Trail Dr., LLC v. Silver Hill Fin., LLC

• Decision Date: 07 June 2012
• Docket Number: NO: 4:11CV00173 SWW,: 4:11CV00173 SWW
• Parties: TRAIL DR., LLC Plaintiff v. SILVER HILL FINANCIAL, LLC; MANUFACTURERS AND TRADERS TRUST COMPANY; BAYVIEW LOAN SERVICING, LLC; and WACHOVIA COMMERCIAL MORTGAGE, INC. Defendants
• Court: U.S. District Court — Eastern District of Arkansas

TRAIL DR., LLC Plaintiff

v. SILVER HILL FINANCIAL, LLC; MANUFACTURERS AND TRADERSTRUST COMPANY; BAYVIEW LOAN SERVICING, LLC; andWACHOVIA COMMERCIAL MORTGAGE, INC. Defendants

NO: 4:11CV00173 SWW

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF ARKANSAS WESTERN DIVISION

Dated: June 7, 2012

ORDER

Plaintiff Trail Dr., LLC ("Trail") filed this action in state court against Silver Hill Financial, LLC ("Silver Hill"), Manufacturers and Traders Trust Company ("M&T"), and Bayview Loan Servicing, LLC ("Bayview"), alleging, among other things, that Defendants violated Arkansas usury law. Defendants removed the case to federal court, asserting subject matter jurisdiction on the basis of complete diversity of citizenship between the parties and an amount in controversy exceeding $75,000.

The case is before the Court on cross motions for summary judgment (docket entries #47, #48, #49, #50 through #66), responses in opposition (docket entries #67, #69, #68, #70), and replies in support (docket entries #71, #72). After careful consideration, and for reasons that follow, Defendants' motion for summary judgment will be granted, and this case will be dismissed with prejudice.

Summary judgment is appropriate when "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). As a prerequisite to summary judgment, a moving party must demonstrate "an absence of evidence to support the non-moving party's case." Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986). Once the moving party has properly supported its motion for summary judgment, the non-moving party must "do more than simply show there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).

The non-moving party may not rest on mere allegations or denials of his pleading but must "come forward with 'specific facts showing a genuine issue for trial.'" Id. at 587 (quoting Fed. R. Civ. P. 56(e)). "[A] genuine issue of material fact exists if: (1) there is a dispute of fact; (2) the disputed fact is material to the outcome of the case; and (3) the dispute is genuine, that is, a reasonable jury could return a verdict for either party." RSBI Aerospace, Inc. v. Affiliated FM Ins. Co., 49 F.3d 399, 401 (8th Cir. 1995).

II.

The following facts are undisputed.¹ Trail, a limited liability company, was formed by Aviva Janofsky ("Janofsky") and Joseph O'Sullivan ("O'Sullivan"). On August 22, 2006, Janofsky and O'Sullivan entered a real estate sales contract with non-party James Thompson forthe purchase of a mobile home park located in Mabelvale, Arkansas. The sales contract makes the offer to purchase contingent on obtaining satisfactory financing, in the buyer's sole discretion, within 30 days after acceptance. See docket entry #52, Ex. #20 (Real Estate Contract, ¶16). The contract provides:

Buyer shall notify Seller in writing when the contingencies are satisfied. If Buyer fails to provide such written notice before the [30-day deadline] that a contingency . . . has been satisfied, then this [contract] shall be void and the Earnest Money shall be refunded to the Buyer, and the Buyer and Seller shall have no further obligation to each other.

Id.

After obtaining loan terms from several lenders, Janofsky and O'Sullivan executed two adjustable rate promissory notes in favor of Silver Hill: a note for the principal amount of $185,600 ("First Note") and a note for the principal amount of $23,200 ("Second Note"). Trail is named borrower on the First and Second Notes, and O'Sullivan and Janofsky personally guaranteed Trail's loan debt.

Before closing the loans, Silver Hill issued two forms titled "Final Loan Term Sheet" to Janofsky and O'Sullivan, which "outlines certain key business terms and conditions of the proposed loan with Silver Hill Financial, LLC." Docket entry #47, Exs. #1, #2 The Final Loan Term Sheets outline the interest rate of the proposed loans as follows: "Fixed at 9.750% for the first 84 months. Thereafter, Prime Rate (currently 8.23%) plus 2.375 adjusted every six (6) months." Id. Additionally, the documents outline two prepayment penalties that would apply if the borrower repaid the principal balance during the "Lockout Period," defined as the initial seven years of the thirty-year amortization period. The prepayment penalties described in the Final Loan Term Sheets include: (1) a prepayment fee equal to five percent of the unpaid balance and (2) an amount equal to "all interest accrued during the Lockout period on the then-outstanding principal balance of the Loan."² O'Sullivan read and understood the Final Loan Term Sheets, and he and Janofsky signed them.

The real estate sale and related mortgage transactions closed on November 7, 2006. The closing documents that required O'Sullivan's and Janofsky's signatures were dispatched to them by overnight delivery. O'Sullivan, as representative for Trail, read all of the closing documents, including the First and Second Notes, before he signed and returned them to the closing company in Arkansas.

Paragraph 1 of the Notes provides an initial interest rate of 9.750% per annum for the first eighty-four months of the loan term, to be adjusted on specified change dates. See docket entry #47, Exs. #3, #4. The Notes provide that the interest rate will not be increased or decreased more than 2% on the initial change date or more than 1.5% on subsequent change dates. Id. Paragraph 7 of the Notes, set forth below, concerns prepayment penalties:

7. PREPAYMENT

a. Lockout Period: Borrower shall not be permitted to make any full or partial prepayment of the principal balance of this Note (a "Prepayment") prior to that date

that is eighty-four (84) months after the date of this Note (the "Lockout Period"). If, for any reason, a Prepayment is made during the Lockout Period (a "Lockout Prepayment"), Borrower shall, simultaneously therewith, be obligated to pay: (i) the aggregate amount of interest which would have accrued on the unpaid principal balance of this Note from the date of such Lockout Prepayment through the expiration date of the Lockout Period (the "Lockout Fee"), plus (ii) all amounts specified in Section 7(b) below).

b. Prepayment Period: At any time during the Prepayment Period (as defined below), the principal balance of this Note may be prepaid in whole, but not in part, pursuant to the terms contained in this Section 7. If Borrower makes any Prepayment within the first Seven years after the date of this Note (the "Prepayment Period"), the Borrower shall be obligated to pay to Lender the following amounts:

(i) an amount equal to Five percent (5.000%) of the then outstanding unpaid principal balance of this Note (the "Prepayment Consideration"); and

(ii) all accrued interest on the outstanding principal balance to and including date on which the Prepayment is made; and

(iii) all other sums due under this Note, the Security Instrument and all Other Security Documents.

c. Prepayments Without Consideration: No Prepayment Consideration or Lockout Fee (if any) shall be due or payable with respect to any full or partial Prepayment made by Borrower after expiration of the Prepayment Period.

d. Notice of Prepayment: Prior to making any Prepayment, Borrower must provide Lender with not less than sixty (60) days advance written notice of Borrower's intent to make such Prepayment. Such notice must specify: (i) the date on which Prepayment is to be made, and (ii) the principal amount of such Prepayment. Lender shall not be obligated to accept any Prepayment unless it is accompanied by all other amounts due in connection therewith.

Docket entry #47, Exs. #3, #4(emphasis added). Paragraph 16 of the Notes contains a merger clause stating the Notes, the security instrument and other security documents represent the final agreement between the parties. Id.

In exchange for the First and Second Notes, Trail received $208,800 for purchase of the mobile home park. Trail made payments on the First and Second Notes through May 8, 2010,but then ceased making any payments.

By early 2010, Trail's mobile home park was uninhabited and in disrepair. See docket entry #47, Ex. A (O'Sullivan Dep. at 109, 116). According to O'Sullivan, the prepayment penalties associated with the Notes prevented Trail from selling the park or obtaining funds through refinancing. Id., at 117. Trail requested and received payoff statements from the loan servicers, Defendants M&T and Bayview. M&T issued a payoff statement for the First Note, showing a total payoff of $264,220.43, which included $78,557 in prepayment consideration. See docket entry #65, Ex. #18. Bayview issued a payoff statement for the Second Note, showing a total payoff of $33,949.20, which included prepayment consideration of $1,135.10 and a lockout fee of $6,755.59. See docket entry #65, Ex. #19. Trail never attempted to prepay the Notes, and has never paid prepayment consideration or lockout fees under the Notes.

Trail commenced this lawsuit on January 18, 2011, claiming that Silver Hill, Bayview, and M&T charged usurious interest rates and committed unconscionable conduct in violation of the Arkansas Deceptive Trade Practices Act. Additionally, Trail brings a separate fraud claim against Silver Hill, claiming that Silver Hill induced it to make the First and Second Notes by misrepresenting an effective interest rate of 9.75%. Trail seeks summary judgment as to all claims.

III.

Usury

Arkansas's usury law,³ set out in the Arkansas Constitution, provides: "The maximum lawful rate of interest on any contract ... shall not exceed five percent (5%) per annum above the Federal Reserve Discount Rate at the time of the contract." Ark. Const. art. 19 § 13(a)(i) (1987). Usurious contracts are void as to the amount of usurious interest, and a party who has been subjected to usurious interest...