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Trident Labs, Inc v. Merrill Lynch Commercial Finance Corp

October 26, 2011


APPEAL from an order of the Superior Court for the County of Los Angeles. Alan S. Rosenfield, Judge. (Los Angeles County Super. Ct. No. BC 401081)

The opinion of the court was delivered by: Grimes, J.


Reversed and remanded.


The loan agreement between the parties had a forum selection clause. The borrower waived any rights to commence an action against the lender in any jurisdiction except Cook County, Illinois. The lender could enforce the loan documents either in Illinois or anywhere else the borrower or collateral might be located. The borrower sued the lender in California, where the borrower was located. The lender litigated the suit in California vigorously, removing the case to the United States District Court, Central District, and, after it was remanded, filing a cross-complaint and other pleadings and engaging in substantial discovery, including discovery motions. Then, after more than 19 months of litigation in California, the lender moved to dismiss or stay the lawsuit based on the forum selection clause that required the borrower to sue in Illinois, contending that, under Code of Civil Procedure section 410.30 (section 410.30), it could make such a motion "at any time." The trial court granted the motion and stayed the action.

We reverse, concluding that section 410.30 does not permit a motion based on a forum selection clause to be made "at any time," and that the trial court erred in enforcing the forum selection clause under the circumstances of this case.


Plaintiff Trident Labs, Inc., had a line of credit with a predecessor of defendant Merrill Lynch Commercial Finance Corp. from 1998 until September 2007. In September 2007, the parties executed a term loan for $1.8 million that replaced the line of credit. The loan agreement required plaintiff to repay the outstanding principal plus interest over 60 months. The agreement also required plaintiff to provide annual financial statements, prepared by independent accountants, by April 30 of each year, and to maintain a specified debt service coverage ratio. Plaintiff's chief executive officer, Laurence Fishman, personally guaranteed plaintiff's obligations under the loan agreement.

The loan agreement and the guaranty were governed by Illinois law and contained forum selection clauses. The clause in the loan agreement allowed defendant, "in its sole discretion," to enforce the loan documents either in the State of Illinois or in any other jurisdiction "where Customer or any Collateral may be located." But plaintiff was required to bring any action in Cook County, Illinois: "Customer irrevocably submits itself to jurisdiction in the State of Illinois and venue in any state or federal court in the County of Cook for such purposes, and Customer waives any and all rights to contest said jurisdiction and venue and the convenience of any such forum, and any and all rights to remove such action from state to federal court. Customer further waives any rights to commence any action against [defendant] in any jurisdiction except in the County of Cook and State of Illinois."

Plaintiff did not comply with its obligation to provide annual reviewed financial statements for the year 2007 by April 30, 2008. Plaintiff instead provided only internally prepared, draft financial statements, almost four months late, on August 25, 2008. According to defendant, these statements showed plaintiff was not in compliance with the debt service coverage ratio, and defendant so informed plaintiff. The parties held discussions about restructuring the term loan, but the discussions were not successful.

On September 4, 2008, the parties executed a letter agreement. The letter stated that plaintiff had violated the terms of the loan agreement by failing to maintain the required debt service coverage ratio, and it was projected that plaintiff would continue to violate the debt service coverage ratio covenant through September 30, 2008. Defendant waived these violations (but no future or other violations), conditioned upon receipt of a covenant violation fee of $1,000, and an increase in the interest rate.

On October 3, 2008, defendant sent a demand notice to plaintiff, telling plaintiff it was in breach of the loan agreement because it failed to provide the reviewed 2007 financial statements and demonstrate compliance with the debt service coverage ratio, and demanding cure of the breaches by October 17, 2008. The demand notice warned that defendant would pursue its available remedies, including accelerating the loan obligation, if plaintiff did not cure the breaches. Plaintiff then sent defendant a draft of its reviewed year-end financial statements for 2007, which, according to defendant, showed plaintiff had breached the debt service coverage ratio requirement. On October 22, 2008, defendant sent plaintiff a notice of default and demand for full repayment.

On October 31, 2008, plaintiff--a California corporation with its principal place of business in Los Angeles County--filed this lawsuit, alleging three causes of action, for unfair business practices under the Business and Professions Code, fraud and deceit, and breach of contract. In substance, plaintiff alleged that, during the negotiations to restructure the September 2007 loan agreement, defendant was experiencing serious internal financial problems, as a result of which defendant made arbitrary and bad faith demands on plaintiff "in order to illegally force [plaintiff] to agree to an interest rate increase, monetary penalties or accelerated payoff of the loan . . . ." The complaint alleged that, although plaintiff was never in default in its payments under the loan agreement, defendant told plaintiff that it would institute default procedures if plaintiff did not sign the letter agreement, and did so in order to coerce plaintiff to repay the loan early so defendant could receive a cash infusion to offset its own economic difficulties.

After plaintiff filed suit, the parties litigated the matter in California for more than 19 months, until June 2010, when defendant moved to dismiss or stay the lawsuit based on the forum selection clause. The ...

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