Shook v. Republic Nat. Bank of Dallas

• Decision Date: 19 November 1981
• Docket Number: No. 1490,1490
• Citation: 627 S.W.2d 741
• Parties: John L. SHOOK, Appellant, v. REPUBLIC NATIONAL BANK OF DALLAS, Appellee.
• Court: Texas Court of Appeals

Page 741

627 S.W.2d 741

John L. SHOOK, Appellant, v. REPUBLIC NATIONAL BANK OF DALLAS, Appellee.

No. 1490.

Court of Appeals of Texas, Tyler.

Nov. 19, 1981.

Rehearing Denied Jan. 7, 1982.

Second Motion Rehearing Denied Feb. 11, 1982.

Tom Thomas, Dallas, for appellant.

Bruce W. Bowman, Jr., Dallas, for appellee.

McKAY, Justice.

This appeal is from a judgment notwithstanding the verdict against appellant John L. Shook who sued appellee Republic National Bank of Dallas alleging usury accomplished through a shell corporation and economic duress in the execution and renewals of a corporate note and in the forced sale of collateral. Appellee, who was awarded $310,395.09 on its counterclaim for principal and interest against Shook, cross-appeals claiming that the trial court erred in considering several defensive issues and in admitting evidence. Appellee also claims that appellant's death caused any usury cause of action he may have had to abate.

John L. Shook (Shook) had been a banking customer of Republic National Bank of Dallas (Republic) since the early 1970's. Shook, a Dallas attorney, was personally indebted to Republic for $698,500.00 on July 30, 1974. On that date, Shook executed a personal renewal note payable to Republic Prior to the execution of the July 30 renewal note, Republic's senior Vice President and Shook's longstanding loan officer, Dewey H. Dean, Jr. (Dean), informed appellant that Republic would be unable to extend him further credit at the interest rate lawfully chargeable by Republic to an individual. ¹ Accordingly, Dean and Shook attempted to find a solution that would prevent Republic from having to call appellant's loan and foreclose his collateral. At this point the facts are in dispute; Republic asserts that Shook suggested the use of a corporation to assume his personal debt, while Shook maintains that Republic required the use of a corporation to assume his individual debt.

in this amount. This renewal note was due August 30, 1974, and was partially collateralized with Shook's stock in Republic Financial Services, Inc. (R.F.S., Inc.). The R.F.S., Inc. stock had been pledged long before July of 1974; however, it had declined in value to the extent that it was insufficient to pay the principal of the note and Republic deemed Shook's loan a "problem loan."

In any event, on July 22, 1974, Shook organized J.L.S., Inc. It is undisputed that J.L.S., Inc. was a valid Texas corporation, that Articles of Incorporation were filed, and that corporate resolution was delivered to Republic showing that the Board of Directors of J.L.S., Inc. had approved a loan to it. It is likewise uncontroverted that J.L.S., Inc. was capitalized at minimum capitalization requirements, had no business activity, no income, no shareholders or directors meetings, and no employees.

On August 30, 1974 Shook executed, on behalf of J.L.S., Inc., a $698,500.00 note payable to Republic as renewal and extension of appellant's personal note. Shook then signed a personal guarantee of the J.L.S., Inc. note. The corporate renewal bore interest at Republic's prime rate plus three percent (3%) per annum.

Thereafter, the proceeds of the August 30, 1974 J.L.S., Inc. loan were deposited to an account styled J.L.S., Inc. The funds in the J.L.S., Inc. account were immediately transferred to Shook's account and simultaneously to Republic to pay off Shook's personal note. The J.L.S., Inc. bank account was closed on March 12, 1975.

Following the execution of the J.L.S., Inc. note and up until the time suit was filed, Shook sold portions of the R.F.S., Inc. stock to reduce the principal and interest owed on the J.L.S., Inc. note. Shook also sold other personal assets to reduce the J.L.S., Inc. debt.

Shook sued Republic on February 13, 1979 alleging that J.L.S., Inc. was used as a device to evade the Texas usury laws. He alleged that Republic required him to form this corporation to allow Republic to charge the higher corporate rate of interest; that Republic knew he was unable to obtain refinancing of his personal debt elsewhere; and, that had he not agreed to incorporate he would have lost the collateral in foreclosure proceedings. Shook further pled that Republic forced him to sell the R.F.S., Inc. stock collateralizing the J.L.S., Inc. note. Shook sought recovery of twice the amount of usurious interest he had paid, as well as actual and exemplary damages for duress. Republic filed denials, affirmative defenses, and a counterclaim for the principal and interest owing on three notes as well as ten percent (10%) contractual attorney's fees. ²

Trial was to a jury. The jury found that Shook and Republic had agreed to transfer Shook's personal loan to J.L.S., Inc. so Republic could charge a rate of interest higher than that allowed to be charged an individual; that J.L.S., Inc. was used as a device or subterfuge to allow Republic to charge Shook this higher rate of interest; that Shook, not J.L.S., Inc., was the "true borrower" in the J.L.S., Inc. loan transaction; that Republic knew that Shook was the "true borrower"; that Shook sold 10,675 shares of R.F.S., Inc. as a result of duress; that after such duress had ceased to exist, Shook had waived his duress claim; and that Shook is estopped by his conduct from recovering on his duress claim. The trial court entered judgment against Shook and for Republic, and awarded Republic $310,395.09 as principal and accrued interest owing on the notes and $29,779.51 as contractual attorney's fees.

In his first two points of error, Shook contends the trial court erred in rendering judgment against his usury claim because the jury's findings to special issues one through four ³ are supported by the evidence and therefore allow him to recover upon his usury claim. Republic argues that special issues one through four are immaterial and cannot form the basis of a judgment favoring Shook because Article 1302-2.09, Tex.Rev.Civ.Stat.Ann. (Vernon 1980), precludes judicial inquiry into a corporate loan within corporate interest rate limits and signed by a guarantor. We agree with appellant and sustain his first two points of error.

Article 1302-2.09 provides as follows:

Notwithstanding any other provision of law, corporations, domestic or foreign, may agree to and stipulate for any rate of interest as such corporation may determine, not to exceed one and one-half percent (11/2%) per month, on any bond, note, debt, contract or other obligation of such corporation under which the original principal amount is Five Thousand Dollars ($5,000) or more, or on any series of advances of money pursuant thereto if the aggregate of sums advanced or originally proposed to be advanced shall exceed Five Thousand Dollars ($5,000), or on any extension or renewal thereof, and in such instances, the claim or defense of usury by such corporation, its successors, guarantors, assigns or anyone on its behalf is prohibited; however, nothing contained herein shall prevent any charitable or religious corporation from asserting the claim or interposing the defense of usury in any action or proceeding.

Republic correctly points out that as a general rule a lender may condition the making of a loan upon the requirement of a Corporate loan documents, however, may not be used as a fiction to conceal a usurious transaction. Micrea, Inc. v. Eureka Life Ins. Co. of America, 534 S.W.2d 348, 354 (Tex.Civ.App.-Fort Worth 1976, writ ref'd n.r.e.). Furthermore, a corporation may not be used as a subterfuge to cloak a usurious loan to an individual. Franklin Offices, Inc. v. Harding, 579 S.W.2d 254, 255 (Tex.Civ.App.-Dallas 1979, no writ). Usurious transactions are uniformly condemned in Texas no matter how they are disguised. Western Guaranty Loan Co. v. Dean, 309 S.W.2d 857, 863 (Tex.Civ.App.-Dallas 1957, writ ref'd n.r.e.). Texas, therefore, looks to substance, not form, to determine whether a transaction is in fact usurious. Commercial Securities Co. v. Rea, 130 Tex. 11, 105 S.W.2d 872, 875 (1937); Independent Lumber Co. v. Gulf State Bank, 299 S.W. 939, 942 (Tex.Civ.App.-Galveston 1927, writ ref'd).

corporate borrower. This condition, in itself, does not render the loan usurious although the purpose of requiring incorporation is to allow the lender to charge the higher corporate rate of interest. Houston Furniture Distrib., Inc. v. Bank of Woodlake, 562 S.W.2d 880, 883 (Tex.Civ.App.-Houston (1st) 1978, no writ). See American Century Mortgage Investors v. Regional Center, Ltd., 529 S.W.2d 578, 582 (Tex.Civ.App.-Dallas 1975, writ ref'd n.r.e.). It is also the rule that the mere formation of a corporation to obtain an otherwise usurious loan does not normally render the transaction violative of Texas usury laws since the lender's requirement of a corporate borrower is an attempt to comply with the law to obtain a result desired by the parties and permitted by law. Skeen v. Glenn Justice Mortgage Co., 526 S.W.2d 252, 256 (Tex.Civ.App.-Dallas 1975, no writ), citing Jenkins v. Moyse, 254 N.Y. 319, 172 N.E. 521 (1930).

Republic relies upon eight Texas cases for the proposition that a corporate loan within corporate interest rate limits is shielded from judicial scrutiny and that special issues one through four are therefore immaterial. In our view, these special issues are not immaterial. We feel Republic's reliance upon these cases is misplaced for three reasons.

First, and most importantly, many of the cases cited by Republic specifically acknowledge limitations on the use of the corporate form. See, e.g., American Century Mortgage Investors v. Regional Center, Ltd., supra at 580; Houston Furniture Distrib., Inc. v. Bank of Woodlake, supra at 883; Franklin Offices, Inc. v. Harding, supra at 255. Too, the cases relied upon by Republic involve corporate borrowers with corporate business purposes for the loan in question. A critical and distinguishing factor in the case at bar is the undisputed fact that the J.L.S., Inc. loan was...