USING OUT OF STATE CHOICE OF LAW TO AVOID CALIFORNIA USURY RULES?  THINK AGAIN! 

By: Eric P. Israel

A recent case of interest held that California usury law “is [a] fundamental public policy of the state,” which can overcome the choice of law provisions in loan documents.  G Companies Management, LLC v. LREP Arizona LLC, 88 Cal. App. 5th 342, 304 Cal. Rptr. 3d 651 (2023).  In G Companies, the California Court of Appeal held that anti-usury laws represent a strong public policy of the State, and hence that ordinary choice of law rules apply notwithstanding contractual provisions referencing the law of another state that may be more creditor friendly. This appears to be a change from prior law.  See, e.g., Ury v. Jewelers Acceptance Corp., 227 Cal. App. 2d 11, 20 (1964); Gamer v. duPont Glore Forgan, Inc., 65 Cal. App. 3d 280 (1976); Hyundai Sec. Co. v. Lee, 232 Cal. App. 4th 1379 (2015); Mencor Enterprises, Inc. v. HETS Equities Corp., 190 Cal. App. 3d 432 (1987).  Violations of usury laws can have harsh consequences, including recovery of treble damages.  Cal. Civ. Code § 1916-3(a).

Oftentimes, lenders include in their loan documentation contractual provisions stating that the law of another state applies, even in situations where the transaction has few or no contacts with that other state.  Important factors triggering G Companies might be the location of the borrower, the location of the collateral, and the alternative state’s interest in the transaction.  Practitioners should be aware of the G Companies case when drafting documentation for secured transactions.  Bankruptcy trustees may be able to use G Companies to challenge the underlying debts and liens securing them on usury grounds.

The Uniform Foreign-Country Money Judgment Recognition Act provides that a court is not required to recognize a foreign judgment that is “repugnant to the public policy of this state or of the United States.”  It remains to be seen whether domestication of a foreign judgment will be open to challenge under California usury laws.