Sarlot-Kantarjian v. First Pennsylvania Mortg. Trust

• Decision Date: 02 July 1979
• Docket Number: SARLOT-KANTARJIAN,No. 77-3232,77-3232
• Citation: 599 F.2d 915
• Parties: , a General Partnership composed of Raymond R. Sarlot and Karl G. Kantarjian, Plaintiff/Appellant, v. FIRST PENNSYLVANIA MORTGAGE TRUST, a voluntary association organized under the laws of the Commonwealth of Massachusetts and Associated Advisers, Inc., a Delaware Corporation, Defendants/Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 915

599 F.2d 915

SARLOT-KANTARJIAN, a General Partnership composed of Raymond R. Sarlot and Karl G. Kantarjian, Plaintiff/Appellant, v. FIRST PENNSYLVANIA MORTGAGE TRUST, a voluntary association organized under the laws of the Commonwealth of Massachusetts and Associated Advisers Inc., a Delaware Corporation Defendants/Appellees.

No. 77-3232.

United States Court of Appeals, Ninth Circuit.

July 2, 1979.

Jerome Zamos, Zamos, Hofmann & Roberts, Santa Barbara, Cal., for plaintiff/appellant.

Fred F. Gregory, Gibson, Dunn & Crutcher, Los Angeles, Cal., for defendants/appellees.

Appeal from the United States District Court for the Central District of California.

Before HUFSTEDLER and WALLACE, Circuit Judges, and FITZGERALD ^*, District Judge.

FITZGERALD, District Judge.

Sarlot-Kantarjian, a partnership engaged in real estate development, appeals from a summary judgment entered in favor of First Pennsylvania Mortgage Trust, a real estate investment fund, in an action for recovery of usurious interest and for declaratory relief. The district court concluded that the parties' selection of Massachusetts law in the loan agreement was valid and binding although the interest rate allowable under Massachusetts law was greater than the maximum permitted under California law. We affirm.

Sarlot-Kantarjian (S-K) is a California general partnership consisting of Sarlot, a contractor, and Kantarjian, a lawyer, both knowledgeable and experienced in construction and real estate ventures. In September 1973, S-K sought construction financing for a proposed 66-unit condominium project to be built in the Bel Air section of Los Angeles. S-K engaged a mortgage company to assist it in obtaining a two year construction loan of.$3.2 million dollars at a rate of 5% Over the prime rate. In October 1973, the mortgage company was notified by Associated Advisers, Inc., a New Jersey firm employed by defendant First Pennsylvania Mortgage Trust, that S-K's loan application had been conditionally approved.

First Pennsylvania Mortgage Trust is a real estate investment trust organized under the laws of Massachusetts for the purpose of lending money for construction or improvement of real property. The Trust maintains its principal place of business in Boston and has never maintained an office or any employees in California.

In November 1973, First Pennsylvania's Board of Trustees met in Boston, considered and approved a loan to S-K. A commitment letter was sent to the mortgage company setting forth the terms and conditions of the proposed loan to S-K. The letter fixed Boston as the locale for the closing of the loan and repayment of any monies lent. It further specified that all "documents executed in connection with this loan are and shall be governed by and construed according to the statutes and laws of Massachusetts." S-K signed the commitment letter, and Sarlot has acknowledged that he read the quoted language, understood it and intended Massachusetts law to apply.

After the commitment letter was received by Associated Advisers in early December, Pennsylvania Trust engaged California legal counsel to prepare the loan documents. These documents were submitted to S-K for review prior to closing of the loan. Sarlot and Kantarjian then travelled to Boston for the closing and to obtain the initial disbursement of funds. The closing was delayed a day pending resolution of certain engineering and technical problems relating to the project, and negotiations regarding these problems were held in New Jersey with Associated Advisers. The loan closed in Boston on December 21, 1973 with the execution of an amended commitment letter and the various loan documents.

The loan proceeds were disbursed out of Pennsylvania Trust's operating account in Boston into S-K's transfer account in Boston. S-K also maintained a disbursement account in a California bank to facilitate payment of the project's construction expenses.

In May and June 1975, the parties agreed to modify the December 21, 1973 loan by reducing the interest rate and the amount of payments required to obtain a release of the mortgage lien on constructed condominium units. At the same time, the parties agreed to a second loan in the amount of $250,000. All loan repayments by S-K were paid into Pennsylvania Trust's operating account in Boston and the entire loan has been satisfied.

Pennsylvania Trust maintains that the interest paid on the combined total of the two notes was 13.47% Averaged over the life of the loan, while S-K contends that the actual effective rate of interest approached 18%. It is conceded, however, that the interest charged exceeds 10%, and therefore would be usurious under California law.

California choice of law rules properly govern the question of whether the contractual choice-of-law clause is valid, for it is well established that the conflict of law rules to be applied by a federal court in a diversity case must conform to those prevailing in the state in which the federal court is located. Klaxon Co....