Imperial Corp. of America v. Frenchman's Creek Corp.

• Decision Date: 01 February 1972
• Docket Number: No. 30853.,30853.
• Citation: 453 F.2d 1338
• Parties: IMPERIAL CORPORATION OF AMERICA, Plaintiff-Appellee-Cross-Appellant, v. FRENCHMAN'S CREEK CORPORATION et al., Defendants-Appellees-Cross-Appellants, Layton A. Humphrey, Wm. E. Robertson, Defendants-Appellants-Cross-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

453 F.2d 1338 (1972)

IMPERIAL CORPORATION OF AMERICA, Plaintiff-Appellee-Cross-Appellant, v. FRENCHMAN'S CREEK CORPORATION et al., Defendants-Appellees-Cross-Appellants, Layton A. Humphrey, Wm. E. Robertson, Defendants-Appellants-Cross-Appellees.

No. 30853.

United States Court of Appeals, Fifth Circuit.

January 10, 1972.

Rehearing Denied February 1, 1972.

COPYRIGHT MATERIAL OMITTED

John L. Roach, Roach & Robertson, Dallas, Tex., for Layton A. Humphrey.

Robert S. Mizell, Howell, Johnson, Mizell, Taylor, Price & Corrigan, Dallas, Tex., for Wm. E. Robertson.

John H. McElhaney, Dallas, Tex., for Imperial Corp. of America; R. W. Calloway and Turner, Rodgers, Winn, Scurlock & Sailers, Dallas, Tex., of counsel.

Charles E. Tobin, Dallas, Tex., for Frenchman's Creek Corp., and others.

Before GOLDBERG, GODBOLD and RONEY, Circuit Judges.

GODBOLD, Circuit Judge:

This diversity suit concerns a claim of usury under Texas law in connection with a large construction loan.

Defendants proposed to build near the campus of a Texas university a dormitory to be owned by them. They secured from an insurance company a commitment for long term permanent financing, and negotiated with plaintiff Imperial for short term financing to provide funds for construction. On August 31, 1966 defendants and Imperial entered into a lengthy and detailed written Loan Agreement providing that Imperial agreed to lend to defendants during the period ending December 1, 1967 sums of money the unpaid principal amount of which should not exceed at any one time $4,500,000, to be used for construction of the dormitory. Defendants agreed to execute and deliver to Imperial their promissory note payable "on or before November 1, 1967, unless otherwise extended as provided herein," in the principal sum of $4,500,000, with interest payable quarterly on the unpaid balance "at the rate of 8½ per annum from the date of any advancement of funds" to defendants by Imperial.

The note provided that it was "issued pursuant to" the Loan Agreement. While the note recited an amount certain of $4,500,000, the Loan Agreement provided that the principal actually owing on the note would be the aggregate of all advances made by Imperial, less any payments made on principal, with interest to accrue only on the amount of each advance from the date such advance was made. The Loan Agreement tied the right of defendants to obtain advances to the progress of construction of the dormitory and the schedule of progress payments.

The Loan Agreement required that the note be secured by a mortgage and deed of trust covering the dormitory site. Defendants were required on completion of the dormitory and on or before the maturity of the note and any renewal or extension thereof to consummate the permanent loan, for which they held a commitment in the principal amount of at least $3,700,000, and to apply the proceeds to payment of the construction loan. Imperial agreed to renew and extend the note if the permanent loan commitment was extended.

The Loan Agreement recited that Imperial desired to acquire for investment purposes a 25% undivided interest in the dormitory property, to be conveyed to it in lieu of payment of 25% of the balance of the construction loan (after application of proceeds of the permanent loan.) The remaining 75% of the balance would be paid to Imperial, or, at its option, Imperial could accept a new note therefor, with interest at 8½ per annum, payable in monthly installments over four years, and secured by a second lien mortgage and deed of trust plus assignment of all net revenues from operation of the dormitory.

Defendants were required by the Loan Agreement to reimburse Imperial for costs, expenses and legal fees in an amount not to exceed $22,500 and to pay a "loan or commitment fee" of $67,500.

The promissory note and the deed of trust were executed in the form agreed upon, and delivered, around September 16, 1966. The deed of trust contained the following saving clause:

No provision of this instrument or of the Notes shall require the payment or permit the collection of interest in excess of the maximum permitted by law. If any excess of interest in such respect is herein or in the notes provided for, or shall be adjudicated to be so provided for herein or in the Notes, the provisions of this paragraph shall govern, and neither the Mortgagors nor their heirs, successors and assigns shall be obligated to pay the amount of such interest to the extent that it is in excess of the amount permitted by law.

The initial advance was made September 30, in the amount of $860,000, from which there was deducted (or advanced to defendants and paid back to Imperial) the commitment fee of $67,500 and reimbursement of expenses in the amount of $22,500. Thereafter advances were made from time to time until they totalled $4,500,000, the last advance being made July 1, 1968.¹ Defendants made interest payments quarterly as provided.

On July 30, 1968 the permanent loan was closed. Meanwhile because of a change in the law Imperial was forbidden to acquire the 25% ownership interest. The parties executed an amendment to the Loan Agreement providing that defendants would pay $4,000,000 principal on the note ($3,700,000 from the permanent loan plus $300,000 cash) and Imperial would accept in renewal and extension of the $500,000 balance defendants' note for $500,000, payable in twelve months, with interest at 8½ per annum, payable quarterly. The note was to be secured by Imperial's retaining a $500,000 interest in the original deed of trust, and by a new deed of trust as well, but all of Imperial's liens to be subordinate to the $3,700,000 first lien and the lien of a second mortgage loan to be procured by defendants and not to exceed $800,000. The transactions were consummated on July 30 under the amended terms, except it appears that Imperial subordinated its liens securing the new note to second liens securing the individual defendants on notes payable to them by the corporate defendant aggregating $800,000.

Defendants defaulted on the $500,000 note, after making payments of some of the interest but no principal. Imperial sued. Defendants raised the defense that the interest charged and paid in the loan transaction exceeded the maximum interest allowable by Texas law of 10% per annum,² causing all interest to be forfeited, with the result that rather than being indebted to Imperial the defendants in fact had overpaid by some $4,500. This defense embraces several contentions. (1) The $22,500 reimbursement of expenses actually was disguised interest. The District Court found that this item was not interest. We affirm that finding. (2) The $67,500 commitment fee was interest. (3) The $67,500, since actually charged and paid in the first twelve months of the loan, must be considered as interest for that period alone. The sum of this item and the interest at 8½ per annum on advances from time to time made exceeded the maximum interest allowable for that first twelve months. (4) The tainted interest causes Imperial to lose its right to any interest. (5) All payments of interest that have been made must be credited against the outstanding principal of the $4,500,000 note as and when made, and then against the outstanding principal of the $500,000 note.

The District Court in a nonjury trial found that the $67,500 commitment fee was interest but that the $22,500 reimbursement of expenses was not. It found that interest payments made during the first year (described as twelve months beginning September 16, 1966), at the 8½ rate, plus the $67,500, produced a sum greater than the maximum allowable interest on advances from time to time made during the twelve months, calculated at 10% per annum. However, the trial court declined to treat the $67,500 as applicable to only the first twelve months but "spread" it over the life of the loan, beginning September 16, 1966, the date on which the note was executed, and extending to July 30, 1968. The court aggregated the interest paid during that period, including the $67,500, and found that it exceeded by $3,835.88 the maximum interest allowable by Texas law on the amounts from time to time due during that period.³ The court found that the excess of $3,835.88 would have been usurious interest absent the saving clause, but that by reason of that clause Imperial was entitled to collect the maximum allowable interest and need only credit the defendants the sum of $3,835.88 against their obligation on the $500,000 note.

The note contained an acceleration clause. The court found that if default and acceleration had occurred during the first twelve months usurious interest would have resulted. The saving clause was held to prevent this contingency from giving rise to usurious interest.

The District Court allowed recovery of the principal balance on the $500,000 note, plus unpaid interest thereon, after giving defendants credit for the excess interest of $3,835.88, calculated as described above. Defendants appealed.

The finding that the $22,500 reimbursement of expenses was not interest is not plainly erroneous. There was ample evidence that Imperial paid more than that amount in fees for legal services and for inspection of the premises as the work progressed. Bond fide fees for services of this nature, paid to the lender's special agents and not participated in by the lender, are not considered as interest. See Greever v. Persky, 140 Tex. 64, 165 S.W.2d 709 (1942); Nevels v. Harris, 129 Tex. 190, 102 S.W.2d 1046, 1049 (1937); Miller v. Gibralter Savings & Bldg. Assn., 132 S.W.2d 606 (Tex.Civ.App.1939).

Imperial does not contest the finding that the $67,500 commitment fee was "front end" interest.⁴ We conclude that, for the purpose of determining whether the loan was usurious, the trial court correctly rejected the defendants' view that the $67,500 interest figure was required to be considered as interest for only the first twelve months...