Case Number: EC062090    Hearing Date: August 28, 2014    Dept: 56

Case Name: Inter-Continental Trading, Inc. v. National Funding, Inc., et al.
Case No.: EC062090
Motion: Demurrers and Motion to Strike

Tentative Ruling: Demurrers are sustained.

Plaintiff Inter-Continental Trading Inc. filed this action against National Funding Inc., Yellowstone Capital West LLC, and a third defendant who has not appeared. The operative pleading is the Second Amended Complaint which asserts a single cause of action for unlawful business practices arising out of a lending transaction. Yellowstone and National Funding demur to the SAC. Plaintiff has opposed the demurrer by Yellowstone but has filed no opposition to the demurrer by National Funding.

The SAC alleges that Plaintiff entered into written loan agreements with the Defendants: National Funding agreed to loan Plaintiff $125,000 and Plaintiff agreed to repay $172,500 within one year; Yellowstone agreed to loan Plaintiff $75,000 and Plaintiff agreed to repay $106,425 within one year. Plaintiff alleges that these transactions were unlawful business practices because Defendants violated Financial Code §22302 and Civil Code §1670.5 (prohibiting unconscionable loan agreements) and 10 CCR §1452 (prohibiting loans on terms beyond the borrower’s financial ability to pay).

FC §22302 & CC §1670.5 –
Unconscionability has procedural and substantive elements, and both must be found for a court to invalidate a contract or one of its terms. See Ikhchooyi v. Best (1995) 37 Cal.App.4th 395, 409-10; A&M Produce Co. v. FMC Corp. (1982) 135 Cal.App.3d 473, 487.

Procedural unconscionability “includes (1) oppression ‘aris[ing] from an inequality of bargaining power which results in no real negotiation and an absence of meaningful choice’; and (2) surprise ‘involv[ing] the extent to which the supposedly agreed-upon terms of the bargain are hidden in a prolix printed form drafted by the party seeking to enforce the disputed terms.’” Ikhchooyi, supra 37 Cal.App.4th at 409-10.

Nothing like that is alleged here. The SAC describes lending transactions between corporate entities, set forth in clear written agreements. Plaintiff alleges that the loan agreements were prepared on standardized forms, but that does not support procedural unconscionability. See Crippen v. Central Valley RV (2004) 124 Cal.App.4th 1159, 1165-66. Plaintiff also alleges that it was in a vulnerable financial position, seeking a high-interest loan from a non-banking lender, but that also fails to establish the procedural element. Defendants are licensed finance lenders under Fin. Code §22000 et seq., and are authorized to provide alternative lending.

Substantive unconscionability “includes terms that are one-sided, lacking in justification and ‘reallocate[] the risks of the bargain in an objectively unreasonable or unexpected manner.’” Ikhchooyi, supra 37 Cal.App.4th at 409-10.

The SAC fails to meet this standard. Plaintiff alleges that the agreed interest rates are shockingly excessive, but Defendants are licensed finance lenders exempt from usury laws under Fin. Code §22002. An interest rate can be substantively unconscionable, but there must be a showing that “it imposes a cost on the borrower which is overly harsh and was not justified by the circumstances in which the contract was made.” Carboni v. Arrospide (1991) 2 Cal.App.4th 76, 83-85. Plaintiff has failed to make this showing. The SAC merely describes a lending transaction between a corporate borrower and finance lenders licensed by the State.

10 CCR §1452 –
This regulation is violated when a finance company fails to consider the financial ability of a borrower to reasonably repay a loan in the time and manner provided in the agreement. The SAC does not allege any conduct of this sort by Yellowstone or National Funding. It alleges that Plaintiff was in a “vulnerable financial position” and was unable to repay the loans within the time and manner agreed, but this concerns Plaintiff. The SAC does not allege that Yellowstone or National Funding failed to take Plaintiff’s financial condition into account when making or negotiating the loans.

Ruling –
The demurrers are sustained, without leave to amend. Plaintiff has had three opportunities to allege sufficient causes of action, and there appears to be no reasonable probability that Plaintiff can do so. Eg, Sprinkles v. Associated Indemnity (2010) 188 Cal.App.4th 69, 76; Long v. Century Indemnity (2008) 163 Cal.App.4th 1460, 1468. Defendants’ motions to strike are moot.