because it violated New Mexico public policy.
The trial court agreed with Bank of America, found the late fee was enforceable
against the guarantors under New Mexico law, and entered judgment for the bank in the
amount of $377,438.82. We reversed, holding the guaranty waiver was unenforceable.
3
1
(Bank of America, N.A. v. Lahave (Mar. 26, 2013, B237360) [nonpub. opn.].) That
decision has become final.
On remand, the guarantors sought trial and appellate attorney fees in the combined
amount of $389,702.95. Applying California law, the trial court granted the fees in two
separate orders, finding “There is no New Mexico party to the assumed Guaranty, and the
place of performance would be California, since that is where Plaintiff demanded
payment.” Bank of America appealed each order separately. We consolidated the
appeals.
DISCUSSION
I. Issue
Civil Code section 1717 provides in relevant part as follows: “In any action on a
contract, where the contract specifically provides that attorney’s fees and costs, which are
incurred to enforce that contract, shall be awarded either to one of the parties or to the
prevailing party, then the party who is determined to be the party prevailing on the
contract, whether he or she is the party specified in the contract or not, shall be entitled to
reasonable attorney’s fees in addition to other costs.” Section 1717 establishes a
“mutuality of remedy when a contract makes recovery of attorney fees available only for
one party.” (PLCM Group, Inc. v. Drexler (2000) 22 Cal.4th 1084, 1090-1091.)
Bank of America does not dispute that the guarantors would be entitled to attorney
fees under the guaranty if Civil Code section 1717 applies. Instead, it contends Civil
Code section 1717 has no application because the parties expressly agreed in the guaranty
that New Mexico law would govern the contract. Under New Mexico law, which has no
analog to Civil Code section 1717, the attorney fee provision would be applied as written,
meaning guarantors would not be entitled to attorney fees.
1
We take judicial notice of our opinion in Bank of America, N.A. v. Lahave,
supra, B237360, and also of Bank of America, N.A. v. Lahave (June 26, 2013, B240826)
nonpublished opinion, which reversed an award of postjudgment attorney fees to Bank of
America. (Evid. Code, § 452.)
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The issue is whether California or New Mexico law applies.
II. Principles of Choice-of-Law Analysis
California generally “follows a ‘governmental interests’ approach to choice of
laws questions.” (Janzen v. Workers’ Comp. Appeals Bd. (1997) 61 Cal.App.4th 109,
115, fn. 3.) Pursuant to this approach, the courts “must search to find the proper law to
apply based upon the interests of the litigants and the involved states.” (Reich v. Purcell
(1967) 67 Cal.2d 551, 553.) The courts give “special attention to the actual interests of
the concerned states in the resolution of the particular issue presented.” (Kasel v.
Remington Arms Co. (1972) 24 Cal.App.3d 711, 730, italics added.)
When a contract contains a choice-of-law provision, California employs the
analytical process found in the Restatement Second of Conflict of Laws (Restatement),
section 187. (Nedlloyd Lines B.V. v. Superior Court (1992) 3 Cal.4th 459, 464-465
(Nedlloyd).)
Restatement, section 187, subdivision (2) provides: “The law of the state chosen
by the parties to govern their contractual rights and duties will be applied . . . unless
either [¶] (a) the chosen state has no substantial relationship to the parties or the
transaction and there is no other reasonable basis for the parties choice, or [¶] (b)
application of the law of the chosen state would be contrary to a fundamental policy of a
state which has a materially greater interest than the chosen state in the determination of
the particular issue and which, under the rule of § 188, would be the state of the
applicable law in the absence of an effective choice of law by the parties.”
This approach requires “the court first to determine either: (1) whether the chosen
state has a substantial relationship to the parties or their transaction, or (2) whether there
is any other reasonable basis for the parties’ choice of law. If neither of these tests is met,
that is the end of the inquiry, and the court need not enforce the parties’ choice of law. If,
however, either test is met, the court must next determine whether the chosen state’s law
is contrary to a fundamental policy of California. If there is no such conflict, the court
shall enforce the parties’ choice of law. If, however, there is a fundamental conflict with
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California law, the court must then determine whether California has a ‘materially greater
interest than the chosen state in the determination of the particular issue . . . .’ (Rest., §
187, subd. (2).) If California has a materially greater interest than the chosen state, the
choice of law shall not be enforced, for the obvious reason that in such circumstance we
will decline to enforce a law contrary to this state’s fundamental policy.” (Nedlloyd,
supra, 3 Cal.4th at p. 466, fns. omitted; Guardian Savings & Loan Assn. v. MD
Associates (1998) 64 Cal.App.4th 309, 316-317.)
Here, the guaranty’s choice-of-law provision elected to apply New Mexico law.
We therefore undertake the Restatement analysis.
III. Application
A. New Mexico Has No Substantial Relationship to the Parties or Transaction
Bank of America is a multinational corporation headquartered in North Carolina.
The guarantors reside in California. The guaranty was executed in Los Angeles and was
presumably to be performed there. The only connections between New Mexico and the
guaranty were that the obligor under the guaranteed promissory note was a New Mexico
corporation and the note was secured by real property located in New Mexico. But we
are aware of no reason, and Bank of America offers none, why New Mexico would be
interested in a foreign guaranty of an admittedly domestic obligation. Bank of America
argued below when applying for a writ of attachment that the guarantors “have little or no
relationship with New Mexico,” and the guaranty “is a separate and distinct obligation”
from the promissory note. We agree.
Bank of America argues the guarantors had substantial other contacts with New
Mexico regarding the underlying financial and property transactions, and filed two
complaints there, one to enjoin Bank of America from obtaining a writ of attachment in
this matter and the second for malicious prosecution of this matter. But the guarantors’
tangential financial dealings in New Mexico are irrelevant to that state’s interest in the
guaranty, the only transaction at issue. And post-guaranty New Mexico litigation based
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solely on California litigation can hardly generate a substantial New Mexico relationship
with the guaranty itself.
We conclude New Mexico has insufficient connection with the parties or the
guaranty to meet the “substantial relationship” test under Nedlloyd.
Bank of America argues that even if no substantial relationship exists between
New Mexico and either the parties or the guaranty, the guarantors are barred by the
doctrine of judicial estoppel from asserting lack of such a relationship because they made
numerous judicial admissions in several venues that New Mexico law applies to the
guaranty. We disagree.
As we stated in ABF Capital Corp. v. Berglass (2005) 130 Cal.App.4th 825, “The
courts invoke judicial estoppel to prevent judicial fraud from a litigant’s deceitful
assertion of a position completely inconsistent with one previously asserted, thus
compromising the integrity of the administration of justice by creating a risk of
conflicting judicial determinations. [Citations.] The inconsistent position generally must
be factual in nature. [Citation.] [¶] As a general rule, the court should apply the doctrine
only when the party stating an inconsistent position succeeded in inducing a court to
adopt the earlier position or to accept it as true. If the party did not succeed, then a later
inconsistent position poses little risk of inconsistent judicial determinations and
consequently introduces ‘“little threat to judicial integrity.”’” (Id. at p. 832.)
Here, Bank of America recites 14 instances where the guarantors asserted that the
guaranty was entered into in New Mexico, that New Mexico law should govern it, or that
California has no interest in it. But to the extent the guarantors argued that New Mexico
law should govern or California has no interest, those are legal positions, not factual
ones, and cannot form the basis for judicial estoppel.
In any event, Bank of America adduces no instance where the guarantors
succeeded in inducing a court to adopt their position. Judicial estoppel applies only when
“the party was successful in asserting the first position (i.e., the tribunal adopted the
position or accepted it as true).” (MW Erectors, Inc. v. Niederhauser Ornamental &
7
Metal Works Co., Inc. (2005) 36 Cal.4th 412, 422.) Bank of America argues the
guarantors gained three “advantages” from their representations: They (1) succeeded in
having attorney fees reduced from the amount Bank of America originally requested
when it was the prevailing party; (2) succeeded in having a writ of attachment stayed and
ultimately vacated; and (3) ultimately prevailed on appeal, all while arguing New Mexico
law should apply to the guaranty. But simply prevailing in the contest of the day does not
suffice. Bank of America adduces no instance where the court adopted the guarantors’
position that New Mexico law should apply. For example, although the guarantors
ultimately prevailed on appeal in Bank of America, N.A. v. Lahave, supra, B237360, they
argued there, and we agreed, that New Mexico and California law were the same
regarding waiver of illegality, and we relied on California law to hold that “a guarantor
cannot waive the unenforceability of an illegal principal obligation.” (Id. at p. *23.) As
for trial court rulings favoring the guarantors, many reasons may exist for a court to stay
or vacate an attachment order or award less in attorney fees than a party demands, but
few of these reasons—and on this record none —turn on choice of law. For example, the
only explanation the trial court gave for vacating the writ of attachment was that the court
“cannot find that plaintiff has established that it is likely to succeed as to the interest and
or late fee amounts.” Absent some indication that a court adopted a representation by the
guarantors that New Mexico law applies, judicial estoppel does not bar their argument
that California law should apply.
B. No Other Reasonable Basis Exists for the Parties’ Choice of Law
The next question is whether a reasonable basis exists for the parties’ choice of
law. Bank of America, which ignores this element on appeal, offers no explanation why
the parties inserted a New Mexico choice of law provision in the guaranty agreement, and
we can discern none. Although the underlying promissory note concerned a loan made in
New Mexico to a New Mexico resident, and was secured by real property located in New
Mexico, no reasonable basis exists to apply New Mexico law to a guaranty agreement
between foreign residents. As intimated above, the financial and property transactions
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surrounding the guaranty involved several successors in interest, assignments, and
assumption agreements, and at least one prior guarantor. But Bank of America adduces
nothing in the record that would explain the choice of law.
Finding neither a substantial relationship between New Mexico and the parties or
the guaranty, nor any other reasonable basis for the parties’ choice of law, our inquiry
ends, and we need not enforce the choice. (Nedlloyd, supra, 3 Cal.4th at p. 466.)
C. Civil Code Section 1717 Represents a Fundamental Policy of California
If, for the sake of argument, the guarantors were estopped from denying that New
Mexico had a substantial relationship with them and/or the guaranty, or if some other
reasonable basis existed for the parties’ choice of law, we would nevertheless conclude
California law applies because application of New Mexico law “would be contrary to a
fundamental policy of” California, “which has a materially greater interest than the
chosen state in the determination of the particular issue.” (Restat., § 187, subd. (2).)
California has a fundamental policy concerning the mutuality of attorney fee
provisions in contracts. Civil Code section 1717, subdivision (a) states that “[a]ttorney’s
fees provided for by this section shall not be subject to waiver by the parties to any
contract which is entered into after the effective date of this section. Any provision in
any such contract which provides for a waiver of attorney’s fees is void.” (Civ. Code, §
1717, subd. (a).) “‘This language is mandatory, unavoidable and emphatic. Section
1717(a) is no default provision or gapfiller, subject to override by the parties. Rather, it
represents a basic and fundamental policy choice by the state of California that
nonreciprocal attorney’s fees contractual provisions create reciprocal rights to such
fees.’” (ABF Capital Corp. v. Grove Properties (2005) 126 Cal.App.4th 204, 217.)
“‘Section 1717(a) constitutes the statutorily expressed public policy of California, and,
thus, under California’s rules regarding enforcement of contractual choice of law
provisions, if California has a materially greater interest in the subject of the litigation
than the state chosen by the parties, section 1717(a) will be applied in lieu of the chosen
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state’s law. . . .’” (Ibid.) New Mexico law, which affords no reciprocity for attorney
fees, conflicts with this fundamental policy of California.
D. California Has a Materially Greater Interest than New Mexico in the Attorney
Fee Award
The next question is whether California has a materially greater interest than New
Mexico in the award of attorney fees in California litigation. Here, Bank of America
sued California residents in California. “The interest of California in seeing its residents
receive fair play with respect to attorney fees, when resort is made to the California
courts, is a fundamental equitable policy of this state. Because resort is made to the
California courts, and implicates the equitable treatment of California citizens, California
has a great material interest in the attorney fees issue—fees which are attributable to
litigation in California.” (ABF Capital Corp. v. Grove Properties, supra, 126
Cal.App.4th at p. 220.) This interest is materially greater than any interest New Mexico
could have in assuring the enforcement of its law concerning attorney fees because here,
the attorney fees are not being incurred as a result of any use of New Mexico courts.
Relying on Hughes Electronics Corp. v. Citibank Delaware (2004) 120
Cal.App.4th 251, Bank of America argues different law may not be applied to different
legal issues raised in a single contract. Thus, if New Mexico law applies to some
provisions of the guaranty, as guarantors have always argued, it must apply to the
attorney fee provision as well. The argument is without merit. As stated above, in
determining choice of law, California courts give “special attention to the actual interests
of the concerned states in the resolution of the particular issue presented.” (Kasel v.
Remington Arms Co., supra, 24 Cal.App.3d at p. 730.) The question is whether
California has a materially greater interest than New Mexico in the “particular issue”
presented. (Restat., § 187, subd. (2); Nedlloyd, supra, 3 Cal.4th at p. 466.) We are
compelled to apply different law to different legal issues raised in a single contract if to
do so is the only way to comport with “this state’s fundamental policy.” (Nedlloyd,
supra, at p. 466.)
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Hughes Electronics Corp. v. Citibank Delaware is not to the contrary. There, the
issue was whether a California or New York limitations period applied to a dispute
arising out of a banking relationship. The trial court enforced the parties’ New York
choice of law and applied New York’s facial limitations period, but neglected to follow
New York’s “borrowing statute,” which “required that each cause of action must be
timely under both New York law and the law of the jurisdiction in which the claim
arose.” (Hughes Electronics Corp. v. Citibank Delaware, supra, 120 Cal.App.4th at p.
255.) The appellate court reversed, holding “a trial court may not choose to enforce some
but not all of the applicable laws of [the chosen] jurisdiction.” (Id. at p. 256.) Hughes
therefore stands for the proposition that all applicable foreign laws must be applied to a
particular issue, not that all issues must be subject to the same law.
E. California Law would Apply in the Absence of an Effective Choice of Law
Provision
The final question under the Restatement analysis is whether California law would
apply in the absence of an effective choice of law by the parties.
If a contract contains no choice-of-law provision, a California court will generally
“‘“apply its own rule of decision unless a party litigant timely invokes the law of a
foreign state. In such event [that party] must demonstrate that the latter rule of decision
will further the interest of the foreign state and therefore that it is an appropriate one for
the forum to apply to the case before it.”’ [Citations.] . . . [T]he foreign law proponent
must identify the applicable rule of law in each potentially concerned state and must
show it materially differs from the law of California. . . . [I]f the relevant laws of each
state are identical, there is no problem and the trial court may find California law
applicable . . . . [Citations.] [¶] If, however, the trial court finds the laws are materially
different, it must proceed to the second step and determine what interest, if any, each
state has in having its own law applied to the case. [Citation.] Despite materially
different laws, ‘there is still no problem in choosing the applicable rule of law where only
one of the states has an interest in having its law applied.’” “Only if the trial court
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determines that the laws are materially different and that each state has an interest in
having its own law applied, thus reflecting an actual conflict, must the court take the final
step and select the law of the state whose interests would be ‘more impaired’ if its law
were not applied. [Citations.] In making this comparative impairment analysis, the trial
court must determine ‘the relative commitment of the respective states to the laws
involved’ and consider ‘the history and current status of the states’ laws’ and ‘the
function and purpose of those laws.’ [Citation.] These rules apply whether the dispute
arises out of contract or tort [citations], and a separate conflict of laws inquiry must be
made with respect to each issue in the case [citations].” (Washington Mutual Bank v.
Superior Court (2001) 24 Cal.4th 906, 919-920, italics added.)
Here, the laws of California and New Mexico on attorney fee reciprocity conflict,
but New Mexico has no discernable interest in California litigation over a guaranty
involving non-New Mexico residents that was entered into and was to be performed in
2
California. Therefore, California law would apply.
Bank of America urges us to reject the approach set forth in ABF Capital Corp. v.
Grove Properties, supra, 126 Cal.App.4th 204, in which Division Two of the Fourth
District applied California over New York law, and instead reaffirm our holding in ABF
Capital Corp. v. Berglass, supra, 130 Cal.App.4th 825, where we applied New York law
rather than California law on similar facts. But the result would be the same under either
approach. In Berglass we distinguished Grove Properties and applied New York law in
part because we did “not know where [the] defendant executed the contract or the parties
negotiated the contract.” (130 Cal.App.4th at p. 838.) But here, Lahave declared he
2
The result would be the same under Restatement section 188, which provides:
“In the absence of an effective choice of law by the parties (see § 187), the contacts to be
taken into account in applying the principles of § 6 to determine the law applicable to an
issue include: [¶] (a) the place of contracting, [¶] (b) the place of negotiation of the
contract, [¶] (c) the place of performance, [¶] (d) the location of the subject matter of the
contract, and [¶] (e) the domicil, residence, nationality, place of incorporation and place
of business of the parties.” (Restat., § 188, subd. (2).)
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executed the guaranty in Los Angeles, and the notary seal on the signature page bears
him out. Berglass is further distinguishable in that there, the plaintiff resided in New
York and the defendant was part of a New York partnership whose general partner was a
New York corporation. “In other words, one party to the contract was a New York
resident when its general partner executed the contract,” and the record was silent as to
the other party’s residence when the contract was executed. (Id. at p. 834.) We held
“[t]hat one of the parties resides in a foreign state gives the parties a reasonable ground
for choosing that state’s law.” (Ibid.) No such ground appears here, where neither party
to the guaranty was a New Mexico resident when the guaranty was executed.
CONCLUSION
Pursuant to California’s choice-of-law principles, California law applies to the
guaranty notwithstanding the parties’ election of New Mexico law. Under California
law, the guaranty’s attorney fee provision is reciprocal. (Civ. Code, § 1717.) Therefore,
the trial courts were correct to award the guarantors their trial and appellate attorney fees.
DISPOSITION
The judgment is affirmed. Respondents are to recover their costs on appeal.
NOT TO BE PUBLISHED.
CHANEY, J.
We concur:
ROTHSCHILD, P. J.
JOHNSON, J.
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