Woods-Tucker Leasing Corp. of Georgia v. Hutcheson-Ingram Development Co.

• Decision Date: 03 April 1981
• Docket Number: HUTCHESON-INGRAM,WOODS-TUCKER,No. 79-1651,79-1651
• Citation: 642 F.2d 744
• Parties: 30 UCC Rep.Serv. 1505 LEASING CORPORATION OF GEORGIA, Appellant, Cross-Appellee, v.DEVELOPMENT COMPANY, A Partnership, and Harry L. Crumpacker, III, Appellees, Cross-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 744

642 F.2d 744

30 UCC Rep.Serv. 1505

WOODS-TUCKER LEASING CORPORATION OF GEORGIA, Appellant, Cross-Appellee, v. HUTCHESON-INGRAM DEVELOPMENT COMPANY, A Partnership, and Harry L. Crumpacker, III, Appellees, Cross-Appellants.

No. 79-1651.

United States Court of Appeals, Fifth Circuit.

April 3, 1981.

J. Albert Kroemer, Dallas, Tex., for appellant, cross-appellee.

David T. Harvin, Houston, Tex., for Vinson and Elkins, amicus curiae.

Leon Jaworski, Fulbright & Jaworski, Houston, Tex., Arthur Blanchard, Craig Murrin, DeHay & Blanchard, Dallas, Tex., for FNB Financial Co., amicus curiae.

John H. McElhaney, Dallas, Tex., for Aetna Life Ins. Co., etc.

George A. Crowley, Fort Worth, Tex., for Great American Management and Inv., Inc.

Steven A. Lande, Los Angeles, Cal., for Lipofsky, Lande & Leipziger.

Steve Brutsche, Gerald P. Urbach, Dallas, Tex., for appellees, cross-appellants.

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

On Petition For Rehearing

Before GOLDBERG, TATE, and SAM D. JOHNSON, Circuit Judges.

TATE, Circuit Judge:

The appellant's application for rehearing is granted. Our previous opinion, reported at 626 F.2d 401 (1980), is withdrawn and vacated and the following opinion is substituted in its place:

The central remaining issue of this appeal concerns whether a bankruptcy court sitting in Texas should honor a party contractual choice of Mississippi law in determining whether to apply the Texas or Mississippi usury statute to a transaction (involving Texas-located property) between a Texas partnership and a Mississippi-headquartered corporate subsidiary of a Georgia corporation. In our opinion on original hearing, ¹ we held that Texas law applied to the transaction, despite the contractual choice of Mississippi law by the parties, essentially on the ground that, under Texas choice-of-law rules, the parties could not contrive to evade the usury laws of Texas in a loan transaction having its most significant contacts in Texas. The defendant-appellant restricts its application for rehearing so as to question only the panel's decision applying Texas law rather than the party-selected law of Mississippi ² a state with which the transaction bore a "reasonable relation," as solely required by Uniform Commercial Code § 1-105(1) (1972 version), adopted by the legislatures of both Texas and Mississippi. ³ Upon reconsideration, we find that, as contended, the party contractual choice of Mississippi law should be honored, and we affirm the district court's decision to that effect.

Factual Context

In the written instruments executed between the parties, ⁴ the Texas partnership (Hutcheson-Ingram) sold farm equipment to the Mississippi-based purchaser (Woods-Tucker) for $85,000 (although the evidence accepted by the trier of fact is that its value was some $197,000); Woods-Tucker simultaneously leased it back to Hutcheson-Ingram for three years at a rental of some $3,000 per month, for total (re)payments of $114,061. The lease, which expressly provided that it "shall be governed by the law of the state of Mississippi," was silent as to any right of Hutcheson-Ingram to repurchase the equipment. However, admitting extrinsic evidence, ⁵ the bankruptcy judge found that the parties had entered into a collateral oral agreement that gave Hutcheson-Ingram the option to repurchase the equipment for $8,500 at the expiration of the three-year lease term, and that at that time the equipment would have a value in excess of the $40,000 for which it sold under distress conditions during the bankruptcy proceedings findings that the district court affirmed (as do we) as not clearly erroneous (and as, in fact, supported by the great weight of the evidence, if the extrinsic evidence is admissible).

The bankruptcy court, considering these and other surrounding facts, determined that the transaction, although a sale-leaseback in form, was a transaction intended to create a security interest in the farm equipment to secure payment of the money advanced by the "purchaser" as the price, and that therefore it was a secured loan regulated by the UCC rather than a sale and leaseback intended to permanently divest Hutcheson-Ingram, the seller-borrower, of title. ⁶ See UCC §§ 1-201(37) and 9-102(1). This finding was affirmed by the district court and by us in our original hearing, as was the consequent determination of the bankruptcy court that treating the transaction as a secured loan the amount exacted in repayment included interest in excess of 20% per annum.

We should here note that the transaction was therefore usurious under either Mississippi or Texas law, both of which then provided for a maximum interest rate of 10% per annum. The practical difference to the parties in the application of the respective laws is that Texas law provides more stringent penalties for usury violations, as well as clearly for the imposition of attorney's fees (as to which Mississippi law is less clear ⁷).

I. The Choice of Law Issue

The choice of law issue arises in the context of a federal bankruptcy proceeding in Texas. It arises in connection with the enforcement by a Mississippi creditor of a security interest against a Texas debtor on an obligation finally executed in Mississippi, with regard to property located in Texas both at the time the transaction was entered into and at the time the security interest was sought to be enforced. Resolution of the substantive issues does not implicate any federal rule or bankruptcy policy but only whether, under applicable state law (either that of Texas or of Mississippi) the transaction is in fact a secured loan rather than a true sale-leaseback; and if a loan, whether it is usurious. Under these circumstances, whether the claim of the creditor is a "valid and subsisting" obligation "is a question which, in the absence of overruling federal law, is to be determined by reference to state law." Vanston Bondholders Protective Committee v. Green, 329 U.S. 156, 161, 67 S.Ct. 237, 239, 91 L.Ed. 162 (1946) (holding, however, that under its circumstances the payment of interest on interest implicated federal bankruptcy policies and was determinable by federal, not state, law).

Where the transaction has multistate contacts (as here), Vanston continues, the determination of which particular state's law should apply "requires the exercise of an informed judgment in the balancing of all the interests of the states with the most significant contacts in order best to accommodate the equities among the parties to the policies of those states." Id., 329 U.S. at 162, 67 S.Ct. at 239. In the case before us, the transaction sought to be enforced in a Texas federal forum has significant contacts with both Texas and Mississippi. A threshold question here is whether in resolving issues of state law arising in the context of a bankruptcy proceeding, a federal court must apply the choice of law rules of the forum state in which it sits, see Klaxon v. Stentor Elec. Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); Erie R.R. Co. v. Tomkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), or may exercise its independent judgment and choose whatever state's substantive law it deems appropriate in the context of the case before it, see 1A Moore's Federal Practice P 0.325, at 3406-13 (1980). Both the Supreme Court and this circuit have taken care to avoid resolving this question in the context of the Bankruptcy Act. E. g., Vanston Bondholders Protective Committe v. Green, supra, 329 U.S. at 161-62, 67 S.Ct. at 239; McKenzie v. Irving Trust Co., 323 U.S. 365, 371 n.2, 65 S.Ct. 405, 408 n.2, 89 L.Ed. 305 (1945); Fahs v. Martin, 224 F.2d 387, 396-97 (5th Cir. 1955); but cf. In Re Wallace Lincoln-Mercury Co., Inc., 469 F.2d 396, 400 n.1 (5th Cir. 1972) ("In this federal bankruptcy case the District Court is not obliged to use the choice-of-law methodology of the forum state....") (dicta ). ⁸

To the extent we are faced with this threshold question of whether a federal or a forum (Texas) choice of law rule applies, we see no need to resolve it. For reasons to be elaborated, we find that Texas, by its adoption of the UCC, has provided a choice of law rule specifically directed to contractual choice of law provisions by parties to transactions regulated by the UCC. Texas UCC § 1.105(a). If we were required to exercise independent federal judgment in choosing whether to apply Texas or Mississippi law to this UCC-regulated transaction involving significant contacts with both Texas and Mississippi, we would likewise look to UCC § 1-105(1), adopted in identical versions in both Texas and Mississippi (see note 3 supra ) as part of a national effort to establish a nationally uniform law to govern the validity and effect of commercial transactions. Texas UCC § 1.102(b)(3); Mississippi UCC § 75-1-102(2)(c). As stated in In Re King-Porter Company, 446 F.2d 722, 732 (5th Cir. 1971), although in the context of a different issue arising in a bankruptcy proceeding: "The Uniform Commercial Code has been adopted in all but one state. It should generally be considered as the federal law of commerce including secured transactions."

We therefore conclude, as did the panel in Fahs v. Martin, supra, that the application of an independent federal choice of law rule and of the forum state's choice of law rule would lead to the same result, and thus "we do not determine which road the trial court should have travelled to arrive at the common destination." Fahs v. Martin, 224 F.2d at 399.

II. The Texas Choice of Law Rule

Both parties contend that the Texas choice of law rule should determine whether the law of Texas or instead of Mississippi governs the validity and alleged usuriousness of this transaction with contacts with both states. ⁹ The debtor, Hutcheson-Ingram, contends that the law of Texas (pertinently, here, its usury law) applies, since Texas had the most significant contacts with...