In re Cadillac Wildwood Development Corp.
| Decision Date | 04 March 1992 |
| Docket Number | Bankruptcy No. HG 82-00358. |
| Citation | 138 BR 854 |
| Parties | In re CADILLAC WILDWOOD DEVELOPMENT CORPORATION, Debtor. |
| Court | U.S. Bankruptcy Court — Western District of Michigan |
Harold E. Nelson, Clary, Nantz, Wood, Hoffius, Rankin & Cooper, Grand Rapids, Mich., for the debtor.
Jack E. Boynton, Murchie, Calcutt & Boynton, Traverse City, Mich., for Northwestern Sav. Bank & Trust.
This matter is before the Court to decide the motion brought by the Debtor, Cadillac Wildwood Development Corporation, to reconsider and recalculate the allowed secured and unsecured claim of Northwestern Savings & Loan Association (hereinafter, "Northwestern"). The Debtor's request is made pursuant to § 502(j) of the Bankruptcy Code () and FED. R.BANKR.P. 3007 and 3008. I have jurisdiction to decide the issues raised pursuant to 28 U.S.C. § 1334(b) and § 157(b)(2)(B).
The Debtor first requests that I reconsider the previously allowed claims of Northwestern. Assuming reconsideration is granted, the Debtor argues that the amount of Northwestern's claim should be recalculated and a large portion of it disallowed due to the erroneous inclusion of post-petition interest in Northwestern's proof of claim in violation of § 506(b) of the Code and due to the charge of usurious interest. Northwestern has agreed that it improperly included post-petition interest in its proof of claim and failed to credit two payments made by the Debtor. The parties have stipulated to the amount of Northwestern's claim absent a finding that usurious interest was charged. This leaves the Debtor's defense of usury as the remaining objection to the claim of Northwestern.
The Debtor is a Michigan corporation engaged in the construction and selling of condominium residences. On January 11, 1980, the Debtor entered into a $400,000.00 construction loan (hereinafter, the "loan") with Northwestern to finance the construction of condominium units. The loan was evidenced by a promissory note (referred to as the "note") and secured by a real estate mortgage. The note provided for payment "with interest on unpaid principal from time to time outstanding at the rate of sixteen and one-half percent (16½%) per annum." The loan was guaranteed by stockholders of the Debtor and their spouses.
It is undisputed that the Debtor agreed, in addition to the repayment of principal plus interest, to pay an $8,000.00 commitment fee and $4,000.00 in closing costs as part of the loan transaction. The $4,000.00 in closing costs included a $2,000.00 charge for attorney fees. The Debtor paid the $8,000.00 commitment fee and wound up paying $4,003.00 in closing costs; that is, three dollars extra in closing costs than what was agreed upon by the parties at the onset of the loan.1 At the loan closing, Northwestern failed to furnish a loan settlement statement indicating the loan costs paid or to be paid by the borrower.2
On February 5, 1982, the Debtor filed a voluntary petition seeking relief under Chapter 11 of the Code. Northwestern filed its proof of claim on January 7, 1985 in the total amount of $743,146.84. Northwestern now admits that this proof of claim was too high for several reasons. First, Northwestern failed to credit the balance owing on the loan with two payments made by the Debtor totalling $10,906.69. Northwestern also admits that it included post-petition interest in the value of its claim in violation of § 506(b) of the Code. The parties agree that after crediting payments made by the Debtor and by the guarantors, and taking into account the admitted elimination of post-petition interest, Northwestern now possesses a secured claim for $386,488.72 plus interest. Northwestern's unsecured claim has been reduced to zero. (Letter from Mr. Boynton to the Court of December 4, 1991 and letter from Mr. Nelson to Mr. Boynton of December 3, 1991.) The value of this secured claim is subject to further adjustment depending on how I rule on the Debtor's defense of usury.
The Debtor's Fourth Amended Plan of Reorganization was confirmed by the Court on June 5, 1985. The Plan provides for Northwestern's allowed secured claim in Class Three and any remaining claim in Class Four as a general unsecured claim. In light of the parties' stipulation, only the value of the claim included in Class Three is in dispute.
On December 21, 1981, Northwestern commenced a suit in the Circuit Court for Kent County, Michigan against the Debtor and the loan guarantors to recover unpaid principal and interest. Proceedings against the Debtor were stayed by the filing of its petition for relief, but continued against the guarantors. Trial before the Circuit Court for the County of Kent was held on January 27, 1986. In this state court action, the guarantors asserted the defense of usury against the claim of Northwestern.
The Circuit Court found that the $8,000.00 commitment fee and the $2,000.00 in attorney fees were in fact additional interest charges and needed to be considered in determining the actual rate of interest Northwestern required the parties to pay.3 The Circuit Court held that the additional interest charges raised the rate of interest in the written loan agreement above the percentage called for thereby rendering the transaction usurious. The Circuit Court concluded that since the transaction was infected with usury, all interest payments made thus far should be applied toward the principal balance owing. A copy of the Circuit Court decision was attached to the Debtor's Motion for consideration by this Court.
The Michigan Court of Appeals found that the commitment fee and the $4,000.00 in loan costs were agreed to in writing as part of the loan transaction. In support of its conclusion, the Court of Appeals referred to the promissory note evidencing the indebtedness as well as a series of letters exchanged between the Debtor and Northwestern expressing the parties' concurrence that the Debtor would pay the additional costs. Finding that the 16½% per annum interest rate and the loan costs and commitment fee were all agreed to in writing, the Court of Appeals held that the guarantors were precluded from raising the defense of usury by an exception for corporations from the general usury prohibition.4 The Court of Appeals concluded that the guarantors were liable for all interest charges. The Court of Appeals reversed the Circuit Court and remanded the case for a new computation of the amount owing to Northwestern under the loan agreement. Again, a copy of this decision was provided by the Debtor. The Michigan Supreme Court denied leave to appeal and subsequently denied a motion to reconsider the decision by the Court of Appeals. Northwestern Savings & Loan Association v. Cadillac Wildwood Development Corporation, 431 Mich. 870 (1988) (); Northwestern Savings & Loan Association v. Cadillac Wildwood Development Corporation, No. 83140(37), 1988 Mich. LEXIS 2165 (Nov. 30, 1988) (denying reconsideration).
The Debtor filed the present motion to reconsider the allowed secured claim of Northwestern on October 16, 1991. A hearing was held on November 26, 1991.
With the Debtor's § 506(b) objection to Northwestern's claim settled, the remaining issues concern whether Northwestern charged usurious interest in the loan transaction. If it is found that Northwestern violated the usury statute, the amount of the Class Three secured claim will have to be recomputed based on the penalty imposed for the commission of usury under Michigan law.
11 U.S.C. § 502(j) provides, in part, that In order to grant the Debtor's request for reconsideration, sufficient cause must be shown. Upon the showing of cause, the objection to the claim of Northwestern, raised as the defense of usury, can then be considered. 11 U.S.C. § 502(b)(1) provides that upon the filing of an objection to a claim the court shall determine the amount of such claim and disallow all or part of the claim to the extent that it is unenforceable against the debtor by applicable law.5
The general prohibition against the charge of usurious interest is set forth in MICH.STAT.ANN. § 19.15(1) 438.31 which states:
The interest of money shall be at the rate of $5.00 upon $100.00 for a year ... except that in all cases it shall be lawful for the parties to stipulate in writing for the payment of any rate of interest, not exceeding 7% per annum.
As could be expected, due to modern lending practices and the general escalation of interest rates, this statute has become littered with exceptions. The Debtor concedes that two exceptions are applicable to the proceedings before me. As already noted, MICH.STAT.ANN. § 21.200(275) 450.1275 provides that a domestic corporation may by agreement in writing "agree to pay in excess of the legal rate." Similarly, under MICH.STAT.ANN. § 19.15(1c)(2) 438.31c(2) the parties to a note secured by a first lien against real property "may agree in writing for the payment of any rate of interest." The Debtor agrees that the loan implicates these exceptions. Additionally, MICH.STAT. ANN. § 19.15(1c)(11) 438.31c(11) provides that parties to a note of $100,000.00 or more "the bona fide primary security for which is a lien against real property other than a single family residence" may agree in writing for the payment of any rate of interest. It seems likely that MICH.STAT. ANN. § 19.15(1c)(11) 438.31c(11) would also apply as an exception to the loan. To make this determination, however, I would have to make a factual conclusion as to whether the collateral was a single family residence. The Debtor was not given an opportunity to argue this point. Therefore, since the two other exceptions are sufficient, I will cease...
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