• California High Court Rules That Lender Can Exclude Convicted Felon from Real Estate Deal
  • November 28, 2011
  • Law Firm: Lerch Early Brewer Chartered - Bethesda Office
  • The California Court of Appeals recently ruled that a lender had legitimate business reasons to exclude a director from a company investment because the director was a convicted felon.

    Ronald Semler was a member of ARI Overland, LLC. ARI applied for a mezzanine loan from General Electric Capital Corporation. GE Capital approved the loan and became an “equity investor” by making an investment in ARI. However, GE Capital also notified ARI that Semler could not be a party to the investment because he had been convicted of felonies in 1988. ARI excluded Semler as a member and did not allow him to invest in the company.

    Semler filed a lawsuit alleging a violation of the California Unruh Civil Rights Act by GE Capital for discriminating against him because he was a convicted felon. The trial court ruled that Semler’s lawsuit was barred by the two-year statute of limitations for personal injuries and dismissed his lawsuit. Semler appealed. The Court of Appeals stated it did not need to investigate the question of whether the two-year statute of limitations barred his claim because it could resolve the underlying case by determining whether the Act applied to Semler.

    The California Unruh Civil Rights Act mandates that all persons “are entitled to the full and equal accommodations” and are “free and equal, and no matter what their race, color, religion, ancestry, or national origin are entitled to the full and equal accommodations . . . in all business establishments of every kind whatsoever.” California courts have ruled that the Act may also protect personal characteristics other than those listed. For example, other cases have extended the Act to protect families with children from housing discrimination.

    The question before the Court of Appeals in this case was whether a convicted felon is such a characteristic protected by the Act. While the Act’s enumerated characteristics are not morally objectionable, the court said, “Being a felon, however, denotes quite the opposite.” Individuals who fall within the Act’s listed categories generally are not restricted by other laws with respect to their rights and privileges. However, the court found that a felon does forfeit many rights and freedoms enjoyed by non-felons, such as disqualification from jury service and inaccessibility to firearms. The court also pointed out that felons are not protected by large bodies of law to protect classes of persons who have historically received adverse treatment, such as racial minorities and women. “In sum, there is no support in the language or history of the Unruh Act for Semler’s contention that being a felon is within its scope.”

    The court also found that Semler’s criminal convictions raised legitimate questions about his honesty and trustworthiness, which were valid concerns in judging his creditworthiness. Accordingly, GE Capital had a legitimate interest in ensuring the creditworthiness of its borrowers and the court ruled that a person’s criminal history, as it relates to character and judgment, “bears a legitimate and manifest relationship to the extension of credit.”

    Finally, the court determined that it was not equipped to substitute the lender’s judgment of creditworthiness of its borrowers, and that the potential consequences of allowing Semler’s claim to be tried in a court of law would improperly involve the courts in second-guessing the lending institution’s expertise in determining loan and investment criteria.

    This case is cited as Semler v. General Electric Capital Corp., No. B221103, 2011 WL 2569286 (Cal. App. 2 Dist. 06/29/11).