Shannon Vail Five Inc. v. Bunch

• Decision Date: 02 November 2001
• Docket Number: SHANNON-VAIL,PLAINTIFFS-APPELLANTS,SHANNON-LAKE,DEFENDANTS-APPELLEES,SHANNON-THE-GREENS,No. 00-15444,00-15444
• Citation: 270 F.3d 1207
• Parties: (9th Cir. 2001) FIVE INC.;;ELSINOR INC.,, v. DEL BUNCH, JR.; ERNESTINE L. BUNCH; CHICAGO TITLE COMPANY,
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1207

270 F.3d 1207 (9th Cir. 2001)

SHANNON-VAIL FIVE INC.; SHANNON-THE-GREENS; SHANNON-LAKE ELSINOR INC., PLAINTIFFS-APPELLANTS, v. DEL BUNCH, JR.; ERNESTINE L. BUNCH; CHICAGO TITLE COMPANY, DEFENDANTS-APPELLEES.

No. 00-15444

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted September 12, 2001

Filed November 2, 2001

Todd Gabriel, Sparber, Ferguson, Ponder & Ryan, San Diego, California, and R. Vaughn Gourley, Stephens, Gourley & Bylater Las Vegas, Nevada, for the plaintiffs-appellants.

Michael H. Singer, Oshins, Singer, Segal & Morris, Las Vegas, Nevada, for the defendants-appellees.

Appeal from the United States District Court for the District of Nevada; David W. Hagen, District Judge, Presiding. D.C. No. CV-97-00284-DWH/LRL

Before: Politz,^* W. Fletcher, and Fisher, Circuit Judges.

William A. Fletcher, Circuit Judge:

Plaintiffs appeal the district court's decision that Nevada rather than California law should be applied to a claim that usurious interest rates were charged on six loans made by defendants, as well as to a conversion claim arising out of the application of a payment on one loan to an outstanding balance on another loan. Applying Nevada law, the district court found that the interest rates were permissible and that there had been no conversion.

We have jurisdiction under 28 U.S.C. § 1291 and affirm the district court on both issues.

I.

Plaintiffs are three California corporations--Shannon/Vail Five, Shannon/The Greens, and Shannon/Lake Elsinore--organized and owned by Thomas P. Dobron, a real estate developer residing in Nevada. From 1993 to 1995, Dobron, acting on behalf of the Shannon companies, entered into six loan agreements for substantial sums with defendants Del Bunch, Jr. and Ernestine L. Bunch, Nevada citizens, to fund new real estate development projects in California. The loans carried a 15% per annum interest rate plus 10% paid up front. According to plaintiffs, this resulted in effective interest rates ranging from 27.12% to 31.61%. The loans were secured by trust deeds for real property located in California. The loans were also personally guaranteed by Dobron; the guarantees expressly provided that Nevada law governed the terms of the guarantees. None of the promissory notes contained any choice-of-law clauses, but each note recited that the loan was to be repaid in Nevada.

In November 1995, Shannon/Vail Five overpaid Bunch $52,000 on one of the loans. Instead of refunding the money, defendants, over Dobron's objection, applied the funds to the outstanding balance on a loan to Shannon/Lake Elsinore.

In March 1996, plaintiffs filed a complaint in California state court containing a usury claim for all six loans, as well as a conversion claim for the $52,000 overpayment. The case was removed to federal district court in the Southern District of California under 28 U.S.C. § 1446, and was then transferred to the District Court of Nevada under 28 U.S.C. § 1404(a).

Nevada has no usury statute, but California prohibits interest rates in excess of 10%. See Cal. Const. art. XV, § 1. The Nevada district court applied the Restatement (Second) of Conflict of Laws (1971) ("Restatement") to determine whether Nevada or California law should apply to the usury claim. Specifically, the district court applied Restatement § 195, under which it found that Nevada law applies.¹ The court also concluded that California did not have a more significant relationship to the contract than Nevada under the principles stated in § 6(b) of the Restatement.

In a later order, the district court applied Nevada law to the conversion claim, and found that there had been no conversion.

II.

We review a district court's conclusions of state law de novo. Salve Regina College v. Russell, 499 U.S. 225, 231 (1991). This appeal involves issues of conflict of laws. We must select the correct choice-of-law rule, a pure legal question, and then apply that rule to the facts of this case, a mixed question of law and fact. Since the relevant facts are largely undisputed, we are making primarily legal determinations, and de novo review is thus appropriate. See Tolbert v. Page, 182 F.3d 677, 682 (9th Cir. 1999).

A federal district court must apply the state law that would be applied by the state court of the state in which it sits. This is true whether the basis for subject matter jurisdiction is diversity of citizenship under 28 U.S.C. § 1332 or federal question under 28 U.S.C. § 1331. See Bass v. First Pacific Networks, Inc., 219 F.3d 1052, 1055 n.2 (9th Cir. 2000); Maternally Yours, Inc. v. Your Maternity Shop, Inc ., 234 F.2d 538, 541 n.1 (2d Cir. 1956). After a transfer pursuant to 28 U.S.C. § 1404(a), the transferee district court generally must apply the state law that the transferor district court would have applied had the case not been transferred. See Van Dusen v. Barrack, 376 U.S. 612, 639 (1964) ("A change of venue under § 1404(a) generally should be, with respect to state law, but a change of courtrooms."). Since the transferor district court was in California, the Nevada district court was required to apply the law that a California state court would have applied, including the conflicts law of California. See Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 496 (1941).

A. Plaintiffs' Usury Claim

To evaluate plaintiffs' claim that the rate of interest charged under the loan contracts is illegal because it is usurious under California law, we must determine whether California law applies. To determine the law governing a contract, California courts look to the relevant statute and, for further guidance, to the choice-of-law principles outlined in the Restatement. Henderson v. Superior Court, 77 Cal. App. 3d 583, 592 (Cal. Ct. App. 1978).

California Civil Code § 1646 states the traditional conflicts rule that, for matters pertaining to performance, "[a] contract is to be interpreted according to the law and usage of the place where it is to be performed; or, if it does not indicate a place of performance, according to the law and usage of the place where it is made." In this case, the loan funds were disbursed from Nevada and repayment was required in Nevada. Since Nevada is thus the place of performance of the loan contract, § 1646 appears to require that Nevada law be applied.

For a more particularized and nuanced analysis that ultimately reaches the same result, we turn to the Restatement. The parties argue over which of four possible sections of the Restatement apply. We discuss each of the sections in succession.

1. Section 187

Section 187 of the Restatement provides that the "law of the state chosen by the parties" will govern. Parties can indicate this choice either through an express provision in the contract or by reference to legal doctrines that are peculiar to the law of a particular state and that thereby indicate the parties' preferred choice of law. Restatement § 187, cmt. a.

Defendants argue that the choice-of-law provision from Dobron's personal guarantees on plaintiffs' loan obligations should be integrated into the promissory notes of the plaintiff corporations. The relevant clause in the guarantees states: "This Guarantee shall be governed by and construed in accordance with the law of the state of Nevada" (emphasis added). However, the limiting language ("This Guarantee .. .") of the clause reveals that the choice-of-law clause was intended to apply only to the guarantee itself. Moreover, by definition, a guarantee is a separate undertaking in which the principal obligor does not join, and a guarantee exists independent of the original obligations between the principal obligor and the obligee. This understanding is expressly reflected in the langauge of Dobron's guarantees: "Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Borrower." Because none of the requisite choice-of-law indications are found in the promissory notes themselves, § 187 is inapplicable in this case.

2. Section 188

Absent a clear agreement between the parties as to the governing law, Restatement § 188 is the general provision under which choice of law is determined for a contract. Section 188 provides that the local law of the state which, with respect to the disputed issue, "has the most significant relationship to the transaction and the parties" is the applicable law, and it lists five factors to guide this determination.² Immediately following § 188 are sections providing more specific criteria for particular types of contracts. See Restatement § § 189-197. The Restatement contemplates that these subsequent sections will be used to decide choice of law in such contracts. See Restatement, "Introductory Note," Ch. 8, Title B, at 586 ("These contracts are given special attention because it is considered possible to state with respect to each that, in the absence of an effective choice of law by the parties, a particular contact plays an especially important role in the determination of the state of the applicable law.").

3. Section 195

Section 195 specifically addresses "Contracts for the Repayment of Money Lent." Under § 195, the basic rule is that the law of the state in which the money is to be repaid governs: "The validity of a contract for the repayment of money lent and the rights created thereby are determined, in the absence of an effective choice of law by the parties, by the local law of the state where the contract requires that repayment be made . . . ." Restatement § 195. The basic rule covers laws governing the interest rate at which the money is to be repaid, including usury laws: "The local law of the state selected by application of the present rule governs such issues as the debtor's right to repay the loan before it matures, the creditor's right to proceed against the debtor without having exhausted his security, the time when the loan is to be repaid and the rate of interest that must be paid...