Opinion
Civil Action No. 4:98CV60-A.
February 1, 2000.
MEMORANDUM OPINION
The court has before it the motion of the plaintiff C.I.O.S. Foundation ("C.I.O.S.") for summary judgment against defendants Naguchi Trading Company, Inc. ("Naguchi"), NDF, Inc. ("NDF") and George W. Hood, Jr. ("Hood"). C.I.O.S. also moves for entry of default judgment against defendant Berkston Insurance A.V.V. ("Berkston"). Plaintiff invokes this court's jurisdiction under 28 U.S.C. § 1332.
Hood was president of Naguchi Trading Company and NDF, Inc.
In accordance with the provisions of 28 U.S.C. § 636(c), the parties consented to have a United States Magistrate Judge conduct all proceedings in this case, including an order for entry of a final judgment. Therefore, the undersigned has authority to render an opinion regarding plaintiff's motion for summary judgment and for default judgment.
FACTUAL SUMMARY
In ruling on a motion for summary judgment, the court shall not make credibility determinations, weigh the evidence or draw from the facts legitimate inferences for the movant. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). Rather, the evidence of the nonmovant is to be believed, and all justifiable inferences are to be drawn in his favor. Anderson, 477 U.S. at 255. This factual summary is drafted in accordance with this holding.
The following facts underlying this suit are undisputed. On January 8, 1997, C.I.O.S. loaned Naguchi $650,000.00, and Naguchi executed a promissory note agreeing to pay the loan back in thirty-six monthly installments of $22,532.46. (Reynolds Aff., Ex. A.) The note provided that each installment would "consist of a payment of principal and interest, with the unpaid principal bearing interest at the rate of fifteen percent (15%) per annum." Simultaneously with execution of the promissory note, NDF and Hood executed Guaranty Agreements, and on the following day Berkson signed a similar agreement guaranteeing the loan. (Reynolds Aff., Exs. B, C, D.) Naguchi paid the first installment under the promissory note when it came due on February 8, 1997, but it failed to make the next payment on March 8, 1997. C.I.O.S. gave notice of the default on March 25, 1997, (Hafter Aff., Ex. 1), and Hood and C.I.O.S. began negotiations to restructure the loan payments. (Hood Aff., ¶ 5.)
As a result of the negotiations, Naguchi executed an amended promissory note in favor of C.I.O.S. in April 1997 and dated it January 8, 1997, which was the date of the original note. The amended promissory note provided that Naguchi would make two interest payments on April 8, 1997 and May 8, 1997, with the payment Naguchi had made in February 1997 to be applied to the first of the interest payments. (Reynolds Aff., Ex. F.) The remainder of the payments would comprise thirty-one installments of $22,532.46, each consisting of principal and interest. The amended promissory note contained the following provision which was not present in the original note:
Any installment payment which is five (5) days or more delinquent shall bear interest from its original date to date of payment at the rate of fifteen percent (15%) per annum.
Counsel for defendants added this provision to the promissory note at the behest of counsel for C.I.O.S. Following execution of the amended promissory note, Berkston, NDF and Hood each reaffirmed their guaranty agreements on the basis of the amended note. (Reynolds Aff., Exs. G, H, I.).
In May 1997, Naguchi again failed to make its monthly payment, and C.I.O.S. gave notice of the default. When Naguchi did not cure the default, C.I.O.S. gave notice of the default to the guarantors on September 8, 1997. (Reynolds Aff., Exs. J, L, N.) C.I.O.S. demanded payment by the guarantors of $100,378.62, which constituted the payments on principal and interest which came due between May and September 1997, in addition to "late fees" through September 8, 1997. When the guarantors failed to cure within thirty days of the notice of default in accordance with the terms of the amended promissory note, C.I.O.S. accelerated the balance of Naguchi's obligations. C.I.O.S. filed suit in this court on March 5, 1998, then filed an amended complaint thirteen days later, and finally filed its second amended complaint on November 23, 1998.
C.I.O.S. sent the notices first class, return receipt requested, but only Berkston's letter was actually received. (Reynolds Aff., Ex. K.) The notices mailed to NDF in care of Hood and to Hood himself were returned to sender bearing an indication that they were "unclaimed." (Reynolds Aff., Exs. M, O.) Nevertheless, NDF and Hood admit that they received notice of the default and that they "have not made complete payment" of the amounts due. (Answer to Amended Complaint, ¶ ¶ 15, 17, 19.)
The most recent amendment demanded judgment for C.I.O.S. on the basis of the amended promissory note and reaffirmations of guaranty, while the original and first amended complaints had addressed the original promissory note and guaranty agreements. Naguchi, NDF and Hood represented to the court that they had no objection to the amendment. C.I.O.S. Foundation v. Berkston Ins. A.V.V., No. 4:98CV60-A (N.D.Miss. Nov. 19, 1998) (order sustaining plaintiff's motion for permission to file second amended complaint).
SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The party seeking summary judgment carries the burden of demonstrating that there is an absence of evidence to support the non-moving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 91 L.Ed.2d 265 (1986). After a proper motion for summary judgment is made, the burden shifts to the non-movant to set forth specific facts showing that there is a genuine issue for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986); Ragas v. Tennessee Gas Pipeline Company, 136 F.3d 455, 458 (5 th Cir. 1998); Brothers v. Klevenhagen, 28 F.3d 452, 455 (5 th Cir.), cert. denied, 513 U.S. 1045 (1994); Hanks v. Transcontinental Gas Pipe Line Corp., 953 F.2d 996, 997 (5 th Cir. 1992). Substantive law determines what is material. Anderson, 477 U.S. at 249. "Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted." Id., at 248. If the non-movant sets forth specific facts in support of allegations essential to his claim, a genuine issue is presented. Celotex, 477 U.S. at 327. "Where the record, taken as a whole, could not lead a rational trier of fact to find for the non-moving party, there is no genuine issue for trial." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 89 L.Ed.2d 538 (1986); Federal Savings and Loan, Inc. v. Krajl, 968 F.2d 500, 503 (5 th Cir. 1992). The facts are reviewed drawing all reasonable inferences in favor of the non-moving party. Banc One Capital Partners Corp. v. Kneipper, 67 F.3d 1187, 1198 (5 th Cir. 1995); Matagorda County v. Russell Law, 19 F.3d 215, 217 (5 th Cir. 1994); King v. Chide, 974 F.2d 653, 656 (5 th Cir. 1992). However, this is so only when there is "an actual controversy, that is, when both parties have submitted evidence of contradictory facts." Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5 th Cir. 1994); see Guillory v. Domtar Industries, Inc., 95 F.3d 1320, 1326 (5 th Cir. 1996). In the absence of proof, the court does not "assume that the nonmoving party could or would prove the necessary facts." Little, 37 F.3d at 1075 (emphasis omitted).MOTION BY C.I.O.S. FOR SUMMARY JUDGMENT
Plaintiff C.I.O.S. now moves the court for summary judgment in its favor against defendants Naguchi, NDF and Hood. In support of its motion, C.I.O.S. submits the sworn affidavit of Kent Reynolds, controller of C.I.O.S. Foundation. (Motion for Summary Judgment, Ex. 1.) As pointed out in the memorandum in support of the motion for summary judgment, the Fifth Circuit has stated that "because of the relative simplicity of the issues involved, suits involving promissory notes `are among the most suitable classes of cases for summary judgment.'" Colony Creek, Ltd. v. Resolution Trust Co., 941 F.2d 1323, 1325 (5 th Cir. 1991) (quoting Loyd v. Lawrence, 472 F.2d 313, 316 (5 th Cir. 1973)). The remaining defendants Naguchi, NDF and Hood resist summary judgment on three grounds: (1) they contend genuine issues of fact remain regarding the correct interpretation of the amended promissory note; (2) genuine issues of fact remain regarding whether adopting the construction of the note as C.I.O.S. urges would violate Texas' usury law; and (3) summary judgment is precluded by the existence of an agreement by C.I.O.S. not to seek entry of a judgment so long as the defendants are "diligently seeking alternative financing to pay off this loan." (Response to Motion for Summary Judgment, ¶ ¶ 1-3.) The court addresses each of these arguments in turn.
The court has already entered a default judgment against defendant Berkston, as will be further discussed later in this opinion.
First, the court must determine which state's law applies in order to determine how to construe the amended promissory note. In a diversity case such as this, the court applies the choice-of-law rules of the forum state. Denman v. Snapper Division, 131 F.3d 546, 548 (5 th Cir. 1998). "Mississippi follows the `most significant relationship' or `center of gravity' test for determining the applicable law." Id. at 549 (citations omitted). In Mitchell v. Craft, 211 So.2d 509, 512 (Miss. 1968), the seminal case adopting the center of gravity test in Mississippi, the Mississippi Supreme Court stated that "[w]e will assume that a case is to be governed by the law of the forum unless it is expressly shown that a different law applies, and in case of doubt, a court will naturally prefer the laws of its own state." However, in making its conflict analysis, the court notes that Mississippi has wholeheartedly embraced the Restatement (Second) of Conflicts of Laws. Mitchell, 211 So.2d at 515-16. See generally Michael H. Hoffheimer, Mississippi Conflict of Laws, 67 Miss. L.J. 175, 281-82 (1997) ("[L]oan agreements are normally governed by the law of the place of repayment" (citing Restatement (Second) of Conflict of Laws § 195 (1971))).
It is interesting to note that the Mississippi Supreme Court also made the somewhat contradictory statement that
Ordinarily, the local law of the state where the injury occurred will determine the rights and liabilities of the parties, "unless with respect to the particular issue, some other state has a more significant relationship to the occurrence and the parties, in which event the local law of the other state will be applied."
Mitchell, 211 So.2d at 516. See Denman, 131 F.3d at 549. Nevertheless, the Restatement clearly provides the "guideposts" by which the court is to determine which law to apply. Denman, 131 F.3d at 549.
The Restatement provides the following:
The validity of a contract for the repayment of money lent and the rights created thereby are determined, in the absence of an effective choice of law by the parties, by the local law of the state where the contract requires that repayment be made, unless, with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties, in which event the local law of the other state will be applied.
Restatement (Second) of Conflict of Laws § 195 (1971). The general choice of law principles alluded to in section 6 include the following:
(1) A court, subject to constitutional restrictions, will follow a statutory directive of its own state on choice of law.
(2) When there is no such directive, the factors relevant to the choice of the applicable rule of law include
(a) the needs of the interstate and international systems,
(b) the relevant policies of the forum,
(c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
(d) the protection of justified expectations,
(e) the basic policies underlying the particular field of law,
(f) certainty, predictability and uniformity of result, and
(g) ease in the determination and application of the law to be applied.
Restatement (Second) of Conflict of Laws § 6 (1969).
Applying these principles in the case at bar, the court concludes that it should follow Texas law in interpreting the amended promissory note. The parties did not include a choice of law provision in the original or amended promissory notes. The amended promissory note provides, however, that the loan is payable at a mailing address in Waco, Texas, (Reynolds Aff., Ex. F), and the Restatement adopts the place of payment as the controlling jurisdiction for conflicts of law purposes, absent a more significant relationship with another state. The rationale behind this rule is given in the comment to section 195:
Repayment is the ultimate aim and objective of the contract, and the place where the contract requires that repayment be made will naturally loom large in the minds of the parties. Indeed, it can often be assumed that the parties, to the extent that they thought about the matter at all, would expect that the local law of the state where repayment is to be made would be applied to determine many of the issues arising under the contract. The rule also furthers the choice-of-law values of certainty, predictability and uniformity of result and, since the state where the contract requires that repayment be made will be readily ascertainable, of ease in the determination of the applicable law.
Restatement (Second) of Conflict of Laws § 195 cmt. a (1971).
In this case, no other states' relationship to the instrument at issue is so significant as to outweigh that of Texas. The evidence before the court indicates that C.I.O.S. is a Tennessee charitable foundation with its principal place of business in Texas. (Second Amended Complaint, ¶ 1.) Naguchi, NDF and Hood are all domiciliaries of Mississippi. (Second Amended Complaint, ¶ 2.) Both the original and amended promissory notes required payment at a Texas address, which section 195 finds indicative that the parties could have justifiably expected Texas law to apply to issues of construction. Moreover, Texas law regarding construction of promissory notes is predictable and easily applied.
The defendants' answer states that they cannot admit or deny that C.I.O.S. is an entity domiciled in Texas or Tennessee, (Answer to Second Amended Complaint, ¶ 1), but defendants do not dispute that C.I.O.S. has its principal place of business in Texas.
Turning to the arguments against granting summary judgment for C.I.O.S., it is defendants' position that the parties added the provision that installments which are overdue by five days shall bear interest at fifteen percent per annum simply "to clarify that 15% interest would continue to run on the unpaid principal portion of a monthly installment even if the installment might become delinquent." (Hood Aff., ¶ 8.) Defendants dispute plaintiff's interpretation of the note which would require payment of "late fees" amounting to 15% interest on each installment including principal and interest which was five days overdue. In simple terms, C.I.O.S. contends that the promissory note should be interpreted to require payment of interest on the entire amount of each unpaid installment, while defendants contend that the 15% should be interpreted to require payment of 15% interest only on that portion of any overdue installment that constitutes principal.
The amended promissory note provides that each of the installments is to "consist of a payment of principal and interest. . . ." (Reynolds Aff., Exhib. F, ¶ (c).)
Texas law precludes admission of parol testimony to contradict the terms of an unambiguous promissory note. The court assumes that all negotiations between C.I.O.S. and the defendants "merged" into the amended promissory note. Pitman v. Lightfoot, 937 S.W.2d 496, 529 (Tex. 1996) ("Absent pleading and proof of ambiguity, fraud, or accident, a written instrument presumes that all prior agreements of the parties relating to the transaction have been merged into the written instrument."). "It is well established that written instruments, including promissory notes, cannot be changed by evidence of a prior or contemporaneous oral agreement that contravenes the terms of the written instrument." Albritton Development Co. v. Glendon Investments, Inc., 700 S.W.2d 244, 246 (Tex. 1985). The same rule against admission of parol evidence applies to all prior agreements, whether oral or written, which seek to amend or vary a promissory note. Frith v. Guardian Life Insurance Company of America, 9 F. Supp.2d 734, 739 (S.D.Tex. 1998) ("The parol evidence rule provides that if the parties have integrated their agreement into a single written memorial, all prior negotiations and agreements with regard to the same subject matter are excluded from consideration whether they are oral or written.").
Defendants submitted the affidavits of Jerome Hafter and defendant Hood, along with a memorandum from Kent Reynolds dated April 11, 1997, (Hafter Aff., Exhib. 2), all of which state that the parties intended the amended promissory note to include the same terms and conditions as the original note except for the structure of the payments. According to the defendants' interpretation of the promissory note, therefore, C.I.O.S. is not entitled to the "late fees" it demands. The court concludes, however, that the evidence of prior or contemporaneous oral or written agreements is not admissible to vary the terms of the amended promissory note, which the court finds to be unambiguous. The only reasonable interpretation of the note is that Naguchi, and the guarantors in turn, were bound to pay to C.I.O.S. monthly installments which consisted of principal and interest, and when any such installment became delinquent, interest began to accrue on the entire amount until it was paid. The interpretation of this clause urged by defendants is simply not reasonable. The essence of the previous agreement was that the debtor would owe 15% interest on the principal. Adopting defendants' interpretation of the clause would credit C.I.O.S. with insisting upon placing a redundant provision in an agreement which was already clear. This the court declines to do. Defendants cannot defeat summary judgment by arguing that a genuine issue of material fact exists regarding construction of the amended promissory note itself.
The same holds true with defendants' position that C.I.O.S. is precluded from obtaining a judgment in this case because of a subsequent oral agreement that it would not do so as long as defendants diligently sought alternative financing to pay off the loan. Generally, any such agreement would constitute a modification of the amended promissory note because it would extend the time for payment in contradiction of the promissory note's terms, and evidence of such an agreement would be precluded by the parol evidence rule as discussed in the preceding paragraphs. However, because the amended promissory note at issue expressly provides that the holder "may extend the due date of this Promissory Note or any installment thereof. . . ." the court will consider whether the alleged agreement precludes summary judgment.
The only evidence of the agreement which defendants submit is the affidavit of defendant George W. Hood, Jr. Hood states that he entered into the alleged agreement with C.I.O.S. not to obtain judgment only after the loan became delinquent and after the instant lawsuit was filed. The court concludes that any such oral agreement, if it exists, is entirely irrelevant to whether C.I.O.S. is entitled to judgment as a matter of law on the promissory note; thus, the agreement does not defeat plaintiff's summary judgment motion.
Defendants' final argument is that there exists a genuine issue of material fact as to whether the amended promissory note is enforceable because it would effectively require payment of 30% interest on the debt. Texas law applies to this portion of the dispute, as well, and in the agreed pretrial order the parties direct the court to three Texas statutes: Tex. Fin. Code Ann. §§ 303.305(b), 303.001 and 305.003 (West. 1999). Interest is "the compensation allowed by law for the use, forbearance, or detention of money," Tex. Fin. Code Ann. § 301.001 (West 1999), and usury is defined as "interest that exceeds the applicable maximum amount allowed by law." Tex. Fin. Code Ann. § 301.001(4) (West. 1999). "A contract for usury is contrary to public policy. . . ." Tex. Fin. Code Ann. § 302.001(4) (West. 1999). See Dunnam v. Burns, 901 S.W.2d 628, 631 (Tex.App. 1995). For purposes of this opinion, the court finds that the maximum rate of interest for a loan of this sort under Texas law is 18% per annum.
Under Texas law
A person who contracts for, charges, or receives interest that is greater than the amount authorized [by statute] is liable to the obligor for an amount that is equal to the greater of: (1) three times the amount computed by subtracting the amount of interest allowed by law from the total amount of the interest contracted for, charged, or received; or (2) $2,000 or 20 percent of the amount of the principal, whichever is less.Tex. Fin. Code Ann. § 303.001 (West. 1999).
The Texas legislature has adopted a complex scheme of usury laws based on a "floating ceiling" linked to the twenty-six week treasury bill rate, or "T-bill" rate. For a loan of $250,000 or more, "[t]he maximum interest rate . . . is 18 percent a year if the loan's interest rate is set out in a written contract. . . ." Tex. Fin. Code Ann. § 302.102(a) (West. 1999). However, under Texas' statutory scheme, "a person may contract for, charge, or receive a rate or amount that does not exceed the applicable ceiling. . . ." Tex. Fin. Code Ann. § 303.001(a) (West. 1999). The statutes expressly provide that the use of the ceilings is optional. Id. For a loan of the sort at issue in this case, the weekly ceiling is applicable, and it is calculated by multiplying the T-bill "auction rate" by two and rounding to the nearest one-quarter of one percent. Tex. Fin. Code Ann. §§ 303.003(4), 303.301(a) (West. 1999). Under the ceiling scheme, if the rate computed for the ceiling is less than 18 percent per annum, the ceiling is 18 percent. Tex. Fin. Code Ann. §§ 303.009(a), 303.304(a) (West. 1999). At no relevant time did the announced discount rate exceed 5.45 percent, See Historical Securities Search Results (visited Aug. 9, 1999)
http://www.publicdebt.treas.gov/servlet/OFAuctions , thus the rate calculated would have never exceeded 11 percent per annum, and the highest interest rate which C.I.O.S. could have charged defendant Naguchi was 18 percent per annum. Tex. Fin. Code Ann. §§ 303.009(a), 303.304(a) (West. 1999). In reaching this conclusion, the court took into consideration the applicable discount rates for January and April 1997, in light of the dates that the promissory notes at issue went into effect. Also, Tex. Fin. Code Ann. § 303.308 (West 1999) provides authority for the court to take judicial notice of the ceilings as published in the Texas Register pursuant to Tex. Fin. Code Ann. § 303.307(a) (West 1999). The rate published in the Texas Register for commercial loans of over $250,000 was 18 percent at all times relevant to this litigation. 22 Tex. Reg. 89-3945 (1997).
"The elements of usury are: 1) a loan of money; 2) an absolute obligation to repay the principal; and 3) exaction of interest in an amount greater than is allowed by law." Blanchard Co. v. Heritage Capital Corp., No. CIV.A.3:97-CV-0690-H, 1998 WL 101913, at *4 (N.D.Tex. Feb. 27, 1998) (citing Holley v. Watts, 629 S.W.2d 694 (Tex. 1982)). In the instant case there is no question that there was a loan and an absolute obligation to repay the principal plus interest, thus it remains for the court to determine whether the interest was greater than that allowed by the statutes, i.e., 18 percent per annum. There is a presumption that a contract is intended to be nonusurious, Thrift v. Hubbard, 44 F.3d 348, 360 (5 th Cir. 1995) (citing Tygrett v. University Hardens Homeowners' Association, 687 S.W.2d 481, 485 (Tex.App. 1985)), and "[b]ecause the question of whether a contract is usurious is one of contract interpretation, it is determinable as a matter of law." Parhms v. BB Ventures, Inc., 938 S.W.2d 199, 203 (Tex.App. 1997) (citing Fisk Elec. Co. v. Constructors Associates, Inc., 888 S.W.2d 813, 814 (Tex. 1994)). Perhaps it is better stated that whether a contract is facially usurious is for the court to decide as a question of law, while it falls to the jury to decide whether a contract that is not usurious on its face is in effect intended to yield a usurious rate of interest. ECE Technologies Inc. v. Cherrington Corp., 168 F.3d 201, 205 (5 th Cir. 1999) ("Under Texas law, where a contract is not facially usurious, the question of whether there was an intent to commit usury is for the jury" (citing Moser v. John F. Buckner Sons, 292 S.W.2d 668, 671 (Tex.App. 1956))). Compare Parhms, 938 S.W.2d at 203 (holding whether contract is usurious is question of law), with Dryden v. City National Bank of Laredo, 666 S.W.2d 213, 216) (Tex.App. 1984) ("usury, where not apparent from the face of the instrument, is a question of fact for the jury"), and Sinclair v. Mack Trucks, Inc., 355 S.W.2d 563, 565 (Tex.App. 1962) ("question of usury is generally one of fact . . . [and s]ince the instruments themselves did not show usury, the question as to whether usurious interest was collected was a matter for determination by the trier of facts.").
To determine whether a contract is facially usurious, the court must decide whether "there is any contingency by which the lender may get more than the lawful rate of interest. . . ." Coxson v. Commonwealth Mortgage Co. of America, 43 F.3d 189, 191 (5 th Cir. 1995) (quoting Shropshire v. Commerce Farm Credit Co., 30 S.W.2d 282, 285-86 (Tex. 1930), cert. denied, 284 U.S. 675 (1931)). "If the affirmative terms of the entire contract could yield a usurious result, then the contract is `facially' usurious." Id. at 192 (quoting Smart v. Tower Land and Investment Co., 597 S.W.2d 333, 341 (Tex. 1980)). At first blush, it appears that this contract could have yielded a usurious result, but upon closer examination the court concludes that is not the case. Applying the spreading doctrine to the loan, the court must "compare the total interest provided for in the note with the maximum amount that could lawfully be charged over the [three]-year term. . . ." Tanner Development Co. v. Ferguson, 561 S.W.2d 777, 781 (Tex. 1977). The $650,000.00 principal would have borne $351,000.00 in interest over the 36-month term of the loan if C.I.O.S. had charged 18 percent per annum, yielding a total of $1,001,000.00; therefore, the amount C.I.O.S. claimed under the contract must have been less than that amount if the amended promissory note is to be found not usurious. In fact, the maximum amount ever demanded in payment by C.I.O.S. was $936,713.58, thus the contract was not usurious on its face, and the court finds that defendants' argument in this respect fails as a matter of law.
Texas' courts have uniformly embraced the spreading doctrine in determining whether a loan is usurious. In Texas courts, the doctrine dates to at least 1859, Tanner Development Co. v. Ferguson, 561 S.W.2d 777, 784 n. 9 (Tex. 1977), but it was given in its accepted form in the case of Nevels v. Harris, 102 S.W.2d 1046, 1049 (Tex. 1937), where the court stated "[i]f the contract for the use and detention of the principal debt is not a sum greater than such debt would produce [at the maximum lawful rate of interest] from the time the borrower had the use of the money until it is repaid, it is not usurious." See Standard Savings Association v. Greater New Canaan Missionary Baptist Church, Inc., 786 S.W.2d 774, 777 (Tex.App. 1990) ("Once the amount of the true principal is determined, then the court should calculate the interest (1) at . . . the maximum amount under the state constitution; and (2) over the entire term of the note. . . .").
This is the amount demanded in the motion for summary judgment dated May 28, 1999. In making this calculation, the court added the "late fees" to the 15 percent interest provided for in the contract to see whether the total amount of interest under the contract exceeds the legal rate of interest in Texas. Hardwick v. Austin Gallery of Oriental Rugs, Inc., 779 S.W.2d 438, 443 (Tex.App. 1989); Dixon v. Brooks, 678 S.W.2d 728, 731 (Tex.App. 1984). Although late fees of this sort are not "interest" as defined at common law, the statutory definition of interest "includes the late charges because it includes compensation for the obligor's detention of money past the date it is due and payable." Hardwick, 779 S.W.2d at 443 (construing predecessor statute to Tex. Fin. Code Ann. § 305.001 (West. 1999)). It is the substance of a transaction, not its form, which determines whether it is usurious. Allied Supplier Erection, Inc. v. A. Baldwin Co., Inc., 688 S.W.2d 156, 159 (Tex.App. 1985).
Even had defendant Naguchi successfully shown the loan to have been usurious, that defense would not be available to the other defendants. See Ginsberg 1985 Real Estate Partnership v. Cadle Co., 39 F.3d 528, 534 (5 th Cir. 1994) (applying Texas law).
Plaintiff also moves for summary judgment against defendant Berkston. As stated earlier in this opinion, Berkston failed to respond to the pleadings which C.I.O.S. filed in this case. Upon the application of C.I.O.S., the clerk made an entry of default by Berkston on July 28, 1998, and default judgment was entered on August 4, 1998. Accordingly, plaintiff's motion for summary judgment against Berkston is moot and shall be denied.
The court having determined that plaintiff is entitled to judgment as a matter of law against defendants Naguchi, NDF, Inc. and Hood, it now remains to calculate the actual amount of damages to which C.I.O.S. is entitled from these remaining defendants. First, the court finds that C.I.O.S. is due the principal amount of $650,000.00, in addition to $295,500 in interest on the principal calculated at 15% per annum for a term of three years, less the payments of $23,833.33 which Naguchi applied to interest in February and April 1997. Moreover, C.I.O.S. is entitled to interest in the form of late charges, although the court has not added any late charges for installments which would have come due after March 5, 1998, the date of acceleration. Calculating the late charges as also bearing interest at 15% per annum from the thirteenth day of the month in which they became due, and using the formula contained in Pentico v. Mad-Wayler, Inc., 964 S.W.2d 708, 715 n. 4 (Tex.App. 1998), the court finds that the defendants are liable to C.I.O.S. for an additional amount of $13,150.83. Thus, the court is able to determine as of the date of acceleration which was also the date suit was filed that C.I.O.S. had accrued damages in the total amount of $934,817.50.
Under Texas law, filing suit on a note accelerates maturity. Bundrick v. First National Bank of Jacksonville, 570 S.W.2d 12, 15 (Tex.Civ.App. 1978). "[A]fter acceleration of the note, no monthly installments were due or payable but only the total unpaid principal was due, owing and payable [and] the late charge provision . . . did not apply to the accelerated principal debt. . . ." Allied Supplier Erection, 688 S.W.2d at 158.
The Pentico court established the following as the correct formula for calculating late charges on a debt: [(principal payment + interest charges) x 15% x number of days late] / 360.
Texas courts also hold as a matter of law that "a prevailing plaintiff may recover prejudgment interest compounded daily (based on a 365-day year) on damages that have accrued by the time of judgment." McKinney v. Meador, 695 S.W.2d 812, 814 (Tex.App. 1985) (quoting Cavnar v. Quality Control Parking, Inc., 696 S.W.2d 549, 554 (Tex. 1985)). As the Court of Appeals for the Fifth Circuit has stated, "[t]he Texas law of prejudgment interest can fairly be described as bewildering," Thrift v. Hubbard, 44 F.3d 348, 361 (5 th Cir. 1995) (quoting Concorde Limousines, Inc. v. Moloney Coachbuilders, Inc., 835 F.2d 541, 548 (5 th Cir. 1987)). See also Johnson Higgins of Texas, Inc. v. Kenneco Energy, Inc., 962 S.W.2d 507, 528 n. 9 (Tex. 1998) (tracing oblique development of common law and statutes governing awards of prejudgment interest in Texas). See generally Robert H. Pemberton, A Guide to Recent Changes and New Challenges in Texas Prejudgment Interest Law, 30 Tex. Tech L. Rev. 71 (1999) (describing evolution of Texas prejudgment interest law as "`misleading,' `illogical,' and even bewildering'"). In a case such as this one involving purely economic losses by C.I.O.S., the court is unaware of any Texas statute that would apply, and any award of prejudgment interest is governed by the common law. Johnson Higgins, 962 S.W.2d at 530; Pemberton, supra, at 97-98. "Where no statute controls the award of prejudgment interest, the decision to award such interest is left to the sound discretion of the trial court . . . relying upon equitable principles and public policy." City of Port Isabel v. Shiba, 976 S.W.2d 856, 861 (Tex.App. 1998). The court finds that C.I.O.S. is entitled to an award of prejudgment interest from the date suit was filed. Johnson Higgins, 962 S.W.2d at 531-32. "[P]rejudgment interest accrues at the rate for postjudgment interest" 5.997% in this instance "and it shall be computed as simple interest." Id. at 532; Tanglewood Terrace, Ltd. v. City of Texarkana, No. 06-98-00059-CV, 1999 WL 407499, at *11 (Tex.App.-June 21, 1999). In this case, C.I.O.S. is entitled to $106,437.87 in prejudgment interest.
"`Simple' interest is interest that does not compound." Pemberton, supra, at 72. The appropriate formula for calculating prejudgment interest is [(amount of damages) x (interest rate) / 365] x (number of days between date damages were ascertainable and the day prior to entry of judgment). Garza v. Estate of Salinas, No. 04-94-00516-CV, 1996 WL 667868, at *6 (Tex.App.-Nov. 20, 1996). Thus, the court calculates prejudgment interest in this case as follows: $934,817.50 x 5.997% = $56,061.01 / 365 = $153.59 x 693 days = $106,437.87.
In accordance with the express terms of the promissory note and the guaranty agreements, defendants are also liable to plaintiff for the costs and expenses, including reasonable attorney's fees and expenses, incurred in collecting on the note. C.I.O.S. presents evidence that it has incurred $10,228.83 as legal fees and expenses in attempting to secure payment of the amended promissory note, and defendants shall be liable for that amount, as well. Finally, C.I.O.S. is entitled to an award of postjudgment interest at 5.224% per annum from the date of this opinion and final judgment until satisfaction of defendants' obligation.
An order in accordance with this opinion shall issue this day.
This, the 28 th day of January 2000.
FINAL JUDGMENT
S. ALLAN ALEXANDER, Magistrate Judge.
In accordance with the memorandum opinion issued this day,
ORDERED:
(1) That plaintiff's motion for summary judgment against defendants Naguchi Trading Company, Inc., HDF, Inc., and George W. Hood, Jr. is granted.
(2) Plaintiff's motion for summary judgment against defendant Berkston Insurance A.V.V. is denied.
(3) Defendants Naguchi, HDF and Hood are jointly and severally liable to plaintiff for damages in the amount of $934,817.50 and $106,437.87 in prejudgment interest. Postjudgment interest shall accrue at 5.997% per annum from the date of this opinion and final judgment until satisfaction of defendants' obligation.
(4) Defendants Naguchi, HDF and Hood are likewise liable for $10,228.83 plaintiff incurred as legal fees and expenses in attempting to secure payment of the amended promissory note.
SO ORDERED, this the 28 th day of January 2000.