Uniwest Mortg. Co. v. Dadecor Condominiums, Inc.

• Decision Date: 20 July 1989
• Docket Number: No. 88-1478,88-1478
• Citation: 877 F.2d 431
• Parties: 9 UCC Rep.Serv.2d 577 UNIWEST MORTGAGE CO., Plaintiff-Appellee, v. DADECOR CONDOMINIUMS, INC., and Brett Davis, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 431

877 F.2d 431

9 UCC Rep.Serv.2d 577

UNIWEST MORTGAGE CO., Plaintiff-Appellee, v. DADECOR CONDOMINIUMS, INC., and Brett Davis, Defendants-Appellants.

No. 88-1478.

United States Court of Appeals Fifth Circuit.

July 20, 1989.

Rehearing Denied Aug. 23, 1989.

Michael F. Pezzulli and Charles J. Fortunato, Dallas, Tex., for defendants-appellants.

Robert P. Latham and Jonathan L. Snare, Dallas, Tex., for plaintiff-appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before GOLDBERG, REAVLEY and HIGGINBOTHAM, Circuit Judges.

GOLDBERG, Circuit Judge:

Appellants in this choice of law case would have us strap on mountaineering gear and scale the Pikes Peak of usury law--Colorado law. As amateur cartographers, we are certainly willing, and do, survey the undulations of the mountain, but the appellants have ill-equipped us with the necessary apparatus for a wintery ascent. Without crampons, ice axes, and other snowy habiliments, such a climb would be ill-advised. Using our transit, therefore, we caliper our way to an affirmance of the district court.

I. FACTS AND PROCEDURAL BACKGROUND

Appellant-defendant Brett Davis ("Davis") is the president of appellant-defendant Dadecor Condominiums, Inc. ("Dadecor"). Dadecor borrowed $550,000 from appellee-plaintiff Uniwest Mortgage Co. ("Uniwest"). Davis executed a separate guaranty agreement which guarantees both the present loan and all future indebtedness of Dadecor to Uniwest unconnected with this loan. Uniwest is incorporated in Wyoming with its principal place of business in Denver, Colorado. Dadecor has both its principal place of business and place of incorporation in Texas.

Uniwest sued Davis, as the guarantor, and Dadecor, as the obligor of the promissory note, after Dadecor defaulted on the loan. The district court's jurisdiction properly rests upon diversity of citizenship. 28 U.S.C. Sec. 1332. Appellants claim that Texas law applies, and that the loan and guaranty are usurious under Texas law. Alternatively, appellants contend that the loan and guaranty are usurious even assuming Colorado law applies. The district court found that Colorado law applies and that the loan and guaranty are not usurious. We agree.

As reflected in a 90 day promissory note, Uniwest loaned Dadecor $550,000 at an annual interest rate of 10.5% (18.5% for overdue payments), calculated on the basis of a 360-day year. The loan was executed on December 24, 1986 and became due on March 25, 1987. Also on December 24, 1986, Davis executed, in his individual capacity, the separate guaranty agreement which guarantees the Dadecor-Uniwest December 24, 1986 promissory note and all future indebtedness unconnected with this promissory note. Additional terms of both the guaranty and the promissory note appear in a separate document, the "letter loan agreement." The clause that appellants claim is usurious appears in the letter loan agreement.

Paragraph three of the typewritten letter loan agreement, and a handwritten footnote, which is referenced in paragraph three, state:

Guarantor [Davis] hereby agrees to use his best efforts to cause Troy & Nichols, within 120 days of the date hereof, to provide Lender [Uniwest] with a continuing commitment to purchase residential mortgage loans in amounts up to $2 million a month on such terms and conditions as offered to the best customers of Troy & Nichols.* [HANDWRITTEN FOOTNOTE: "Lender acknowledges that Guarantor will make no efforts in this regard unless and until Troy & Nichols is no longer owned by Stockton Savings Association or any other FSLIC insured institution and Guarantors (sic) obligation hereunder is undertaken solely as a broker and does not represent any action as a principal or owner of Troy & Nichols and that the decision to make any such commitment shall be an independent decision of the Management of Troy & Nichols."] If Guarantor is unable to cause Troy & Nichols to issue such a commitment, Guarantor shall pay Uniwest Mortgage Co. on demand a loan origination fee of $85,000 for providing this loan to Borrower. Such payment obligation is secured by a Security Agreement ¹ of even date herewith.

Uniwest has never demanded the $85,000 mentioned in the letter loan agreement, payable by Davis in his capacity as guarantor, nor has Davis ever paid any of the $85,000.

The Dadecor-Uniwest promissory note includes the following language:

This Note is secured by, and the holder of this Note is entitled to the benefits of, a Security Agreement (the "Security Agreement") and a Guaranty Agreement (the "Guaranty Agreement") of even date herewith given by Brett Davis for the benefit of Payee to secure this Note. Reference is made to the Security Agreement and Guaranty Agreement for a description of the property covered thereby and the rights, remedies and obligations of the holder hereof in respect thereto.

* * *

* * *

This Note is to be governed by and construed according to the laws of the State of Colorado.

The guaranty agreement is a preprinted form which includes the following pertinent provision: "Indebtedness: All obligations of Borrower [Dadecor] to Bank [Uniwest] now or hereafter existing, howsoever created, arising or evidenced, whether direct or indirect, voluntary or involuntary, absolute or contingent, liquidated or unliquidated, and whether Borrower may be liable individually or jointly with others. * * * This guaranty shall be construed and governed by the laws of Colorado."

Uniwest, Dadecor and Davis, as the guarantor, executed a Modification and Extension Agreement on April 30, 1987, extending the maturity date of the loan to June 23, 1987. Dadecor thereafter defaulted. A principal of $390,775 was outstanding, Dadecor having paid $159,225 on the principal. Dadecor had also paid accrued interest in the amount of $5,812.78.

Uniwest filed this suit in the Northern District of Texas on September 22, 1987, against Dadecor and Davis. Dadecor and Davis counterclaimed asserting causes of action under Texas and Colorado usury law, and argued as an affirmative defense that the loan was illegal under both Texas and Colorado usury law. The parties filed opposing motions for summary judgment. The district court granted Uniwest's motion for summary judgment and denied Davis and Dadecor's motion for summary judgment, holding that the parties' contractual choice of Colorado law should be given effect, and that under Colorado law, the interest charged was not usurious. The district court awarded Uniwest the principal and interest as provided for in the promissory note ($390,775 plus accrued and unpaid interest thereon in the amount of $41,601.25 as of March 24, 1988, interest at the rate of $113.98/day from March 24, 1988 to June 7, 1988, the day of Judgment, and post-judgment interest at the rate of 10% until satisfaction of Judgment).

Both the promissory note and the guaranty agreement include reasonable attorneys' fees provisions. The district court awarded Uniwest reasonable attorneys' fees in the amount of $13,268.50.

Dadecor and Davis appeal to this Court.

II. DISCUSSION

The choice of law provision in the guaranty agreement ² declares that Colorado law applies to disputes arising from the guaranty. The guaranty agreement includes a potentially usurious provision--the $85,000 "fee" due Uniwest if Davis failed to perform certain services. Because we sit in diversity, we must apply the law of Texas, the forum. The issue in this case, then, is whether the guaranty's express choice of Colorado law provision is enforceable under Texas law.

While we agree with the district court that the parties' choice of Colorado law applies according to Texas choice of law principles, we take a slightly different path in reaching our conclusion. We first decide whether the Uniform Commercial Code ("UCC") or the common law of contracts applies to this dispute. The district court relied upon a UCC case, Woods-Tucker Leasing Corp. v. Hutcheson-Ingram, 642 F.2d 744, 751-53 (5th Cir.1981) (UCC's reasonable relationship test), in reaching its conclusion. As we shall explain, Woods-Tucker is not the guiding case for this dispute because the common law, not the UCC, governs the guaranty agreement.

Since the district court issued its opinion, the Texas Supreme Court has announced a new standard for non-UCC cases. Desantis v. Wackenhut Corp., 31 Tex.Sup.Ct.J. 616, --- S.W.2d ---- (July 13, 1988). ³ Under Desantis, Texas' interest in Davis' guaranty agreement is not materially greater than Colorado's interest. Therefore, we apply the contractual provision which chooses Colorado law as the governing law to this dispute. The guaranty's clause concerning an additional fee of $85,000 is not usurious because it is contingent and the payee (Uniwest) has not demanded payment. A contingent uncollected sum does not enter into one's calculation of usurious interest under Colorado law. Finally, the attorneys' fees, which the district court awarded pursuant to the terms of the contracts, are reasonable.

A. THE UNIFORM COMMERCIAL CODE

We first confront whether the Uniform Commercial Code or common law choice of law principles apply to the guaranty agreement. Article 3 of the Texas Uniform Commercial Code covers commercial paper. We assume that the promissory note is a negotiable instrument. Tex.Bus. & Com.Code Sec. 3.104. ⁴

For a guaranty to fall within the scope of UCC Sec. 3.416 (guarantors), the guarantor must "sign" the "instrument" in the capacity of a guarantor. The guaranty agreement in this case is a separate agreement; it is not a part of the promissory note, the negotiable instrument. In addition, the guaranty agreement is general covering all current or potential future indebtedness between Dadecor and Uniwest. The guaranty is not limited to the scope of the promissory note.

A separate guaranty agreement does not fall within the ambit of the Uniform Commercial Code. See Crown Life Ins. Co. v. LaBonte, 111 Wis.2d 26,...