Sterling Property Management, Inc. v. Texas Commerce Bank ( 1994 )

United States Court of Appeals,
Fifth Circuit.
No. 93-2865.
STERLING PROPERTY MANAGEMENT, INC., et al., Plaintiffs-
Appellants,
v.
TEXAS COMMERCE BANK, NATIONAL ASSOCIATION, Defendant-Appellee.
Sept. 27, 1994.
Appeal from the United States District Court for the Southern
District of Texas.
Before JONES, BARKSDALE and BENAVIDES, Circuit Judges.
BENAVIDES, Circuit Judge:
This case arises out of loan renewals granted by the Appellee,
Texas Commerce Bank, National Association (TCB), to the Appellants,
Sterling Texas Contractor, Inc. (Sterling) and Metro Draperies,
Inc. (Metro). Sterling and Metro each executed a promissory note
to TCB and guaranteed each other's note. Appellants seek reversal
of the summary judgment denying relief on their claim of usury
against TCB and granting TCB's counterclaims for non-payment of the
two notes. Applying Texas law, the district court found that the
plaintiffs had failed to raise a genuine issue of material fact as
to their respective usury claims. The Appellants also challenge
the award of attorneys' fees, claiming that the fees awarded were
unreasonable and excessive. We affirm the summary judgment with
respect to the usury claims and the non-payment of the notes.
Finding a genuine issue of material fact as to the reasonableness
of the attorneys' fees, we reverse and remand.
1
I. FACTS AND PROCEDURAL HISTORY
On December 12, 1989, Sterling executed a note for $50,000,
with Metro giving an absolute guaranty of payment on the note. On
the same date, Metro executed a note for $54,295.60, with Sterling
providing the absolute guaranty of payment. Paul Nichols signed
the documents in his capacity as president of Sterling. Paula
Nichols signed the documents in her capacity as president of Metro.
Prior to December 12, 1989, the only guarantor of the two
promissory notes of Metro and Sterling was Paul Nichols.
On February 3, 1992, Sterling Property Management, Inc.,
Sterling, Metro, Paul Nichols, Paula Nichols, and Sterling
Advertising filed a complaint against TCB in the 234th Judicial
District Court of Harris County, Texas. Among the claims made was
that the notes executed by Sterling and Metro were usurious. TCB
filed a notice of removal based on federal question jurisdiction,
and the entire action was removed to the United States District
Court for the Southern District of Texas, Houston Division. TCB
filed an answer containing compulsory counterclaims seeking
recovery on the two notes and reasonable attorneys' fees. The
plaintiffs filed a motion to remand, alleging improper notice of
removal. The district court determined that there was no
independent basis for federal jurisdiction over the plaintiffs'
state law claims, and partially granted the motion, remanding most
of the claims to state court. The court retained jurisdiction over
the usury claim pursuant to the provisions of the National Bank
2
Act, 12 U.S.C. sections 85 and 86,1 and TCB's counterclaim to
recover on the notes.
TCB filed a motion for summary judgment, arguing that there
was no genuine issue of material fact as to the usury claim and
thus, it was entitled to judgment as a matter of law on its
counterclaim for payment of the notes. The Plaintiffs argued that
the motion should be denied, urging a factual dispute. The
district court granted TCB's motion for summary judgment and
ordered the plaintiffs to pay $127,582.87 in damages and accrued
interest, $47,000 in attorneys' fees, and costs of court. Sterling
and Metro now appeal, arguing that the two notes were usurious and
disputing the reasonableness of the attorneys' fees.
II. STANDARD OF REVIEW
When a summary judgment is appealed, this Court evaluates a
district court's decision to grant summary judgment by reviewing
the record under the same standards that the district court applied
to determine whether summary judgment was appropriate. Herrera v.
Millsap, 862 F.2d 1157, 1159 (5th Cir.1989). Therefore, the
summary judgment will be affirmed only when this Court is
"convinced, after an independent review of the record, that "there
is no genuine issue as to any material fact' and that the movant is
entitled to judgment as a matter of law.' " Id. (quoting Brooks,
Tarlton, Gilbert, Douglas & Kressler v. United States Fire Ins.
Co., 832 F.2d 1358, 1364 (5th Cir.1987) and Fed.R.Civ.P. 56(c)).
1
These federal statutes contain the applicable usury
provision and allow a bank organized under state law to charge
the rate of interest allowed under state law.
3
Fact questions must be considered with deference to the nonmovant.
Herrera v. Millsap, 862 F.2d at 1159. Accordingly, when a fact
question is dispositive of a summary judgment motion, we "review
the facts drawing all inferences most favorable to the party
opposing the motion." Id. (citation and internal quotation marks
omitted). Questions of law, however, are reviewed de novo. Id.
III. CLAIM OF USURY
As previously set forth, the district court granted TCB's
motion for summary judgment finding that the usury claim failed as
a matter of law and that TCB was entitled to judgment as a matter
of law on its counterclaim for payment of the notes. The parties
agree that Texas law governs the determination whether the
transactions are usurious. Under Texas law, interest "is the
compensation allowed by law for the use or forbearance or detention
of money," and usury "is interest in excess of the amount allowed
by law." Tex.Rev.Civ.Stat.Ann. art. 5069-1.01(a), (d) (Vernon
1983); see In re Casbeer, 793 F.2d 1436, 1444 (5th Cir.1986).
Additionally, because the usury statute is penal in nature, it must
be strictly construed. Texas Commerce Bank-Arlington v. Goldring,
665 S.W.2d 103, 104 (Tex.1984).
The Appellants admit that the two promissory notes have not
been paid in full. However, relying on Alamo Lumber Co. v. Gold,
661 S.W.2d 926 (Tex.1983), they claim that the notes are usurious.
In Alamo Lumber, the Texas Supreme Court held "that a lender who
requires as a condition to making a loan, that a borrower assume a
third party's debt, as distinguished from a requirement that the
4
borrower pay another one of his own debts, must include the amount
of the third party's debt in the interest computation." Alamo
Lumber, 661 S.W.2d at 928. Accordingly, the following requirements
must be met for Alamo Lumber to apply: (1) a lender requires as a
condition to making a loan to the borrower; (2) that the borrower
assume a third party's debt.
The Appellants argue that their situation essentially is
identical to the one in Alamo Lumber. The court below assumed for
purposes of the motion for summary judgment that TCB had required
the guaranties as a condition of the loan renewals for Sterling and
Metro. The district court further assumed, and TCB has not
contested, that if Alamo Lumber is applicable to this scenario, the
notes would be usurious.
Relying on Moore v. Liddell, Sapp, et al., 850 S.W.2d 291
(Tex.App.—Austin 1993, writ denied), TCB argues that Alamo Lumber
does not apply to the facts of this case. In Moore, the Texas
court of appeals held "that Alamo Lumber does not apply to the ...
situation of a guaranty of another's debt as a condition for a
loan." Moore, 850 S.W.2d at 294 (emphasis added). The Court of
Appeals expressly refused to apply Alamo Lumber to a guarantor
situation because a guarantor's liability is contingent on the
borrower's default. Id. at 293-94. The Court explained that
"[i]nclusion of a contingent liability as interest on the
guarantor's separate obligation would go against the parties'
expectations and greatly increase uncertainty in lending
transactions." Moore, 850 S.W.2d at 294.
5
The Appellants point to the language in Moore referring to the
guarantor's liability as "a contingent secondary obligation." Id.
In contrast, the Appellants refer to their own guaranty agreements
which provide that the guaranty is "unconditional and absolute."
They claim such language renders them primarily liable. Thus, the
Appellants argue that TCB's reliance on Moore is misplaced because
that case dealt with a "contingent" liability. Therein lies the
heart of this dispute—whether guaranties of payment, which
unconditionally and absolutely guarantee payment, are contingent
liabilities under Moore.
In other words, Appellants' position is that, as guarantors
of payment, there were no contingencies on their liability.
Appellants argue that because they became primarily liable for the
debt, Alamo applies to them just as if they had assumed the debt.
Appellants stress that they are "guarantors of payment" as opposed
to "guarantors of collection." It is undisputed that the
Appellants' guaranties are guaranties of payment and not of
collection. "A guaranty of payment, which is also known as an
absolute guaranty, requires the guarantor to pay immediately upon
the principal obligor's default." In re Pulliam, 90 B.R. 241, 243
(Bkrtcy.N.D.Tex.1988).2 Accordingly, it is only after the
2
On the other hand, "[a] guaranty of collection, which is
also known as a conditional guaranty, enables the creditor to
seek payment from the guarantor only after the occurrence of some
condition "such as the condition that the creditor has
unsuccessfully and with reasonable diligence sought to collect
the debt from the principal debtor.' " In re Pulliam, 90 B.R. at
243 (quoting United States v. Vahlco Corp., 800 F.2d 462, 466
(5th Cir.1986).
6
borrower's default that a guarantor of payment becomes primarily
liable. The liability of a guarantor of payment therefore is
contingent on the borrower's default. In re Pulliam, 90 B.R. at
243.3
It is true that "a guarantor of payment is akin to a co-maker
in that both are primary obligors." Reece v. First State Bank of
Denton, 566 S.W.2d 296, 297 (Tex.1978). Nevertheless, "[a]n
analysis of the liability of the guarantor vis-a-vis the liability
of the maker clearly indicates that a guarantor does not step into
the maker's shoes and thereby acquire all his rights and
privileges." United States v. Little Joe Trawlers, Inc., 776 F.2d
1249, 1252 (5th Cir.1985) (emphasis in original). Indeed, only the
makers of the note may assert a usury claim. Id. (citing Houston
Sash & Door Co. v. Heaner, 577 S.W.2d 217 (Tex.1979)). Such a
claim is not available to an unconditional guarantor unless the
claim against the maker is void for illegality. Id.4
The Appellants correctly state that, under Texas law, to
determine whether a transaction is usurious, it is the substance of
the transactions rather than the form which is definitive. See
Fears v. Mechanical & Indus. Technicians, Inc., 654 S.W.2d 524, 530
(Tex.App.—Tyler 1983, writ ref'd n.r.e.). We do not rely on the
labels, but rather the substance of the transactions. The instant
3
See also Republican National Bank v. Northwest National
Bank, 578 S.W.2d 109, 114 (Tex.1978) ("A true guaranty creates a
secondary obligation whereby the guarantor promises to answer for
the debt of another and may be called upon to perform once the
primary obligor has failed to perform.").
4
There is no claim that the notes themselves are usurious.
7
guaranty agreements specifically provide notice to the guarantor as
follows: "You are being asked to guarantee the debt of Borrower
now existing or hereafter arising.... If the Borrower doesn't pay
any of such debts, you will have to.... You may have to pay up to
the full amount of all Borrower's debts if the Borrower does not
pay." (emphasis added). This language is entirely consistent with
the definition of a guarantor of payment.5
Although the Appellants became primarily and absolutely liable
on each other's debts, that liability was contingent on the
borrower's default. Therefore, because the Appellants did not
assume each other's loans within the meaning of Alamo Lumber, but
instead were simply guarantors of payment, they are precluded from
asserting a claim of usury. The district court correctly granted
summary judgment in favor of TCB as to the usury claim and the
counterclaim of non-payment.
IV. ATTORNEYS' FEES
Finally, the Appellants urge that the district court erred in
awarding TCB the entire amount of attorneys' fees requested. TCB's
counsel, in a brief and conclusory affidavit attached to the
amended motion for summary judgment, requested attorneys' fees in
the amount of $42,000 with additional fees of $5,000 in the event
of an appeal, asserting such fees were usual and customary.
In response, counsel for the Appellants filed his brief
5
Cf. Universal Metals & Machinery, Inc., v. Bohart, 539
S.W.2d 874, 878 (Tex.1976) (quoting Simon v. Landau, 27 Misc. 2d
269, 208 N.Y.S.2d 120 (N.Y.Sp.Term 1960) regarding determination
that the term "primary obligors" in guaranty agreement did not
render defendants co-makers in light of all documents).
8
affidavit in which he asserted that he was aware of the reasonable
and customary fees charged in such cases and that $42,000 was
unreasonable and excessive. Further, counsel also asserted that
TCB had improperly requested attorneys' fees related to the claims
that had been remanded to state court and were not related to the
notes at issue. Because fact issues clearly exist as to the
reasonableness and amount of the fees, we vacate the award of
attorneys' fees for further proceedings.
CONCLUSION
For the reasons set forth above, the judgment is AFFIRMED.
The award of attorneys' fees is VACATED and REMANDED for further
proceedings.
9