Rent-Rite Superkegs W., Ltd. v. World Bus. Lenders, LLC (In re Rent-Rite Superkegs W.), Bankruptcy Case No. 16-10407 TBM

CourtUnited States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado
Writing for the CourtBankruptcy Judge Thomas B. McNamara
Decision Date17 May 2019
Docket NumberAdv. Pro. No. 18-1099 TBM,Bankruptcy Case No. 16-10407 TBM



Bankruptcy Case No. 16-10407 TBM
Adv. Pro.
No. 18-1099 TBM


May 17, 2019

Bankruptcy Judge Thomas B. McNamara

Chapter 7


I. Introduction.

Interest is the lubricant that keeps the machinery of the United States' financial markets humming. No bank wants to lend its money without some return on its capital. And no borrower expects to receive free funding from its lender. But what about 120.86% interest per year? It's hard to believe that the management of any legitimate United States company would ever agree to pay such an ultra-high rate of interest. It makes no sense. Even a fifth-grader taking an introduction to economics class should know better. But that is what happened in this crazy case.

Bank of Lake Mills, a Wisconsin state chartered bank, agreed to loan $550,000 to CMS Facilities Maintenance, Inc. ("CMS"), a Colorado-based corporation. CMS executed a Promissory Note promising to repay the balance in Wisconsin within a year. There was a catch: the borrowing came at a significant price. CMS had to pay interest on the loan at the rate of 120.86% per year. The Parties agreed that federal law and Wisconsin law (if not preempted) would govern the validity of the Promissory Note. Federal interstate interest law generally is based on the contract, the location of the state chartered bank, and the place of payment. Wisconsin permits corporations to agree to any interest rate. In the Badger State, there is no such thing as corporate

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Although the reasons are a mystery, another company, Yosemite Management, LLC ("Yosemite Management"), stepped in and pledged some of its Colorado real estate as security for CMS' obligation to Bank of Lake Mills under a Deed of Trust. Later, Bank of Lake Mills assigned its rights under the Promissory Note to Defendant, World Business Lenders, LLC (the "Lender"). Later still, Yosemite Management sold the encumbered real estate to the Debtor/Plaintiff, Rent-Rite Superkegs West., Ltd. (the "Debtor"). The two companies have common management.

When the Debtor acquired the real estate, it knew about the Deed of Trust, knew that CMS' obligation to Bank of Lake Mills was in default, and knew that the obligation bore interest at an extraordinarily high rate. All of this might have suggested that it would be very unwise to buy the real estate. However, the Debtor went through with the acquisition anyway. Perhaps, not surprisingly, given the quality of its decision-making, the Debtor later declared bankruptcy.

Thereafter, the Debtor sued the Lender and asserted three causes of action: declaratory judgment under Fed. R. Bankr. P. 7001(9); claim disallowance under Sections 502 of the Bankruptcy Code; and equitable subordination under Section 510 of the Bankruptcy Code.1 The central thrust of the Debtor's Complaint is that the Promissory Note is usurious and, therefore, invalid. Even though the parties to the Promissory Note agreed to federal law and Wisconsin law (if not preempted), the Debtor contends that the Promissory Note should be governed by Colorado law. Colorado law prohibits interest rates above 45% per annum.

It all comes down to the applicable law. If federal law or Wisconsin law governs the Promissory Note, the Lender prevails. On the other hand, if Colorado law governs the Promissory Note, the Debtor wins. This sounds simple. But it is not. The dispute requires the Court to engage in a very complex and difficult choice of law analysis to determine the applicable substantive law. After evaluating various choice of law approaches, the Court ultimately concludes that all paths favor the Lender. The ultra-high interest rate contained in the Promissory Note is permissible under federal law and Wisconsin law. Pleas for fairness and equity cannot rescue the Debtor from the governing law, or its misguided decision-making.

II. Jurisdiction and Venue

The Court has jurisdiction to enter final judgment on all of the issues presented in this Adversary Proceeding pursuant to 28 U.S.C. § 1334. The claims and defenses are core proceedings under 28 U.S.C. §§ 157(b)(2)(A) (matters concerning administration of the bankruptcy estate); (b)(2)(B) (allowance or disallowance of claims against the estate); (b)(2)(C) (counterclaims by the estate against persons filing claims against the

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estate); and (b)(2)(O) (other proceedings adjusting the debtor-creditor relationship).2 Both the Debtor and the Lender consented to the Court's exercise of jurisdiction over this Adversary Proceeding and the entry of final judgment on all claims and defenses. Venue is proper in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

III. Procedural History

On December 11, 2017, the Debtor filed for relief under Chapter 11 of the Bankruptcy Code.3 A few months later, the Debtor commenced this Adversary Proceeding against the Lender by filing an "Adversary Complaint." (Docket No. 1, the "Complaint.")4 Thereafter, the Lender submitted its "Answer," denying the Debtor's claims. (Docket No. 6, the "Answer.")

As the impending trial date loomed near, the parties filed a "Joint Motion to Continue Trial" (Docket No. 27, the "Motion to Continue"), in which they requested that the Court vacate the trial set for September 11, 2018, establish a schedule for the submission of a statement of undisputed legal facts and legal briefs, and reset the trial for a later date. In the Motion to Continue, the parties seemed to contend, on the one hand, that the Court should decide the legal issues in the case without trial because the "facts of this case are largely uncontested," but also seemed to contend, on the other hand, that the Court might still need to hold a trial on a later date. The Court conducted a hearing on the Motion to Continue. After listening to the parties' positions, the Court denied the Motion to Continue without prejudice. (Docket No. 31.)

Later, the parties filed a "Joint Motion to Vacate Trial." (Docket No. 30, the "Motion to Vacate.") In the Joint Motion to Vacate, the parties stated: "[T]he facts of the case are largely uncontested. It is the parties' position that a determination by the Court on the legal principles at issue in the case would resolve the matter without the need for trial." Accordingly, the parties submitted "Amended Stipulated Facts" (Docket No. 30-1, the "Stipulated Facts") and "Amended Stipulated Exhibits" (Docket No. 30-2) consisting of Exhibit Nos. 1-8, B, C, D, and H (the "Exhibits"). The parties also proposed that they be permitted to submit "written closing arguments" in lieu of trial.

Consistent with the parties' requests, the Court entered an "Order Re: Joint Motion to Vacate Trial" (Docket No. 32), vacating the trial and stating:

Submission of Amended Stipulated Facts and Amended Exhibits. The Amended Stipulated Facts (Docket No. 30-1)

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and Amended Stipulated Exhibits (Docket No. 30-2 ) submitted by the parties (along with copies of the exhibits hand-delivered to chambers) shall constitute the only evidence upon which the parties shall rely in submission of written arguments, and shall constitute the only evidence for the Court to consider in determining the claims in the Plaintiff's Adversary Complaint.

Further, the Court directed the parties to submit their "written closing arguments."

Subsequently, the Debtor filed its "Final Written Arguments" (Docket No. 36) and the Lender submitted its "Argument and Memorandum of Law" (Docket No. 35) (together, the "Closing Arguments"). Both Closing Arguments focused on the applicable choice of law and appeared to suggest that the Court should apply Colorado choice of law principles based upon Colorado case law and Section 187 of the Restatement (Second) of Conflicts of Laws ("Restatement Section 187"). Having reviewed the Closing Arguments, the Court determined that neither of the parties addressed certain critical legal issues. Accordingly, the Court ordered the Parties to provide supplemental legal briefs. (Docket No. 37, the "Order for Additional Briefing.") Both Parties complied and submitted supplemental legal briefs. (Docket Nos. 39, 40, 41, and 42, the "Supplemental Legal Briefs".) Thus, all of the claims and defenses in the Adversary Proceeding are fully submitted and ripe for decision.

IV. Findings of Fact.

Based upon the Stipulated Facts and Exhibits, the Court makes the following findings of fact:

A. The Promissory Note, Deed of Trust, and Assignment.

On April 19, 2016, CMS executed a "Business Promissory Note and Security Agreement" (Ex. 1, the "Promissory Note") in favor of Bank of Lake Mills in the original principal amount of $550,000.5 CMS' "principal place of business" was listed as "939 Telluride Street, Aurora, CO," while Bank of Lake Mills was identified as an "FDIC insured, Wisconsin state chartered bank" located at "136 E. Madison St., Lake Mills, WI."6 The Promissory Note states that it "is accepted by [Bank of Lake Mills] in Wisconsin." Id.

CMS agreed to pay "Bank of Lake Mills, its successors and/or assigns" the principal amount of $550,000 plus interest at the Wisconsin offices of Bank of Lake Mills, "or at such other location or in such manner as designated by [Bank of Lake

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Mills]."7 The amounts due under the Promissory Note bore interest at a remarkably high rate: "0.331123287671% per day until paid in full." That rate equals 120.86% per annum. CMS agreed to pay principal and interest in the daily amount of $3,775.72 starting April 25, 2016, and continuing for one year until the Promissory Note matured on April 24, 2017.8 Further, CMS contracted to make the daily payments to Bank of Lake Mills by "automatic ACH debit" from a "Designated Checking Account."9 In the event of default by CMS, the Promissory Note provided for CMS to also pay Bank of Lake Mill's costs of...

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