C & W Leasing, Inc. v. Orix Credit Alliance, Inc., 89-4012

• Decision Date: 01 April 1992
• Docket Number: No. 89-4012,89-4012
• Citation: 957 F.2d 815
• Parties: 35 Fed. R. Evid. Serv. 468 C & W LEASING, INC., Plaintiff-Counter-Defendant-Appellant, v. ORIX CREDIT ALLIANCE, INC., Defendant-Counterclaim Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 815

957 F.2d 815

35 Fed. R. Evid. Serv. 468

C & W LEASING, INC., Plaintiff-Counter-Defendant-Appellant, v. ORIX CREDIT ALLIANCE, INC., Defendant-Counterclaim Appellee.

No. 89-4012.

United States Court of Appeals, Eleventh Circuit.

April 1, 1992.

On Petitions for Rehearing

June 2, 1992.

Kenneth L. Mann, Orlando, Fla., for plaintiff-counter-defendant appellant.

Lawrence M. Watson, Jr., David S. Oliver, Michael S. Orfinger, Carlton, Fields, Ward, Emmanuel Smith & Cutler, Orlando, Fla., for defendant-counterclaim appellee.

Appeal from the United States District Court for the Middle District of Florida.

Before TJOFLAT, Chief Judge, COX, Circuit Judge, and GODBOLD, Senior Circuit Judge.

GODBOLD, Senior Circuit Judge:

This removed diversity case involves a controversy between borrower and lender over three aspects of a loan. The borrower, C & W, alleged that Alliance, the lender, misrepresented the rate to be charged on the loan, miscalculated the amount of interest necessary to be paid upon prepayment, and inflated the amount necessary for prepayment by including an improper charge, and refused to pay to C & W the funds generated by the charge.

C & W prepaid the loan and sued Alliance on a number of jury-tried theories--fraud, civil theft, Florida RICO, and conversion--and non-jury counts for reformation and rescission. The court granted a directed verdict for defendant on the RICO claim. The jury found for C & W on the count for conversion and for Alliance on all other counts. It entered a special verdict denying punitive damages. The court granted judgment n/o/v on the conversion count. It denied reformation and rescission. Consequently Alliance wholly prevailed. C & W appeals.

We affirm the directed verdict on the RICO claim, reverse the judgment n/o/v on the conversion claim, reverse on all other counts tried to the jury because the court erred in a crucial evidentiary ruling and in instructing the jury, reverse the special verdict denying punitive damages, and reverse the denial of reformation and rescission.

I. The history

One of C & W's principal customers was ALAD, which was in financial difficulty. C & W and ALAD agreed that C & W would seek a loan and would lend the funds to ALAD. For this service Creeden, the principal of C & W, would be given stock in ALAD. C & W sought to obtain a loan at a rate not to exceed 16%.

Through CIC, a Florida company which served as finder or broker, C & W received a loan commitment letter from Alliance. The letter set out the principal amount, termed an "advance," of $1.5 million; the amount of the note, $2,172,000; and a schedule of 60 monthly payments declining annually. The loan was to be "front-end loaded," i.e., payments for each of the first 12 months were to be $56,938, declining in months 49 through 60 to $18,824. No interest rate was stated although the cost to C & W of the funds, $672,000, was apparent from deducting the "advance" from the amount of the note. ¹

Security was required consisting of assets of C & W and personal guaranties by individual principals of C & W, and assets of ALAD and guaranties by ALAD and its principal.

The claim that Alliance misrepresented the interest rate arises from conversations concerning the interest rate, conducted before the loan was closed, between at one end Cole (an Atlanta-based officer of Alliance who worked with broker-originated loans) and at the other end, Sutton (the broker), and Wells and Morrison (attorneys for C & W). Cole was asked what was the rate, or the cost of the money. According to Cole, he responded that it was "15.65% running rate." ² Persons at the other end deny he used the term running rate and say they had never heard of a running rate until controversy arose between the parties.

There was testimony that in at least one of these conversations Cole referred to a complex formula pursuant to which the figure he gave would be converted to an add-on rate and to the schedule of payments that would be required. There was testimony that Cole said the complex formula was used in Alliance's New York office and that he did not understand it but that it was predicated on the 15.65% figure.

Attorney Wells testified that he understood from Cole's description of converting to an add-on rate and setting up a schedule of payments that the converted rate would be equivalent to 15.65%.

There was evidence, with which all agree, that the actual interest rate to maturity was 20.24%. Cole testified by deposition that he himself calculated the payment schedule following instructions from the president of Alliance that the return to Alliance should be about 20%, and, after deducting a broker's fee, a net to Alliance of about 18%.

According to Wells and Morrison, they discussed the commitment letter with C & W and inserted some modifications. They told C & W that the interest rate was 15.65%.

The commitment letter required that C & W's counsel supply an opinion letter, using Alliance's standard form, which was to indicate that mortgagors of property given as security had good title and that liens to be created would be valid. Before the loan was closed and the note signed, Wells, who was to furnish the opinion letter, performed calculations under the sum of digits method because he had to assure himself that in the event of prepayment within one year the interest paid would not exceed the Florida large loan usury rate of 25% and thereby possibly cause the loan to be unenforceable. Alliance acknowledges in its brief that Wells' intent was to calculate the interest rate in the event the loan was prepaid within one year. Wells came up with a figure of 22.09%. He testified that he did not report his calculation to C & W. Wells was capable of calculating the interest rate produced by the schedule of payments (20.24%), but he did not do so. He testified that he saw no need to check the figure Cole gave.

The loan was closed. C & W signed a note that embraced the terms of the commitment letter. C & W, ALAD, and the principals of the two companies signed a guaranty. ³

Concurrently C & W reloaned to ALAD the funds received and was reimbursed by ALAD for the investigation fee that it (C & W) had paid to Alliance. The ALAD-C & W note was a "mirror copy" of the C & W-Alliance note.

Less than two months after the closing ALAD's bookkeeper found that, utilizing a 16% rate, she could not allocate on her books principal and interest components of ALAD's monthly payments to C & W. According to her testimony, after six to seven hours of unsuccessful efforts to prepare an amortization schedule, she talked to Wells and Morrison, who told her the note was represented by Cole as having an interest rate of less than 16%. She called Alliance, seeking the interest rate, and was told that it did not furnish amortization schedules to customers. She then asked ALAD's CPA to prepare a schedule. Using a hand calculator and a trial-and-error effort, he was able to calculate, after 10 to 12 hours of work, that the annual percentage rate to maturity was 20.24%. This information was passed on to C & W, which had its accountant check it, using a computerized machine that contained present value tables. He was able to confirm the 20.24% figure in around 15 minutes.

C & W had recognized in its original dealings with ALAD that if ALAD did not operate profitably it would be closed down or sold and the loan paid off. About seven months after the Alliance loan was closed C & W and ALAD found a buyer for ALAD's assets. C & W elected to prepay the Alliance loan and called on Alliance for a prepayment figure and supporting calculations. Alliance gave a figure. ALAD's assets were sold, and on the same day C & W paid Alliance but with a written protest of the amount. Later it filed this suit.

C & W's theories run this way:

(1) Alliance fraudulently misrepresented the interest rate on the loan. Cole represented that the rate was 15.65%, while the actual annual percentage rate was 20.24%. This resulted in inflation of the amount required to prepay.

(2) Alliance fraudulently miscalculated the amount required for prepayment by double charging interest for the month in which the loan was prepaid, thereby overstating the required prepayment by $10,930.

(3) Alliance fraudulently miscalculated the prepayment as follows. Unknown to C & W, Alliance had paid a $50,000 finder's fee to CIC. By agreement between Alliance and CIC, in the event of prepayment Alliance was given a right to recoup from CIC a ratable amount of the finder's fee. ⁴ The method for calculating prepayment of the loan was set out in the note. The formula was to begin with the difference between the face of the note and the amount advanced (i.e., $672,000). This was to be adjusted by the "Rule of 78's" or the "Sum of the Digits," producing the amount of a "refund" to C & W. According to C & W, Alliance treated the "difference" between the face of the note and amount advanced as $622,000 rather than $672,000; i.e., Alliance deducted from the component of $672,000 the secret finder's fee that Alliance had paid to CIC. The consequence was that the "refund" to CIC was reduced by $31,858.59 and the net amount that C & W was out of pocket was increased in the same amount. In this way, according to C & W, Alliance passed on to C & W, and required C & W to pay, a substantial part of Alliance's loan expense consisting of the unearned portion of the finder's fee. Alliance then waited to see if it would be able to recoup from CIC that part of its loan expense. After prepayment Alliance called on CIC to repay to it the "unearned" portion of the finder's fee, $31,858.59, and CIC did repay. Alliance was then obligated to remit these funds to C & W because it had inflated the payoff in this amount. Alliance tendered to C & W a check in the amount received from CIC but wrote into the check a general release of all claims against Alliance and CIC. C & W refused the check because of the general...