First American Bank & Trust v. Windjammer Time Sharing Resort, Inc.

• Decision Date: 15 January 1986
• Docket Number: No. 84-2109,84-2109
• Citation: 11 Fla. L. Weekly 199,483 So.2d 732
• Court: Florida District Court of Appeals
• Parties: 11 Fla. L. Weekly 199 FIRST AMERICAN BANK & TRUST, f/k/a First American Bank of Palm Beach, a Florida corporation, Appellant/Cross Appellee, v. WINDJAMMER TIME SHARING RESORT, INC., a Florida corporation, Appellee/Cross Appellant.

Page 732

483 So.2d 732

11 Fla. L. Weekly 199

FIRST AMERICAN BANK & TRUST, f/k/a First American Bank of Palm Beach, a Florida corporation, Appellant/Cross Appellee, v. WINDJAMMER TIME SHARING RESORT, INC., a Florida corporation, Appellee/Cross Appellant.

No. 84-2109.

District Court of Appeal of Florida Fourth District.

Jan. 15, 1986.

Rehearings Denied March 17, 1986.

Edna L. Caruso of Edna L. Caruso, P.A., West Palm Beach, for appellant/cross appellee.

Harris K. Solomon and Michael J. McNerney of Brinkley, McNerney & Morgan and Karen Kantner of Britton, Cassel, Schantz & Schatzman, P.A., Fort Lauderdale, for appellee/cross appellant.

HURLEY, Judge.

Appellant bank seeks to overturn a final judgment finding that it loaned money at a usurious rate of interest. The borrower, in turn, cross appeals and contends that the trial court failed to award sufficient damages. We affirm in part and reverse in part.

Windjammer borrowed $1,900,000 from the First American Bank & Trust (the bank) to finance the renovation and conversion (into time-share units) of a hotel. The money was disbursed in four separate loans: one for $150,000, one for $250,000 and two for $750,000. The interest rate on each of the loans was to float at two and one-half percent above the bank's prime rate.

This case is atypical in that Windjammer did not default on the loans. The entire $1,900,000, as well as the interest thereon, was paid in full and ahead of schedule. Shortly after making the final payment, Windjammer filed suit to recover double the total amount of interest it had paid on the loan. ¹ Specifically, Windjammer claimed that the interest rate--which floated from a high of twenty-two percent when the loans were first booked, to a low of fifteen percent when the final payment was made--had on several occasions during the life of the loans exceeded the eighteen percent usury ceiling imposed by section 687.03, Florida Statutes (1983). The bank answered and, as a defense, asserted that the Florida usury statute had been preempted by enactment of the Depository Institutions Deregulation and Monetary Control Act of 1980 (the act). ² Windjammer then filed an amended complaint in which it claimed that the interest charged was usurious no matter which law applied, state or federal. Windjammer expressly referred to the interest ceiling established by § 86a of the federal act. The bank filed an amended answer with affirmative defenses. It stood by its original assertion of federal preemption, but did not cite any provisions of the act which would have exempted it from the interest ceiling in § 86a.

Prior to trial, a predecessor trial judge granted a partial summary judgment in favor of Windjammer, finding that the $150,000 "commitment fee" charged to Windjammer for servicing one of the $750,000 loans was unreasonable and, therefore, constituted interest. A successor trial judge granted, in part, the bank's motion for rehearing and retried this issue. The bank defended the fee as a reasonable fee assessed to cover its cost of issuing the loan. Windjammer, on the other hand, claimed that the fee was exorbitant and, in reality, was nothing more than additional interest on the $750,000 loan. Ultimately, the court, sitting as the trier of fact, ruled in favor of Windjammer and found the $150,000 "commitment fee" was no such thing, but rather was interest on the $750,000 loan. Thus, the trial court concluded that the bank had charged interest at a usurious rate on one of the $750,000 loans, on the $250,000 loan, and on the $150,000 loan. The court entered a final judgment to this effect and also awarded Windjammer prejudgment interest.

I.

The threshold question in preemption analysis is whether the relevant federal legislation has explicitly indicated that it is to be given preemptive effect, for "Congress may preempt state authority to act by using explicit preemptive language in a statute." Tectonics, Inc. of Florida v. Castle Construction Co., 753 F.2d 957, 961 (11th Cir.1985). Again, "it is well-established that within constitutional limits congress may preempt state authority by so stating in express terms." Pacific Gas and Electric Co. v. State Energy Resources Conservation & Development Commission, 461 U.S. 190, 204, 103 S.Ct. 1713, 1722, 75 L.Ed.2d 754, 765 (1983); see also Jones v. Rath Packing Co., 430 U.S. 519, 525, 97 S.Ct. 1305, 1309, 51 L.Ed.2d 604 (1977).

The section of the act which is at the heart of this appeal--section 86a of 12 U.S.C.--expressly states that its provisions apply "notwithstanding any state constitution or statute which is hereby preempted for the purposes of this section...." Thus, we hold that the 1980 Depository Institutions Deregulation and Monetary Control Act, when applicable, preempts Florida usury law.

The act, sometimes called the "usury preemption act." Quiller v. Barclays American/Credit Inc., 764 F.2d 1400, 1403 (11th Cir.1985) (Hill, J., dissenting), was designed, in part, to emancipate banks from a "Catch-22" situation which, in recent times, presented itself with increasing frequency. Faced with rising interest rates, banks were often forced to purchase money at an interest rate superior to that at which state usury law would allow it to lend the money. Obviously, this did not bode well for the banking industry. A bank cannot remain long in business if it must lend at under eighteen percent the money it borrows at twenty-two percent. Thus, Congress enacted the 1980 Depository Institutions Deregulation and Monetary Control Act. Various sections of the act--such as section 86a--specifically preempt state usury rates when those rates are set below the cost of money, (usually determined by reference to the discount rate on ninety day commercial paper in effect at the Federal Reserve bank in the Federal Reserve district where the lender is located). In Union National Bank of Laredo v. Nelson 747 F.2d 310 (5th Cir.1984), the court, in reference to 12 U.S.C. § 86a, stated:

[t]he statute was enacted as part of the Depository Institutions Deregulation and Monetary Control Act of 1980 as a temporary measure designed to aid banks in making business loans where their cost of funds was greater than state usury limits. The statute addressed that problem by preempting state usury laws and substituting federal ceilings for certain loans.

747 F.2d at 313 (footnote omitted); see also 1980 U.S. Code Cong. & Ad. News, 255-56, 308-09, 3506, 3550.

The act would be impotent if it did not have the effect of preempting state ceilings. Virtually every court that has had occasion to address the issue has held that state interest-rate limits have been preempted by the 1980 Act. See, e.g., Quiller, supra; Nelson, supra; Medford v. Wholesale Electric Supply Co., 286 Ark. 327, 691 S.W.2d 857 (1985); Bank of Evening Shade v. Lindsey, 278 Ark. 132, 644 S.W.2d 920 (1983); Vickery v. Mobile Home Industries, Inc., 171 Ga.App. 566, 320 S.E.2d 633 (1984). Thus, to reiterate, we too hold that, when applicable, the 1980 Depository Institutions Deregulation and Monetary Control Act preempts state interest ceilings.

II.

Whether applying state or federal law, a court must first determine precisely what the interest is in a given case. In the case at bar, the bank challenges the trial court's determination that the $150,000 "commitment fee" was in fact interest on the one $750,000 loan.

The banking industry has developed a variety of fees and charges which accompany loans but which, for one reason or another, are not designated as interest. The determination whether such a fee--in this case, called a "commitment fee"--is really in the nature of interest is by no means a novel question. To facilitate the analysis of these fees, the courts have developed a general rule that if a service, commitment, or otherwise-designated fee which accompanies a loan represents a legitimate "reasonable" cost to the buyer (servicing the loan), then the fee will not be regarded as interest for usury purposes. See, e.g., Cumberland Capital Corp. v. Patty, 556 S.W.2d 516 (Tenn.1977).

In Arkansas Savings & Loan Association v. Mack Truck of Arkansas, 263 Ark. 264, 566 S.W.2d 128 (1978), the lender charged a fee which it claimed covered its cost of binding itself absolutely and unconditionally to disburse the loan proceeds. The court found that the charge did not square with the real cost of such a commitment and treated the charged amount as interest. The court concluded that the charged amount was little more than additional profit on the loan and, in reality, was designed to help pay the lender's overhead expenses. A bank cannot charge fees to cover overhead; a bank can only charge the borrower for the reasonable expenses of making the loan. Anything else is interest. See, e.g., Financial Federal Savings & Loan Association v. Burleigh House, Inc., 305 So.2d 59 (Fla. 3d DCA 1974), cert. discharged, 336 So.2d 1145 (Fla.1976), cert. denied, 429 U.S. 1042, 97 S.Ct. 742, 50 L.Ed.2d 754 (1977) (closing costs which exceeded the lender's out-of-pocket expenses treated as interest).

To determine whether a commitment fee is reasonable, it is necessary to consult the customary and acceptable practice in the trade. Financial Federal Savings & Loan Association v. Burleigh House, Inc., supra. Moreover, a court must also consider all of the facts and circumstances surrounding the fee's assessment. Kissell Co. v. Gressley, 591 F.2d 47 (9th Cir.1979). As noted in Altherr v. Wilshire Mortgage Corp., 104 Ariz. 59, 448 P.2d 859, 864 (1968):

The determination of [a commitment fee's] legality requires an ad hoc approach. Pertinent factors would be the tightness or looseness of money, the amount of the fee, the rates prevailing in the short-term money market where the lender might keep the funds while waiting for the borrower to call for the loans, etc. What would be a reasonable fee at one time might be unreasonable at another. Each case must necessarily require a...