In re Lawson Square, Inc.
| Decision Date | 14 May 1986 |
| Docket Number | Bankruptcy No. FA85-146,Adv. No. CMS 86-162. |
| Citation | 61 BR 145 |
| Parties | In re LAWSON SQUARE, INC., Debtor. FIRSTSOUTH, F.A., Plaintiff, v. LAWSON SQUARE, INC., Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Arkansas |
James J. Glover, Little Rock, Ark., for debtor.
Richard L. Ramsay, Pine Bluff, Ark., for plaintiff.
Pending before the Court for decision following the hearing in the above-styled matter on April 21, 1986, is the issue of whether the January 26, 1984 loan made by FirstSouth, F.A., ("FirstSouth") to Lawson Square, Inc., the debtor, is usurious. In order to resolve that issue it must first be determined whether the Depository Institutions Deregulation and Monetary Control Act of 1980 ("Monetary Control Act")1 has preempted Arkansas's usury limitations set forth in Amendment 602 for a loan made in this State by a federally insured institution after March 31, 1980 and secured by a first lien on residential real property.3
It is the debtor's position that subsection (a)(i) of Amendment 60 is controlling. The debtor contends that the loan in issue is usurious because several times during the term of the loan the interest rate on the loan exceeded the ceiling allowed by that subsection, i.e., "5% per annum above the Federal Reserve Discount Rate at the time of the contract." The debtor also contends the loan is usurious because various charges such as "release fees" under the loan are in fact interest which also result in an interest charged in excess of Arkansas's ceiling.
It is FirstSouth's position that subsection (a)(i) of Amendment 60 is not controlling. Rather, FirstSouth contends that, pursuant to subsection (d)(ii) of Amendment 60, the controlling provisions are federal, specifically 12 U.S.C. §§ 1730g and 1735f-7 (note), provisions of the Monetary Control Act. FirstSouth submits further that the loan in issue is not subject to any interest limitation.
After consideration of the evidence before it, the Court concludes that subsection (d)(ii) of Amendment 60 and U.S.C. §§ 1730g and 1735f-7 are controlling under these facts. The loan in issue is therefore not usurious.
The decision is based upon the following findings of fact and conclusions of law.
On January 26, 1984 the debtor executed several documents evidencing the loan made to the debtor by FirstSouth. The documents included: a Loan Agreement with Amendment, a Promissory Note ("Note"), a Mortgage securing the Note, and a Security Agreement.
The security for the loan from FirstSouth (which is insured by the Federal Deposit Insurance Corporation) to the debtor is a first lien on residential real property in Fayetteville, Arkansas. The parties have stipulated that the transaction is a residential loan. The collateral for the loan includes a condominium project, four rental houses and a vacant lot zoned for a multi-family dwelling.
The Note, in the sum of $1,705,800.00, has a floating interest rate not to exceed 4% over the rate payable on a 90-day Treasury Bill on dates specified in the Note.4
The parties also stipulated to the following additional facts:5
1. The rates on 90-day commercial paper in the St. Louis Federal District ("Federal Reserve Discount Rate") and on 90-day Treasury Bills varied during the term of the Note as follows:6
Federal Reserve 90-Day
Date Discount Rate Treasury Bill
3/30/84 8.5 9.72
7/31/84 9.0 10.40
8/31/84 9.0 10.63
9/28/84 9.0 10.22
2. The amendment to the Loan Agreement, executed in connection with the 1984 Loan, provides for payment of certain "release fees" in addition to the interest payable under the terms of the Note. Those sums to be paid by the debtor include (1) a $1,000.00 "release fee" to be paid to FirstSouth upon the sale of any unit of the collateral and (2) a payment of 105% of the appraised value of each unit released from the Mortgage.
The relevant state constitutional provisions and federal statutes to be construed by the Court are as follows:
Ark. Const. art. 19, § 13. (Amendment 60, passed at the General Election on Nov. 2, 1982).
12 U.S.C. 1730g ().
12 U.S.C. § 1735f-7, note.
In analyzing subsection (a)(i) of Amendment 60 the Court finds that its language clearly provides a usury ceiling on any contract for general loans within the state. The language of the "miscellaneous" provisions found in subsection (d)(ii) of Amendment 60 is also clear and unequivocal that the ceiling is not intended to apply to loans secured by a first lien on residential real property.
The Monetary Control Act contains a specific provision granting states the option to override the federal usury preemption. Pub.L. 96-221, Title V, § 501(b)(2). However, the override period was limited to the three years after April 1, 1980 and before April 1, 1983. During that period states were given the power to override the federal preemption by either adopting a law or certifying that the voters of the state had voted in favor of a provision which explicitly stated that the state did not want the federal mortgage usury preemption to apply in that state. Id. However, Arkansas did not elect to override the federal preemption of the state's usury ceiling and the right to do so has now expired.8 Ark. Const. art. 19, § 13 (Amendment 60). Subsection (d)(ii) of Amendment 60, enacted during the override period, clearly reflects the State's intention to allow the federal preemption to stand. Accord, Troutt v. First Federal Savings and Loan of Hot Springs, 280 Ark. 505, 659 S.W.2d 183 (1983); Bank of Evening Shade v. Lindsey, 278 Ark. 132, 644 S.W.2d 920 (1983). See also McInnis v. Cooper, 271 Ark. 503, 611 S.W.2d 767 (1981) (discussing purpose of Monetary Control Act).
Thus, the federal preemption provisions of the Monetary Control Act do control this loan which falls squarely within the loans to be governed by § 1735f-7 (note) and Amendment 60: it was a loan made by a federally insured savings and loan, after March 31, 1980, secured by a first lien on residential real property.
Consequently, when determining which of the two permissible rates contained in 12 U.S.C. § 1730g(a) is the greater and, thus, the controlling rate, it is noted that Arkansas's usury ceiling has been preempted. Thus, the state's unlimited rate would be the greater and as such, would be the rate...
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