In re Auto Intern. Refrigeration

• Decision Date: 15 March 2002
• Docket Number: Bankruptcy No. 99-33892-HCA-7.,Adversary No. 00-3446.
• Citation: 275 B.R. 789
• Parties: In re AUTO INTERNATIONAL REFRIGERATION, Debtor. Jeffrey H. Mims, Chapter 7 Trustee, Plaintiff, v. Fidelity Funding, Inc. and Guaranty Business Credit Corporation, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Texas

275 B.R. 789

In re AUTO INTERNATIONAL REFRIGERATION, DebtorJeffrey H. Mims, Chapter 7 Trustee, Plaintiff, v.Fidelity Funding, Inc. and Guaranty Business Credit Corporation, Defendants.

Bankruptcy No. 99-33892-HCA-7.

Adversary No. 00-3446.

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

March 15, 2002.

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Kevin M. Lippman, Munsch, Hardt, Kopf, Harr & Dinan, Dallas, TX, for plaintiff.

Bruce W. Bowman, Winstead, Sechrest & Minick, Dallas, TX, for defendants.

MEMORANDUM OPINION

HAROLD C. ABRAMSON, Bankruptcy Judge.

On May 28, 1999, Auto International Refrigeration, the above captioned debtor ("AIR"), filed a petition for reorganization under Chapter 11 of the Bankruptcy Code(the "Code").AIR was a business that sold, both retail and wholesale, automotive refrigeration parts.A Motion to Convert the case to Chapter 7 was subsequently granted on November 2, 1999, based on the continued diminution of the AIR estate post-bankruptcy, which left AIR with an inability to reorganize.On September 27, 1999, prior to the Motion to Convert being granted, Guaranty Business Credit Corporation("GBCC"), d/b/a Fidelity Funding Inc.("Fidelity"), a creditor of AIR, filed a proof of claim in AIR's bankruptcy in the amount of $224,730.51 (the "Claim"), based upon a Loan and Security Agreement entered into between AIR and Fidelity (the "Loan Agreement").¹After conversion, Jeffrey H. Mims("Plaintiff"), was appointed the Chapter 7Trustee for the AIR estate.

Plaintiff initiated this adversary proceeding against Fidelity on September 11, 2000, asserting claims for usury, breach of contract, and for equitable subordination of Defendants' Claim in AIR's bankruptcy.After Defendants filed their Claim, Plaintiff amended its complaint on December 6, 2000, adding GBCC as a joint and several defendant with Fidelity.After amending its complaint for a second time, Plaintiff then filed a Motion for Summary Judgment on August 24, 2001, which was countered by Defendants' Motion for Summary Judgment filed on the same date.On November 30, 2001, this Court entered an Order granting in part and denying in part both Plaintiff's and Defendants' Cross Motions for Summary Judgment(the "Summary Judgment Order").Plaintiff then filed a Motion for Reconsideration and Request for Hearing(the "Reconsideration Motion"), which this Court granted on January 16, 2002.After consideration of all evidence presented in this adversary proceeding, this Court enters this Memorandum Opinion disposing of all issues.

FACTUAL BACKGROUND

As of the date of the bankruptcy petition, AIR had debt outstanding to Defendants under the terms of the Loan Agreement, which was entered into on June 30, 1998.Under the Loan Agreement, Defendants offered to AIR a revolving credit loan (the "Loan"), secured by, among other things, all of AIR's accounts receivable, allowing AIR to borrow and repay advances of principal up to a Facility Limit of $1,500,000.Pursuant to the Loan Agreement, the amount of principal that could be borrowed by AIR at any one time was limited under a prescribed Borrowing Base formula based on AIR's accounts receivable,² with the aggregate amount of outstanding principal limited to the lesser of the Borrowing Base or the Facility Limit.The stated interest rate under the Loan Agreement was prime plus 2 1/2 percent, with the interest rate fluctuating between 11 and 10 1/4 percent over the eleven months prior to bankruptcy.

In addition, the Loan Agreement also called for various fees and charges to be paid by AIR, including Initial and Annual Facility Fees, a Due Diligence Deposit, Attorney's Fees, a Collateral Monitoring Fee, an Audit Fee, and other Additional Expense Reimbursements.When these fees became payable by AIR, they were recorded on AIR's account, with interest accruing on the fees from the date recorded.The initial advance of principal under the Loan Agreement was made on June 30, 1998 in the amount of $581,661.07, but this amount included the Initial Facility Fee in the amount of $22,500.

Under the terms of the Loan Agreement, the filing of a petition in bankruptcy constituted an Event of Default.While the majority of the Events of Default gave the Defendants the option of accelerating the entire principal amount of the debt by notifying AIR of its intent to do so, if the Event of Default was AIR's filing of bankruptcy, all of the obligations under the Loan Agreement would automatically be immediately due and payable.However, if an Event of Default did occur, and the Loan Agreement was accelerated resulting in usurious interest being charged, the Loan Agreement included a Savings Clause requiring Defendants to reduce the interest to a non-usurious amount.

On July 9, 1999, Defendants, believing that the Loan Agreement had exceeded the legal interest rate of eighteen percent allowed under Texas law,³ sent a Cure Letter to AIR's counsel, pursuant to Texas Finance Code § 305.103(a),⁴ stating that AIR's account had received a credit of $68,825.40.⁵Then on July 12, 1999, Defendants sent a second Cure Letter to AIR's counsel confirming a second credit of $4,070.96.⁶Plaintiff responded to these Cure Letters by sending a letter to Defendants on September 14, 1999, alleging certain matters which it contended made the Loan Agreement usurious.

Plaintiff alleges that the Loan Agreement is not only facially usurious, but when the Loan Agreement was accelerated, which Plaintiff claims occurred not only by the express terms of the Loan Agreement, by operation of bankruptcy law, and by affirmative action of the Defendants, the Loan Agreement became usurious.Plaintiff believes that the maximum amount of interest that could have been charged over the term from closing to bankruptcy was $40,794.41, but when the $33,993.71 in interest actually charged by Defendants is added to the $144,467.44 in fees which it alleges to be interest, the total interest charged over that same time span was $178,460.97.Subtracting the maximum amount of interest that could have been charged from the alleged interest, Plaintiff believes that Defendants charged AIR $137,669.56 in usurious interest.

Because Plaintiff alleges that Defendants charged AIR usurious interest, in Count 1, it asked this Court to assess the triple penalty pursuant to Texas Finance Code § 305.001,⁷ equaling $413,008.68.In addition, because Plaintiff alleges that more than twice the legal amount of interest was charged, Plaintiff asks this Court to award it the principal on which the usurious interest was charged, plus the interest and fees charged by Defendants pursuant to Texas Finance Code § 305.002,⁸ which amounts to $1,933,716.92.Plaintiff asks that these penalties, totaling $2,346,725.60, be assessed against the Defendants, which if done, would net $2,131,995.09 after elimination of Defendants' Claim of $224,730.51.

In Count 2, Plaintiff alleges that Defendants are in breach of the Loan Agreement because they did not "promptly" refund the usurious interest Plaintiff believes to have been charged, and thus requests an amount at least equal to the usurious interest charged of $137,669.56.Finally, in Count 3, Plaintiff requests that Defendants' allowed claim in the bankruptcy be equitably subordinated, pursuant to 11 U.S.C. § 510(c), to all other allowed claims based upon Defendants charging of usurious interest under the Loan Agreement.

Defendants responded by alleging that not only is the Loan Agreement not facially usurious, but even if the Loan Agreement had been accelerated, which it alleges did not occur, the Loan Agreement would still not be usurious because the Fees which Plaintiff believes are interest, are in fact "bona fide" fees, and as such can not be interest.Defendants also believe that even if the Fees are in fact interest, they are to be spread over the contracted-for term of the Loan Agreement, and not the shorter time from closing to bankruptcy, which would make the Loan Agreement non-usurious.Finally, Defendants raise the defenses of the Cure Letters and the Savings Clause to defeat any potential usury.⁹As to Plaintiff's breach of the Loan Agreement claim, Defendants believe that they are not in breach because no usurious interest was charged, AIR has not performed under the Loan Agreement by paying back principal and interest, and any usurious interest that was charged was "promptly" cured by Defendants' Cure Letters.

Based on the foregoing, the issues which the parties have put before this Court for determination are as follows:

1) whether the fees charged by Defendants are "bona fide" fees or disguised interest;

2) whether the Loan Agreement was accelerated, either by the express terms of the Loan Agreement, by operation of bankruptcy law, or by affirmative action of Defendants, thus making the period for determining usury the time from closing to bankruptcy and not the contracted-for three year term;

3) whether the Loan Agreement was usurious, including the maximum amount of interest that could have been charged under the Loan Agreement pre-bankruptcy and post-bankruptcy;

4) whether the Loan Agreement was facially usurious;

5) whether GBCC assumed Fidelity's liability for usury or had any knowledge of potential usury;

6) whether Defendants' Cure Letters were judicial admissions and whether they were proper in light of Texas law;

7) whether the Loan Agreement's Savings Clause was an effective defense to usury;

8) whether Defendants breached the Loan Agreement by not "promptly" crediting back usurious interest; and

9) whether Defendants' Claim should be disallowed under the Bankruptcy Code.

SUMMARY JUDGMENT STANDARD

Under Federal Rule of Civil Procedure 56(c), made applicable by Federal Rule of Bankruptcy Procedure 7056, summary judgment may be granted if the pleadings, depositions, answers to interrogatories and admissions on...