First South Sav. Ass'n v. First Southern Partners, II, Ltd. ( 1992 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
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NO. 91-2248
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FIRST SOUTH SAVINGS ASSOCIATION
and RESOLUTION TRUST CORPORATION,
as Conservator,
Plaintiffs-Appellees,
versus
FIRST SOUTHERN PARTNERS, II, LTD,
Defendants,
COFFEE R. CONNER and
THE ESTATE OF JACK GAULDING,
Deceased, Defendants-Appellants.
_______________________________________________________
Appeal from the United District Court
for the Southern District of Texas
________________________________________________________
Before REAVLEY, HIGGINBOTHAM and DeMOSS, Circuit Judges.
DeMoss, Circuit Judge:
On March 31, 1983, Coffee R. Conner and Jack Gaulding,
("Guarantors"), each executed separate guaranty agreements of a
promissory note executed by First Southern Partners, II, Ltd., a
Texas limited partnership (of which Conner and Gaulding were the
general partners) payable to First Savings Association, Port
Neches, Texas, in the amount of $2,790,000, (the "Note"), which was
secured by a first mortgage lien on certain real property described
in the Note. The specific language of the Guaranty agreements
reads as follows:
"Guarantor absolutely and unconditionally
guarantees the prompt, complete, and full
payment of all amounts due on the Note from
the date hereof through the date a Certificate
of Occupancy is issued by the City of Lubbock,
Lubbock County, Texas, for all improvements to
be constructed on the property more
particularly described on Exhibit "B" attached
hereto and made a part hereof for all
purposes, from and after which date
Guarantor's liabilities and obligations
hereunder shall be limited to fifty per cent
(50%) of the principal balance of the Note
outstanding from time to time through the date
of maturity, howsoever such maturity may
occur,. . ."
First South Savings Association ("First South"), succeeded to
all of the rights, title, and interest of the original payee of the
Note including the rights under the Guaranty agreements. The
development covered by the first lien Deed of Trust suffered the
fate of so many other real estate developments in Texas with the
result that First South foreclosed upon the property covered by the
first lien Deed of Trust in April 1988, bidding $987,000 for the
property which amount was credited against sums due and owing under
the Note. A year later, First South suffered the fate of so many
other lending institutions in Texas and the Federal Home Loan Bank
Board appointed the Federal Savings and Loan Insurance Corporation
("FSLIC") as Conservator; and in June 1989 the FSLIC, as
Conservator for First South, brought suit against the maker of the
Note and Guarantors for the outstanding balance of principal and
interest on the Note and another note which is not at issue in this
Appeal.
After passage of the Financial Institution Reform Recovery and
Enforcement Act of 1989, the Resolution Trust Corporation ("RTC"),
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succeeded FSLIC as Conservator of First South, appropriate
substitution of parties were made in the lawsuit and the assets of
First South were placed in a newly created Federal Savings
Association, which was simultaneously placed into conservatorship
controlled by the RTC.
Guarantors answered and counterclaimed that First South and
RTC had "charged usury" in certain letters and in the Original
Complaint filed in this lawsuit, by demanding that the Guarantors
each pay all of the principal and all of the interest on the Note
when each had only guaranteed one-half of the principal and none of
the interest. The dispute was submitted on summary judgment to the
trial judge, who granted judgment to First South and the RTC
against each of the Guarantors for fifty percent (50%) of the
principal balance then outstanding. In his Opinion, the trial
judge ruled, somewhat cryptically, against the Guarantors usury
defense with the following language:
"In Texas, the usury defense is available only
to a maker of a note. The RTC is suing on the
first note for collection from the guarantors.
The defendants, as guarantors, may not raise
usury as a defense."
We affirm the judgment of the trial court for the following
reasons:
A. NO CHARGING OF INTEREST
The principle theory upon which Guarantors rely for their
claim of usury is that certain language in the demand letters sent
out by the Note holder, and in the Original Complaint, constituted
the "charging of interest which is greater than the amount
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authorized by this Sub-title" in violation of the provisions of
Article 5069-1.06 (1) and (2) of the Texas Revised Civil Statutes.
Specifically the demand letter of March 9, 1989,
contained the following language: "Coffee R. Conner and Jack
Gaulding are guarantors of payment on the Notes and are jointly and
severally liable for all amounts due thereon." Likewise, the
Prayer for Relief in the Original Complaint, stated that plaintiffs
were demanding judgment against "Defendants" (which included Coffee
R. Conner and the Estate of Jack Gaulding, deceased) "jointly and
severally" for the full amount of the principal balance of the Note
and for pre-judgment interest on the Note at the highest rate
allowed by law from the date of default to the date of judgment.
The two Guaranty agreements are clearly and unambiguously
separate Guaranty agreements with no joint liability imposed on the
two Guarantors. Likewise, under the clear language of each
Guaranty, the liability of each guarantor was limited to "fifty
percent (50%) of the outstanding balance of principal" after the
Certificate of Occupancy had been delivered; and both parties to
this proceeding have treated that condition as having occurred.
Consequently the referenced statements in the demand letter of
March 9, 1989, and in the Prayer For Relief in the Original
Complaint were erroneous.
Although the note holder attempted to remedy these erroneous
statements in a subsequent demand letter, and in an amended
complaint, the Guarantors take the position that, once uttered,
these erroneous statements were not retractable and constituted the
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"charging of interest greater than the amount authorized" by
Article 5069-1.01 et seq., entitling Guarantors to recover the
penalties and offsets contemplated by Article 5069-1.06.
However, the recent case of George A. Fuller Company of Texas,
Inc. v. Carpet Services, Inc., No. D-0791 S.W.2d
decided by the Texas Supreme Court on January 29, 1992, clearly
disposes of Guarantors' contention that "charging of usurious
interest" can occur in pleadings. In Fuller, the Texas Supreme
Court held:
a demand for prejudgment interest contained in a pleading
does not make a pleader liable for statutory usury
penalties if the pleading seeks the recovery of unlawful
prejudgment interest.
Likewise, the Guarantors have not made a convincing case as to the
"charging of usurious interest" by the language used in the demand
letters in this case. "Interest" is defined by Texas statute as
"compensation allowed by law for the use or forbearance or
detention of money . . . ." Tex. Civ. Code Art. 5069-1.01(a). A
guarantor of a promissory note, however, does not receive such use,
forbearance, or detention of money under a promissory note. A
demand made to the guarantor only for sums owed by the notemaker
under the guaranteed note is, therefore, not a demand for interest.
It is simply a demand for the undifferentiated sum of money defined
in the guaranty agreement.
In this case, the noteholder clearly characterized the
allegedly usurious amounts in the demand letters as amounts owed
under the promissory notes. These amounts were not compensation
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for the guarantors' use, forbearance, or detention of money.
Therefore, they could not be usurious interest under Texas law.
The principle case relied upon by Guarantors for their
conclusion is Houston Sash & Door Co., Inc. v. Heaner, 577 S.W.2d
217 (Tex. 1979). In that case Heaner had executed a letter
agreement guaranteeing payment of all sums owed by Bedford
Corporation (of which he was chairman of the board) to Houston Sash
& Door, Inc. In the same letter agreement Heaner also agreed to
pay, "interest from the due date of any [Bedford] account to the
date of payment at the rate of 12% per annum." The Texas Supreme
Court held that the interest rate "contracted for" in the letter
guarantee agreement was "greater than the amount authorized by this
Subtitle"; and accordingly, Houston Sash was liable for the penalty
prescribed in Article 5069-1.06(1). It was the "contracting for"
language not the "charging" language of Article 5069-1.06 that was
involved.
The critical distinction between the Houston Sash case and the
case before this Court is that here the Guaranty agreement contains
no separate interest agreement; and the obligation of the guarantor
is simply to pay the sum of money defined in the Guaranty
agreement. "It is a fundamental principle governing the law of
usury that it must be founded on a loan or forbearance of money; if
neither of these elements exist, there can be no usury." Crow v.
Home Savings Association of Dallas County, 522 S.W.2d 457, 459
(Tex. 1975). Furthermore, while a guaranty agreement may
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frequently be collateral to a loan or credit transaction, it is not
the same thing as a loan or credit transaction; and absent a
separate interest provision in the guaranty agreement, as in
Houston Sash, an erroneous claim as to the amount of money owed
under a guaranty agreement is simply that, and not a "charging of
interest greater than the amount authorized by this Subtitle"
within the contemplation of Article 5069-1.06.
B. SAVINGS CLAUSE
Both the first lien Note and the Guaranty agreements contain
usury savings clauses. The pertinent language from the Gu aranty
agreements is:
"...and if, from any circumstances whatsoever,
fulfillment of any provision of this Guaranty
at the time performance of such provision
shall be due shall involve transcending the
maximum amount of interest prescribed by law
then, ipso facto, the obligation to be
fulfilled by the Guarantor shall be reduced to
the maximum limit of interest authorized by
law,. . ."
The original loan transaction of which the Guaranty agreement
was a part involved $2,790,000, and was secured by a Deed of Trust
on real property being used for residential purposes, and by
assignments of lease rentals to be generated from the apartment
project on the property. All parties involved were sophisticated
businessmen and lenders. The inclusion of the savings clause
evidenced an express intent to structure the entire transaction so
as to avoid usurious interest.
Under these circumstances, we treat the erroneous statements
in the demand letters and in the Original Complaint as being
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automatically remedied by virtue of the savings clauses in the
underlying documents. See, Federal Deposit Insurance Corp. v.
Claycomb, 945 F.2d 853, 860-61 (5th Cir. 1991) and Woodcrest
Associates, Ltd. v. Commonwealth Mortgage Corp., 775 S.W.2d 434,
437-39 (Tex. App.--Dallas 1989, writ denied).
C. USURY PENALTY AND THE RTC
Finally, the defensive remedies asserted by Guarantors are
punitive in nature under Texas law. Steves Sash & Door Co. v. Ceco
Corp., 751 S.W.2d 473, 476 (Tex. 1988). In Federal Deposit
Insurance Corp. v. Claycomb, supra., this Court has previously held
that claims against the FDIC for usury under the Texas law cannot
be asserted because, "such application could have no deterrent
affect and would only serve to punish innocent creditors of the
failed institution by diminishing available assets." Id. at 861.
The RTC is the successor agency to the FDIC and we here extend the
holding in Claycomb as applicable to the RTC in this case.
CONCLUSION
For all of the above and foregoing reasons, the judgment of
the district court is AFFIRMED.
Reavley, Circuit Judge, concurs in parts B and C only.
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