In response to a 50% rate of interest, Dallas Court of Appeals says, “are usurious?”

Interest Rates

“How many legs does a dog have if you call his tail a leg? Four. Saying that a tail is a leg doesn’t make it a leg.” — Abraham Lincoln.  The same can be said for usurious loans.

In Koch v. Boxicon, LLC, the Dallas Court of Appeals considered the appeal of Koch, a chiropractor, who was sued by Boxicon for breaching an agreement for the “purchase of future business income.”  Boxicon had financed Koch’s business by paying Koch $96,000 over six months. In exchange, Koch was required to make “pay back payments” to Boxicon totaling $192,000 over two years. The defendant claimed agreement was a usurious loan while the defendant claimed the agreement wasn’t a loan at all because the recitals expressly stated the agreement “is NOT a loan.”  The trial court allowed the jury to decide and entered a judgment in favor of the plaintiff. The Dallas Court of Appeals reversed and held that the agreement was usurious as a matter of law. Noting that courts look to the substance rather than the form of a transaction, the court held that agreement met the statutory definition of a loan and provided for an absolute obligation to repay the principal. Though the agreement stated it was a “purchase of a portion of the future cash stream generated by the business” and “is NOT a loan,” the agreement went on to state that “This is NOT an agreement to buy a percentage of the business, but for a fixed return upon capital invested by Buyer as per this agreement.” So, what is a loan agreement if you agree it isn’t a loan?  A loan.  Saying that it isn’t a loan doesn’t make it not a loan (regardless of your use of all caps).

Koch v. Boxicon

 

Bank Error in Your Favor

After the real estate bubble burst in 2008, borrowers attempted all sorts of ways to get out of their obligations. Most notably, debtors repeatedly challenged the ways that their mortgages had been transferred and recorded (or not) by the banks that had held, swapped, sold, and securitized them. Long story short, it hardly ever worked, as courts across the country mostly (but not always) eschewed technical arguments in favor of the big picture of who owed what to whom. But a new opinion from the Dallas Court of Appeals shows that when the bank doesn’t follow the rules in litigation, the debtors may still escape liability on a loan.

In this instance, a pair of individual guarantors for a $748,000 loan were sued by Wells Fargo after the borrower defaulted. While the case was pending, Wells Fargo allegedly assigned the loan documents to another entity, Apex. Wells Fargo’s attorneys later filed a motion for withdrawal and substitution, which the trial court granted. The motion failed to mention the assignment of the loan documents to Apex. The guarantors then filed for no-evidence summary judgment, pointing out that Wells Fargo had conducted no discovery and that the discovery period was closed. The motion argued that there was no evidence to show who owned the guaranty. When Apex appeared and tried to cure that deficiency, the guarantors objected and moved to strike Apex’s summary judgment evidence. The trial court sustained the objections and granted summary judgment. The Court of Appeals affirmed, holding that it was not an abuse of discretion to exclude Apex’s evidence because it had waited 11 months after acquiring the loan to amend Wells Fargo’s discovery responses by disclosing its ownership. That was not “reasonably prompt,” and it acted as an unfair surprise to the guarantors to have that come out only in response to their summary judgment motion.

LSREF2 Apex (TX) II, LLC v. Blomquist, No. 05-14-00851-CV

Evidence Is No Impediment the Second Time Around

Just under two years ago, the Court of Appeals reversed summary judgment for Compass Bank because its custodian of records affidavit did not explain how the witness would have personal knowledge to prove up the promissory note. On remand, the trial court granted the bank’s amended motion for summary judgment, and this time that judgment was affirmed. Among other things, the defendants sought to establish a fact issue by pointing to a discrepancy in the amount of damages owed to the bank in the original summary judgment affidavit versus the affidavit in the amended motion. The Court of Appeals disposed of that issue by pointing out that it had already held the original affidavit to be “no evidence,” so the purported conflict was not really a conflict at all. The Court also held that the bank was not required to file the original promissory note, despite a Collin County local rule to that effect, because the local rule conflicted with the Texas Rules of Evidence governing the admissibility of a duplicate. Finally, although the lending instrument contained an illegal homestead warranty provision, the Court held that provision was severable from the remainder of the contract.

Vince Poscente Int’l, Inc. v. Compass Bank, No. 05-14-00165-CV

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Expert Jiu Jitsu and Attorney Fees

In 2010, the Court of Appeals reversed summary judgment in favor of the lender in a collateral-disposition case, holding that the borrowers had raised a fact question as to the commercial reasonableness of the property. DMC Valley Ranch, L.L.C. v. HPSC, Inc., 315 S.W.3d 898 (Tex. App.–Dallas 2010, no pet.). On remand, the lender took the position that the defendants’ valuation expert report was correct, and again moved for summary judgment on that basis (apparently seeking to recover a smaller deficiency rather than fighting for a larger one). The trial court granted summary judgment for the lender, and also awarded attorney fees via summary judgment. The Court of Appeals affirmed on the deficiency ruling, but reversed on attorney fees. The Court held that there was a fact issue on the reasonableness and necessity of the attorney fees because the defendants’ attorney had submitted an affidavit opining that it was unreasonable to seek fees for unsuccessful appeals and motions, and that it was not appropriate to have seven lawyers on the file. The case was therefore remanded for further proceedings on attorney fees.

DMC Valley Ranch LLC v. HPSC, Inc., No. 05-11-01730-CV