Brack v. Omni Loan Co., Ltd.

• Decision Date: 17 June 2008
• Docket Number: No. D049198.,D049198.
• Citation: 164 Cal.App.4th 1312,80 Cal. Rptr. 3d 275
• Court: California Court of Appeals Court of Appeals
• Parties: JOSHUA W. BRACK, Plaintiff and Appellant, v. OMNI LOAN COMPANY, LTD., et al., Defendants and Respondents.

164 Cal.App.4th 1312

80 Cal. Rptr. 3d 275

JOSHUA W. BRACK, Plaintiff and Appellant, v. OMNI LOAN COMPANY, LTD., et al., Defendants and Respondents.

No. D049198.

Court of Appeals of California, Fourth District, Division One.

June 17, 2008.

Majors & Fox, Frank J. Fox, Lawrence J. Salisbury, Steven T. Wlodek; Law Office of Mary A. Lehman and Mary A. Lehman for Plaintiff and Appellant.

Pillsbury, Winthrop, Shaw & Pittman, Richard M. Segal, Connie J. Wolfe; Diamond, McCarthy, Taylor, Finley & Lee, William T. Reid IV, Michael S. Truesdale and Lisa S. Tsai for Defendants and Respondents.

Edmund G. Brown, Jr., Attorney General, Tom Greene, Chief Assistant Attorney General, Albert Norman Shelden, Ronald A. Reiter, Kathrin Sears and Michele R. Van Gelderen, Deputy Attorneys General, as Amicus Curiae.

OPINION

BENKE, Acting P. J.

The principal defendant in this class action lawsuit, respondent Omni Loan Company, Ltd. (Omni),¹ a Nevada corporation, engaged in consumer lending in California. Although Omni's activities would otherwise be subject to the California Finance Lenders Law (Finance Lenders Law) (Fin. Code,² § 22000 et seq.), under choice-of-law provisions in Omni's loan agreements borrowers agreed Omni's loans would be governed by the law of Nevada. We conclude this choice of Nevada law is not enforceable.

In general, California courts will enforce a contractual choice of law if the state whose law was chosen has an interest in the parties' controversy. However, if application of the chosen law conflicts with a fundamental policy of this state, our courts must consider the impact application of the law will have on California's interests. If California's interests are materially greater than the interests of the state whose law was chosen by the parties, California will apply its law.

As we explain more fully below, here because application of Nevada law would conflict with fundamental California policy as manifested in the Finance Lenders Law and because California has a greater interest in the parties' transaction than Nevada, the parties' choice of law is not enforceable.

FACTUAL AND PROCEDURAL BACKGROUND

Omni is a Nevada corporation with its principal place of business in Las Vegas, Nevada.³ Omni is in the business of providing consumer loans to members of the military. Typically, Omni's loans are between $900 and $1,800, have repayment schedules of between nine and 18 months, and are funded by Omni on the same day Omni receives a borrower's application. In California, Omni's borrowers are nonresident members of the military, most of whom agree to repay their loans by way of deductions from their military paychecks. Omni's borrowers must also provide Omni with a security interest in personal property.

Commencing in July 1997 Omni attempted to obtain permission from the Commissioner of Corporations (the commissioner) to make loans in California to nonresident members of the military without complying with the requirements of the Finance Lenders Law. In seeking permission to make such loans, Omni relied on an early ruling the commissioner had provided to one of Omni's competitors, Pioneer Military Lending, Inc. (Pioneer). In 1996 Pioneer contacted the commissioner and described a loan program restricted to nonresident military personnel Pioneer planned to establish in California. Pioneer asked the commissioner for a ruling that its loan program was not subject to the Finance Lenders Law, and the commissioner provided it with such a ruling. In a letter to Pioneer, the commissioner stated "it is difficult to discern what the interest is of the State of California so as to require licensure of Pioneer under [Finance Lenders Law]." Thus, the commissioner advised Pioneer its loan program was not finance lending within the meaning of the Finance Lenders Law.

The commissioner declined to provide Omni with a ruling permitting it to operate its loan programs in California without a Finance Lenders Law license. In declining to grant Omni's request, the commissioner stated: "Omni's proposed lending activities are similar to Pioneer's, in that both lenders have represented to the Department that they will only be making loans to military personnel who are not residents of California. However, Omni appears to propose a greater business presence in California than Pioneer proposed to the Department. Pioneer represented to the Department that its loan paperwork would not be processed in California, and that the loans would be funded out-of-state. Thus, Pioneer represented that it would be making the loans from out-of-state to nonresidents stationed in California, and that its business activities within California would be minimal. Omni appears to propose a main California office to perform all functions related to making loans, and to further propose contracting with one to two independent contractors to facilitate the lending through the California main office. Omni is proposing to engage in more lending activities within the state of California than Pioneer, and is therefore more likely to be engaged in the business of a finance lender in California than Pioneer. In short, Omni has not chosen to structure its California lending activities in a manner identical to the Pioneer structure set forth in [the Pioneer letter]."

Omni challenged the commissioner's conclusion its business plan was materially different from Pioneer's. However, the commissioner declined to alter the Department of Corporations' determination: "As noted in [our earlier letter to you], the Department is unwilling to expand the reasoning in [the Pioneer letter] to include expanded business activity in California merely because the lending is to non-resident military personnel. Under the [Finance Lenders Law], California has a number of state interests in licensing finance lending activities beyond the protection of its citizens; therefore, any expansion of the business presence and business activities in California related to loans to non-resident military personnel could impact the state's interests and thus the Department would require licensure under the [Finance Lenders Law]."

Notwithstanding the commissioner's refusal to provide Omni with a ruling permitting it to operate in California without a license, in 2000 Omni opened a loan office in Oceanside, and in 2002 it opened another office in San Diego. In addition to the loan offices, Omni developed a retail partners program with California retailers by which Omni financed retail purchases by nonresident members of the military. Although Omni restricted lending from its California offices to nonresident members of the military, when California members of the military came into one of the Omni's offices, the California residents were directed to a computer terminal in the office and advised to go online and obtain financing through Omni's online affiliate, Militaryloans.com.

Plaintiff and appellant Joshua W. Brack was a nonresident member of the military stationed at Camp Pendleton. Brack initially applied electronically for a loan from Omni but was directed to complete his loan application at Omni's Oceanside office. Brack was not advised until he was presented with the loan agreement the interest rate would be 34.89 percent per annum. The loan was secured by Brack's personal property and included a $104.63 charge for property insurance and a prepaid finance charge. Like all of Omni's loans, Brack's loan agreement contained a choice-of-law provision, which stated: "You agree that this loan contract is subject to Nevada State law." Brack repaid his loan in October 2002.

In December 2003 Brack filed a class action lawsuit against Omni. Brack's principal allegation was that Omni's practices violated borrower's rights under the Finance Lenders Law. Brack alleged Omni's violations of the Finance Lenders Law gave rise to claims under the Consumers Legal Remedies Act (Civ. Code, § 1750 et seq.) and the Unfair Competition Law (Bus. & Prof. Code, § 17200 et seq.) as well as under the Finance Lenders Law itself. Among other allegations, Brack alleged Omni was engaged in the business of a finance lender without obtaining a license from the commissioner and failed to prominently display in its offices a full and accurate schedule of its interest rate and other charges.

Omni answered the complaint and denied its material allegations. In addition, Omni asserted as an affirmative defense its contention that Brack's loan and all the loans of the putative class members contained a choice-of-law provision under which the borrowers agreed the loan would be governed by the law of Nevada. Omni also asserted Brack's claims were barred by the commerce clause of the United States Constitution.

Omni stipulated to class certification. The trial court then ordered trial of Omni's choice of law and commerce clause defenses be bifurcated from trial of Brack's affirmative claims. Omni's defenses were tried first by the court.

The trial court found Nevada had a substantial relationship to the loan agreements because Omni Loan Company, Ltd., was incorporated in Nevada and the loans were approved in Nevada. In its principal finding, the court determined California had no fundamental interest in the loan transactions which would require that its laws be applied in place of the law selected under the terms of the loan agreements. In reaching this conclusion, the trial court considered three circumstances. First, it looked to the fact that the department had permitted Pioneer to operate in California without a license and in many respects OMNI's activities were similar to what the department had authorized in its Pioneer letter. Secondly, the trial court found that, in any event, Omni's licensing status was strictly a regulatory matter and not a matter to be considered with respect to the enforceability of the choice-of-law provisions of Omni's loan agreements. Finally, aside from the requirement that finance...