C.C. Port, Ltd. v. Davis-Penn Mortgage Co.

UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 94-60831
Summary Calendar
C.C. PORT, LTD., A TEXAS LIMITED PARTNERSHIP,
and WEIL PROPERTIES, INC.,
Plaintiffs-Appellants,
VERSUS
DAVIS-PENN MORTGAGE COMPANY,
FEDERAL NATIONAL MORTGAGE ASSOCIATION and FANNIE MAE,
Defendants-Appellees.
Appeal from the United States District Court
For the Southern District of Texas
(C-94-182)
(June 1, 1995)
Before REYNALDO G. GARZA, SMITH, and WIENER, CIRCUIT JUDGES.
REYNALDO G. GARZA, CIRCUIT JUDGE:*
This is a usury case. Before this Court is the issue of
whether a prepayment penalty is usurious. For the reasons
discussed below we affirm.
*
Local Rule 47.5 provides: "The publication of opinions that
have no precedential value and merely decide particular cases on
the basis of well-settled principles of law imposes needless
expense on the public and burdens on the legal profession."
Pursuant to that Rule, the Court has determined that this opinion
should not be published.
On August 22, 1991, Appellants C.C. Port, Ltd. and Weil
Properties, Inc. (collectively, the "Borrower") executed the Multi-
Family Note (Note) in the amount of $3,288,500.00 payable to Davis-
Penn Mortgage Company (Davis-Penn). Davis-Penn promptly assigned
the Note to the Federal National Mortgage Association (Fannie
Mae).1 The Note was secured by a Deed of Trust on the Kingston
Port Apartments located in Corpus Christi, Texas and provided for
an interest rate of 10.875 percent. The Note provided for a
maturity of fifteen years, with repayment to take place in monthly
installments:
The principal and interest shall be payable .
. . in consecutive monthly installments of
THIRTY-ONE THOUSAND SIX AND 94/100 Dollars
(U.S. $31,006.94) on the first day of each
month beginning October 1, 1991, (herein
"amortization commencement date"), until the
entire indebtedness evidenced hereby is fully
paid, except that any remaining indebtedness,
if not sooner paid, shall be due and payable
on September 1, 2006.
The Note also provided that the Borrower may prepay the entire
unpaid principal balance upon providing the Lender sixty days prior
written notice and upon payment of a prepayment premium to be
calculated by a formula provided in the Note.
The Borrower sought to prepay the entire unpaid principal.
Upon request, the Lender calculated the prepayment premium on the
unpaid principal balance to be $1,174,538.09. Unwilling to tender
the prepayment premium, the Borrower filed suit on March 4, 1994 in
the 94th Judicial District Court of Nueces County, Texas. On April
1
Davis-Penn and Fannie Mae will be referred to collectively as
the "Lender."
2
22, 1994, the Lender removed the case to the district court under
12 U.S.C. § 1723a(a) and Article III of the Constitution of the
United States. On the 27th day of October, 1994, the district
court granted the Lender's motion to dismiss.
Discussion
This case was decided below upon motions to dismiss under Rule
12(b)(6) of the Federal Rules of Civil Procedure. This Court
reviews de novo a district court's dismissal on the pleadings,
accepting as true those well-pleaded factual allegations in the
complaint. Guichy v. Bank of LaPlace, 954 F.2d 278, 281 (5th Cir.
1992). Taking the facts alleged in the complaint as true, if it
appears certain that the plaintiff cannot prove any set of facts
that would entitle it to the relief it seeks, affirmance is in
order. Scheur v. Rhodes, 416 U.S. 232, 236 (1974); Benton v.
United States, 960 F.2d 19, 21 (5th Cir. 1992).
The Borrower's sole basis for its usury claim is premised on
the assertion that the prepayment premium is interest.
Accordingly, we limit our review to this single issue. Interest is
defined under Texas law as "compensation for the use, forbearance
or detention of money." Tex. Rev. Civ. Stat. Ann. art. 5069-1.01
(Vernon 1987). The essential elements of a usury transaction are
(1) a loan of money; (2) an absolute obligation to repay the
principal; and (3) the exaction of a greater compensation than
allowed by law for the use of the money by the borrower. Nijarro
v. Sasi Int'l, Ltd., 904 F.2d 1002, 1005 (5th Cir. 1990), cert.
3
denied, 498 U.S. 1048 (1991); Holey v. Watts, 629 S.W.2d 694, 696
(Tex. 1982).
Under Texas law, a borrower has no right to prepay a loan in
the absence of a contract permitting it.2 Parker Plaza West
Partners v. Unum Pension & Ins. Co., 941 F.2d 349, 352 (5th Cir.
1991); Groseclose v. Rum, 860 S.W.2d 554, 557 (Tex.App.--Dallas
1993, no writ); Ware v. Traveler's Indem. Co., 604 S.W.2d 400, 401
(Tex.Civ.App.--San Antonio 1980, writ ref'd n.r.e.). Where the
contract grants the borrower the right to prepay, a prepayment
premium is not compensation for the use, forbearance, or detention
of money, rather it is a charge for the option or privilege of
prepayment. Parker Plaza, 941 F.2d at 352; Hettig & Co. v. Union
Mut. Life Ins. Co., 781 F.2d 1141, 1145 (5th Cir. 1986); Bearden
v. Tarrant Sav. Ass'n, 643 S.W.2d 247, 249 (Tex.App.--Fort Worth
1982, writ ref'd n.r.e.); Boyd v. Life Ins. Co. of the Southwest,
546 S.W.2d 132, 133 (Tex.Civ.App.--Houston [14th Dist.] 1977, writ
ref'd). The rationale for this rule is that the borrower may avoid
paying the prepayment premium by paying the note according to its
terms.
The Borrower presents two arguments for the proposition that
the prepayment premium is usurious interest. First, the Borrower
contends that the Lender is not entitled to perfect tender in time
2
This doctrine, which the Borrower conveniently labels the
"perfect tender in time" rule, provides that "[a] debtor cannot,
before the maturity of his debt, compel his creditor to accept
payment, and a tender before maturity is without effect." Bell v.
Mast, 7 S.W.2d 102, 104 (Tex.Civ.App.--Beaumont 1928, writ dism'd
w.o.j.).
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because the contract to accept payment over time is illusory.
Second, the Borrower contends that the prepayment premium is
usurious because it is involuntarily payable upon "act of Lender."
We find both arguments to be meritless.
The Borrower focuses on a portion of a clause in the Note,
contending that the contract to accept payment over time is
illusory. The clause provides, in full, as follows:
From time to time, without affecting the
obligation of the undersigned or the
successors or assigns of the undersigned to
pay the outstanding principal balance of this
Note and observe the covenants of the
undersigned contained herein, without
affecting the guaranty of any person,
corporation, partnership or other entity for
payment of the outstanding principal balance
of this Note, without giving notice to or
obtaining the consent of the undersigned, the
successors or assigns of the undersigned or
guarantors and without liability on the part
of the holder hereof, the holder thereof may,
at the option of the holder hereof, extend the
time for payment of said outstanding principal
balance or any part thereof, reduce the
payments thereon, extend the time for payment
of said outstanding principal balance or any
part thereof, reduce the payments thereon,
release anyone liable on any of said
outstanding principal balance, accept a
renewal of this Note, modify the terms and
time of payment of said outstanding principal
balance, join in extension or subordination
agreement, release any security given herefor,
take or release other or additional security,
and agree in writing with the undersigned to
modify the rate of interest or period of
amortization of this Note or change the amount
of the monthly installments payable hereunder.
The Borrower contends that the language "without giving notice or
obtaining the consent of the undersigned . . . the holder hereof
may . . . modify the terms and time of payment of said outstanding
5
principal balance. . ." gives the Lender the right to modify the
time and terms of payment. Using terms such as "absolute right to
modify," "absolute control over the time and terms of payment," the
"untrammelled right to modify the time and terms of repayment,"
"the right to modify the repayment terms of the note at will"
"absolute discretion in modifying the terms of repayment," and "the
right unconditionally to modify the time and terms of repayment,"
the Borrower likens the Note to a demand note -- the Borrower
contends that the repayment provisions are illusory because the
Lender can alter the time and manner of payment. The Borrower's
illusory argument can be summarized in the following syllogism:
because the Lender can alter the time and manner of payment, the
Lender retains no right to demand perfect tender in time; because
the Lender cannot demand perfect tender in time, a prepayment
premium is not consideration for giving up this right and is
therefore interest.
We disagree. First, the Borrower cites no federal or Texas
authority in support of its proposition that a prepayment premium
is usurious in a situation even remotely similar to the case sub
judice. Second, the Borrower mischaracterizes the language of the
Note. "A mortgage is governed by the rules which apply to
interpretation of contracts. Parker Plaza, 941 F.2d at 352(quoting Meisler v. Republic of Texas Saving Assoc., 758 S.W.2d
878, 885 (Tex.App.--Houston [14th Dist.] 1988, no writ)). Courts,
in construing a contract, review the entire agreement in order to
determine its meaning; courts should not consider a single
6
provision in isolation. Tennessee Gas Pipeline Co. v. F.E.R.C., 17
F.3d 98, 102 (5th Cir. 1994). Moreover, under Texas law, there is
a specific presumption against a finding of a usurious interest.
Federal Deposit Ins. Corp. v. Claycomb, 945 F.2d 853, 860 (5th Cir.
1991), cert. denied, 112 S.Ct. 2301 (1992). "In construing the
loan documents, we must ascertain and give effect to the objective
intention of the parties as expressed in the written instruments.
. . . We must presume that the parties intended to obey the law
unless the contrary plainly appears." Woodcrest Ass'n, Ltd. v.
Commonwealth Mtg. Corp., 775 S.W.2d 434, 438 (Tex.App.--Dallas
1989, writ denied). Therefore, applying the same standard as the
court below, we must look at the contract as a whole and presume
that the parties intended to obey the law.
Contrary to the Borrower's assertions, the Lender may not
demand payment before the due date. Neither the language of the
Note nor the law contemplates such an interpretation. When the
clause is read in its entirety and in context to the other
provisions in the Note it becomes apparent that the Note is payable
at a definite time. The clause, of which the Borrower quotes only
selected portions, insures that persons such as guarantors or
general partners of the Borrower are not released in the event
payment terms are extended, payments are reduced, or collateral
released. The clause was placed in the Note to allow the Lender
some flexibility in dealing with a borrower who cannot make
payments or requests that certain collateral be released. The
benefit of this clause flows to the Borrower. If this clause were
7
redacted from the Note the Lender would be unable to extend the
time for payment, resulting in a default, acceleration, and
foreclosure when the Borrower falls on bad times. We recognize the
commercial realities of this situation and refuse to construe the
Note in such a way as to do injustice to the parties' intentions.3
Furthermore, the last portion of the clause states clearly that in
order to modify the rate of interest or the period of amortization
or change the amount of the monthly installments, the Lender must
obtain the undersigned's written agreement.4 Lastly, the terms of
the Note support the Lender's construction and our interpretation.
The Note states that it is for a term of fifteen years and provides
for acceleration of the principal and interest only upon default.
Reading the clause in its entirety and in context to the other
provisions of the Note reveals clearly the intentions of the
parties and the futility of the Borrower's position.
The Borrower's argument that a prepayment premium due upon
"act of Lender" somehow converts the premium into interest is
similarly without merit. The Lender has taken no "action"
whatsoever. Therefore, this issue is not before this Court.5 The
3
Relevant to this analysis is the scenario of the Lender
attempting to construe this language as empowering it to demand
payment or change the terms of payment in such a way as to harm the
Borrower. If that were the case, we would be unable to entertain
such a construction.
4
The portion provides: "and agree in writing with the
undersigned to modify the rate of interest or period of
amortization of this Note or change the amount of the monthly
installments payable hereunder."
5
This Court, under facts properly raising this issue, rejected
this argument in Parker Plaza, 941 F.2d at 352.
8
decision of the court below is AFFIRMED.
9