General Elec. Co. v. Keyser

• Citation: 275 S.E.2d 289,166 W.Va. 456
• Decision Date: 20 February 1981
• Docket Number: No. 14164,14164
• Parties: GENERAL ELECTRIC COMPANY, a Corporation v. Charles M. KEYSER.
• Court: West Virginia Supreme Court

Page 289

275 S.E.2d 289

166 W.Va. 456

GENERAL ELECTRIC COMPANY, a Corporation v. Charles M. KEYSER.

No. 14164.

Supreme Court of Appeals of West Virginia.

Feb. 20, 1981.

Syllabus by the Court

1. A choice of law provision in a contract will not be given effect when the contract bears no substantial relationship with the jurisdiction whose laws the parties have chosen to govern the agreement, or when the application of that law would offend the public policy of this state.

2. "The law of the state in which a contract is made and to be performed governs the construction of a contract when it is involved in litigation in the courts of this state". Syl. pt. 1 (in part) Michigan National Bank v. Mattingly, W.Va., 212 S.E.2d 754 (1975).

Rose, Southern & Padden, Duane Southern, Elisabeth H. Rose, Fairmont, for appellant.

Paul E. Parker, Jr., Fairmont, for appellee.

McGRAW, Justice:

This appeal involves a conflict of laws question and is one of first impression in this jurisdiction. All material facts are undisputed.

By a written instrument dated November 28, 1973, the appellant, Charles M. Keyser, of Marion County, West Virginia, guaranteed the punctual payment of any and all debts or obligations which Hamilton Varadyne Hannibal, Inc. (hereinafter Hamilton), a California corporation, then owed or would owe to General Electric Corporation (hereinafter G.E.). The guaranty agreement, a form contract prepared by G.E., was executed in Marion County. One clause in the agreement provided that the interpretation and application of the guaranty would be governed by the laws of the state of New York, G.E.'s place of incorporation.

In July of 1974, Hamilton executed three promissory notes payable to G.E., each in the amount of $4,000, with interest at thirteen percent per annum. Each note was executed and delivered in California and was payable at an Irvine, California bank. Hamilton defaulted on the notes, having paid no principal or interest, and subsequently declared bankruptcy. G.E. received from the trustee in bankruptcy a pro rata payment of $3,149.89 towards the payment of the balance on the three notes.

G.E. notified Keyser of Hamilton's default on the notes and demanded payment under the terms of the guaranty. Failing to receive payment, G.E. instituted suit in the Circuit Court of Marion County against Keyser to recover the $12,000 due under the notes as well as interest at thirteen percent. G.E. later amended its complaint to request interest at six percent.

Keyser answered by asserting that the rate of interest on the underlying debt was usurious and, therefore, the applicable law barred G.E. from recovering any interest on the debt. Keyser also counterclaimed under West Virginia law for statutory damages in an amount not to exceed four times the amount of interest agreed to be paid to G.E. by the underlying debtor, Hamilton. ¹

G.E. moved for summary judgment based upon the pleadings and evidence filed in the cause. In its judgment order, the trial court applied California law and determined that the rate of interest on the underlying notes was usurious under that law and that Keyser was entitled to plead and have the benefit of the defense of usury. The lower court also ruled that California law governed the remedies available to Keyser and that under that law, Keyser was relieved from paying any accrued interest on the underlying debt. This ruling, however, precluded Keyser's counterclaim under West Virginia law. Thus, G.E., having received $3,149.89 from Hamilton's trustee in bankruptcy, was entitled to a judgment of $8,850.11, the amount of the outstanding principal due under the notes.

The appellant's only allegation of error is that the lower court should have applied West Virginia law or New York law to determine the remedy accorded one interposing the defense of usury in a suit on a guaranty. Specifically, the appellant says that while the lower court correctly applied California law to determine if the underlying obligations were usurious, it should have applied West Virginia's statutory usury penalty and allowed the appellant's counterclaim to go forth. His premise is that the guaranty is a separate agreement which should be construed under the laws of the state where the contract was made, which, he contends, is West Virginia. Failing that, he asks us to uphold the choice of law provision of the guaranty because it is his view that New York law will relieve him from paying both the interest and the principal.

The appellee argues that the trial court correctly applied California law to determine the status of the underlying debt as well as the remedies available to one interposing the defense of usury in a suit on a guaranty. G.E. argues that such a result is proper under at least two theories. Its first theory is based on West Virginia's traditional conflict of laws rule that a contract is to be construed according to the law where it was made and to be performed. Its second theory is that under the emerging doctrine known as the "center of gravity" of the contract, California has the greatest interest in the contract and therefore California law should apply. Failing these theories, G.E. asks for the application of New York law because, as it views New York law, Keyser is precluded from raising the usury defense. We think the lower court correctly determined that California law governs both aspects of this case. Accordingly, we affirm the ruling of the lower court.

We have had few occasions to comment upon conflicts of law rules generally and no occasion to discuss the rules in the context of guaranty agreements such as the one before us. Counsel has directed us to only a sprinkling of West Virginia cases which shed very little light on the subject. Accordingly, our efforts here require a general discussion of this often confusing area of law.

As a defense to a suit on a guaranty, usury has spawned what can be described as a jumble of conflicts of laws rules. The issues range from whether a court should give effect to a choice of laws clause, considering the strong public policy reasons which surround usury laws, see e. g., Potlatch No. 1 Federal Credit Union v. Kennedy, 76 Wash. 806, 459 P.2d 32 (1969); Restatement (Second) of Conflict of Laws § 203, (1971), to whether a guaranty should follow the law governing the underlying transaction, Restatement, supra, § 194. Unquestionably though, the initial and simplest step a court must take is to determine what law governs the underlying transaction and then determine if the transaction is usurious under that law.

In the instant case, neither party contests the application of California law to determine the status of the underlying obligations and we see no reason to discuss the issue extensively. The notes are clearly California agreements as they were made between Hamilton, a California corporation, and G.E., were signed in California, and were to be performed in California, since Hamilton was to repay the notes through G.E.'s agent, a California bank. As we have held before, "(t)he law of the state in which a contract is made and to be performed governs the construction of a contract when it is involved in litigation in the courts of this state". Syl. pt. 1, (in part), Michigan National Bank v. Mattingly, W.Va., 212 S.E.2d 754 (1975). See also, Pemco v. Rose, W.Va., 257 S.E.2d 885 (1979). The California law in effect at the time the notes were signed limited contractual interest to twelve percent. Cal.Civil Code § 1916-1 (West). The interest rate on the notes is thirteen percent and therefore is violative of California usury law. It should be noted, as well, that the rate of interest on the notes violated the interest ceiling of all states to which the transactions had a relationship, substantial or otherwise, at the time the notes were made. The penalties for usury imposed by these states vary greatly, however, and ascertaining which state's law will apply to the remedy is the substance of this dispute. To determine the applicable law, we need to examine the effectiveness of the choice of law provision in the guaranty and, if it is not effective, determine which law will apply to the guaranty. Counsel has directed us to no case where we have ruled on the effectiveness of a choice of laws clause, and our research has failed to reveal one. ²

Generally, most courts will uphold a choice of law provision unless the transaction falls into either one of two exceptions, best outlined in section 187(2) of the Restatement (Second) of Conflict of Laws. That section states that a choice of law provision will not be given effect when the chosen state has no substantial relationship to the parties or the transaction, or when the application of the law of the chosen state would be contrary to a fundamental public policy of the state whose law would apply in the absence of a choice of laws provision. ³ See Sarlot-Kantarjian v. First Pennsylvania Mortgage Trust, 599 F.2d 915 (9th Cir. 1979); Continental Mortgage Investors v. Sailboat Key, Inc., 354 So.2d 67 (Fla.App.1977); overruled on other grounds, 378 So.2d 287 (Fla.1979).

The requirement that the jurisdiction chosen by the parties have some substantial relationship to the transaction is the general rule of most jurisdictions and is a rule of long standing. See, e. g., See v. Philadelphia Warehouse Co., 274 U.S. 403, 47 S.Ct. 626, 71 L.Ed. 1123 (1927); Bedford v. Eastern Building & Loan Association, 181 U.S. 227, 21 S.Ct. 597, 45 L.Ed. 834 (1901). The rule is quite vital today, see, Norris v. Norris, 419 A.2d 982 (D.C.App.1980); Redwing Carriers Inc. v. Foster, 382 So.2d 554 (Ala.1980); State ex rel. Meierhenry v. Spiegel, 277 N.W.2d 298 (S.D.1978); National Equipment Rental v. Taylor, 225 Kan. 58, 587 P.2d 870 (1978), and is perhaps most vital in usury cases. Sailboat Key, supra ; Tuchler, Boundaries to Party Autonomy in the Uniform Commercial Code: A Radical View, 11 St. Louis L.J....