Himelsein Mandel Fund Mgmt., LLC v. Fortress Inv. Grp. LLC

• Decision Date: 28 March 2019
• Docket Number: B281210
• Court: California Court of Appeals Court of Appeals
• Parties: HIMELSEIN MANDEL FUND MANAGEMENT, LLC et al., Plaintiffs and Appellants, v. FORTRESS INVESTMENT GROUP LLC et al., Defendants and Appellants.

HIMELSEIN MANDEL FUND MANAGEMENT, LLC et al., Plaintiffs and Appellants, v. FORTRESS INVESTMENT GROUP LLC et al., Defendants and Appellants.

B281210

COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION FOUR

March 28, 2019

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Los Angeles County Super. Ct. No. BC495595)

APPEALS from a judgment of the Superior Court of Los Angeles County, Ann I. Jones, Judge. Affirmed in part and reversed in part with directions.

Simpson Thacher & Bartlett, Michael D. Kibler; Glaser Weil Fink Howard Avchen & Shapiro, Patricia L. Glaser, Sean Riley; Greines, Martin, Stein & Richland, Robin Meadow and Cynthia E. Tobisman for Plaintiffs and Appellants.

Munger, Tolles & Olson, Bradley S. Phillips, Lisa J. Demsky, Laura D. Smolowe and Jordan D. Segall for Defendants and Appellants.

Himelsein Mandel Fund Management, LLC and related entities (collectively HM) filed a complaint against Fortress Investment Group, LLC and related entities (collectively Fortress) alleging several causes of action, some legal and some equitable, relating to a $65 million credit and security agreement (CSA) and an alleged oral promise to extend further credit.¹ Fortress filed a cross-complaint.

The CSA included a choice-of-law provision stating that New York law governed the agreement and its construction, and also included a waiver of the right to jury trial. The trial court concluded that New York law governed the enforceability of the jury trial waiver, and that the waiver was enforceable under New York law and encompassed both contract and noncontract causes of action. The court therefore denied HM's demand for jury trial and conducted a nonjury trial, which resulted in a defense judgment on the complaint and no relief on the cross-complaint. Both sides appealed.

HM contends: (1) although the equitable causes of action were appropriately tried by the court, the trial court erred by denying a jury trial on the legal causes of action; (2) the court erred by applying New York law rather than California law to HM's noncontract causes of action both at trial and in ruling on Fortress's demurrers and motions for summary adjudication; and (3) HM's unjust enrichment cause of action should be reinstated regardless of which state's law applies.

Fortress challenges the denial of its motions for summary adjudication of several causes of action in the complaint and the denial of relief on its cross-complaint. Fortress contends: (1) it was entitled to summary adjudication of HM's causes of action for intentional and negligent misrepresentation, promissory estoppel, and unfair competition; and (2) the trial court erred in denying relief on Fortress's causes of action for breach of the CSA and for a deficiency judgment.

We conclude that (1) the New York choice-of-law provision is unenforceable with respect to the jury trial waiver because the enforcement of a predispute jury trial waiver would be contrary to fundamental California public policy; (2) the denial of the right to jury trial is a structural error requiring a reversal on all of HM's causes of action adjudicated at trial; (3) the choice-of-law provision encompasses only contract causes of action, so the trial court on remand must apply the governmental interest analysis to decide which state's law applies to HM's causes of action adjudicated at trial and its unjust enrichment cause of action; (4) HM has not shown which state's law applied to several noncontract causes of action adjudicated before trial and has shown no error in those pretrial rulings; (5) the court erred by sustaining a demurrer to HM's unjust enrichment cause of action; (6) we need not review the denial of Fortress's motions for summary adjudication; and (7) the court properly denied relief on Fortress's deficiency and breach of contract causes of action. We therefore reverse the judgment on the complaint as to the causes of action adjudicated at trial and the unjust enrichment cause of action, with directions to the trial court to decide the governing law by applying the governmental interest analysis, and otherwise affirm the judgment.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Parties

HMFM is a limited liability company organized under New York law and engaged in the business of investment management. HM Ruby is a limited partnership organized under Delaware law and engaged in the life settlement investment business. A life settlement involves the sale of an interest in a life insurance policy to a third party that pays the premiums and eventually collects the death benefits. Quantlife is a limited liability company organized under Delaware law and a wholly-owned subsidiary of HM Ruby. Brentwood is a limited liability company organized under Delaware law and a wholly-owned subsidiary of Quantlife.

Fortress Investment is a limited liability company organized under Delaware law, based in New York, and engaged in the business of investment management. Fortress Credit is a Delaware corporation with its principal place of business in New York. The other defendants are related to or affiliated with Fortress Investment and Fortress Credit in some manner.

2. The Credit and Security Agreement

HMFM sought an investor to provide funds needed to maintain its portfolio of life settlements. In November 2009, HMFM and Fortress Investment entered into a mutual nondisclosure agreement to maintain the confidentiality of information shared for the purpose of evaluating "the potential transaction involving a credit facility, joint venture, and/or equity acquisition." The agreement included a choice-of-law provision stating, "This Agreement and its validity, construction, effect, and performance shall be governed by the laws of the State of California," and a forum selection clause designating the City of Los Angeles as the forum for any litigation arising outof the agreement. The agreement also included a waiver of any right to jury trial.

On February 12, 2010, Brentwood and Fortress Credit entered into the CSA, which provided for a $65 million credit facility secured by collateral consisting of life settlements held by Brentwood. Under the CSA, Brentwood agreed to repay the amounts borrowed, plus interest and fees.

The CSA provided that in the event of a default, Fortress Credit could notify Brentwood that all of Brentwood's obligations were due and payable and pursue its rights as a secured creditor under the Uniform Commercial Code. The CSA stated, "it shall be commercially reasonable for the Program Agent [Fortress Credit] to sell the Collateral on an 'as is' basis, without representation or warranty of any kind."

The CSA included a choice-of law provision stating:

"THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK BUT OTHERWISE WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES)."

The CSA also included a waiver of the right to jury trial immediately following the choice-of-law provision:

"EACH OF THE PARTIES HERETO WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING DIRECTLY OR INDIRECTLY OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREUNDER."

The CSA included an indemnity provision stating that Brentwood would indemnify Fortress Credit and others for expenses relating toBrentwood's failure to perform its obligations under the CSA, any misrepresentation made in connection with the CSA, any litigation arising from the CSA, and other matters.

The CSA provided that the agreement could be amended only by a signed writing. The CSA included a nonexclusive consent to jurisdiction in the State of New York, but did not limit the venue for any lawsuit to that state.

3. The Default and Foreclosure

In August 2010, Wayne Himelsein of HMFM asked Rodney Hutter of Fortress for more credit. According to Plaintiffs, after weeks of discussions, Hutter orally promised to provide an additional $20 million in credit. Defendants dispute this.

On December 1, 2010, Fortress Credit sent Brentwood a notice of default under the CSA. Fortress later sent additional notices of default and foreclosed on the collateral, which was sold at a public auction for $72.5 million on June 2, 2011. Fortress was the high bidder with a credit bid. Fortress claimed the amount owed under the CSA was approximately $185,675,943, leaving a deficiency after the sale of approximately $113,175,943.²

4. The Complaint, Amended Complaints, and Demurrers

On November 13, 2012, HM filed a complaint against Fortress alleging 10 causes of action for breach of contract, misappropriation of trade secrets, breach of fiduciary duty, violation of the unfair competition law (Bus. & Prof.Code, § 17200 et seq.), violation of the California Commercial Code and New York Uniform Commercial Code (UCC), securities fraud (Corp. Code, §§ 25401, 25402), common law fraud, and unjust enrichment. HM demanded a jury trial.

Fortress demurred to several causes of action, arguing that they failed to state a valid cause of action under California law. Fortress noted that the CSA contained a choice-of-law provision designating New York law. Fortress argued: "Defendants cite to California law because the claims subject to this demurrer would fail regardless of whether New York or California law applies. Defendants reserve all rights to argue for the application of New York law." The trial court sustained a demurrer to the unjust enrichment cause of action without leave to amend on the grounds that there was no such cause of action under...