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CALIFORNIA CORPORATE & SECURITIES LAW

Courts Tackle Meaning of “May” Under the Finance Lenders Law

Section 22340(a) of the California Financial Code provides that a licensee “may sell promissory notes . . . to institutional investors.”  Does this mean that a licensee may only sell promissory notes to institutional investors or that selling promissory notes to institutional investors is something that licensees are permitted to do?  U.S. Magistrate Judge Nathanael M. Cousins answered that question a few weeks ago in Skinner v. Mountain Lion Acquisitions, Inc., 2014 U.S. Dist. LEXIS 10425 (N.D. Cal. Jan. 28, 2014).

The case began with a loan by a licensed lender to the plaintiff.  The lender later sold the debt to the defendant which was not an institutional investor.   Apparently believing that the best defense is a good offense, the plaintiff sued for, among other things, declaratory relief that the licensee had violated Section 22340(a).  The gist of the plaintiff’s argument was that under the statute, a licensee may only sell to institutional investors.  If she could convince the court of a violation, she hoped to have the loan declared void pursuant to Financial Code Section 22750(b).

The Court, noting that Section 15 of the Financial Code provides that “may” is permissive, found that the Plain language of the statute merely authorizes the sale of loans to institutional investors. The Court bolstered its conclusion by referring to the legislative history of the statute which shows that it was enacted to clarify that finance lenders could sell real estate secured loans without a real estate broker’s license.

This was actually the third strike for the plaintiff’s counsel.  After the parties had submitted briefs in this case, U.S. District Court Judge Charles R. Breyer issued rulings in two other cases involving the same plaintiff’s counsel.  Le v. Sunlan Corp., 2013 U.S. Dist. LEXIS 150352 (N.D. Cal. Oct. 18, 2013) and  Braden v. BH Fin. Services, Inc., 2013 U.S. Dist. LEXIS 156578 (N.D. Cal. Oct. 31, 2013).  In those cases Judge Breyer concluded that Section 22340 merely gave licensees under the Financial Lender Law express authority to sell real-estate secured loans without being licensed real estate brokers.

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