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Development Acquisition Group, LLC v. eaConsulting


January 15, 2010


The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge


Through this action, Plaintiff The Development Acquisition Group, LLC ("Plaintiff") moves for summary adjudication of its claim for breach of contract as well as summary adjudication of the cross-claim for declaratory relief filed by Defendant eaConsulting, Inc. ("Defendant"). Plaintiff so moves pursuant to Federal Rule of Civil Procedure 56. For the reasons set forth below, Plaintiff's Motion is denied.*fn1


In late 2006, Plaintiff executed a $500,000 loan to Defendant secured by a Stock Pledge Agreement in which Defendant's CEO, Chin K. Wong, pledged his personal shares of stock in the Defendant corporation as security for the loan. The Convertible Promissory Note memorializing the loan set forth an interest rate of 8% over the course of 90 days with a provision for an increase to 12% in the event of default. Defendant defaulted on the loan and parties thereafter executed a loan modification agreement memorialized by a second Convertible Promissory Note (the "Note") and Stock Pledge Agreement ("Pledge Agreement"). In it, the principal due was increased to $525,000.

Although Defendant has made substantial payment, Plaintiff alleges that money is still owed on the Note. Defendant argues that the 32% annual interest rate sought by Plaintiff violates California usury law under California Constitution Article XV § 1.

After failed negotiations, Plaintiff filed suit for breach of contract for failure to pay the Note and to compel registration of the pledged shares. Plaintiff now seeks summary adjudication of its breach of contract claim and Defendant's cross-claim for declaratory relief on the usury issue.


The Federal Rules of Civil Procedure provide for summary judgment when "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). One of the principal purposes of Rule 56 is to dispose of factually unsupported claims or defenses. Celotex Corp. v. Catrett, 477 U.S. 317, 323-324 (1986).

Rule 56 also allows a court to grant summary adjudication on part of a claim or defense. See Fed. R. Civ. P. 56(a) ("A party claiming relief may move...for summary judgment on all or part of the claim."); see also Allstate Ins. Co. v. Madan, 889 F. Supp. 374, 378-79 (C.D. Cal. 1995); France Stone Co., Inc. v. Charter Township of Monroe, 790 F. Supp. 707, 710 (E.D. Mich. 1992).

The standard that applies to a motion for summary adjudication is the same as that which applies to a motion for summary judgment. See Fed. R. Civ. P. 56(a), 56(c); Mora v. ChemTronics, 16 F. Supp. 2d. 1192, 1200 (S.D. Cal. 1998).

A party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of "the pleadings, depositions, answers to interrogatories, and admissions on file together with the affidavits, if any," which it believes demonstrate the absence of a genuine issue of material fact.

Celotex Corp. v. Catrett, 477 U.S. at 323 (quoting Rule 56(c)). If the moving party meets its initial responsibility, the burden then shifts to the opposing party to establish that a genuine issue as to any material fact actually does exist.

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 585-87 (1986); First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 288-89 (1968).

In attempting to establish the existence of this factual dispute, the opposing party must tender evidence of specific facts in the form of affidavits, and/or admissible discovery material, in support of its contention that the dispute exists. Fed. R. Civ. P. 56(e). The opposing party must demonstrate that the fact in contention is material, i.e., a fact that might affect the outcome of the suit under the governing law, and that the dispute is genuine, i.e., the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 251-52 (1986); Owens v. Local No. 169, Assoc. of Western Pulp and Paper Workers, 971 F.2d 347, 355 (9th Cir. 1987). Stated another way, "before the evidence is left to the jury, there is a preliminary question for the judge, not whether there is literally no evidence, but whether there is any upon which a jury could properly proceed to find a verdict for the party producing it, upon whom the onus of proof is imposed." Anderson, 477 U.S. at 251 (quoting Schuylkill and Dauphin Improvement Co. v. Munson, 81 U.S. 442, 448 (1871)). As the Supreme Court explained, "[w]hen the moving party has carried its burden under Rule 56(c), its opponent must do more than simply show that there is some metaphysical doubt as to the material facts....Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no 'genuine issue for trial.'" Matsushita, 475 U.S. at 586-87.

In resolving a summary judgment motion, the evidence of the opposing party is to be believed, and all reasonable inferences that may be drawn from the facts placed before the court must be drawn in favor of the opposing party. Anderson, 477 U.S. at 255. Nevertheless, inferences are not drawn out of the air, and it is the opposing party's obligation to produce a factual predicate from which the inference may be drawn. Richards v. Nielsen Freight Lines, 602 F. Supp. 1224, 1244-45 (E.D. Cal. 1985), aff'd, 810 F.2d 898 (9th Cir. 1987).


Plaintiff seeks summary adjudication on its breach of contract claim asserting that it is entitled, as a matter of law, to full repayment of the loan entered into by parties at a 32% interest rate per annum. Central to this matter is a determination of the applicability of California's usury law.

California Constitution Article XV § 1 provides that interest charged on an obligation in excess of 10% is usurious and therefore cannot be collected. However, several statutory exemptions to this rule exist, including an exemption for indebtedness over $300,000. Cal. Corp. Code § 25118. Notwithstanding, this statutory exemption to the constitutional rule may not apply if a loan is guaranteed by personal assets. Cal. Corp. Code § 25118(e)(1).

Plaintiff alleges Defendant has breached the terms of the loan by failing to repay the Note at a 32% annual interest rate.*fn2

Although California's usury law generally limits the interest that may be charged, Plaintiff argues that statutory exemption applies because the loan is for an indebtedness over $300,000.

However, Defendant's CEO Chin K. Wong pledged over to Plaintiff 525,000 personally held shares of Common Stock in the Defendant corporation as security for the loan. The Promissory Note specifically refers to the Pledge Agreement as providing collateral to the loan. (Pl.'s Mot. Summ. J., Ex. "Convertible Promissory Note", Jan. 2, 2007, at 1-2) The Pledge Agreement was entered into and signed by Mr. Wong as an individual, not on behalf of the Defendant corporation or in his capacity as CEO. (Pl.'s Mot. Summ. J., Ex. "Stock Pledge Agreement", Jan. 2, 2007, at 1-8) As such the collateral pledged to secure the loan was a personal asset within the meaning of Cal. Corp. Code § 25118(e)(1). The loan is therefore disqualified for statutory exemption.

It is inconsequential the assets pledged were shares of the Defendant corporation itself. The items offered could have just as easily been widgets. As long as it was privately owned and privately pledged, the collateral existed as a personal asset falling outside the reach of statutory exemption to California's usury law.

Consequently, collection on the Note must comply with the limitations of California Constitution Article XV § 1. Summary adjudication on the matter would be improper.


For the reasons stated above, Plaintiff's Motion for Summary Adjudication (Docket No. 16) is DENIED without prejudice.*fn3


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