California Civil Code Section 1717 Reciprocal Attorney's Fees Provision Declared Fundamental Policy in California, Overruling Choice-of-Law Provision in Contract

In First Intercontinental Bank v. Ahn, D.C. No. CV11-08764-RGK, Intercontinental Bank ("Bank") appealed to the Ninth Circuit from the U.S. District Court for the Central District of California's ruling awarding attorney's fees under California Civil Code section 1717 in a diversity breach of contract action where the underlying contract had a Georgia choice-of-law provision.  The Ninth Circuit Court of Appeals held that the district court correctly concluded that California Civil Code section 1171(a) governed the attorney's fees dispute. 

The underlying action involved Bank's purchase money loan to AEHCC and Christina Ahn in connection with the purchase of a hotel.  Christina Ahn's parents, Edward Ahn and Helen Ahn, guaranteed the loan.  Bank is chartered in Georgia and its principal place of business is in Georgia while the Ahns reside in California.  At some point, Bank released Christina Ahn from her obligations under the loan, however, Edward and Helen Ahn remained as guarantors of the loan.  In June of 2011, AEHCC stopped making payments on the loan and Bank demanded that Edward and Helen Ahn honor their guarantees.  The Ahns did not respond and Bank moved for summary judgment against Edward and Helen Ahn, Christina Ahn, and AEHCC.  The district court granted Banks' summary judgment against AEHCC and Edward and Helen Ahn, however,  the district court also granted summary judgment to Christina Ahn, holding that the Bank released her from any obligations.  Christina Ahn then moved for Attorney's Fees and Costs pursuant to California Civil Code section 1717(a).  Bank argued that Georgia law should govern the attorney's fees dispute because there was a Georgia choice-of-law provision in the underlying loan agreement. 

In determining whether Georgia or California law applied to the attorney's fees dispute, the Ninth District Court of Appeal followed the three step method set forth in Restatement (Second) of Conflict of Laws section 187.  Under section 187, the court first determined "whether the chosen state has a substantial relationship to the parties or their transaction, or…whether there is any other reasonable basis for the parties' choice of law." Washington Mut. Bank, F.A. v. Superior Court, 15 P.3d 1071, 1078 (Cal. 2001).  Next, the court determined whether California "would be the state of the applicable law in the absence of an effective choice of law by the parties." Restatement (Second) of Conflict of Laws, section 187(2).  Finally, the court determined whether the relevant portion of the chosen state's law is contrary to the fundamental policy in California law. 

In assessing section 187, the Court found that Georgia had a substantial relationship to the parties in the transaction because the Bank is chartered in Georgia, its principal place of business is in Georgia, and it drafted the contract and related documents in Georgia.  Next, the Court found that California law would have applied to the contract at issue in the absence of the Georgia choice-of-law provision.  In determining this, the Court looked to the following factors: (1) the contract was executed in both Georgia and California (2) the contract was negotiated in both Georgia and California, (3) payment on the contract was due in Georgia, (4) the subject matter of the contract was located in Louisiana, (5) the parties are citizens of Georgia and California, and (6) California has a fundamental policy interest in protecting citizens from non-reciprocal attorney's fees clauses.  Finally, the Court found that California has a fundamental policy disfavoring non-reciprocal attorney's fees clauses in litigation and that California had a materially greater interest than Georgia in the attorney's fees dispute because Bank chose to file the case in California and the case involves a California resident. 

The Court determined that Civil Code section 1717 applied to the attorney's fees dispute even though the underlying contract had a Georgia choice-of-law provision.  Parties contracting in different states should be aware of this ruling when relying on choice-of-law provisions.  The Court's determination that Civil Code section 1717 is a fundamental policy in California will act to override choice-of-law provisions in awarding attorney's fees where fees might not have otherwise been awarded.