Federal Sav. & Loan Ins. v. Kralj

• Decision Date: 17 August 1992
• Docket Number: No. 91-2841,91-2841
• Citation: 968 F.2d 500
• Parties: FEDERAL SAVINGS & LOAN INSURANCE, receiver of Americity Federal Savings Bank, Plaintiff-Appellee, v. Nicholas K. KRALJ, Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 500

968 F.2d 500

FEDERAL SAVINGS & LOAN INSURANCE, receiver of Americity Federal Savings Bank, Plaintiff-Appellee, v. Nicholas K. KRALJ, Defendant-Appellant.

No. 91-2841.

United States Court of Appeals Fifth Circuit.

Aug. 17, 1992.

Tim Labadie, Joe K. Longley, Longley & Maxwell, Austin, Tex., for defendant-appellant.

Kevin M. Crotty, Dennis S. Klein, Hughes, Hubbard & Reed, Ann S. DuRoss, Asst. Gen. Cnsl., FDIC, Washington, D.C., amicus curiae, FDIC, as Manager of the FSLIC Resol. Fund.

Reese L. Harrison, Jr., Wendy L. Martinez, Oppenheimer, Rosenberg, Kelleher & Wheatley, Inc., Theodore Campagnolo, San Antonio, Tex., for Americity Federal Sav. Bank.

Appeal from the United States District Court For the Southern District of Texas.

Before SMITH and EMILIO M. GARZA, Circuit Judges, and KENT, District Judge. ^*

EMILIO M. GARZA, Circuit Judge:

After Nicholas K. Kralj defaulted on a promissory note, Americity Federal Savings Bank brought suit to recover amounts due. Americity then moved for summary judgment. Kralj argued that the promissory note was usurious on its face and that the pleadings should have been amended to reflect a reduction in the debt resulting from the foreclosure of the property securing the promissory note. The district court granted Americity's motion for summary judgment. Finding no error, we affirm the district court's summary judgment.

I

The facts of this case are uncontested. Kralj and two others ¹ executed a promissory note in favor of Tesoro Savings & Loan Association, in the principal amount of $3,258,185. The promissory note was due and payable on or before eighteen months. As security, Kralj executed a Deed of Trust granting Tesoro a security interest in certain real property ("the Property").

Kralj entered into a renewal, extension and increase of the loan from Tesoro in the principal amount of $3,900,000. Kralj promised to pay Tesoro the principal sum of $3,900,000 with interest, on or before one year. This promissory note provided that interest would be calculated on the basis of the actual number of days elapsed over a year composed of 360 days.

Tesoro then entered into a second renewal and modification promissory note ("the Note") with Kralj in the amount of $4,350,000. Interest under the Note was to be due and payable quarterly as it accrued, beginning October 1, 1986, and continuing regularly until December 31, 1987, when the entire principal and interest then remaining unpaid would become due and payable. ² Interest on the Note was calculated on a daily rate equal to 1/360th of the annual percentage rate provided in the Note. The Note also provided that all past due interest and principal would bear interest at the maximum legal rate.

Kralj failed to make the quarterly interest payments and the principal payments provided for under the Note. Tesoro notified Kralj that the Note was due and payable. Kralj failed to pay, and Tesoro filed suit in state court to recover the amounts allegedly due on the Note. Tesoro bought the collateral, which secured Kralj's loan, at a foreclosure sale. Tesoro's bid of $1,285,000 was the successful bid, and this amount was applied to the outstanding balance due on the Note.

Tesoro was subsequently declared insolvent and the FSLIC was appointed as receiver. The FSLIC and Americity then entered into an acquisition agreement whereby Americity acquired most of Tesoro's assets, including the Note. After the FSLIC removed the case to federal court, Americity intervened as the current owner of the Note. ³ In its original complaint in intervention ("the complaint"), Americity alleged it was due the sum of $4,166,487.99 as the amount of principal and interest due and owing on the Note as of May 16, 1989. In response to Kralj's interrogatories, Americity stated that this amount consisted of a principal balance of $3,608,569.02, plus interest which was accruing at a rate of $1,804.28 per day.

Kralj subsequently filed a counterclaim alleging statutory and common law usury. Americity concedes that its original calculation was based on an 18% annual rate calculated over a 360-day year, which results in an effective annual rate of 18.25%, ⁴ which is greater than the maximum allowed by law. ⁵ Americity asserts, however, that this calculation was made by one of its employees solely to respond to Kralj's interrogatories requesting information about amounts listed in the complaint, ⁶ and that the use of the 360-day year was contrary to its practice which is to calculate default interest based on a 365-day or 366-day year. Americity amended its complaint and answers to interrogatories to represent a demand for interest at a lawful rate. ⁷

Americity subsequently moved for summary judgment, and the district court granted the motion, holding that statements in pleadings and interrogatories cannot constitute a usurious demand for interest, that the Note was not usurious on its face, and that the alleged failure to give adequate consideration at the foreclosure sale was not a violation of usury laws. On appeal, Kralj argues, among other things, that pleadings and answers to interrogatories can constitute an excessive demand for interest, and that the district court erred in holding that the Note was not usurious on its face.

II

Summary judgment is appropriate if the record discloses "that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). In reviewing the summary judgment, we apply the same standard as the district court. See Waltman v. Int'l Paper Co., 875 F.2d 468, 474 (5th Cir.1989) (citation omitted); Moore v. Mississippi Valley State Univ., 871 F.2d 545, 548-49 (5th Cir.1989) (citations omitted). We review all issues de novo. Wilson v. Job, Inc., 958 F.2d 653, 656 (5th Cir.1992) (citation omitted). The pleadings, depositions, admissions, and answers to interrogatories, together with affidavits, must demonstrate that no genuine issue of material fact remains. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). To that end, we must "review the facts drawing all inferences most favorable to the party opposing the motion." Reid v. State Farm Mut. Auto. Ins. Co., 784 F.2d 577, 578 (5th Cir.1986) (citation omitted). Where the record, taken as a whole, could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (citation omitted).

A

Americity provided the unlawful interest rate information in its complaint and in its initial answers to Kralj's interrogatories. Kralj argues that Americity's pleadings and answers to interrogatories demanding unlawful interest constitute a charge of usurious interest under Texas' usury statute. See Tex.Rev.Civ.Stat.Ann. art. 5069-1.06 (West 1987). ⁸ We disagree.

In Gibraltar Sav. v. LDBrinkman Corp., we indirectly noted that a demand for interest in a pleading does not constitute a charge of interest for purposes of the Texas usury laws unless the underlying agreement is itself usurious. See Gibraltar Sav. v. LDBrinkman Corp., 860 F.2d 1275, 1296 n. 26 (5th Cir.1988), cert. denied, 490 U.S. 1091, 109 S.Ct. 2432, 104 L.Ed.2d 988 (1989). ⁹ In LDBrinkman, we also noted the district court opinion in Fibergrate Corp. v. Research-Cottrell, Inc. Id. at 1296, citing Fibergrate Corp. v. Research-Cottrell, Inc., 481 F.Supp. 570 (N.D.Tex.1979).

The district court in Fibergrate held that the Texas usury statute is penal in nature and must be strictly construed. See 481 F.Supp. at 571. The district court also held that under the Texas usury statute "a claim for interest as damages is alone not a charge of interest within the meaning of the statute." Id. at 572. ¹⁰

Recently, in George A. Fuller Co. v. Carpet Serv., Inc., the Supreme Court of Texas held that "a demand for prejudgment interest contained in a pleading does not make a pleader liable for statutory usury penalties if the pleading seeks the recovery of unlawful prejudgment interest." ¹¹ Carpet Services distinguished the purpose of the usury laws, which is to correct abusive practices in consumer and commercial credit transactions, and the purpose of pleadings, which is to notify a party of the issues at trial. Id. at 605. Carpet Services stated that a claim for prejudgment interest, which arises from the judicial process--and not from a commercial credit transaction--should be treated as part of the judicial process, rather than a possible violation of the usury laws. Id.

The Carpet Services court did not decide whether pleadings that claim other types of interest based on underlying documents that are usurious may themselves constitute a usurious charge of interest. Id. at 604 n. 1. Carpet Services offers no explicit guidance to a court faced with a pleading that demands interest, other than prejudgment interest, at a rate in excess of the maximum allowed by law, but which is based on an underlying document that is not itself usurious. Given the policy arguments relied on by Carpet Services, we believe the Carpet Services holding is consistent with LDBrinkman. That is, if the underlying documents are not usurious, then irrespective of the type of interest demanded in the pleadings, imposing a penalty for usury, based solely on a demand made in a pleading or interrogatory answer, does nothing to fulfill the purpose of usury laws, which is to correct abusive practices in consumer and commercial credit transactions. See Carpet Services, 823 S.W.2d at 605.

Another recent Fifth Circuit case echoes this reasoning. First S. Sav. v. First S. Partners, II, Ltd. involved a claim by the guarantors of a note that the note holder had committed usury by charging interest at a higher rate than allowed by law. See First S. Sav. Ass'n v. First S. Partners, II, Ltd., 957 F.2d 174,...