2012-00133750-CU-NP

Phyllis Calibo vs. Incline Energy

Nature of Proceeding: Hearing on Demurrer to First Amended Complaint

Filed By: Weiner, Elisha E.

The demurrer of Defendants Energy Incline, LLC (“Incline”), John Sherriff and Lorraine
Sherriff (collectively “Defendants”) to the first amended complaint (“FAC”) of Plaintiffs
Phyllis Calibo (“Calibo”) and Karen Seiler (collectively “Plaintiffs”) is OVERRULED in
part and SUSTAINED in part without leave to amend.

Plaintiffs are domestic partners who allege that Defendants have provided consumer
loans in California without first obtaining the required licenses under Corporations
Code § 22100. Plaintiffs further allege that, notwithstanding a desist and refrain order
that the California Corporations Commissioner (“Commissioner”) issued to Defendants
in 2010, Defendants have continued to act as finance lenders in California. According
to Plaintiffs, Defendants make high-interest loans to civil plaintiffs as a means to fund
litigation in which attorneys expect awards of legal fees or other future payments.
Defendants’ position is that they do not make loans, but rather they enter into
agreements to invest in litigation in exchange for a share of potential future proceeds
in the form of money judgments or settlements.

Plaintiffs allege that Defendants provided them with such a “litigation advance” in
which the interest rate increased by 40 percent every six months. Plaintiffs used the
advance to litigate a personal injury lawsuit involving Calibo’s motor vehicle collision.
Although the principal loan amount allegedly was $46,350, approximately two years
after Defendants made the loan, they filed a lien in Plaintiffs’ personal injury case for
the amount of $101,970. Six months later, Defendants allegedly asserted a right to
payment of $120,510. Plaintiffs allegedly informed Defendants that the loan was
usurious, but Defendants have not changed their position. Plaintiffs further allege that
the loan agreement contains an improper liquidated damages clause purportedly
entitling Defendants to attorney’s fees in the amount of one-third the money otherwise
owed under the loan.

In the FAC, Plaintiffs have pleaded causes of action for declaratory relief, unfair
business practices [B&P Code §§ 17204 et seq.] and breach of contract [CC § 1671].
Defendants demur to all three causes of action on grounds of failure to state a cause
of action and misjoinder of parties. Although the contract that is the crux of the lawsuit
contains Nevada venue and choice-of-law provisions, the parties waived those
provisions and have asked this court to resolve the dispute by reference to California
law.

The First Cause of Action for Declaratory Relief

Failure to State a Cause of Action

Defendants’ demurrers are OVERRULED.

First, Defendants argue in a footnote that declaratory relief is inappropriate because
Plaintiffs’ action is a “preemptive substitute for defending incline’s possible lawsuit for
breach of contract.” (See Moving Memo. at 4, fn. 7.) Defendants cite Osseous Technologies of America, Inc. DiscoveryOrtho Partners, Inc. [“ Osseous”] (2010) 191
th
Cal.App.4 357, 369.) Although the court might discretion to sustain the demurrer
under Osseous, it declines to do so. Plaintiffs’ allegations presents a continuing
controversy over Calibo’s contractual duties, which turn upon questions whether the
contract (1) contemplates a loan or an investment and (2) contains an unlawful
liquidated damages provision. Plaintiffs’ allegations thus present justiciable
controversies that are not limited to past conduct. In its discretion, the court will permit
the controversies to advance beyond the pleading stage.

Defendants further argue that the demurrer should be sustained because the
allegations supporting Plaintiffs’ declaratory relief cause of action fail on the merits. In
their view, the contract, which is attached as an exhibit to the FAC, cannot be
construed to contemplate a loan and, therefore, as a transaction subject to California’s
usury laws. In this regard, the contract provides the following, inter alia:

“This Agreement represents a purchase of proceeds by IE and is not a
loan because if there are no proceeds then the Sellers will have no
obligation to pay IE. There is a very real risk that IE may receive nothing
back from this purchase of proceeds if the Sellers are unsuccessful in
their litigation. If IE believed that it might only receive a small interest rate
return it never would purchase the proceeds under this transaction.

However, if any court deems this Agreement a loan (despite the
intentions of the parties executing the agreement) then IE will have the
right to cure. IE will cure and the Sellers will allow this cure by converting
this purchase of proceeds into a loan at the lower of the maximum
interest rate allowed under the law or 300% per year simple annual
interest rate. If the purchase of proceeds transaction is converted to a
loan under this paragraph then the Sellers will pay IE for all of its actual
legal fees for managing this contract change and any litigation
associated with this contract modification.”

(FAC, Exh. 2 at 5.)

Despite the contract language describing the transaction as a purchase of proceeds
rather than a loan, whether the parties intended the transaction to be a loan is a
question of fact that turns upon the circumstances giving rise to the transaction. (
th
Ghirardo v. Antonioli (1994) 8 Cal.4 791, 799-800.) Only after those historical facts
are settled may a court determine whether the transaction is subject to California’s
usury proscriptions. (Id. at 800.) Moreover, whether a transaction is a loan subject to
the State’s usury laws, or a sale or other arrangement exempt form those laws, does
not depend on the labels the parties apply to their dealings. (Id. at 799-800 [“In all
such [i.e., usury] cases the issue is whether or not the bargain of the parties, assessed
in light of all the circumstances and with a view to substance rather than form, has as
its true object the hire of money at an excessive rate of interest”] [citation omitted]
[brackets in original].)

One of the factors used to determine whether a transaction is a loan is the existence
vel non of a genuine risk of loss of the transferred funds. (See Miller & Starr, Cal. Real
Estate (3d ed. 2011), § 21:11 at 52-53 and fn. 17 [citing Haweis v. Baddour (App. 3
Dist. 1932) 121 Cal. App. 437, 448-449].) Although the contract in the instant case
provides that such a risk existed, Ghirardo teaches that the genuineness of Incline’s
risk of loss is a factual issue that turns upon historical facts, e.g., whether the motorist
who struck Calibo admitted fault, where there were other potential causes of Calibo’s
injuries, and thus whether Incline was actually at risk of not recovering its litigation
advance. Because a court ruling on a demurrer cannot make findings of such
historical facts, this court cannot conclude that Plaintiffs’ allegations state only a sale of
proceeds that is outside the scope of California’s usury laws. Accordingly, the
demurrer to the first cause of action must be overruled.

In reaching its conclusion, the court notes that Defendants’ reliance on 321 Henderson
th
Receivables Origination LLC v. Sioteco (2009) 173 Cal.App.4 1059 is misplaced.
Defendants, who acknowledge that no California appellate court has held that litigation
advance transactions are categorically exempt from California’s usury laws, argue that
Sioteco is the most analogous California case. (Moving Memo. at 7:14-25.) The
relevant issue in Sioteco was whether a contract to sell structured settlement
payments could be construed a loan subject to usury laws. Holding that such
contracts do not involve loans, the Sioteco court focused its analysis on the statutory
th
language governing sales of structured settlement payments. (173 Cal.App.4 at 1076
-1077 [the Structured Settlement Transfer Act repeatedly describes structured
settlement agreements as “sales”].) Because there is no similar statutory scheme
regulating the litigation advance before this court, Sioteco offers little if any guidance.

The court further notes Defendants’ request for the court to follow courts in other
jurisdictions, which Defendants assert have concluded that litigation-advance contracts
are not loans. (See Moving Memo. at 6:13-7:5 [citing cases].) Because none of those
cases involved a ruling at the pleading stage, they provide little if any assistance, and
the court’s analysis remains unchanged.

Misjoinder

The demurrers are OVERRULED.

Defendants argue that the Sheriffs are misjoined because they are not signatories to
the litigation-advance contract. Although the court agrees with this assertion, it
overrules the demurrer because Plaintiffs’ first cause of action can be construed to
contain a request for a declaration that performance under the contract must be
assessed in light of the Sheriffs’ alleged violations of the Financial Code and the
Commissioner’s associated desist and refrain order. As a consequence, the Sheriffs
are proper parties under the first cause of action.

The Second Cause of Action for Violation of the Unfair Practices Act

Failure to State a Cause of Action

Defendants’ demurrers are OVERRULED.

Defendants predicate their demurrers on the argument made and rejected in relation to
the first cause of action, i.e., that the litigation-advance contract cannot be construed
as a loan as a matter of law. Accordingly, the demurrers are overruled for reasons
stated above.

Misjoinder The demurrers are OVERRULED.

Plaintiffs base their second cause of action against the Sheriffs in part upon the latters’
alleged violations of the Financial Code and the Commissioner’s desist and refrain
order. Accordingly, the court again rejects Defendants’ contention that, because the
Sheriffs did not sign the litigation advance contract and the contract does not in itself
render the Sherriffs proper parties, the Sheriffs have been misjoined.

The Third Cause of Action for Breach of Contract under CC § 1671

Failure to State a Cause of Action

Defendants’ demurrers are SUSTAINED without leave to amend.

Plaintiffs’ third cause of action is based on the alleged unlawfulness of the following
provisions:

“If [Incline] must engage the services of any attorney to collect the sum
due, then Sellers will be responsible for reasonable attorneys’ fees and
costs for such. The parties agree that a fee equal to one-third of the
money due IE is a reasonable fee for such purpose. This obligation by
the Sellers is joint and several.”

(FAC, Exh. 2 at 3 [brackets added].) Plaintiffs characterize the quoted material as a
liquidated damages clause. Plaintiffs further allege that the provisions violate CC §
1671, which prohibits liquidated damages clauses that were unreasonable “under the
circumstances existing at the time the contract was made.” In Plaintiffs’ view, the
subject provision were unreasonable because they contemplated attorneys’ fees
bearing no relation to damages actually suffered as the result of a breach of the
contract. (FAC, ¶ 44.)

The court agrees with Defendants that the contract provisions in question do not
constitute a liquidated damages clause and, therefore, that the allegations fail to state
a cause of action. In the court’s view, the provisions purport to provide a method for
calculating attorney’s fees as costs of suit “if [Incline] must engage the services of an
attorney“, not for calculating damages resulting from a breach of contract. Given its
construction of the provisions, the court need not decide whether, as Plaintiffs argue in
the Opposition, the provisions violate CC § 1671(c), governing contracts for retail
purchases and rentals of personal property and services.

Because the court sustains the demurrers without leave to amend, it need not reach
the Sherriffs’ demurrers on grounds of misjoinder.

Judicial Notice

Defendants’ request for judicial notice of court documents is GRANTED. In taking
judicial notice of these documents, the court accepts the fact of their existence, not the
truth of their contents. (See Professional Engineers v. Dep’t of Transp. (1997) 15
th
Cal.4 543, 590 [judicial notice of findings of fact does not mean that those findings of
fact are true]; Steed v. Department of Consumer Affairs (2012) 204 Cal.App.4th 112,
120-121.) Conclusion

The demurrers to the first and second causes of action are overruled. The demurrer to
the third cause of action on grounds that the allegations fail to state a cause of action
are sustained without leave to amend. The court does not reach the remaining
demurrers to the third cause of action.

No later than December 4, 2013, Defendants shall file and serve their answer(s).

The minute order is effective immediately. No formal order pursuant to CRC 3.1312 or
further notice is required.

The notice of motion does not provide notice of the court’s tentative ruling system, as
required by Local Rule 1.06(D). Counsel for moving party is directed to contact
counsel for opposing party forthwith and advise counsel of Local Rule 1.06 and the
court’s tentative ruling procedure. If counsel for moving party is unable to contact
counsel for opposing party prior to hearing, counsel for moving party shall be available
at the hearing, in person or by telephone, in the event opposing party appears without
following the procedures set forth in Local Rule 1.06(B).