Hutchison v. Commercial Trading Co., Inc.

• Decision Date: 31 January 1977
• Docket Number: Civ. A. No. 3-6359-E.
• Citation: 427 F. Supp. 662
• Parties: Frank HUTCHISON v. COMMERCIAL TRADING CO., INC.
• Court: U.S. District Court — Northern District of Texas

427 F. Supp. 662

Frank HUTCHISON v. COMMERCIAL TRADING CO., INC.

Civ. A. No. 3-6359-E.

United States District Court, N. D. Texas, Dallas Division.

January 31, 1977.

Donald W. Keck, Dallas, Tex., for plaintiff.

Joel W. Cook, Houston, Tex., Franklin H. Perry, Dallas, Tex., for defendant.

MEMORANDUM AND ORDER OF DISMISSAL

MAHON, District Judge.

The above-referenced cause of action was originally filed on 5 October 1972, at a time when this Court was sitting in the Dallas Division of the Northern District of Texas. On November 1972, Defendant filed a motion to dismiss for lack of personal jurisdiction over Defendant and for failure to state a claim upon which relief could be granted. A hearing was set on Defendant's motion to dismiss on 7 December 1972, at which time Defendant's motion was carried along. Subsequently, Defendant answered and discovery proceeded. On 26 July 1973, the Court entered an Order setting schedule for discovery, briefing, and ruling on the motion to dismiss. On 14 May 1975, the Court ordered that Defendant's motion be in all respects denied.

Defendant, sure of its position, filed a "Motion for Rehearing, or, in the Alternative, to Certify Questions Under 28 U.S.C. § 1292(b)" and a request for findings of fact and conclusions of law. On 13 June 1975, the Court ordered that Defendant's motion for rehearing be carried along.

On 16 December 1975, the Court held a hearing on Defendant's motion for rehearing. Following the 16 December 1976 hearing, and up to 9 December 1976, both parties have filed letter briefs updating their respective arguments for their positions.

Having carefully reconsidered all of the pleadings, briefs, and arguments of both parties, the Court is now of the opinion that Defendant's motions for rehearing and to dismiss for failure to state a claim should be granted.

I. PLEADINGS AND CAUSE OF ACTION

Plaintiff pleads that, on 26 November 1968, a second lien promissory note was signed on behalf of Beckwood, Inc., as maker by Arthur W. Beck, Jr., president of Beckwood, Inc., in favor of Defendant, providing for interest to be paid at the rate of 1 11/48% per month. This note was unconditionally personally guaranteed by Arthur W. Beck, Jr., and his wife, and secured by a second lien deed of trust on property personally owned by Arthur W. Beck, Jr., located in Tarrant County, Texas. Plaintiff further claims that this note was "in renewal, rearrangement, and extension" of two earlier promissory notes (30 January 1968 and 22 November 1968), both executed by Arthur W. Beck, Jr., on behalf of Beckwood, Inc., both unconditionally guaranteed by Arthur W. Beck, Jr., and his wife, and both made payable to R. Blair Rugh.

Plaintiff claims that he will show that all sums here in dispute were loaned by Defendant to Arthur W. Beck, Jr., only if such sums were first funded by R. Blair Rugh, if a Beck corporation were the payor and maker of the note, if the note were guaranteed by Mr. and Mrs. Beck, and if the note provided for further security in the form of a deed of trust on real estate owned by Arthur W. Beck, Jr., individually. Plaintiff contends that this alleged arrangement was a requirement, scheme, and disguise on the part of Defendant to avoid Texas's maximum 10% per annum interest laws on loans to individuals by conditioning the note on the naming of a corporation as the maker.

Plaintiff further claims that he will show that Arthur W. Beck, Jr., was the alter-ego of Beckwood, Inc., at the time the note was signed.¹ Plaintiff contends, therefore, that the loans in question were actually loans to an individual at an interest rate greater than 10% in violation of Tex.Civ.Stat.Ann. art. 5069-1.02.

The notes in question were paid in part by Mr. Beck, until Plaintiff came into possession of certain property of Mr. Beck's and was assigned all rights of Mr. Beck with regard to the contracts in question. Plaintiff has subsequently paid in full the remainder due on the notes.

II. PERSONAL JURISDICTION

The Court remains of the opinion that there can be no doubt of personal jurisdiction over Defendant under the Texas long-arm statute, Tex.Rev.Civ.Stat.Ann. art. 2031b.

Even accepting Defendant's position that it has no officers, agents, or contact with the State of Texas other than its investigation leading up to the "acquisition" of the loans in question, and possible other loan transactions not related to this lawsuit, it is evident that this Court has jurisdiction over Defendant. Defendant has assumed a loan contract with a Texas corporation and a Texas individual. Repayment of the loan was anticipated to take place from the State of Texas. The note was secured by property located in the State of Texas. It is patently obvious that maintenance of a usury action in the State of Texas does not offend the "traditional notions of fair play and substantial justice" that limit the reach of long-arm statutes such as that of Texas's. See International Shoe Co. v. Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945); McGee v. International Life Insurance Co., 355 U.S. 220, 78 S.Ct. 199, 2 L.Ed.2d 223 (1957); Hanson v. Denckla, 357 U.S. 235, 78 S.Ct. 1228, 2 L.Ed.2d 1283 (1958); Product Promotions, Inc. v. Cousteau, 495 F.2d 483 (5th Cir. 1974). Cf. Arthur, Ross & Peters v. Housing, Inc., 508 F.2d 562 (5th Cir. 1975); the opinion of this Court in Frito-Lay Inc. v. Proctor & Gamble Co., 364 F.Supp. 243 (N.D.Tex.1974).

Defendant must have foreseen that, if payments on the lien were not made, it would have to utilize the laws of the State of Texas to enforce payment or to foreclose on Texas real property. Moreover, the Court finds from deposition that Defendant was engaged in a course of business with Arthur W. Beck, Jr., and that R. Blair Rugh was, for the sake of the transactions now before the Court, actually Defendant's agent.

Accordingly, the Court concludes: (1) that Defendant has had more than minimal contacts with the State of Texas, resulting from Defendant's own affirmative acts; and (2) that it is fair and reasonable to require Defendant to come into the State of Texas to defend this action.

III. TEXAS USURY LAW

Assuming for the sake of Defendant's motion to dismiss that Plaintiff's pleadings and allegations are true, the Court is nevertheless of the opinion that Plaintiff has failed to state a claim upon which relief can be granted.

In the present case, Plaintiff does not contend that Beckwood, Inc., was not an ongoing corporation at the time the loan in question was consummated. Nor does Plaintiff contend that Beckwood, Inc., was created for the purpose of avoiding the Texas usury laws. There is no question that Beckwood, Inc., was legally and properly incorporated under the laws of the State of Texas. Plaintiff does contend, however, that Beckwood, Inc., was the alter-ego of Arthur W. Beck, Jr., that it was used for his personal purposes, and that corporate and personal funds were continually intermixed.

The rate of interest generally applicable on loans to individuals is governed by Tex. Rev.Civ.Stat.Ann. art. 5069-1.02, which provides:

Except as otherwise fixed by law, the maximum rate of interest shall be ten per cent per annum. A greater rate of interest than ten per cent per annum unless otherwise authorized by law shall be deemed usurious. All contracts for usury are contrary to public policy and shall be subject to the appropriate penalties prescribed in Article 1.06 of this Subtitle.²

But under Tex.Rev.Civ.Stat.Ann. art. 1302-2.09, corporations may "stipulate for any rate of interest as such corporation may determine, not to exceed one and one-half percent (1½%) per month, on any bond, note, debt, contract or other obligation of such corporation" of $5000 or more. "In such instances, the claim of usury by such corporation, its successors, guarantors, assigns or anyone on its behalf is prohibited."

Plaintiff's contention is that Article 1302-2.09 has application only to "bona fide loans" to corporations. Where, however, an individual applies for a loan, and the lender merely uses the corporate structure as a devise, scheme, or technique to evade the interest limits set by Article 5069-1.02, Plaintiff's position is that the resulting higher-interest loan is not a "bona fide corporate loan," but is rather a loan to an individual in excess of the interest limit set in Article 5069-1.02.

Defendant's position is that any loan to a corporation falls under Article 1302-2.09, regardless of the intentions of the parties to the contract with regard to the eventual use to which the money would be put.

The question now squarely before the Court is which Article, 5069-1.02 or 1302-2.09, applies in a situation where a lender is willing to make a loan to an individual only if the individual accepts a higher interest rate than that allowed under Article 5069-1.02 and uses a corporation to avoid the usury laws of the State of Texas.

Since this case is founded on diversity jurisdiction, 28 U.S.C. § 1332, this Court must decide the present case as would a court of the State of Texas. Guaranty Trust Co. v. York, 326 U.S. 99, 108-109, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945). Unfortunately, there is only one Texas case on point, and its holding is not entirely conclusive.

In Skeen v. Glenn Justice Mtg. Co., 526 S.W.2d 252 (Tex.Civ.App. — Dallas 1975, no writ), a mortgage company sued the individual guarantors to a note, the maker of which was a corporation. The defendants there contended, after a grant of summary judgment in favor of the mortgage company, that the obligor corporation was formed at the lender's insistence for the sole purpose of circumventing the Texas usury law, and that the loan should therefore be considered usurious. While reversing and remanding on other grounds, the Skeen Court held that incorporation for the sole purpose of circumventing Texas usury laws does not render a loan transaction usurious. Choosing to follow the New York solution to this...