Change Capital Partners Fund I, LLC v. Volt Electrical Systems, LLC ( 2018 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
CHANGE CAPITAL PARTNERS
FUND I, LLC, a Delaware limited
liability company,
C.A. No. Nl7C-05-290 RRC
Plaintiff/Amended Counterclaim
Defendant,
V.
VOLT ELECTRICAL SYSTEMS,
LLC, a Texas limited liability company
and PAUL J. BOUDREAUX, JR.,
Defendants/Amended Counterclaim
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Plaintiffs. )
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Submitted: January l(), 2018
Decided: April 3, 2018
On PlaintifFS Motion to Dismiss Amended Counterclaim. GRANTED.
MEMORANDUM OPINION
Kate Harmon, Esquire, Rafael X. Zahralddin, Esquire, and Shelley A. Kinsella,
Esquire, Elliot Greenleaf, P.C., Wilmington, Delaware, Attorneys for
Plaintiff/Amended Counterclaim Defendant Change Capital Partners Fund I, LLC.
Marc S. Casarino, Esquire, White and Williams LLP, Wilmington, Delaware,
Attorney for Defendants/Amended Counterclaim Plaintiffs Volt Electrical Systems,
LLC and Paul J. Boudreaux, Jr.
COOCH, R.J.
I. INTRODUCTION
ln this Motion by Change Capital Partners Fund I, LLC (“Plaintiff’) to
Dismiss Defendants’ Amended Counterclaim, Plaintiff argues, pursuant to Superior
Court Civil Rule lZ(b)(6), that this Court should honor the parties’ choice-of-law
provision, Which designates Delaware law, in their operative “Merchants
Receivables Purchase and Security Agreement” contract. Defendant Volt Electrical
Systems, LLC (“Volt”) and Defendant Paul J. Boudreaux, Jr. (“Boudreaux” and,
collectively With Volt, “Defendants”) argue in response that Delaware law should
not govern this transaction as to Counts I-IV of the Complaint because either New
York or Texas Would be the “default state(s)” for those counts in the absence of a
choice-of-law clause in the contract, enforcement of the loan transaction under
Delaware law Would be contrary to fundamental principles of New York and Texas
law, and New York and Texas have materially greater interests in the determination
of this issue than does Delaware. Defendants acknowledge that Count V is governed
by Delaware law.l
This Court finds, however, that Delaware law governs this transaction.
Delaware courts ar``e generally reluctant to subvert parties’ agreed-upon choice-of-
laW provisions. This Court may in appropriate cases ignore a choice-of-law clause
through the exception in Restatement (Second) 0f Conjll``cts § 187(2)(b), Which
allows parties to a contract to disregard the chosen state’s governing law and apply
the law of a state that Would have applied absent the choice-of-law clause (the
“default state”) if the default state has a materially greater interest than the chosen
state in the determination of the issue and application of the law of the chosen state
Would be contrary to a fundamental policy of the default state. The Court does not
find that use of this exception is proper under these facts. Therefore, the Court Will
not disrupt the Delaware choice-of-law clause. The Court grants Plaintiff’s Motion
to Dismiss the Amended Counterclaim.
' Def.S’ Resp. at 12-13 (citing Papena'ick v. Robert Bosch GmbH, 1981 Del. Super. LEXIS 675 (Del. Super.
1981)); Tr. of Oral Arg., November 20, 2017, at 26.
II. PROCEDURAL HISTORY AND FACTS
The parties submitted at the Court’s request a “Parties’ Statement of Agreed
Upon: (i) Procedural History; (ii) Facts; and (iii) Restated Contentions” (the “Agreed
Statement”) on January 9, 2018. The Agreed Statement follows below:
PROCEDURAL HISTORY
[Plaintiff] filed the Complaint commencing the instant action on May 22, 2017.
Defendants filed their Answer and Counterclaim (the “Countcrclaim”) on July 5,
20l7. [Plaintiff] filed a Motion on Behalf of Plainti``/_"f Change Capital Partners
Funa' 1, LLC to Dismiss Defena’ants ’ Counterclaim Pursuant to Del. Super. Ct. Civ.
R. 12(b)(6) on July 25, 2017 (the “Inilial Motion to Dismiss”). Thereafter,
Defendants sought leave to amend the original Counterclaim on August 2, 2017,
which leave was granted by this Court on August l4, 2017. [Plaintiff] withdrew
the lnitial Motion to Dismiss on August 9, 2017 and Defendants filed the Amended
Counterclaim on August 15, 2017. The Amended Counterclaim lodges five causes
of action, four of which are predicated upon New York or Texas statutes: (i) N.Y.
Penal Law § 190.40; (ii) N.Y. Gen. Bus. Law § 349; (iii) Tex. Fin. Code §
305.001(a) and § 304.001; (iv) Tex. Bus. & Com. Code § l7.44(a); and (v)
negligence/negligent misrepresentation
On August 29, 2017, [Plaintiff] filed its Motz'on on Behalf of Plaintl``ff
Change Capital Partners Fund I, LLC to Dismiss Defendants’ Amended
Counterclaim Pursuant to Del. Super. Ct. Civ. R. ]2(b)(6) (the “Motion 10
Dismiss”). Defendants’ Responsive Brl``ef in Opposition to Plaintij"’s Motion lo
Dismz'ss Amended Counterclaim was filed on September 29, 2017. Thereafter, the
Reply in Support of Motion on Behalf of Plaintz``jj’ Change Capital Partners Funa' I,
LLC to Dismiss Defendants ’ Amended Counterclaim Pursuant to Del. Super. Cl‘.
Civ. R. ]2(}))(6) (the “Reply”) was filed by [Plaintiff] on October 13, 2017. A
hearing was held on the Motion to Dismiss before the Court on November 20, 2017
(the “Heari\ig”). Both prior to and after the Hearing, [Plaintiff] approached the
Defendants regarding the potential for resolving the matter via mediation, further
settlement discussions or some other form of alternative dispute resolution. The
parties could not reach agreement on any form of resolution. Consequently, the
Parties are providing this Agreed Statement pursuant to the Court’s instructions
after the Hearing,
FACTS
On October 4, 2016, Azadian Group, LLC (“Azadian”), Volt and
Boudreaux entered into a Merchant Receivables Purchase and Security Agreement
(the “ greemcnl”).
The fully executed Agreement contains a choice of law provision
designating Delaware law to apply to issues arising from the Agreement.
On April 18, 2017, Azadian assigned the Agreement to [Plaintiff] (the
“Assignment”). Azadian and [Plaintiff] are both Delaware limited liability
companies headquartered in New York. Volt is a Texas limited liability company
located in Texas. Boudreaux is a Texas resident and the Managing Member of
Volt. Volt and Boudreaux executed the Agreement in Texas.2
III. THE PARTIES’ CONTENTIONS
[The parties restated their contentions in the Agreed Statement:]
A. Plaintl``y§"s Contentions
[Plaintiff] hereby incorporates its Motion to Dismiss and Reply as if fully
set forth herein.
l. Pursuant to the terms of the Agreement, Azadian agreed to purchase
Volt’s future receivables for a flat fee of $350,000.00, less fees and expenses, for a
total payment of $338,000.00. Volt agreed to transfer $472,500.00 of purchased
receivables to Azadian. Boudreaux personally guaranteed Volt’s obligations under
the Agreement. Azadian fully satisfied its obligations under the Agreement and
paid Volt $338,000.00. Thereafter, Volt transferred a total of $248,590.00 in
purchased receivables to Azadian. Volt’s last transfer to Azadian was on April l2,
2017. Consequently, Defendants defaulted on their obligations under the
Agreement, leaving $223,910.00 in purchased receivables not transferred to
Azadian. The Agreement contains provisions allowing Azadian to recover
attorneys’ fees and interest in the event that the Defendants default.
2. For purposes of a Motion to Dismiss, the Court must accept only
well pled allegations as true; the Court need not accept conclusions of law averred
in the Amended Counterclaim as true. Further, with regard to well-pled allegations,
the test is whether Defendants may recover under any reasonably conceivable set
of circumstances
3. Delaware law applies to this matter in its entirety. The Agreement
contains a provision of law designating Delaware law as the law applicable to any
dispute that arising from the Agreement. There is no dispute that Azadian fulfilled
its obligations under the Agreement. The Defendants have defaulted under the
terms of the Agreement in perhaps the most material and fundamental of their
obligations to Azadian and, subsequently, [Plaintiff]. That Delaware law should
2 Parties’ Statement of Agreed Upon (i) Procedural History; (ii) Facts; and (iii) Restated Contentions, D.I. 38.
4
apply to Defendant’ default under the Agreement is squarely within Azadian’s and
the Defendants’ intent as enshrined at Section l9.l of the Agreement. Delaware
law applies because Azadian is a Delaware limited liability company and Azadian
and the Defendants agreed to designate Delaware law as the applicable law for any
disputes concerning the Agreement, which facts establish a material relationship
between the Agreement and Delaware. The facts of this matter provide no
exception to Delaware’s long held, fundamental public policy in allowing parties
freedom to contract.
4. Because Delaware law applies, Counts l through IV of the
Amended Counterclaim must be dismissed Count V of the Amended
Counterclaim must also be dismissed given the insufficient allegations to establish
that [Plaintiff] is liable for Azadian’s alleged conduct prior to the Agreement being
executed. Defendants have failed to sufficiently allege that [Plaintiff] had
knowledge of Defendants’ existing claims against Azadian at the time the
Agreement was assigned to [Plaintiff].
5. To the extent that the Court determines that Delaware law does not
apply, the Court must determine if New York and/ or Texas law apply to this matter.
a. Counts l and ll must be dismissed because the alleged conduct
did not occur in New York and, consequently, the New York
statutes upon which Defendants rely are not applicable
b. Further, Count I must be dismissed because N.Y. Penal Law §
190.40 may not be used as a predicate for a cause of action by
an entity, even if the cause of action is that which seeks a
declaratory judgment, but only as an affirmative defense.
C. Count II must also be dismissed because the Defendants are not
consumers for purposes of N.Y. Gen. Bus. Law § 349 and
Defendants have not alleged any basis that would allow a
factfinder to determine that Defendants are consumers
Defendants’ averment in the Amended Counterclaim that they
are consumers is not a well-pled factual allegation but is rather
a conclusion of law that need not be accepted by the Court. The
Agreement does not fall within the purview of N.Y. Gen. Bus.
Law § 349 because it has no impact on New York’s consumer
public and it is not a consumer transaction; Defendants have not
alleged any bases upon which a fact finder could find to the
contrary.
d. Counts III and IV must be dismissed because Texas law does not
apply to the Agreement.
e. Count IV must also be dismissed because Defendants have
failed to allege any bases upon which they could be found to be
“consumers” under Tex. Bus. & Com. Code § 17.44.
Defendants’ baseless averments regarding their status as
consumers is a legal conclusion that need not be accepted by the
Court. Further, Defendants have failed to allege any basis upon
which the fact finder could find that Azadian knew that the
loaned funds were going to be used to purchase or lease goods
or services as required by Texas law. As noted in the Motion to
Dismiss, [Plaintiff] does not concede that the Agreement is a
loan transaction but acknowledges that, for purposes of the
Motion to Dismiss, the Court must accept all well-pled factual
allegations in the Amended Counterclaim as true. Further,
[Plaintiff] asserts that Defendants’ averments pertaining to the
nature of the Agreement are conclusions of law that need not be
accepted by the Court, rather than well-pled factual allegations.
B. Defendcmts ’ Contentions
The Defendants incorporate their briefing on the Motion to Dismiss and
their arguments as stated on the record at the Hearing, and this synopsis is not
intended to limit, restrict, or waive any of the Defendants’ positions
l. The transaction in dispute is a loan and not a purchase of future
accounts receivables
2. The loan originated and was funded by Azadian (and [Plaintiff] via
the Assignment) in New York.
3. The Defendants were at all relevant times located in Texas
4. Delaware has no relationship to the parties or the subject transaction.
5. The annualized interest rate charged by Azadian (and [Plaintiff] via
the Assignment) is at least 102%.
6. The loan transaction is usurious under New York and Texas law.
7. New York and Texas have well-settled public policies against
usurious loan transactions
8. New York and Texas law would apply but for a choice-of-law
provision in the loan documentation referencing Delaware.
9. Delaware law recognizes that promiscuous use of Delaware choice-
of law provisions to circumvent another state law that would apply but for the
choice of-law provision warrants disregard of the Delaware choice-of-law
provision and application instead of the law of the other state(s).
lO. [Plaintiff] is wrong that the Defendants may not rely upon New
York law. The Defendants are permitted under New York law to seek a declaration
that the criminally usurious nature of the loan transaction warrants cancellation of
the transaction.
ll. [Plaintiff] is wrong that the Defendants may not rely upon New
York law because they are not a consumer. The Defendants have pleaded that they
are a consumer for purposes of New York law, and this is accepted for purposes of
the Motion to Dismiss Nevertheless, as evidenced by the information presented
by the Defendants, New York law applies broadly to protect consumers and
businesses that have been taken advantage of in usurious loan transactions
12. The Defendants may also recover under Texas law since they have
been subjected to criminally usurious loan practices in both New York and Texas
[Plaintiff] is wrong that Texas law does not permit a claim unless there exists the
conjunctive “contracting for U receiving” usurious interest, where the applicable
Texas statute plainly allows for a claim in the disjunctive of “contracting for g
receiving” usurious interest. In this instance, Azadian (and [Plaintiff] via the
Assignment) has both contracted for and received usurious interest in violation of
Texas law.
l3. The Defendants have pleaded that they are a consumer for purposes
of Texas law, and this is accepted for purposes of the Motion to Dismiss. As such,
[Plaintiff] is wrong to suggest that the Defendants’ claims under Texas law should
be dismissed for not being a consumer.
IV. STANDARD OF REVIEW
Upon a motion to dismiss under Superior Court Rule 12(b)(6), the Court “(i)
accepts all well-pleaded factual allegations as true, (ii) accepts even vague
allegations as well-pleaded if they give the opposing party notice of the claim, (iii)
draws all reasonable inferences in favor of the non-moving party, and (iv) only
dismisses a case where the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances”3 However, the Court will “ignore
conclusory allegations that lack specific supporting factual allegations.”4
V. DISCUSSION
Delaware law applies to this matter because the parties entered into a choice-
of-law provision, which designated Delaware as the applicable law for disputes
3 TurfNation, lnc. v. UBUSports, Inc., 2017 WL 4535970, at *5 (Del. Super. Ct. Oct. 11, 2017) (citing Central
Mortg. C0. v. Morgan Stanley Mor!g. Capital Hoi'd:``n_r:s LLC, 227 A.3d 531, 536 (Del. 201 l)).
4 Ia'. (quoting Ramunno v. Crawley, 705 A.2d 1029, 1034 (Del. 1998)).
7
arising from the Agreement. Delaware courts are “strongly inclined” to respect the
Widely recognized and fundamental principle of freedom to contract.5 This Court
will not interfere unless “upon a strong showing that dishonoring the contract is
required to vindicate a public policy interest even stronger than freedom of
contract.”6 “[W]ith very limited exceptions, [Delaware] courts will enforce the
contractual scheme that the parties have arrived at through their own self-ordering,
both in recognition of a right to self-order and to promote certainty of obligations
and benefits Upholding freedom of contract is a fundamental policy of this State.”7
Here, Defendants argue four causes of action in their Amended Counterclaim.
Counts One and Two allege violations of New York laws8 and Counts Three and
Four allege violations of Texas law.9 Defendants’ argument that the public policy
exception to the generally held Delaware rule that courts in this state will honor a
choice-of-law clause is unavailing because the exception is inapplicable here. As
such, Delaware law applies to the Agreement. Accordingly, Plaintiff’ s Motion to
Dismiss Amended Counterclaim is granted because Defendants’ Amended
Counterclaim asserts the applicability of New York and Texas anti-usury statutes
but where Delaware law was agreed by the parties to apply to the loan transaction.
Also, Defendants’ Count Five “Negligence and Negligent Misrepresentation” claim
is dismissed because Defendants’ claim only pertains to Azadian’s conduct, not
Plaintiff``s.
A. Delaware Chol``ce-Of-Law and the Exceprl``on in Restatement (Second) of
Conflicts § 187(2)(1))
“Delaware [c]ourts will honor a contractually-designed choice of law
provision so long as the jurisdiction selected bears some material relationship to the
transaction.” 10 The existence of a choice-of-law clause establishes a material
relationship between the chosen state and the transaction. “Title 6, section 2708(a)
5 Ll'beau v. Fox, 880 A.2d 1049, 1056-57 (Del.Ch.ZOOS), d/§"d in pertinent parl, 892 A.2d 1068, 2006 WL
196379 (Del. Jan. 24, 2006).
6 Id. at 1056; see also Maddock v. Greenville Retirement Community, L.P., 1997 WL 89094, at *7-8 (Del.Ch.
Feb.26, 1997) (“Only a very strong showing that a contract term is a gross violation of the policies embodied in
this common law rule [that reasonable restraints be upheld] would permit [plaintiff] to escape the economic
bargain that he entered.”) (citations omitted).
7 Ascension Ins. Holdings, LLC v. Underwood, 2015 WL 356002, at *4 (Del. Ch. Jan. 28, 2015).
8 Def.s’ Am. Counterclaim at ll-l3 (citing N.Y. Penal Law § 190.40 and N.Y. Gen. Bus Law § 349).
9 Id. at l3- l7 (citing Tex. Fin. Code §305.00](a), Tex. Fin. Code § 305.004(a), and Tex. Bus. & Comm. Code
§ 17.44 (a)).
‘0 Vl``chi v. Koninkll'jke th']l'ps Elecs., N. V., 85 A.3d 725, 766 (Del. Ch. 2014) (quoting J.S. Alberi``cl`` Consl. C0.
v. Ml``d-W. Conveyor Co., 750 A.2d 518, 520 (Del. 2000)).
8
of the Delaware Code recognizes that a choice of law clause is a significant, material
and reasonable relationship with this State and shall be enforced whether or not there
are other relationships with this State.”ll
Where an agreement does not contain a choice-of-law provision, Delaware
courts will apply the “most significant relationship” test of Restatement (Second) of
Conflicts§ 188.12 However, where, as here, the contracting parties designate a
state’s laws to apply, the Restatement (Second) of C0nflicts § 187 instructs:
(2) The law of the state chosen by the parties to govern their contractual rights and
duties will be applied, even if the particular issue is one which the parties could not
have resolved by an explicit provision in their agreement directed to that issue,
unless either
" l Oak Private Equity Venture Capital Ltd. v. Twitler, Inc., 2015 WL 7776758, at *9 (Del. Super. Ct. Nov. 20,
2015) (internal quotation marks omitted).
12 § 188 ofthe Restatement will apply in cases where the parties do not specific a choice of law:
(l) The rights and duties of the parties with respect to an issue in contract are determined by the local
law of the state which, with respect to that issue, has the most significant relationship to the transaction
and the parties under the principles stated in § 6.
(2) 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
These contacts are to be evaluated according to their relative importance with respect to the particular
issue.
(3) If the place of negotiating the contract and the place of performance are in the same state, the local
law of this state will usually be applied, except as otherwise provided in §§ 189- 199 and 203.
Restatement (Second) of Conflict of Laws § 188 (1971).
The Restatement (Second) Conflict of Laws §6(2) provides that the following seven factors are also relevant in
conducting a choice of law inquiry:
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of those states in the
determination of the particular issue,
(d) the protection of justified expectations
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.
Deuley v. DynCorp Inl"l, Inc., 8 A.3d 1156, 1160~61 (Del. 2010).
9
(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 parties13
Delaware courts have recognized the exception in Restatement (Second) of
Conflicts § 187(2)(b) stating, “the Restatement is generally supportive of choice-of-
law provisions, but recognizes that allowing parties to circumvent state policy-based
contractual prohibitions through the promiscuous use of such provisions would
eliminate the right of the default state to have control over enforceability of contracts
concerning its citizens.”14“A mere difference between the laws of two states will
not necessarily render the enforcement of a cause of action arising in one state
contrary to the public policy of another.”15
B. T he Restatement (Second) of Conflicts § 187(2) (b) Exception Does Not
Apply.
Defendants argue that the § 187(2)(b) exception applies to the Agreement
because “Delaware law clearly would not apply in the absence of the choice-of-law
provision”16 and “New York and Texas have strong public policies against usurious
loan transactions . . . .”17 Defendants rely heavily on Ascension Ins. Holdings, LLC
v. Underwood to argue the applicability of the Restatement exception. Ascensz``on
held that:
where the parties enter a contract which, absent a choice-of-law provision, would
be governed by the law of a particular state (which I will call the “default state”),
and the default state has a public policy under which a contractual provision would
be limited or void, the Restatement recognizes that allowing the parties to contract
13 Restatement (Second) of Conflict of Laws § 187 (1971)
14 Ascension, 2015 WL 356002, at *2.
15 Vichi' v. Koninklijke Philz``ps Elecs. N. V., 62 A.3d 26, 45 (Del. Ch. 2012) (quoting J.S. Alberici Consf. Co., 750
A.2d at 520).
16 Def.s’ Resp. at 4. Notably, Defendants fail to declare whether New York or Texas would be the default state.
Defendants only assert that absent a choice-of-law clause, the default state would not be Delaware.
11 Id.
10
around that public policy would be an unwholesome exercise of freedom of
contract.18
Ascension is distinguishable from the facts of this case. As a subsequent Court
of Chancery case held: “[t]o take advantage of this Restatement-based exception,
[defendant] would have to demonstrate both: (l) that enforcement of the Non-
Competition Provisions would be contrary to California public policy_even
assuming that Califomia would be the state whose law would apply if not for the
choice-of-law provisions; and (2) that Califomia has a “materially greater interest”
than Delaware in the enforcement or non-enforcement of the Non-Competition
Provisions”19
Put simply, in order for Defendants to disregard the Agreement’s choice-of-
law clause designating Delaware, they must demonstrate that absent the choice-of-
law provision, New York or Texas would be the “default state” whose law would
apply, enforcement of the loan transaction under Delaware law would be contrary to
a fundamental public policy of New York and/or Texas, and New York and/or Texas
has a materially greater interest than Delaware in the enforcement or non-
enforcement of the loan transaction. Defendant must make a showing of all of the
above in order to invoke the Restatement (Second) of Conflicts § 187(2)(b)
exception.ZO
Defendants fail to demonstrate that the Restatement (Second) of Conflicts §
187(2)(b) exception applies here. Defendants fail to sufficiently demonstrate each
factor as is required under the Restatement. As such, this Court will not disrupt the
long-recognized, fundamental principle in favor of a freedom of contract.
l. Defendants have failed to identify a “default state” whose law
would applv absent the choice-of-law provision, which identifies
Delaware.
Defendants argue that without the choice-of-law clause in the Agreement,
Delaware law would not apply. However, Defendants never identify an alternative
18 2015 WL 356002, at *2.
19 Kan-Dz'-Kz``, LLC v. Suer, 2015 WL 4503210, at *18 (Del. Ch. .luly 22, 2015).
20 Ascension, 2015 WL 356002, at *3 (finding that “[i]f both these questions are answered in the affirmative,
California law will apply notwithstanding the choice-of-law provision in the [contract].”).
ll
state’s law that would apply. Defendants do not name a “default state.”21 Defendants
appear to argue that because “Defendants are located in Texas”22 and “Azadian is
headquartered in New York City and the transaction was handled [in New York]”23
either Texas or New York should be the default state. Defendants’ argument here
casts too wide a net.
Defendant relies on Ascensz``on. However, the facts of Ascensz'on_as well as
the cases that follow it2‘1_are distinguishable to those here. The Court of Chancery
in Ascension applied the Restatement (Second) of COn/qicts § 187(2)(b) exception to
find that the contractually agreed Delaware choice of law should be ignored, and
California law should be applied.25 However, the case only involved two possible
states whose laws could apply: Delaware or California. The default state was
therefore obvious Defendants here have not identified which, if either, state would
be the default state. Defendants have failed to demonstrate that there is an alternative
state like in Ascensi``on that would apply absent the choice-of-law clause in the
Agreement.
Furthermore, the contract at issue in Ascension was a non-compete clause in
a “contract between a corporation doing business in Califomia and an employee
residing in California, entered into in California and to be performed predominantly
in California_not in Delaware.”26 The contract “was negotiated in California and
involved an agreement not to compete that was limited almost completely to areas
within California, by virtue of the geographic scope of the Plaintiffs business.”27 It
is axiomatic that, absent the Delaware choice of law, the state in which the non-
compete clause was intended to apply would be the default state.
21 This Court notes that Defendants asserted at oral argument that “Counts l and ll are New York Law, and
Counts IIl and IV are Texas law.” Tr. of Oral Arg., November 20, 2017, at 27. Defendants also asserted that
another potential “outcome is that Texas law applies to all counts or New York law applies to all counts or
they’re split in some fashion.” Id. at 32. Defendants also seem to claim that identifying a “default state” at this
juncture is premature because, as was stated at oral argument, “[w]e’ll do discovery. [Counsel for Defendants]
will be back before Your Honor in some other form or fashion in terms of a later motion to address what law
should apply . . . and move forward from there.” Id. at 32-33. This Court disagrees Defendants must now identify
a “default state” in order to complete the analysis and determine whether that default state has a “materially
greater interest in the issue” than Delaware. Ascensi'on, 2015 WL 356002, at *3. Defendants failed to do so.
22 Def.s’ Resp. at 1.
23 Id. at 4.
24 See EBP Ll'feslyle Brands Holdl'ngs, Inc. v. Boulbain, 2017 WL 3328363, at *7 (Del. Ch. Aug. 4, 2017); Fyfe
C0., LLC v. Structural Grp., Inc., 2016 WL 4662333, at *5 (D. l\/ld. Sept. 7, 2016); Kan-Di-Ki, LLC, 2015 WL
4503210, at *17.
25 Ascension, 2015 WL 356002, at *5.
26 Id. at *5.
21 Id. at *3 (footnote omitted).
12
Here, the Agreement was for a loan transaction. There is no state, by virtue of
the loan itself, that would clearly apply. The loan was executed in New York,
between a Delaware corporation with its principal place of business in New York
and Texas corporation with its principal place of business in Texas and a Texas
citizen. A loan is not akin to the non-compete clause in Ascension wherein the
geographic scope of the non-compete necessarily invoked California.
Ascension and the three cases that have followed28 all involve non-compete
clauses and choice-of-law conflicts between the same two states: Delaware and
California. Ascension is distinguishable to the facts here and Defendants’ reliance
on it is inapposite.
2. Defendants have demonstrated that enforcement of the loan
transaction would be contrary to New York and/or Texas public
policy.
Defendants cite authority to support their argument that usurious loans are
contrary to Texas and New York public policy.29 This Court agrees that these
sources stand for the proposition that these two states have public policies against
usurious loans Restatement (Second) of Conflicts § l87(2)(b) requires a showing
that “application of the law of the chosen state would be contrary to a fundamental
policy of a state . . . .” Usurious loans are contrary to fundamental public policies of
both New York and Texas. The Texas Finance Code, § 302.001 (b) states that “[a]ll
contracts for usurious interest are contrary to public policy and subject to the
appropriate penalty prescribed by Chapter 305.” “New York has a strong public
policy against interest rates which exceed 25%, which policy must be enforced.”30
Delaware usury laws, on the other hand, place no cap on interest.31 “Delaware
usury law provides no cap on interest rates, but instead allows interest to be charged
in an amount pursuant to the agreement governing the debt.”32 Thus, as Defendants
28 EBP Ll'festyle Brands Holdl``ngs, lnc., 2017 WL 3328363, at *7; Fyfe CO., 2016 WL 4662333, at *5; Kdn-Di-
Ki, LLC, WL 4503210, at *17.
29 Def.s’ Resp. at 4 (citing Texas Finance Code, § 302.001 (b); In re McCorhz'll Pub., Inc., 86 B.R. 783, 793
(S.D.N.Y. 1988); Murlar Equities Partnership ininanez, 2016 N.Y. l\/lisc. LEXlS 3541, *10-12 (N.Y. Sup. Ct.
Sept. l, 2016)).
30 In re McCorhill Pub., Inc., 86 B.R. at 793.
31 5 Del. C. § 943; Kanejfv. Delaware Title Loans, Inc., 587 F.3d 616, 622 (3d Cir. 2009) (“Delaware has no
usury law.”); Madden v. Midland Funding, LLC, 237 F. Supp. 3d 130, 149 (S.D.N.Y. 2017).
32 Madden, 237 F. Supp. 3d at 149.
13
argue, application of Delaware law to the Agreement would be contrary to both New
York and Texas public policy against usurious loans
This Court recognizes that courts in New York and Texas have upheld usury
laws from other states;33 however, the Restatement (Second) of Coan icts § l87(2)(b)
exception refers to a law that is “contrary to a fundamental public policy . . . .” For
purposes of the analysis in this case, this Court acknowledges that usurious loans are
contrary to fundamental public policy in New York and Texas
In addition to the above two factors, to avoid application of Delaware law
pursuant to the choice-of-law clause in the Agreement, Defendants must
demonstrate that New York and/or Texas has a materially greater interest than
Delaware in the enforcement or non-enforcement of the loan transaction. Defendants
have failed to demonstrate that either New York or Texas has a “materially greater
interest” in the Agreement than does Delaware. Aside from the argument that New
York or Texas would apply as the “default state” absent the choice-of-law clause
ascribing Delaware law to the Agreement because Azadian has its principal place of
business in New York and the transaction was handled in New York, Defendants
make no argument as to this factor of the Restatement (Second) of Conflicts§
187(2)(b) exception,
Defendants argue that “[t]he underlying loan transaction has absolutely no
connection to Delaware.”34 However, this Court finds that because Azadian is a
Delaware LLC and because Azadian and Defendants originally entered into the
Agreement, which established Delaware choice of law, the Agreement has a
connection to Delaware.
33 See, e.g., Walter E. Heller & C0. v. Chopp-Wincraft Printing Speci``alties, Inc., 587 F. Supp. 557, 560
(S.D.N.Y. 1982) (holding lllinois choice of law applied instead of New York because usury “is not a favored
defense, particularly in the circumstances here where a corporation rather than a helpless consumer is involved”);
Saturn Capital Corp. v. Dorsey, 2006 WL 1767602, at *8 (Tex. App. June 29, 2006) (holding that “[i]n Texas,
there is nothing inherently violative of public policy in contracting for another state’s usury laws to apply. . . .
However, choice of law provisions . . . may not be used as a subterfuge to avoid the usury law that would
otherwise apply.”) (internal quotation marks omitted); see also Bradt v. W. Pub. Co., 1991 WL 230182, at *4
(Tex. App. Oct. 31, 1991), writ denied (Feb. 12, 1992) (“Texas public policy does not forbid the choice of law
of another state to control as to usury questions if there exists a reasonable connection between the contract and
such other state.”).
34 Def.s’ Resp. at 4.
14
In general, Delaware courts will not “easily” invalidate a contract.35 lt is only
when faced with a threat to some fundamental public policy even greater than the
freedom to contract will the courts do so.36 There is an inherent difficulty in avoiding
a contract on the argument that it conflicts with public policy:37
Delaware courts are rightly reluctant to accept . . . arguments [that a contract should
be invalidated because it conflicts with public policy]. And when they do, it is not
because a person has entered into a contract that has become financially
inconvenient for them to honor, but because the enforcement of the contract
threatens a well-recognized policy interest of concern to our polity in general. That
is, this exception [for the avoidance of a contract due to a conflict with public
policy] does not exist as a sword for parties to avoid their contracts when avoidance
suits their personal interests, but as a shield to protect the community in general
when the terms of a contract endanger the public interest.38
Delaware courts are “strongly inclined to respect [parties’] agreement . .
1339
“When parties have chosen a state’s contract law to govern their contract, it is
illogical to assume that they wished to have the enforceability of that contract judged
by another state’s law.”40 Delaware courts regularly express their reluctance to allow
avoidance of the contractual choice-of-law provision.
As was well-stated in a 2006 analogous Court of Chancery case: “[t]o enter
into a contract under Delaware law and then tell the other contracting party that the
contract is unenforceable due to the public policy of another state is neither a position
that tugs at the heartstrings of equity nor is it commercially reasonable.”41 That court
further observed:
When a rational businessperson enters into an agreement establishing a transaction
or relationship and provides that disputes arising from the agreement shall be
governed by the law of an identified jurisdiction, the logical conclusion is that he
or she intended that law to apply to all disputes arising out of the transaction
or relationship. We seriously doubt that any rational businessperson, attempting to
provide by contract for an efficient and businesslike resolution of possible future
disputes, would intend that the laws of multiple jurisdictions would apply to a single
35 Benz'hana 0f Tokyo, Inc. v. Benihana, Inc., 2005 WL 3753046, at *14 (Del.Ch. Dec. 8, 2005) (citing the
“fundamental principle that parties should have the freedom to contract and that their contracts should not easily
be invalidated”).
36 Libeaa, 880 A.2d at 1058 (stating that Delaware courts will “reluctant[ly] [invalidate a contract when] the
enforcement of the contract threatens a well-recognized policy interest of concern to our polity in general.”).
37 1a
38 1a
39 Id. at 1056-57 (Del.Ch.2005).
40 Abry Partners V, L.P. v. F & WAcquisl``ll``On LLC, 891 A.2d 1032, 1049 (Del. Ch. 2006).
41Id. at 1050.
15
controversy having its origin in a single, contract-based relationship. Nor do we
believe such a person would reasonably desire a protracted litigation battle
concerning only the threshold question of what law was to be applied to which
asserted claims or issues Indeed, the manifest purpose of a choice-of-law clause is
precisely to avoid such a battle.42
Delaware has a strong presumption in favor of the long-held principle of
freedom of contract.43 This Court will therefore not disrupt the mutually agreed-
upon contract terms of the Agreement, including the Delaware choice-of-law
provision. Accordingly, Counts One through F our alleging violations of New York
and Texas law are dismissed.
C. Defendants ’ Count Five “Neglz``gence and Negl l`` gent
Misrepresentation” Claz``m is Dismz'ssed Because the Amended
Counterclaim Alleges no Knowledge Against Plaintiij
Defendants argue that Plaintiff is liable to the same degree as Azadian because
Plaintiff is an assignee with knowledge of the alleged “criminally usurious loan.”44
Defendants argue that
an “assignee [Plaintiff] takes his claim subject to the equities of third persons
against the assigned right where he has knowledge of such equities.” [Papendl``ck,
1981 LEXIS 675 at *20] In other words, when the assignee purchases assets with
full knowledge that a third party has potential claims, the assignee is liable to the
same extent as the assignor. The court noted that the assignee’s recourse would be
to seek indemnification from the assignor.
Here, the Amended Counterclaim sufficiently alleges that [Plaintiff] knew
that the agreement between Azadian and Defendants involved a criminally usurious
loan.45
As a threshold matter in this analysis, it should be noted that Defendants rely
on Delaware case law to argue this claim.46 At oral argument, when asked by the
42 Id. at 1048 n.25 (quoting Nedllayd Lz'nes B. V. v. Superl'or Court, 3 Cal. 4th 459, 469 (1992)).
43 Texas Instruments Inc. v. Tandy Corp., 1992 WL 200604, at *5 (Del. Ch. Aug. 13, 1992) (recognizing a
“powerful presumption in favor of freedom of contract.”).
44 Def.s’ Resp. at 12-13 (citing Papendick, 1981 Del. Super. LEXIS 675).
45 Id. at 13 (citations omitted).
46 Id. at 12 (Citing Pape'na’ick, 1981 D€l. Super. LEXIS 675).
16
Court, Defendants agreed that “Delaware law applies to Count V” and “New York
or Texas [applies] to Counts l, Il, III, and IV.”47
Defendants contend that Plaintiff “knew that the agreement between Azadian
and Defendants involved a criminally usurious loan.”48 However, nowhere in the
Amended Counterclaim do Defendants assert that Plaintiff had knowledge_much
less “full knowledge” 49 _of Defendants’ potential claims against Azadian.
Defendants only make a conclusory assertion that Plaintiff “is liable as assignee of
the Loan Agreement.”50 Defendants also mention that Plaintiff “stands in the shoes
of Azadian under the Loan Agreement[,] however this still falls short of pleading a
claim that Plaintiff had knowledge sufficient to impute liability by way of Azadian’s
alleged actions Thus, Defendants’ Count Five claim for “Negligence and Negligent
Misrepresentation” is dismissed.31
VI. CONCLUSION
The choice-of-law provision in the Agreement, which designates Delaware
law, will apply. As such, Counts One through Four of Defendants’ Amended
Counterclaim alleging New York and Texas law are dismissed. Further, Count Five
of Defendants’ Amended Counterclaim is dismissed because Defendants fail to
assert that Plaintiff had knowledge of Defendants’ potential claims against Azadian.
Without more, Defendants have not made a claim against Plaintiff for “Negligence
and Negligent Misrepresentation.”
Plaintiff’s Motion to Dismiss Defendants’ Amended Counterclaim is
GRANTED.
47 Tr. of Oral Arg., November 20, 2017, at 26-27; see also Catll``n Specl``alty Ins. C0. v. CBL & Assocs. Properti'es,
Inc., 2017 WL 4784432, at *5 (Del. Super. Ct. Sept. 20, 2017) (analyzing Delaware choice-of-law rules in the
insurance context stating that “it would be impractical to apply the law of multiple states to a claim under one
insurance policy covering multiple locations.”); Abry Partners, 891 A.2d at 1048 n.25 (quoting Nedlloyd Lines,
3 Cal. 4111 at 469 (“[w]e seriously doubt that any rational businessperson, attempting to provide by contract for
an efficient and businesslike resolution of possible future disputes, would intend that
the laws of multiple jurisdictions would apply to a single controversy having its origin in a single, contract-based
relationship.”).
48 Id. at 13.
49 Id.
50 Def.s’ Am. Counterclaim at 20,
51 This Court need not reach the unraised issue of whether the Superior Court has jurisdiction over Count V, to
the extent it alleges a “negligent misrepresentation” claim. See, e.g., Wypi``e Invesfmenrs, LLC, v. Wayne
Homschek, 2018 WL 1581981, at *15 (Del. Super. Ct. l\/lar. 28, 2018) (quoting Van Lake v. Sorin CRM USA,
Inc., 2013 WL 1087583, at *11 (Del. Super. Ct. Feb. 15, 2013) (“lt is well-settled Delaware law that the Court
of Chancery has exclusive jurisdiction over claims of negligen[t] misrepresentation.”).
17
IT IS SO ORDERED.
TC.E_ 2
Richard R. Cooch, J.
cc: Prothonotary
18