In Re Brummer

• Decision Date: 28 October 1992
• Docket Number: Bankruptcy No. 92-40026-11,Adv. No. 92/00075.
• Citation: 147 BR 552
• Parties: In re James BRUMMER, a/k/a Brummer Ent., Inc., MPI, Inc., MPI Lumber Millwork, Man-U-Pak, Debtor. James G. BRUMMER, Plaintiff, v. TMG LIFE INSURANCE COMPANY, INC., f/k/a Association Life Insurance Co., Inc., Defendant.
• Court: U.S. Bankruptcy Court — District of Montana

147 B.R. 552 (1992)

In re James BRUMMER, a/k/a Brummer Ent., Inc., MPI, Inc., MPI Lumber Millwork, Man-U-Pak, Debtor James G. BRUMMER, Plaintiff, v. TMG LIFE INSURANCE COMPANY, INC., f/k/a Association Life Insurance Co., Inc., Defendant.

Bankruptcy No. 92-40026-11, Adv. No. 92/00075.

United States Bankruptcy Court, D. Montana.

October 28, 1992.

James A. Patten, Billings, Mont., Gary S. Deschenes, Great Falls, Mont., for plaintiff.

Tracey R. Lindberg, John C. Thomas, Minneapolis, Minn., for TMG Life Ins. Co., Inc.

ORDER

JOHN L. PETERSON, Bankruptcy Judge.

In this adversary proceeding, the Plaintiff/Debtor seeks a determination that the Defendant TMG Life Insurance Co. (TMG) claimed usurious interest on its loan after default. TMG, by answer, denied the material allegations of the Complaint, and issue having been joined, trial was held on September 23, 1992, with James A. Patten and Gary S. Deschenes representing the Plaintiff and Tracey R. Lindberg and John C. Thomas representing TMG. Also heard was the Debtor's objection to TMG's Proof of Claim, based on the same usury claim, that TMG is not the proper holder of the note, and TMG caused the loss of sale of the Helena building resulting in damage to the Debtor as an offset against the claim. No evidence by the Debtor was offered on the latter two issues. The parties have submitted memoranda in support of their respective positions and the matter is ready for decision.

In the pre-trial Order filed in this case, the following are the Agreed Facts:

1. The prime interest rate published in the Wall Street Journal edition three days preceding the execution of Plaintiff's note to Defendant was 10.5%.

2. As of January 7, 1992, the principal balance of Plaintiff's note to Defendant was $873,024.88.

3. As of January 7, 1992, the accrued unpaid interest on Plaintiff's note to Defendant was $90,662.64.

4. As of January 7, 1992, the reinvestment premium upon Plaintiff's note to Defendant was $52,381.49.

5. Effective January 7, 1992, there was the sum of $10,480.93 applied to accrued interest.

6. As of January 7, 1992, there was the outstanding sum of $5,408.52 in the late fees.

7. Effective January 7, 1992, the sum of $19,466.85 was applied to default interest.

8. Plaintiff agrees that if the Reinvestment Premium is not interest, the note cannot be determined to be usurious.

9. Plaintiff agrees that if the applicable time period is other than November 2, 1990 through January 7, 1992, the note cannot be usurious.

10. Plaintiff agrees that if monthly compounding is appropriate, the note is not usurious.

The facts show that TMG's predecessor in interest made a mortgage loan to Brummer on December 21, 1989. Brummer executed a promissory note in the amount of $880,000, providing for monthly payments of $8,238.80, with a balloon payment due January 2, 2000. The monthly payment was computed based on an amortization period of 25 years. The note is secured by a Trust Indenture and Security Agreement, together with Assignment of Rents and Leases, in a rental property known as the Professional Plaza, in Helena, Montana. Brummer made timely payments on the note until November 1, 1990, when the note went into default. Following default, TMG filed a state court foreclosure action. On the eve of the foreclosure sale, January 7, 1992, Brummer filed a Chapter 11 Bankruptcy Petition. Thereafter, Brummer filed this adversary proceeding alleging the amount claimed under the note violated Mont.Code Ann. § 31-1-107.

The promissory note (Exhibit 1) provides for interest at the rate of 10.375% for the first five years of the loan, after which the rate of interest would be modified. The note contains three other provisions pertinent to the issues in this case. First, the note provides that in the event of prepayment prior to maturity "provided no default or event of default exists", a prepayment "premium", under a complicated formula, is due. Second, and critical to this case, is a provision providing —

If a Default occurs hereunder and this note is accelerated, a tender of payment of the amount necessary to satisfy the accelerated amount must be accompanied by a reinvestment premium of six percent (6%) of the accelerated amount paid to compensate the holder for the loss of its investment and the risk of reinvestment ("Reinvestment Premium") and such payment must therefore include such Reinvestment Premium.

Third, the note also provides that if default occurs, the holder, at its option, during the period of default may charge a "default rate" of interest of two percent interest per annum in addition to the interest rate in effect on the note. In this case, the default rate of interest would be 12.375%, an amount which is not usurious under Montana law.

TMG's Proof of Claim filed in this Chapter 11 case, totals $1,014,169.03, consisting of the following:

                Principal              $873,024.88
                Interest               $ 90,662.64
                Default Interest       $ -0-
                Late Charge            $ -0-
                Reinvestment Premium   $ 50,481.51
                Attorney fees          $ -0-
                

The parties now agree the reinvestment premium due is $52,381.49, a payment of $10,480.93 was applied to interest effective January 7, 1992, late fees total $5,408.52 and effective January 7, 1992, a payment of $19,466.85 was applied to default interest. Through this maze of figures, the Plaintiff calculates the TMG claim at $1,051,425.31, and presented testimony that, based on simple interest calculations, TMG's claim at 16.5% (the legal rate) could not exceed $1,040,008, or if compounded annually could not exceed $1,045,645. The calculation of the claim was made from the period of November 2, 1990, the date of default, to January 7, 1992, the bankruptcy petition date.

Jurisdiction of this Court has been conceded by the parties under 28 U.S.C. §§ 1334 and 157(b)(2)(C). This dispute concerns an allowance of the Proof of Claim of TMG and is thus a core proceeding under § 157(b)(2)(C). Langenkamp v. Culp, 498 U.S. 42, ___, 111 S.Ct. 330, 331, 112 L.Ed.2d 343 (1990).

The applicable Montana interest and usury statutes provide in Mont.Code Ann.:

31-1-104. Interest defined. Interest is the compensation allowed by law or fixed by the parties for the use of forbearance or detention of money.

31-1-107. Interest rate allowed by agreement.

(1) Parties may agree in writing for the payment of any rate of interest not more than 6 percentage points per annum above the prime rate of major New York banks as published in the Wall Street Journal edition date 3 business days prior to the execution of the agreement, and such interest shall be allowed according to the terms of the agreement.

(2) A loan that is not usurious when made is lawful for the duration of the loan, provided the loan agreement is not substantially changed. This subsection does not apply to loan renewals.

(3) The provisions of this section do not apply to regulated lenders as defined in 31-1-111.

31-1-108. Penalty for usury — action to recover excessive interest.

(1) The taking, receiving, reserving, or charging a rate of interest greater than is allowed by 31-1-107 shall be deemed a forfeiture of a sum double the amount of interest which the note, bill, or other evidence of debt carries or which has been agreed to be paid thereon.

(2) When a greater rate of interest has been paid, the person by whom it has been paid, his heirs, assigns, executors, or administrators may recover from the person, firm, or corporation taking, receiving, reserving, or charging same a sum double the amount of interest so paid, provided that such action shall be brought within 2 years after the payment of said interest, and provided that, before any suit may be brought to recover such usurious interest, the party bringing suit must make written demand for return of said interest so paid.

The latest Montana Supreme Court decision on usury is Scarr v. Boyer, 250 Mont. 248, 818 P.2d 381, 48 St.Rep. 910 (1991) which holds post-default interest (delay interest) is subject to Montana usury statutes because it involves a "detention" of money and is not in the nature of a penalty which could be avoided by the borrower's timely payment. Scarr explains:

In Parks v. Lubbock (1899), 92 Tex. 635, 51 S.W. 322, the court construed a statute that was virtually identical to Montana\'s present statutory definition of interest. The court held that:

The detention of money arises in a case when a debt has become due, and the debtor withholds its payment, without a new contract giving him a right to do so. . . . The conclusion is not to be resisted that there was a purpose in adding the word "detention" to the accepted definition when the debtor should detain the money owed beyond the stipulated period of forbearance, and so to provide that a promise to pay an additional sum for such detention should be deemed interest, and not merely damages by way of a penalty to secure a prompt performance of the contract. Emphasis added.

Parks, 51 S.W. at 323. The court concluded that the post-default interest at issue in that case was subject to the usury statutes.

The Supreme Court of South Dakota reached the same conclusion in Ulvilden v. Sorken (1931), 58 S.D. 466, 237 N.W. 565. The statutory definition of interest in South Dakota, like the statutes in Texas and Montana, covered the "detention of money." The court cited Parks with approval and added that:

Requiring the maker of a note to pay a higher rate of interest after maturity for the use of money is likely to be as oppressive as when required to pay a higher rate during the term of the loan. It may not be within the power of the borrower promptly to meet his obligations at maturity. If a borrower is to be protected from the extortion of an excessive rate for the use of money, there is no apparent reason why it should be limited to the term of the loan.

Ulvilden, 237 N.W. at 566.

We agree. Usury statutes protect borrowers who lack real bargaining power against overreaching

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