Blooming Terrace No. 1, LLC v. KH Blake St., LLC

• Decision Date: 18 May 2017
• Docket Number: Court of Appeals No. 16CA1096
• Parties: BLOOMING TERRACE NO. 1, LLC, Plaintiff-Appellant, v. KH BLAKE STREET, LLC; and Kresher Holdings, LLC, Defendants-Appellees.
• Court: Colorado Court of Appeals

446 P.3d 834

BLOOMING TERRACE NO. 1, LLC, Plaintiff-Appellant,

v.KH BLAKE STREET, LLC; and Kresher Holdings, LLC, Defendants-Appellees.

Court of Appeals No. 16CA1096

Colorado Court of Appeals, Division I.

Announced May 18, 2017

Reilly Pozner LLP, John M. McHugh, Denver, Colorado, for Plaintiff-Appellant

Moye White LLP, David A. Laird, Jason D. Hermele, Denver, Colorado, for Defendants-Appellees

Opinion by JUDGE GRAHAM

¶ 1 When a borrower obtained a large bridge loan to purchase commercial real estate and defaulted, it agreed to pay forbearance fees and related charges. It paid off the loan in full and then sued the lender for usury. Blooming Terrace No. 1 LLC (Borrower) now appeals from the district court's order granting the motion to dismiss filed by KH Blake Street, LLC and Kresher Holdings, LLC (referred to collectively as Lender). Borrower also appeals the district court's award of attorney fees to Lender. We affirm.

I. Background

¶ 2 The bridge financing took place in April 2013. As set forth in Borrower's complaint, Lender loaned $11,000,000 for an origination fee of $220,000. The loan was secured by a deed of trust and memorialized by a promissory note (Note) that contained an accrual interest rate of eleven percent per annum, a default interest rate of twenty-one percent per annum, a five percent late charge on any late monthly payments, and a $110,000 exit fee. Under the Note, Borrower was required to pay a monthly interest payment calculated at the rate of eight percent per annum (based on a 360-day year),¹ but none of the monthly payments applied to the principal. The Note matured on May 1, 2014.

¶ 3 Borrower defaulted on the Note in April 2014. Lender sent Borrower notices of default on April 2 and again on April 17, 2014. On April 22, 2014, the parties executed a forbearance agreement whereby Lender agreed to forbear until May 1, 2014, from foreclosing on the deed of trust in exchange for a $110,000 forbearance fee plus continued accruing default interest, late charges, and certain additional fees.² At the time the parties executed the forbearance agreement, the amount of interest (including default interest), late charges, exit fee, and estimated legal fees then outstanding was $778,583.33.

¶ 4 The loan was not paid by May 1, 2014. The parties then amended the forbearance agreement on May 13, 2014, whereby Borrower agreed to pay Lender a total forbearance fee of $220,000 to extend its obligation to repay the loan until 1 p.m. on May 16, 2014. On May 15, Borrower paid off the loan including all outstanding interest, fees, and costs. Borrower does not identify the exact amount of payoff in its complaint.

¶ 5 Borrower sued Lender claiming the fees, interest, costs, and expenses payable "for the forbearance period and the amended forbearance period" exceeded the forty-five percent per annum interest allowable under Colorado's usury law, section 5-12-103, C.R.S. 2016. However, Borrower's first claim for relief incorporates all prior allegations in the complaint and those allegations include the entirety of the loan transaction, not just the forbearance period. Borrower also brought a claim for unjust enrichment based on the usury allegation.

¶ 6 Lender filed a C.R.C.P. 12(b)(5) motion to dismiss, arguing that the loan fees charged did not constitute interest above the maximum allowable rate. The district court agreed, concluding that the effective rate of interest for the loan was 12.924 percent based on the total amount of interest charged during the life of the loan.³ Because the interest was not usurious, the court dismissed the complaint in its entirety.

¶ 7 Lender then sought attorney fees pursuant to Section 14.c of the Note, which required Borrower to reimburse Lender "for any costs, including but not limited to, reasonable attorneys' fees ... incurred in ... pursuing or defending any litigation based on, arising from, or related to any Loan Document." The district court awarded attorney fees to Lender in the amount of $15,407.20.⁴

II. Usury

A. Standard of Review

¶ 8 We review de novo a district court's grant of a motion to dismiss. Miller v. Bank of N.Y. Mellon , 2016 COA 95, ¶ 15, 379 P.3d 342.

¶ 9 A motion to dismiss under C.R.C.P. 12(b)(5) for failure to state a claim tests the formal sufficiency of a plaintiff's complaint. Dwyer v. State , 2015 CO 58, ¶ 43, 357 P.3d 185. To survive summary dismissal for failure to state a claim under C.R.C.P. 12(b)(5), a party must plead sufficient facts that, if taken as true, suggest plausible grounds to support a claim for relief. Warne v. Hall , 2016 CO 50, ¶ 24, 373 P.3d 588 (adopting a heightened standard of pleading in Colorado that requires a complaint to allege plausible grounds for relief, not merely speculative grounds). In reviewing a trial court's ruling on a C.R.C.P. 12(b)(5) motion, we accept the material factual allegations in the complaint as true and view them in the light most favorable to the nonmoving party. Id.

B. Usury Statute

¶ 10 Interest is compensation for the use, detention, or forbearance of money or its equivalent. Stone v. Currigan , 138 Colo. 442, 445, 334 P.2d 740, 741 (1959). "If there is no agreement or provision of law for a different rate, the interest on money shall be at the rate of eight percent per annum, compounded annually." § 5-12-101, C.R.S. 2016.

¶ 11 Under section 5-12-103(1), "[t]he parties to any ... promissory note ... may stipulate therein for the payment of a greater or higher rate of interest than eight percent per annum, but not exceeding forty-five percent per annum, and any such stipulation may be enforced in any court of competent jurisdiction in the state."

The rate of interest shall be deemed to be excessive of the limit under this section only if it could have been determined at the time of the stipulation by mathematical computation that such rate would exceed an annual rate of forty-five percent when the rate of interest was calculated on the unpaid balances of the debt on the assumption that the debt is to be paid according to its terms and will not be paid before the end of the agreed term.

Id.

C. Dikeou v. Dikeou

¶ 12 In 1996, the Colorado Supreme Court decided Dikeou v. Dikeou , 928 P.2d 1286 (Colo. 1996). Dikeou addressed whether a late payment charge in a nonconsumer loan was interest or an unenforceable penalty under Perino v. Jarvis , 135 Colo. 393, 312 P.2d 108 (1957).

¶ 13 In Dikeou , a creditor loaned $900,000 secured by a promissory note in which the debtor agreed to pay interest of $9,750 per month, or 13% per annum, with the entire principal due and payable in a balloon payment on the note's maturity date. 928 P.2d at 1287. The note provided that late payment charges in the amount of $700 per day would accrue on payments more than one day late. Id. The debtor failed to make numerous payments, and ultimately the creditor demanded payment of both the note in full and the late charges, calculated at a rate of $413.33 per day. Id. The creditor filed suit to enforce the note, and while the district court entered judgment in the creditor's favor on the principal amount of the note, the district court "refused to enforce the daily late charge provision based on its conclusion that the late charges bore ‘no relationship ... to any possible damage’ that the creditor might have suffered due to the debtor's failure to repay the note according to its terms." Id. at 1287-88. The court of appeals affirmed and the supreme court reversed, concluding that a default interest rate is enforceable and reasonable when it is less than forty-five percent.

¶ 14 Dikeou first concluded that late charges were interest for purposes of the usury statute. Id. at 1293. The supreme court also interpreted the usury statute to require that a default interest rate or late charge be applied retrospectively in order to avoid the literal reading of the statute. The statute's provision that a "rate of interest shall ... be excessive ... only if it could have been determined at the time of the stipulation ... that such rate would exceed an annual rate of forty-five percent ... on the unpaid balances" would seem to require that the interest rate could only be computed by looking forward from the date of the agreement. § 5-12-103(1). According to the supreme court, however, this would be an absurd result because the effective rate of default interest can never be computed at the outset. Obviously, no one could anticipate the length of a default and the amount of late fees at the outset of a loan when all parties anticipate timely payments. The supreme court therefore held that for nonconsumer loans, "the applied per annum rate [of default interest], when added to the initial rate charged on the outstanding principal" must be less than forty-five percent. Dikeou , 928 P.2d at 1295 (emphasis added). The court also concluded that "an effective interest rate is retrospectively computed after all forms of interest charges have been assessed." Id. at 1294-95 (emphasis added). Dikeou does not use the term "annualized." It does, however, offer a partial mathematical computation that appears to annualize the late charge it was considering. Nevertheless, the mathematical computation does not exactly track the Dikeou court's explanation that "an applied rate of interest that is under 45% is reasonable." Id . at 1295 (emphasis added).

¶ 15 Unfortunately, Dikeou 's interchangeable use of several terms makes the application of the usury statute in this case difficult. Indeed, the parties here could not agree at oral argument how it should be applied and provided no less than three ways it might be applied to the current circumstances. The difficulty arises from Borrower's contention that the charges during the forbearance period should be annualized .⁵ By annualizing, Borrower computes a daily charge during the forbearance period and then treats that charge as though it was applied from the outset, during the entirety of the loan. By annualizing the...