filed: new york county clerk 06/19/2015 10:06 am

INDEX NO. 650791/2015
FILED: NEW YORK COUNTY CLERK 06/19/2015 10:06 AM
NYSCEF DOC. NO. 123
RECEIVED NYSCEF: 06/19/2015
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF NEW YORK
HAMIL TON CAPITAL VII, LLC,
Index No. 650791/2015
lAS Part 54
Justice Kornreich
Plaintiff,
-against-
Motion Sequence No. 2
KHORRAMI, LLP (f/k/a KHORRAMI & BOUCHER,
LLP;fi~aKHORRAMIBOUCHERSUNER
SANGUINETTI, LLP; and f/~a KHORRAMI, POLLARD
& ABIR, LLP) and SHAHIN KHORRAMI (al~a SHAWN
KHORRAMI),
Defendants.
PLAINTIFF'S MEMORANDUM OF LAW IN OPPOSITION TO
DEFENDANTS' MOTION TO DISMISS THE COMPLAINT
GANFER & SHORE, LLP
360 Lexington Avenue
New York, New York 1001 7
(212) 922-9250
(212) 922-9335 (facsimile)
Attorneys for Plaintiff Hamilton Capital VII, LLC
TABLE OF CONTENTS
TABLE OF AUTHORITIES ........................................................................................................... ii
PRELIMINARY STATEMENT ..................................................................................................... 1
STATEMENT OF FACTS .............................................................................................................. 6
A.
The Parties ............................................................................................................... 6
B.
The Credit Agreement ............................................................................................. 7
ARGUMENT ................................................................................................................................. 10
POINT I
THE CREDIT AGREEMENT DOES NOT VIOLATE THE ATTORNEY
FEE-SPLITTING PROHIBITIONS UNDER NEW YORK LAW ...................... 11
POINT II
THE CREDIT AGREEMENT IS GOVERNED BY NEW YORK LAW
AND DOES NOT VIOLATE NEW YORK USURY LAW ................................ 17
A.
The Credit Agreement Is Governed by New York Law ....................................... 17
B.
The Credit Agreement Does Not Violate New York Usury Law ......................... 24
CONCLUSION ............................................................................................................................. 25
TABLE OF AUTHORITIES
A. Conner Gen. Contracting Inc. v. Rols Capital Co.,
145 A.D.2d 452, 535 N.Y.S.2d 420 (2d Dep't 1988) ................................................................ 21
Acorn Partners Jl v. Kiley,
193 A.D.2d 397, 597 N. Y.S.2d 63 (1st Dep't 1993) ................................................................. 21
American. Exp. Travel Related Servs. Co. v. Assih,
26 Misc. 3d 1016, 893 N.Y.S.2d 438 (Civ. Ct. Richmond Co. 2009) ....................................... 21
Bonilla v. Rotter,
36 A.D.3d 534, 829 N.Y.S.2d 52 (1st Dep't 2007) ................................................................... 16
Cadle Co. v. Schlichtman,
267 F.3d 14 (1st Cir. 2001) ........................................................................................................ 13
Cain v. Burns,
131 Cal. App. 2d 439 (1955) ..................................................................................................... 17
Cayuga Partners, LLC v. !50 Grand, LLC,
305 A.D.2d 527, 759 N.Y.S.2d 347 (2d Dep't 2003) ................................................................ 11
Coral Capital Solutions LLC v. Best Plastics, LLC,
2014 N.Y. Misc. LEXIS 1779 (N.Y. Sup. Ct. Apr. 10, 2014) .................................................... 3
Core Funding Group, LLC v. McDonald,
2006 Ohio LEXIS 2304 (Ohio Ct. App. 2006) .......................................................................... 13
CPI NA Parnassub B. V v. Ornelas-Hernadez,
2009 N.Y. Misc. LEXIS 3895,
2009 N.Y. Slip Op. 30259 (Sup. Ct. N.Y. Co. Jan. 27, 2009) ................................................... 21
Emmons, Williams, Mires & Leech v. State Bar,
6 Cal. App. 3d 565, 86 Cal. Rptr. 367 (1970) ........................................................................... 17
Ficucane v. Interior Constr. Corp.,
264 A.D.2d 618, 695 N. Y.S.2d 322 (1st Dep't 1999) ........................................................ 22, 23
Freydl v. Meringolo,
2013 U.S. Dist. LEXIS 45881 (S.D.N.Y. March 29, 2013) ...................................................... 16
Gamer v. DuPont Glore Forgan, Inc.,
65 Cal. App. 3d 280, 135 Cal. Rptr. 230 (1976) ....................................................................... 23
11
Gorman v. Grodensky,
130 Misc. 2d 837,498 N.Y.S.2d 249 (Sup. Ct. N.Y. Co. 1985) ............................................... 16
Goshen v. Mut. Life Ins. Co. of New York,
98 N.Y.2d 314, 746 N.Y.S.2d 858 (2002) ................................................................................. 11
IRE-Brasil Resseguros SA. v. Inepar Inv., SA.,
2009 N.Y. Misc. LEXIS 4355,
2009 N.Y. Slip Op. 31723 (Sup. Ct. N.Y. Co. July 31, 2009)
aff'd in relevant part, 83 A.D.3d 573, 922 N.Y.S.2d 308 (1st Dep't 2011),
aff'd, 20 N.Y.3d 310,958 N.Y.S.2d 689 (2012),
cert. denied, 133 S. Ct. 2396 (2013) .................................................................................... 18-21
Jacoby & Meyers, LLP v. Presiding Justices of First, Second, Third & Fourth Dep 'ts,
847 F. Supp. 2d 590 (S.D.N.Y. 2012),
rev 'din part and remanded,
488 Fed. Appx. 526, 2012 U.S. App. LEXIS 24012 (2d Cir. 2012) ................................... 14, 15
Lawsuit Funding LLC v. Lessoff,
2013 N.Y. Misc. LEXIS 5685,
2013 N.Y. Slip Op. 33066(U) (Sup. Ct. N.Y. Co. Dec. 4, 2013) .................................. 12-14, 16
Le Chase Data/Telecom Servs., LLC v. Goebert,
6 N.Y.3d 281, 811 N.Y.S.2d 317 (N.Y. 2006) ............................................................................ 3
Lehman Bros. Commercial Corp. v. Minmetals Int 'I Non-Ferrous Metals Trading Corp.,
179 F. Supp. 2d 118 (S.D.N.Y. 2000) ....................................................................................... 20
Leon v. Martinez,
87 N.Y.2d 83, 614 N.Y.S.2d 972 (1994) ................................................................................... 11
PNC Bank, Delaware v. Berg,
1997 Del. Super. LEXIS 19, 45 U.C.C. Rep. Serv. 2d 27 (Dec. 11, 1996) ......................... 12, 13
Polonetsky v. Better Homes Depot, Inc.,
97 N.Y.2d 46, 735 N.Y.S.2d 479 (2001) ................................................................................... 11
Prins v. Itkowitz & Gottlieb, P.C.,
279 A.D.2d 274, 719 N.Y.S.2d 228 (1st Dep't 2001) ............................................................... 16
Quantum Corporate Funding, Ltd. v. Assist You Home Health Care Servs., L.L.C.,
144 F. Supp. 2d 241 (S.D.N.Y. 2001) ......................................................................................... 3
RIS Assocs. v. N. Y Job Dev. Auth.,
98 N.Y.2d 29, 744 N.Y.S.2d 358 (2002) ................................................................................... 16
lll
Radioactive, J V v. Manson,
153 F. Supp. 2d 462 (S.D.N.Y. 2001) ................................................................................ 21, 22
Schron v. Troutman Saunders LLP,
20 N.Y.3d 430, 963 N.Y.S.2d 613 (2013) ................................................................................. 16
Shasho v. Pruco Life Ins. Co. of New Jersey,
67 A.D.3d 663, 888 N.Y.S.2d 557 (2d Dep't 2009) .................................................................. 24
Skylon Corp. v. Guilford Mills,
864 F. Supp. 353 (S.D.N.Y. 1994) .............................................................................................. 3
Sun Forest Corp. v. Shvili,
152 F. Supp. 2d 367, 388 (S.D.N.Y. 2001) ............................................................................... 20
Supply & Bldg. Co. v. Estee Lauder Int '!.,Inc.
2000 U.S. Dist. LEXIS 2086 (S.D.N.Y. 2000) .......................................................................... 20
Teitler v. Max J Pollack & Sons,
288 A.D.2d 302, 733 N.Y.S.2d 122 (2d Dep't 2001) ................................................................ 11
Tosapratt, LLC v. Sunset Props., Inc.,
86 A.D.3d 768, 926 N.Y.S.2d 760 (3rd Dep't 2011) ................................................................ 20
Ungar v. Matarazzo Blumberg & Assocs., P.C.
260 A.D.2d 485, 688 N.Y.S.2d 588 (2d Dep't 1999) ................................................................ 16
Ury v. Jewelers Acceptance Corp.,
227 Cal. App. 2d 11,38 Cal. Rptr. 376 (1964) ......................................................................... 23
U.S Claims, Inc. v. Yehuda Smolar. PC,
602 F. Supp. 2d 590 (E.D.Pa. March 9, 2009) .......................................................................... 13
Wiener v. Lazard Freres & Co.,
241 A.D.2d 114,672N.Y.S.2d8(1stDep't 1998) ................................................................... 11
Zurich Ins. Co. v. Shearson Lehman Hutton,
84 N.Y.2d 309,618 N.Y.S.2d 609 (1994) ................................................................................. 19
IV
Statutes and Rules
CPLR § 3211(a)(1) ................................................................................................................. 1,4, 10
CPLR § 3211(a)(7) ........................................................................................................... 1,4, 10, 11
Judiciary Law§ 491 ...................................................................................................................... 14
Judiciary Law § 495 ...................................................................................................................... 15
Limited Liability Company Law § 201 ......................................................................................... 15
General Obligations Law§ 5-1401 ...................................................................................... 5, 18-23
General Obligations Law§ 5-501(6) ......................................................................................... 6, 24
Rules of Professional Conduct 5.4 .................................................................................... .11-12, 14
Rules of Professional Conduct 5.4(a) .................................................................................... .4-5, 13
Uniform Commercial Code§ 1-301(c) ......................................................................................... 20
Uniform Commercial Code § 2-402 .............................................................................................. 20
Uniform Commercial Code§ 2A-105 ........................................................................................... 20
Uniform Commercial Code§ 2A-106 ........................................................................................... 20
Uniform Commercial Code § 4-102 .............................................................................................. 20
Uniform Commercial Code§ 4A-507 ........................................................................................... 20
Uniform Commercial Code § 5-116 .............................................................................................. 20
Uniform Commercial Code § 8-110 .............................................................................................. 20
Uniform Commercial Code§ 9-301 .............................................................................................. 20
Uniform Commercial Code§ 9-307 .............................................................................................. 20
22 N.Y.C.R.R. § 1200.54 ............................................................................................................. 11
v
Legislative History
Sponsor's Mem, Bill Jacket, L. 1984, ch. 421 ............................................................................... 19
Articles
Steven Garber, Alternative Litigation Financing in the United States: Issues, Knowns, and
Unknowns (Rand Institute for Civil Justice 2010), at 23, available at
http:/ /www.rand.on.dcontcnt/dam/rand/pubs/occasional papcrs/20 10/RA N D 0 P306. pdf .......... 7
Vl
Plaintiff, Hamilton Capital VII LLC ("Plaintiff' or "Hamilton"), submits this Memorandum
of Law in opposition to the motion of Defendants Khorrami, LLP and Shahin Khorrami
(collectively, "Defendants") to dismiss Plaintiffs Complaint pursuant to CPLR 3211(a)(l) and (7).
Accompanying this Memorandum are the Affidavits of Jack Simony, sworn to on June 15, 2015
(the "Simony Aff.") and Steven J. Shore, Esq., sworn to on June 16,2015 (the "Shore Aff.").
PRELIMINARY STATEMENT
Defendants' motion to dismiss represents a self-serving but legally and equitably
meritless attack upon a form of alternative litigation financing used by many contingency-feebased plaintiffs' law firms, enabling them to represent and bring suit on behalf of injured parties
who might otherwise be barred from seeking justice in the courts because of a lack of financial
resources. Defendants - a law firm specializing in substantial tort cases and its managing partner
-entered into a factor-type agreement with Hamilton in 2009, under which Hamilton provided a
revolving credit facility (the "Revolving Credit Facility") to finance Khorrami LLP's significant
portfolio of tort litigation.
For almost six years, Defendants enjoyed the benefits of this
arrangement, borrowing upwards of $20 million against the multi-million-dollar Revolving
Credit Facility. But now that Defendants want to avoid their obligation to repay the remaining
principal and interest they owe Hamilton, they contend that the financing arrangement that they
sought out and fully utilized for years has somehow become unlawful.
As more fully set forth in the Complaint, on June 17, 2009, the parties entered into a
Credit Agreement (the "Credit Agreement") and related transaction documents (collectively with
the Credit Agreement, the "Transaction Documents") that established the Revolving Credit
Facility. Khorrami LLP was able to, and did, draw down on Hamilton's line of credit to fund its
operating costs. (Compl.
~
17). The Credit Agreement originally had a credit line of $6,000,000,
which was later raised to $7,000,000. (Compl.
~~
18, 33).
In exchange for the ability to draw down millions of dollars on the Revolving Credit
Facility, Khorrami LLP agreed to pay interest of 25% per annum of the outstanding principal
amount plus an additional interest payment calculated as a percentage of Khorrami LLP's gross
revenues ("Revenue Interest").
(Compl.
~~
19-20).
The Revenue Interest component was
capped at the greater of 10% of gross revenues over three years or 10% of $100,000,000 (later
raised to 15%). (Id.). The Transaction Documents provided that they would be governed by
New York law and that any disputes between the parties would be resolved by a New York
Court. (Compl.
~
31).
Since entering into the Credit Agreement, Khorrami LLP has drawn down a total of
$20,046,230 from the Revolving Credit Facility and repaid a total of $23,656,478 to Hamilton,
consisting of approximately $14.4 million in principal and $9.2 million in interest. (Simony Aff.
~
6). As of the date of the Complaint, Defendants owed Hamilton $6,287,379, consisting of
approximately $5,580,000 in principal and $700,000 in interest. (!d.).
At all times, the relationship between Hamilton and Khorrami LLP was that of lender and
borrower. (Simony Aff.
~
7). The Transaction Documents do not contain any provision giving
Hamilton an equity or ownership interest in Khorrami LLP. At no time has Hamilton been a
member, shareholder, or equity investor in Khorrami LLP.
(!d.).
In addition, the Credit
Agreement in Paragraph 9.18 specifically disclaims any control by Hamilton over Khorrami LLP
or any role in the management of its attorney-client relationships. (Affidavit of Shawn (alk/a
Shahin) Khorrami, dated May 1, 2015 ("Khorrami AfT.") Ex.
2
A.~
9.18).
The arrangement between Hamilton and Defendants was a type of factoring agreement, a
routine financing mechanism whereby the factoring company advances funds to a business from
a credit line against that business's accounts receivable.
As security for repayment of the
advanced amounts, the factor usually takes a security interest in all of the borrower's accounts
receivable and inventory. 1 Here, as in many factoring arrangements, Hamilton provided
Khorrami LLP with a credit line that it could draw down against in exchange for Khorrami
LLP's agreeing to repay the amounts borrowed and interest from the revenues it received. As
with many factoring agreements, Hamilton held a security interest in Khorrami LLP's
receivables, i.e, its contingency-fee agreements with clients.
Khorrami LLP first defaulted under the Credit Agreement in 2012, by failing to meet its
payment obligations. (Compl.
~
36). Khorrami also committed other acts of default, including
refusing to furnish Hamilton with required financial information and failing to file income tax
returns. (Id. at
~~
43, 46-48, 51). Although Section 2.5( d) of the Credit Agreement permitted
Hamilton to charge Khorrami LLP an additional 11% per annum on outstanding obligations in
the event of a default under the agreement, Hamilton did not do so.
(Simony Aff.
~
12).
Hamilton unsuccessfully attempted for two and one-half years to negotiate an amicable workout
of Defendants' debt, but in March 2015 Defendants disavowed their obligations under the
Transaction Documents and hired New York counsel who threatened to sue for rescission of the
Credit Agreement, forcing Hamilton to file this action for breach of contract, unjust enrichment,
an accounting, appointment of a receiver, and other relief. (ld.
~~
16, 18).
For reported court decisions addressing factoring arrangements, see, e.g., Le Chase Data/Telecom Servs.,
LLC v. Goebert, 6 N.Y.3d 281, 811 N.Y.S.2d 317 (2006); Quantum Corporate Funding, Ltd. v. Assist You Home
Health Care Servs., L.L.C., 144 F. Supp. 2d 241 (S.D.N.Y. 2001); Sky/on Corp. v. Guilford Mills, 864 F. Supp. 353
(S.D.N.Y. 1994); Coral Capital Solutions LLC v. Best Plastics, LLC, 2014 N.Y. Misc. LEXIS 1779 (N.Y. Sup. Ct.
Apr. 10, 2014).
3
On March 24, 2015, in the face of Khorrami LLP's obvious - and now admitted - dire
financial condition, Hamilton moved the Court for the application of a temporary receiver to
protect its interest in Khorrami LLP's assets, which secure Defendants' debt obligations under
the Transaction Documents. (Shore Aff.
~
3).
The Court twice adjourned the receivership
application to give Defendants the opportunity to demonstrate that they could address the firm's
spiraling financial condition and provide required financial information to Hamilton. Defendants
ignored the Court's directions to turn over financial information, and on May 5, 2015, after
Defendants' counsel stated that the firm was "defunct" (Shore Aff. Ex. C at 10:9-10), the Court
granted Hamilton application for the appointment of a receiver. (Shore Aff.
2015, the Court denied Defendants' request for a stay of that ruling. (!d.
appointing the temporary receiver was entered on June 3, 2015. (Id.
~
~
~
5). On May 20,
7). The Order
6).
Defendants now move for dismissal of the Complaint pursuant to CPLR 3211 (a)( 1) and
(7). In their moving papers, Defendants do not - and could not - assert that they complied with
their obligations under the Transaction Documents.
Instead, Defendants argue that the
underlying Credit Agreement that they voluntarily entered into more than six years ago after
seeking Hamilton out, under which Defendants - a sophisticated attorney who has been
practicing law for almost 20 years and the law firm he founded - enjoyed benefits including the
receipt of cash advances in excess of $20 million, is unlawful. (Compl.
~
5; Simony Aff.
~
6).
Defendants' illegality argument is particularly offensive given the fact that their own outside
attorneys from New York and California provided two legal opinions to Hamilton regarding the
legality of the Transaction Documents during the closing of the transaction in June 2009.
(Simony Aff.
~
8).
4
Defendants' challenges to the lawfulness of the Credit Agreement fail.
First, as
explained in Point I below, Defendants' argument that the Credit Agreement is an impermissible
fee-sharing arrangement between a lawyer and a non-lawyer under Rule 5.4(a) of New York's
Rules of Professional Conduct and other laws is incorrect. Litigation financing arrangements,
such as the Credit Agreement, do not violate Rule 5.4 or any other provision of New York law.
Despite Defendants' attempt to recharacterize the loan as an equity investment by Hamilton in
Khorrami LLP, the Credit Agreement was simply a litigation financing mechanism, of a type that
the Court has accepted and even welcomed as enhancing access to the judicial process by
plaintiffs who might otherwise be shut out for lack of resources.
Second, Defendants argue that under California law, which they contend should apply to
this aspect of the dispute despite the Transaction Documents' express choice ofNew York law to
govern, the Credit Agreement is as usurious. As discussed in Point II(A) below, Defendants'
choice-of-law analysis is without merit.
The Credit Agreement's New York choice-of-law
provision is controlling under Section 5-1401 of the New York General Obligations Law, which
provides that the parties to a contract involving a transaction of $250,000 or more may agree that
the laws ofthe State ofNew York shall govern their agreement. This statute, which was adopted
for the express purpose of eliminating uncertainty from New York conflict-of-laws analysis in
substantial commercial transactions, preempts Defendants' argument that the parties' choice of
New York law should be rejected in favor of California law under a "center of gravity" analysis.
Moreover, even if Hamilton had the burden of establishing that the parties and their contract
have a sufficient relationship to New York to make it reasonable for New York law to apply
(which it does not), it has readily met that burden by showing numerous connections with this
State.
Nor does Defendants' argument based on alleged California public policy justify
5
disregarding the parties' statutorily protected choice of New York law. Finally, as discussed in
Point II(B) below (and as Defendants are well aware), the Credit Agreement is not usurious
under the controlling New York usury law because New York's interest-rate limits do not apply
to a transaction that, like this one, involves more than $2,500,000. See General Oblig. Law § 5501(6).
Defendants have failed to demonstrate any illegality in the Transaction Documents or
even to raise an issue of fact. Their motion to dismiss should be denied in all respects.
STATEMENT OF FACTS
A.
The Parties
Hamilton is a Delaware limited liability company with its principal place of business in
New York, New York. (Compl.
~
12). Hamilton, through its employees and officers located in
New York, negotiated the lending arrangement with Khorrami from New York and executed all
of the Transaction Documents in New York. (Simony Aff.
~
4). Hamilton funded the Revolving
Credit Facility from New York and tracked the outstanding balance and interest due from New
York. (Id. ). As part of the arrangement, two bank accounts were established in New York,
which were to be maintained by Khorrami LLP, for the purpose of receiving funds that Hamilton
would disperse to Khorrami LLP as it drew down on the Revolving Credit Facility and receiving
repayments from Khorrami LLP of the principal and interest it owed to Hamilton under the
Credit Agreement. (!d.
~
8).
Khorrami LLP, a law firm that specializes in representing plaintiffs in substantial tort
cases, is a California limited liability partnership with its principal place of business in Los
Angeles, California. (Compl.
~
13). Mr. Khorrami, an attorney, is the founder and managing
partner ofKhorrami LLP. (Compl.
~
14). Khorrami LLP handles cases throughout the country.
6
Contrary to Defendants' claim (Khorrami Aff.
cases are not venued in California.
~
19), the majority of Khorrami LLP's pending
As demonstrated by a list of Khorrami LLP's pending
litigation matters produced by Defendants in connection with this action, Khorrami represents
clients in significantly more lawsuits outside of California (175) than in California (69). (Shore
Aff.
~
8, Ex. I). Indeed, Khorrami LLP has more cases pending in New Jersey alone (70) than in
California. (ld.).
B.
The Credit Agreement
Like many mass-tort and other contingency-fee-based law firms, Khorrami LLP requires
financing for its cases, many of which require funding for litigation expenses up front but do not
bring the firm revenue until a settlement is reached or a judgment is obtained and collected. 2 In
2009, Khorrami LLP approached Hamilton about obtaining financing for their legal practice.
(Simony Aff.
~
3). To enable Khorrami LLP to fund its operations and finance its contingent-fee
litigation matters, on June 17, 2009, Hamilton and the Defendants entered into the Credit
Agreement.
(Compl.
~
17).
Subject to the terms and conditions of the Credit Agreement,
Hamilton established the Revolving Credit Facility for Khorrami LLP, pursuant to which
Hamilton provided Khorrami LLP with a credit line against which it could draw down funds.
(Compl.
~
18). The Revolving Credit Facility limit was $6,000,000, which was later raised to
$7,000,000. (Compl.
~~
18, 33). Under the Credit Agreement, Khorrami LLP was permitted to
borrow funds from Hamilton for working capital purposes up to the credit facility limit. (!d.
~
32). As Khorrami LLP paid back the outstanding principal, as with most revolving lines of
credit, it could borrow additional amounts up to the credit limit. (!d.). Since entering into the
Credit Agreement, Khorrami LLP has borrowed a total of $20,046,230 against the Revolving
2
See, e.g., Steven Garber, Alternative Litigation Financing in the United States: Issues, Knowns, and
Unknowns (Rand Institute for Civil Justice 201 0), at 23, available at
http://www.rand.org/content/dam/rand/pubs/occasional papers/20 10/RAND OP306.pdf.
7
Credit Facility and has repaid $23,656,478, consisting of approximately $14.4 million m
principal and $9.2 million in interest. (Simony Aff.
~
6).
Khorrami LLP's indebtedness to Hamilton was further documented in a promissory note,
and was secured by collateral consisting of, inter alia, Khorrami LLP's fee income from
contingency-fee cases and the other assets of the firm. (Compl.
~~
14-19). Mr. Khorrami also
personally guaranteed payment of the moneys owed to Hamilton. (!d.
~
17).
In exchange for the Revolving Credit Facility, Khorrami LLP agreed to pay Hamilton
interest on the outstanding principal amount at a rate equal to the lesser of 25% per annum and
the maximum permissible rate under applicable law. (Compl.
~
19). As additional compensation
to Hamilton for entering into the Credit Agreement, Khorrami LLP agreed that Hamilton would
also receive Revenue Interest, calculated as 10% ofKhorrami LLP's Gross Revenues. (Compl.
~
20). However, the Revenue Interest was capped at "the greater of (i) 10% of Borrower's Gross
Revenues between the Closing Date and the third anniversary of the Closing Date or (ii) 10% of
Borrower's Gross Revenues until such time as the total amount of the Gross Revenues equals
$1 00,000,000." (!d.). As part of the amendment to the Credit Agreement that raised the credit
line by an additional $1,000,000, to $7,000,000, the Revenue Interest rate was raised to 15% of
Khorrami LLP's Gross Revenues once the amount of all advances under the Revolving Credit
Agreement exceeded $6,000,000 (Compl.
~
33; Khorrami Aff. Ex. B ~1(b)).
Before disavowing its obligations under the Credit Agreement in March 2015 (Compl.
~
48), Khorrami LLP had repaid a total of $23,656,478 to Hamilton, consisting of approximately
$14.4 million in principal and $9.2 million in interest and Revenue Interest. (Simony Aff.
~
6).
As of the date of the Complaint, Defendants owed Hamilton $6,287,379, consisting of
approximately $5,580,000 in principal and $700,000 in interest. (!d.).
8
The relationship between Hamilton and Khorrami LLP established by the Credit
Agreement was that of lender and borrower. (Simony Aff.
~
7). At no time did Hamilton
become a member, shareholder, or equity investor of Khorrami LLP. (!d.). Likewise, Hamilton
did not interfere with Khorrami LLP's operation as a law firm or its relationships with its clients.
(Id.).
The Credit Agreement specifically provides that Hamilton does not exercise or assert
control of Khorrami LLP or its professional decision-making in representing clients:
None of the covenants or other provisions contained in this Agreement shall, or
shall be deemed to, give the Lender the Right or power to exercise control over
the Cases or any of the affairs or management of any Loan Party [including
Khorrami LLP] ....
(Khorrami Aff. Ex.
A~
9.18).
In connection with the Credit Agreement, the parties also entered into a Clearing Account
Agreement and a Funding Account Agreement with Capital One, N.A., a bank located in
Melville, New York. (Simony Aff.
~
5). Pursuant to these agreements, Capital One was to
establish two controlled bank accounts in New York: a Funding Account, which was to receive
advances on the credit facility from Hamilton to be distributed to Khorrami (Simony Aff. Ex. A),
and a Clearing Account, which was to receive and process deposits from Khorrami LLP for
distribution to Hamilton pursuant to the terms in the Credit Agreement (Simony Aff. Ex. B).
The Credit Agreement contains a choice-of-law provision that designates the laws of
New York State as governing the agreement:
This Agreement and all other Transaction Documents and Security Documents
shall be construed in accordance with and governed by the laws of the State of
New York without regard to conflict of law principles that would result in the
application of other law, and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with the laws of the State of New
York.
9
(Khorrami Aff. Ex. A , 9.15). The Credit Agreement also contains a forum-selection clause
designating the courts in New York as the exclusive jurisdiction for actions arising out of the
Transaction Documents:
Each of the Parties hereto irrevocably and unconditionally (a) submits itself and its
property to the exclusive general jurisdiction of the courts of the State of New York
sitting in the borough of Manhattan in the City of New York ... (b) Consents that
any action or proceeding relating to the transactions contemplated by or arising
from, or for recognition or enforcement of any judgment in respect of, the
Transaction Documents may be brought in such courts.
(Khorrami Aff. Ex. A, 9.22).
Defendants had the advice of counsel in connection with the Credit Agreement and other
Transaction Documents. (Simony Aff. , 8). As part of the closing documents for the Credit
Agreement, Defendants provided to Hamilton two opinion letters from law firms that acted as
special counsel to Defendants in connection with the transaction that opined, subject to the usual
caveats included in such letters, that the Credit Agreement and each of the Transaction
Documents represented valid and binding obligations of Defendants under New York and
California law. (ld. Exs. D and E).
In March 2015, Defendants, through a New York law firm, sent a letter to Hamilton
disavowing its obligations under the Credit Agreement on the ground that it violated the New
York Rules of Professional Conduct prohibition on splitting fees with a non-lawyer. (Simony
Aff. , 18). Such law firm appeared to threaten to bring a lawsuit in New York against Hamilton
to rescind the agreement. (!d.).
ARGUMENT
Defendants have a heavy burden on this motion to dismiss the Complaint pursuant to
CPLR 3211(a)(l) and (7). It is well-settled that a CPLR 3211(a)(l) motion to dismiss "may be
appropriately granted only where the documentary evidence utterly refutes plaintiffs factual
10
allegations, conclusively establishing a defense as a matter of law." Goshen v. Mut. Life Ins. Co.
of New York, 98 N.Y.2d 314, 326, 746 N.Y.S.2d 858, 865 (2002); accord Leon v. Martinez, 87
N.Y.2d 83, 88, 614 N.Y.S.2d 972, 974 (1994); Teitler v. Max J Pollack & Sons, 288 A.D.2d
302, 302, 733 N.Y.S.2d 122, 122-123 (2d Dep't 2001). In evaluating a motion to dismiss for
failure to state a claim under CPLR 3211(a)(7), the Court must accept the allegations of the
Complaint as true, accord the plaintiff the benefit of every possible favorable inference, and
determine only whether the facts as alleged fit within a cognizable legal theory. Leon, 84 N.Y.2d
at 87, 614 N.Y.S.2d at 974; see also Polonetsky v. Better Homes Depot, Inc., 97 N.Y.2d 46, 54,
735 N.Y.S.2d 479,483 (2001) (motion to dismiss must be denied if"from [the] four comers [of
the pleading] factual allegations are discerned which taken together manifest any cause of action
cognizable at law"); Cayuga Partners, LLC v. 150 Grand, LLC, 305 A.D.2d 527, 527, 759
N.Y.S.2d 347, 348 (2d Dep't 2003) (quoting Wiener v. Lazard Freres & Co., 241 A.D.2d 114,
120,672 N.Y.S.2d 8, 13 (1st Dep't 1998)) ("So liberal is the standard under these provisions that
the test is simply whether the proponent of the pleading has a cause of action, not even whether
he has stated one.").
POINT I
THE CREDIT AGREEMENT DOES NOT VIOLATE THE ATTORNEY
FEE-SPLITTING PROHIBITIONS UNDER NEW YORK LAW
Defendants seek to invalidate the Credit Agreement - and, in essence, the entire litigation
financing industry that enables thousands of impecunious plaintiffs to pursue contingency-fee
lawsuits through plaintiffs' -side tort law firms - on the ground that the Credit Agreement
supposedly contains an "illegal fee-sharing provision." (Affidavit of David S. Ratner, dated May
11
5, 2015 ("Ratner Aff.") ~ 10). 3
Section 2.7 of the Credit Agreement entitles Hamilton, as
additional compensation for extending the Revolving Credit Facility to Khorrami LLP, to receive
Revenue Interest, calculated as ten (later fifteen) percent of Khorrami LLP's gross revenues over
a certain time period or up to a specific dollar amount. (Khorrami Aff.
~
2. 7). Defendants argue
that Rule 5.4 of the New York Rules of Professional Conduct, 22 N.Y.C.R.R §1200.54, which
prohibits a lawyer from sharing legal fees with a non-lawyer, renders the Credit Agreement an
illegal contract. (Ratner Aff.
~
13). This argument is inconsistent with the governing case law,
in New York and elsewhere.
In Lawsuit Funding LLC v. Lessoff, 2013 N.Y. Misc. LEXIS 5685, 2013 N.Y. Slip Op.
33066(U) (Sup. Ct. N.Y. Co. Dec. 4, 2013) (Bransten, J.), this Court upheld an alternative
litigation financing agreement similar to the one at issue here, specifically rejecting the law firmborrower's argument that this type of financing constituted an improper sharing of attorney's
fees. In Lawsuit Funding, the lender advanced funds to cover legal costs to the defendant law
firm.
In return, the lender was to receive a portion of the contingent legal fees that the
defendants would receive if certain lawsuits they were handling were resolved in the clients'
favor, plus a percentage of legal- fees received from defendants' other cases until the
advancement and interest were fully repaid. !d. at *11-15. In upholding the lawfulness of this
type of financing arrangement, Justice Bransten pointed to the Delaware court's holding in PNC
Bank, Delaware v. Berg, 1997 Del. Super. LEXIS 19, 45 U.C.C. Rep. Serv. 2d 27 (Dec. 11,
1996).
In PNC Bank, defendants challenged a bank's security interest in a law firm's
Defendants also argue that they should be entitled to recoup the amounts they have paid to Hamilton
pursuant to Section 2.7 of the Credit Agreement. (!d.). Because Defendants to date have only moved to dismiss
Hamilton's claims and have not asserted any counterclaims, Plaintiff will not address this contention in this
Memorandum of Law. In any event, however, such assertion is meritless for numerous reasons including those
addressed herein.
12
contingency-fee contracts on the ground, among others, that it was improper under Rules of
Professional Conduct for a lender to hold a security interest in an attorney's contingency-fee
contracts. !d. at *28 n. 5. The Delaware court directly addressed this argument- in a footnote
but not, as Defendants suggest, in dicta - holding that the bank held a valid security interest in
the contracts because "there is no real 'ethical' difference whether the security interest is in
contract rights (fees not yet earned) or accounts receivable (fees earned) in so far as the Rule of
Professional Conduct 5.4, the rule prohibiting the sharing of legal fees with a nonlawyer, is
concerned." (/d.). After considering the interplay between Rule 5.4(a) and alternative litigation
financing, Justice Bransten held:
There is a proliferation of alternative litigation financing in the United States,
partly due to the recognition that litigation funding allows lawsuits to be decided
on their merits, and not based on which party has deeper pockets or stronger
appetite for protracted litigation. . . . Therefore, this Court adopts the PNC Bank
Court's reasoning and finds that the [Lawsuit Funding arrangement] does not
violate Rule 5.4(a) and is not unenforceable as against public policy.
!d. at *13-14 (emphasis added). 4
Under the Credit Agreement here, just as in Lawsuit Funding, Khorrami LLP agreed to
pay its lender, Hamilton, a percentage of contingency fees it received, up to the greater of 10% of
the gross revenues over three years or 10% of $100,000,000 (later raised to 15%). Defendants
attempt to distinguish Lawsuit Funding from this case on the ground that the borrower in Lawsuit
Funding only agreed to pay the lender a percentage of contingency fees on particular cases rather
than all cases. The attempted distinction fails because the law firm-borrower in Lawsuit Funding
agreed to pay the lender a percentage of fees collected on all its cases, including cases other than
4
See also Cadle Co. v. Schlichtman, 267 F.3d 14, 18 (I st Cir. 2001) (upholding a security interest in a law
firm's anticipated contingency fees); Core Funding Group, LLC v. McDonald, 2006 Ohio LEXIS 2304 (Ohio Ct.
App. 2006) (rejecting argument that public policy prohibited assignment of attorney's interest in contingency fee to
creditor as security for loan); U.S. Claims, Inc. v. Yehuda Smolar, PC, 602 F. Supp. 2d 590, 597 (E.D.Pa. March 9,
2009) (finding that the assignment of amounts owed under contingency fee agreement governed by Article 9 of the
UCC).
13
the specific ones being financed, until the full amount of the advances and interest was repaid.
!d. at *3. Moreover, as in Lawsuit Funding, Khorrami LLP's obligation to pay a percentage of
its contingency fees to its lender was capped, albeit at a specific dollar amount rather than by a
specific group of cases. Defendants do not explain why these minor differences in the specifics
of the financing arrangements agreed to by the different law firms warrants a different result in
this case from Lawsuit Funding or PNC Bank.
Defendants also cite Judiciary Law § 491 as a basis for finding the Credit Agreement an
illegal contract. Section 491 prohibits any person from splitting with or receiving fees from an
attorney "as inducement for placing, or in consideration of having placed, in the hands of such
attorney ... a claim or demand of any kind for the purpose of collecting such claim, or bringing
such an action thereon, or of representing claimant in the pursuit of any civil remedy for the
recovery thereof." Hamilton did not refer claims or clients to Khorrami LLP, and Defendants do
not allege that it did. Thus, Judiciary Law § 491 is, on its face, inapplicable to the Credit
Agreement.
Defendants' reliance on Jacoby & Meyers, LLP v. Presiding Justices of First, Second,
Third & Fourth Dep 'ts, 847 F. Supp. 2d 590 (S.D.N.Y. 2012), rev 'din part and remanded, 488
Fed. Appx. 526, 2012 U.S. App. LEXIS 24012 (2d Cir. 2012), is equally misplaced. The Jacoby
& Meyers law firm wanted to bring in outside, non-lawyer equity investors as owners of the law
firm.
The firm sought a declaratory judgment that Rule 5.4 of the New York Rules of
Professional Conduct is unconstitutional insofar as it provides that only lawyers may own equity
interests in a law firm. The Jacoby & Meyers litigation is thus wholly irrelevant here, because
Hamilton was never an equity investor in Khorrami LLP, and to the contrary, the Credit
Agreement and other Transaction Documents make clear that Hamilton was always simply a
14
lender to Khorrami LLP, not an owner or equity holder in the firm. In any event, the District
Court never ruled on the constitutional issue that Jacoby & Meyers had raised because it held
that the firm lacked standing to raise its constitutional claim. See id. at 598-99.
Moreover, although not mentioned by Defendants in their motion papers, on appeal the
Second Circuit reversed the District Court's decision in part and remanded the case to permit the
plaintiff to amend its complaint in an attempt to cure the standing issue. See Jacoby & Meyers,
LLP v. Presiding Justices of First, Second, Third & Fourth Dep 'ts, 488 Fed. Appx. 526, 2012
U.S. App. LEXlS 24012 (2d Cir. 2012). The case remains pending on remand in the Southern
District of New York - but no matter what the result of the continued litigation, it cannot assist
the Defendants here. If the court ultimately upholds the constitutionality of Rule 5 .4, Defendants
would be no better off than they are today, as the scope of the rule would still not be expanded to
cover litigation financing mechanisms such as the one the Defendants seek vainly to challenge.
And if the federal court were to find Rule 5.4 unconstitutional and enjoin its enforcement as
Jacoby & Meyers seeks, then the rule would no longer exist and Defendants would not be able to
base any legal arguments on it.
Furthermore, because Hamilton did not have an equity ownership interest in Khorrami
LLP, Judiciary Law § 495 and Limited Liability Company Law § 201 (which prohibit nonlawyer investment in law firms), cited by Defendants (Ratner Aff.
~
13 ), are likewise irrelevant.
Defendants also cite a routine February 9, 2015 audit inquiry letter from Hamilton's
Chief Financial Officer to Mr. Khorrami, in which Hamilton's auditor seeks confirmation of the
amount of the note held by Hamilton. (Khorrami Aff.
~
13). Defendants characterize this as a
document in which Hamilton "claims that Section 2.7 entitles them to 'equity ownership' in the
law firm of Khorrami LLP." (Ratner Aff.
~
19). Contrary to Defendants' characterization, the
15
February 9 audit verification letter does not "claim" anything at all. It simply mislabels the
Revenue Interest component of the loan. This extrinsic evidence - piece of correspondence
containing an erroneous phrase, written more than five years after the parties entered into the
original agreement - does not and cannot change the unambiguous terms of the Transaction
Documents. See Schron v. Troutman Saunders LLP, 20 N.Y.3d 430, 436, 963 N.Y.S.2d 613
(2013) ("As a general rule, extrinsic evidence is inadmissible to alter or add a provision to a
written agreement."); RJS Assocs. v. NY Job Dev. Auth., 98 N.Y.2d 29, 33, 744 N.Y.S.2d 358
(2002) ("Extrinsic and parol evidence is not admissible to create an ambiguity in a written
agreement which is complete and clear and unambiguous upon its face.").
The remaining cases cited by Defendants in support of their argument that the Credit
Agreement should be set aside based upon its Revenue Interest provision are also inapposite.
None of the cited cases - all of which pre-date Justice Bransten's 2013 decision in Lawsuit
Funding
involved a litigation financing arrangement or a credit facility for a law firm. See,
e.g., Ungar v. A1atarazzo Blumberg & Assocs., P.C. 260 A.D.2d 485, 688 N.Y.S.2d 588 (2d
Dep't 1999) (agreement under which non-lawyer administrative employee of law firm received
one-third of the firm's earnings and profits constituted impermissible fee-sharing with a nonlawyer); Bonilla v. Rotter, 36 A.D.3d 534, 829 N.Y.S.2d 52 (1st Dep't 2007) (fee-sharing
arrangement with investigator who located personal-injury clients at hospitals); Prins v. ltkowitz
& Gottlieb, P.C., 279 A.D.2d 274, 719 N.Y.S.2d 228 (1st Dep't 2001) (fee sharing-arrangement
with purported insurance expediter charged with extortion); Freydl v. Meringolo, 2013 U.S. Dist.
LEXIS 45881 (S.D.N.Y. March 29, 2013) (attorney splitting fees with disbarred lawyer);
Gorman v. Grodensky. 130 Misc. 2d 837, 498 N.Y.S.2d 249 (Sup. Ct. N.Y. Co. 1985) (attorney
splitting fees with collections manager).
16
Defendants in their "fee-splitting" argument do not dispute that New York law governs
the relationship between the parties as they do in their usury argument (see Point II below), nor
do they explain the inconsistency. For the sake of completeness, we note that the terms of the
Transaction Documents do not violate the California Rules of Professional Conduct either. No
California cases have found that a litigation financing agreement such as the Credit Agreement
violates these rules. Moreover, California courts applying the fee-splitting prohibition in other
contexts have concluded that the "the statute prohibiting fee-splitting prohibits only the attorney,
not the layman. The punishment for doing so is directed at attorneys only." Cain v. Burns, 131
Cal. App. 2d 439 (1955) (attorney could not assert violation of fee-splitting rule as a defense to
private investigator's claim for compensation); see also Emmons, Williams, Mires & Leech v.
State Bar, 6 Cal. App. 3d 565, 86 Cal. Rptr. 367 (1970) (attorney could not use allegation of
illegal fee-sharing as defense to bar association's claim to referral fee).
For the foregoing reasons, the Section 2. 7 of the Credit Agreement is not an illegal feesharing arrangement and does not render the contract unenforceable.
POINT II
THE CREDIT AGREEMENT IS GOVERNED BY NEW YORK LAW
AND DOES NOT VIOLATE NEW YORK USURY LAW
A.
The Credit Agreement Is Governed by New York Law
Defendants argue that, because "California, not New York, has the most significant
contacts to the underlying transaction," California law should be applied to this dispute. (Ratner
Aff.
~
37). Defendants completely ignore New York's choice-of-law statute, which dictates an
entirely different conclusion.
The Credit Agreement contains an explicit and unequivocal choice of law provision:
17
This Agreement and all other Transaction Documents and Security Documents
shall be construed in accordance with and governed by the laws of the State
of New York without regard to conflict of law principles that would result in the
application of other law, and the obligations, rights and remedies of the parties
hereunder shall be determined in accordance with the laws of the State of
New York.
(Khorrami Aff. Ex.
A~
9.15 (emphasis added)).
New York General Obligations Law § 5-140 I ("GOL 5-1401 "), enacted in 1984,
provides that choice-of-law clauses in which the parties to substantial business agreements agree
that their transaction will be governed by New York law are to be enforced according to their
terms:
The parties to any contract, agreement or undertaking, contingent or otherwise, in
of, or relating to any obligation arising out of a transaction covering
in the aggregate not less than two hundred fifty thousand dollars ... may agree
that the law of this state shall govern the rights and duties in whole or in part,
whether or not such contract, agreement or undertaking bears a reasonable
relation to this state.
consider~~~ ion
(Emphasis added). For contracts falling within its scope, this statute supersedes prior caselaw in
which New York courts scrutinized contracts containing choice-of-law clauses and, on rare
occasions, disregarded them upon finding that the contract lacked a sufficient nexus with New
York to make
of General Obli
selection of New York law reasonable. Today, "[t]he plain language
Law § 5-1401 dictates that New York substantive law applies when
parties include an ordinary New York choice-of-law provision ... in their contracts."
IRB-
Brasil Resseguros, SA. v. Inepar Invs., SA., 20 N.Y.3d 310,315,958 N.Y.S.2d 689,692 (2012),
cert. denied, 133 S. Ct. 2396 (2013). As this Court explained as the motion court in IRE-Brasil,
"where the validity, construction or effect of a contract involving $250,000 or more is involved,
General Obligations Law § 5-1401 mandates that a choice-of-law clause in the agreement
denoting that
York law governs the parties rights and obligations, shall be given
18
mandatory effect regardless of whether the contract has a reasonable relationship to New
York." IRE-Brasil Ress'eguros SA. v. Inepar Inv., SA., 2009 N.Y. Misc. LEXIS 4355, at *25,
2009 N.Y. Slip Op. 31723 (Sup. Ct. N.Y. Co. July 31, 2009) (Kornreich, J.) (emphasis added),
aff'd in relevant part, 83 A.D.3d 573, 922 N.Y.S.2d 308 (1st Dep't 2011), aff'd, 20 N.Y.3d 310,
315,958 N.Y.S.2d 689, 692 (2012), cert. denied, 133 S. Ct. 2396 (2013).
The Legislature enacted GOL 5-1401 to eliminate the risk that application ofNew York
conflicts analysis would result in a New York court refusing to follow a choice-of-law provision
designating New York law based on a contract's perceived insufficient contacts with New York.
IRE-Brasil, 20 N.Y.3d at 314, 958 N.Y.S.2d at 691. As the legislative sponsor of the statute
stated in the Sponsor's Memorandum, "[i]n order to encourage the parties of significant
commercial, mercantile or financial contracts to choose New York law, it is important ... that
the parties be certain that their choice of law will not be rejected by a New York Court."
Sponsor's Mem, Bill Jacket, L. 1984, ch. 421. Prior to the statute's enactment, the courts would
conduct a con11icts
· and scrutinize the contacts of the parties and their transaction with
the affected jurisdictions, Jpplying a subjective test of reasonableness that sometimes defeated
the parties' choice of New York law, while generating unnecessary litigation and expense. See,
e.g., Zurich Ins. Co. v. S'hear5wn Lehman Hutton, 84 N.Y.2d 309,317,618 N.Y.S.2d 609 (1994).
General Obligations Law § 5-1401 avoids this process and allows "parties with multijurisdictional
cont~1cts to
avail themselves of New York law if they so designate in their choice-
of-law provisions.·· IR H-nrasil, 20 N.Y.3d at 314, 958 N.Y.S.2d at 691.
GOL 5-140 I applies to disputes arising from contracts which, like the Credit Agreement
and other Transaction Documents, involve obligations exceeding $250,000. There are a handful
of express statutory exceptions: GOL 5-1401 does not apply to contracts for labor or personal
19
services, contracts for personal family or household services, or contracts covered by Uniform
Commercial Code ~ 1-I 05(2) (now UCC 1-301(c)). 5 None of these exceptions applies to the
Transaction Documents or this litigation. Moreover, although Defendants argue that supposedly
applicable California public policy should trump the parties' agreed New York choice-of-law
clause, this Court has held that these express statutory exceptions to GOL 5-1401 are exclusive,
and that alleged concerns about a foreign state's public policy do not constitute such an
exception. IRB-Brasil, 2009 N.Y. Misc. LEXIS 4355, at *26 ("The exceptions listed in the
statute are exclusive, and no exception exists for a foreign state's public policy.") (emphasis
added). Accord, e.g., Sun Forest Corp. v. Shvili, 152 F. Supp. 2d 367, 388 (S.D.N.Y. 2001);
Supply & Bldg. Co. v. Estee Lauder Int'l., Inc., 2000 U.S. Dist. LEXIS 2086 (S.D.N.Y. 2000).
Lehman Bros. Commercial Corp. v. Minmetals Int 'l Non-Ferrous Metals Trading Corp., 179 F.
Supp. 2d 118, 136-38 (S.D.N.Y. 2000) (all cited in IRB-Brasil, 2009 N.Y. Misc. LEXIS 4355, at
*26). As the Appellate Division has stated, in a case governed by GOL 5-1401, "the parties'
choice of law provision is enforceable, unless procured by fraud or overreaching, even if, under a
traditional choice
public policy of
A.D.3d 768, 926 N
exception for
law analysis, the application of the chosen law would violate a fundamental
. more interested jurisdiction." Tosapratt, LLC v. Sunset Props., Inc., 86
.. :?.d 760 (3rd Dep't 2011). This statute "clearly does not include an
[allq~cd]
violations of another jurisdiction's public policy." Lehman Bros.
Cammer. Corp., 179 F. Supp. 2d at 137 (emphasis added).
GOL 5-1401 clearly applies to the Credit Agreement and other Transaction Documents.
As this Court c01wluded in in IRB-Brasil, in words equally applicable here:
UCC l-30Uc) identifies certain specific UCC provisions with their own choice-of-law provisions. These
are UCC 2-402 (governing rights of creditors against sold goods), 2A-105 and 2A-106. (leases), 4-102 (bank
deposits and collections). 4;\-507 (electronic funds transfers), 5-116 (letters of credit), 8-110 (investment securities),
9-301 through 9-307
diem of and priority among security interests and agricultural liens). None of those
sections are applicable to the Credit Agreement.
20
Here, GOL
1401 applies. The [Credit Agreement and other Transaction
Documents! clearly delineate New York as the choice of law, the $250,000
threshold of the statute is met and none of the statutory exceptions apply.
Moreover. New York's predilection to enforce contractual choice of law clauses
militates in favor of applying New York law. No fraud or overreaching occurred
in this case, a case involving sophisticated businesses who acted on the advice of
counsel. Nor would it be unreasonable, unjust or contravene public policy to
apply the law of the situs the parties specifically chose.
IRE-Brasil, 2009 N.Y. Misc. LEXIS 4355, at *26-27; see also CPJ NA Parnassub B. V v.
Ornelas-Hernadez,
N.Y. Misc. LEXIS 3895, at *8, 2009 N.Y. Slip Op. 30259 (Sup. Ct.
N.Y. Co. Jan. 27.
(Lowe, J.). By contrast, the cases cited by Defendants (Ratner Aff. ,,
transactions of lc s tl
$250,000 so that GOL 5-1401 did not apply. See Acorn Partners 11 v.
Kiley, 193 A.D.2t! 397, J
597 N.Y.S.2d 63,64 (1st Dep't 1993) (involving $150,000 loan); A.
Conner Gen. Contracting Inc. v. Rols Capital Co., 145 A.D.2d 452, 453, 535 N.Y.S.2d 420, 421
(2d Dep't 1988) ($30.000 loan); American. Exp. Travel Related Servs. Co. v. Assih, 26 Misc. 3d
1016,1025, 893N.Y
Moreover.
438, 445 (Civ. Ct. Richmond Co. 2009) ($14,500 credit line).
·r
GOL 5-1401 were not dispositive here (which it is) and the test
proposed by Defendants :1pplied, the parties' express contractual choice ofNew York law would
still be upheld. Fven (
will ordinarily be
the context ofGOL 5-1401, a contractual choice-of-law provision
A party wishing to enforce the provision "need merely show that New
York has a 'substanti:l relationship to the parties or the transaction' or that there as a 'reasonable
basis for the parties
2001 ). That test i
parties, their transar.!
approached Ham; l
agreement in Ne\\
." Radioactive, .J V v. Manson, 153 F. Supp. 2d 462, 470 (S.D.N.Y.
satisfied in this case. Among other relevant contacts between the
;md this forum: (i) Hamilton is located in New York; (ii) Defendants
1\lt
securing financing; (iii) Hamilton negotiated the terms of the
· 'iv) Hamilton signed the Transaction Documents in New York; (v) the
21
money to fund the
lving Credit Facility came from Hamilton in New York; (vi) the bank
accounts into which
ioaned money was deposited by Hamilton for access by Khorrami LLP
and into which
Khorr~ur:·
outstanding principal
monitoring of the
LLP' s accounts receivable were deposited for payment to Hamilton of
interest were maintained at a bank branch in New York; (vi) the
balance, calculation of interest, and accounting of payments made
:lCJ
were all performed · 1
York; and (vii) Defendants retained New York counsel to send a
letter to Hamilton dis:1\mving their obligations under the Credit Agreement and threatening to
sue Hamilton in Ne\v York on the purported basis that the Credit Agreement violated New York
law. (Compl.
,! 12;
imony AfT. CJ,l2-5, 18). See Radioactive, JV, 153 F. Supp. 2d at 471
(identifying similar bets as providing a reasonable basis for parties' choice of New York law).
Moreover, the Credit Agreement also contains a forum-selection clause designating New York
courts as the exclusi
(Khorrami Aff. Ex.
jurisdiction for actions arising out of the Transaction Documents
J.22), representing another affiliation between the parties, including the
1
Defendants, and the
Defendants'
New York law and forum.
;:;ument that California has a superior "public policy" interest in this case,
so that California lav\· instead of New York law should be applied, is also flawed.
Even
assuming arguendo that ;0 L 5-1401 did not bar this argument at the threshold, the public policy
exception to party
in contractual choice of law is a narrow one. Merely showing that
differences exist bet\\ L'1'l the laws of New York and another state is insufficient to invoke it.
Ficucane v. Interior Co"slr. Corp., 264 A.D.2d 618, 620, 695 N.Y.S.2d 322 (1st Dep't 1999).
"The party opposing
burden of demonstrat;
principle of justice,
11
rcement of a contractual choice of law on this ground bears a heavy
that the application of the chosen law "violate[s] some fundamental
;:revalcnt conception of good morals, some deep-rooted tradition of the
22
common weal." !d. (intc: nal citations and quotations omitted). Here, Defendants' public policy
the alleged usuriousness of the interest charged under the Credit
argument is based
Agreement. The fact "mt New York's usury statutes do not apply to loans or credit lines in
'le California's might, does not offend any "fundamental principle of
excess of $2,500,000.
justice" or morality. , .
In contractual
:ce-of-law cases not governed by GOL 5-1401, the New York courts
consider the interests of
sovereigns whose interests are affected by the choice of law. Where,
as here, contracting
to a financing arrangement have expressly chosen the law of a state
other than California
::~t
has some reasonable connection to the transaction, California does not
even claim a public P' :icy interest in having its usury statute applied. See, e.g., Ury v. Jewelers
7 Cal. App. 2d 11, 20, 38 Cal. Rptr. 376, 382 (1964) (holding that
Acceptance Corp.,
California docs not han: a strong public policy against enforcing contracts valid under the
chosen law but usurious under California law because California's prohibitions against usury
exempt various classes '
:~::ndcrs
and proscribe varying rates).
Nor docs Gam ,. . DuPont Glore Forgan, Inc., 65 Cal. App. 3d 280, 287, 135 Cal. Rptr.
230, 234 ( 1976), eitec 1 v Defendants (Ratner Aff.
~54),
support enforcing California usury law
in disregard of a Nc\\ · ·ork choice-of-law provision. To the contrary, the California Court of
Appeal in Gamer hcl
although California has a "strong public policy against usury," that
policy was not offend
by a contract whose New York choice-of-law clause validated an
interest rate that was
d in New York but exceeded the rate then permitted in California. !d.
"[California] has no
ng public policy against a particular rate of interest so long as the
charging of that rate
j.
located in New York ·
crmitted by law to the specific lender." !d.
Similarly here, Hamilton is
I Defendants, who have cases all over the country, purposefully availed
23
themselves of the fin:.
available to them from a New York entity. Thus, the parties quite
properly entered into a ( ·redit Agreement providing for financing terms permissible under New
York law. There is no
for this Court to consider holding that California has a preemptive
public policy interest · the outcome of this case, where even the courts of California itself
would not reach that r,· :lt.
B.
The Credit AJ. 1·cment Does Not Violate New York Usury Law
Under New y,
·s usury statute, there is no regulation of the maximum rate of interest
loan in the amount of $2,500,000 or more. See General Oblig. Law
that may be charged on
§§ 5-501(6)(a) (no app!i,·ation of civil usury statute to loans over $250,000), 5-501(6)(b) (no
application of criminal
my statute to loans over $2,500,000); see also Shasho v. Pruco Life Ins.
Co. of New Jersey,
A.D.3d 663, 888 N.Y.S.2d 557 (2d Dep't 2009) (laws regulating
maximum interest rate )I' interest that may be charged, taken, or received did not apply to loans
or forbearances of $2.
J.OOO or more).
The credit li1)1it c C the Revolving Credit Facility at issue in the Credit Agreement was
$6,000,000, later raised
Khorrami LLP since
(Simony AfT.
~
5).
$7,000,000. (Compl.
~~
18, 33). The total amount borrowed by
eeption of the Revolving Credit Facility is in excess of $20 million.
· ':uugh the Credit Agreement provided for a Revolving Credit Facility
rather than a
borrower in one or
t)
'1an, loans aggregating $2,500,000 or more made or advanced to any one
n~,.
deemed to be a singk
· · nstallments pursuant to a written agreement by one or more lenders are
. General Oblig. Law§ 5-501(6)(b). Thus, under New York law the
Credit Agreement is not usurious and Defendants have no defense based on usury.
24
CONCLUSION
For the
forcgoin~'
reasons, Defendants' motion to dismiss should be denied in its entirety.
Dated: New York, cw York
June 19,2015
teven J. Shore
Ira Brad Matesky
Dawn M. Wilson
360 Lexington Avenue, 14th Floor
New York, New York 10017
(212) 922-9250
(212) 922-9335 (facsimile)
Attorneys for Plaintiff
Hamilton Capital VII LLC
25