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noting that MCL 438.32 is "the forfeiture provision of Michigan's usury statute . . . is generally penal in nature"
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Docket No. 152040.
Submitted December 6, 1994, at Grand Rapids.
Decided May 19, 1995, at 9:35 A.M.
Ann S. DuRoss, Colleen B. Bombardier, Robert D. McGillicuddy, and Gregory E. Gore and Law, Weathers Richardson, P.C. (by Ingrid A. Jensen), for the plaintiff and counterdefendant.
Dood Wilson (by John J. Dood), for the defendant and counterplaintiff.
Plaintiff appeals by leave granted an order of the circuit court reversing the district court's judgment of a land contract forfeiture in favor of the Federal Deposit Insurance Corporation (FDIC). The circuit court held as a matter of law that the FDIC is subject to the interest forfeiture provision of the Michigan usury statute, MCL 438.32; MSA 19.15(2), and that the FDIC therefore was not entitled to collect back interest on defendant's land contract. We affirm in part, reverse in part, and remand.
The facts of this case are not in dispute. In 1982, defendant, Eric Bergan, entered into a land contract with the United States Mutual Real Estate Investment Trust (USM REIT) for the purchase of a vendee's interest that the USM REIT held under another land contract for the purchase of residential rental property. Defendant's land contract called for an interest rate of 11.5 percent, a rate that was usurious under Michigan law. MCL 438.31c(6); MSA 19.15(1c)(6). If a lender charges a usurious rate of interest, the borrower is not required to make any interest payments on the loan; all interest payments are credited toward the principal balance. MCL 438.31c(7), 438.32; MSA 19.15(1c)(7), 19.15(2). Accordingly, defendant informed the USM REIT in November 1982 that all past and future payments, excluding tax escrows, would be applied directly toward the principal balance of the land contract. Between 1982 and 1990, defendant paid $74,400 toward the contract, which equaled the principal balance of the loan.
The FDIC's argument that the usury statute should not apply at all to the land contract here is not an issue properly before this Court. The FDIC conceded below that "[i]f Regency . . . had not failed, and was still the institution, the usury would probably be a good argument." Further, the statement of questions in the FDIC's brief on appeal fails to identify the applicability of the usury statute on its own terms as an issue. The legality of the land contract, under which heading the usury issue appears in the FDIC's brief, is immaterial to the disposition of this case.
The USM REIT was dissolved in 1983, and its assets were transferred to the United States Mutual Financial Corporation, a savings and loan holding company. Through a series of assignments, the USM REIT'S interest in defendant's land contract became an asset of the United States Mutual Savings Bank (USM SB). In 1985, the USM SB was declared insolvent, and the Federal Savings and Loan Insurance Corporation (FSLIC) was appointed receiver. The FSLIC arranged a purchase and assumption transaction with the United States Mutual Savings and Loan Association, which changed its name to Regency Savings Bank in 1986. In 1989, Regency was declared insolvent, and the FSLIC was appointed receiver. At that time, approximately $6,000 was due on the principal balance of defendant's land contract. Subsequently, the FSLIC was abolished under § 401(a) of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Pub L 101-73, tit IV, § 401, 103 Stat 356-357. Many of its duties, including serving as receiver for failed banks such as Regency, were transferred to the FDIC.
In March 1990, defendant tendered his final land contract payment to the FDIC. That same month, the FDIC stopped payments to the vendors in the underlying land contract. The vendors in that contract subsequently brought suit against the FDIC for forfeiture of the contract. Defendant was also named as a party in that action because of his derivative interest. The FDIC subsequently filed a cross-claim against defendant for forfeiture of his land contract interest. After the FDIC and the vendors in the underlying contract agreed to the unpaid balance due on that contract and dismissed that action, defendant moved for summary disposition of the remaining claim against him. Defendant raised the defense of usury, claiming that he had paid the full purchase price of the land contract and that he was not obligated to make any usurious interest payments before he became entitled to the FDIC'S interest in the underlying contract. In August 1991, the district court found that the FDIC was not subject to the state usury laws and found defendant liable for $71,563.52 in back interest. Defendant was given ninety days to cure his default or face forfeiture of his interest. The circuit court reversed in April 1992. This Court granted the FDIC'S application for leave to appeal in November 1992.
This appeal is limited to the issues raised in the application for leave to appeal. The FDIC argues that it is entitled to back interest under the land contract despite the forfeiture provision of the state usury statute, because that provision imposes a penalty to which the FDIC should not be subject by virtue of 12 U.S.C. § 1825(b)(3), sovereign immunity principles, and federal common law. The FDIC supports its position with the policy argument that once a bank goes into receivership there is no longer any reason to enforce the forfeiture provision of the usury statute, because enforcement of that provision can no longer serve as a deterrent and would only diminish the value of assets otherwise available to creditors of the failed bank.
For this reason, we decline to address the applicability of the usury defense under the federal holder-in-due-course doctrine. See, e.g., Federal Deposit Ins Corp v Wood, 758 F.2d 156, 160-161 (CA 6, 1985). The application for leave to appeal referred only to the FDIC'S status as a holder-in-due-course under Michigan law. Further, the FDIC expressly represented to the circuit court that it was not relying on holder-in-due-course principles, and its brief on appeal fails to identify the holder-in-due-course issue in the statement of questions. The issue is not material to the legality of the land contract, under which heading the FDIC addresses holder-in-due-course principles. Our holding in this case is limited to the application of the usury statute as a penalty; it does not concern the application of the usury statute as a personal defense to payment of a negotiable instrument. In any event, the rationale behind the penalty and holder-in-due-course theories is essentially the same. Compare Wood and Federal Deposit Ins Corp v Claycomb, 945 F.2d 853, 861 (CA 5, 1991).
12 U.S.C. § 1825(b) provides in pertinent part:
When acting as a receiver, the following provisions shall apply with respect to the [FDIC]:
* * *
(3) The [FDIC] shall not be liable for any amounts in the nature of penalties or fines, including those arising from the failure of any person to pay any real property, personal property, probate or recording tax or any recording or filing fees when due.
The FDIC argues that forfeiture of interest due on defendant's land contract constitutes a penalty from which the FDIC should be immune under § 1825(b)(3). However, that section addresses the FDIC'S status only with respect to taxation, providing that "immunity from `penalties' attaches solely in the context of taxation." Morris v Resolution Trust Corp, 622 A.2d 708 (Me, 1993). But see Federal Deposit Ins Corp v Southwest Motor Coach Corp, 780 F. Supp. 421, 423 (ND Tex, 1991). Section 1825(b)(3) does not apply to penalties for usury.
Alternatively, the FDIC argues that it is not subject to state usury penalties as a matter of sovereign immunity and federal common law. Under the doctrine of sovereign immunity, the United States and its agencies are immune from suit except to the extent that such immunity has been waived. Loeffler v Frank, 486 U.S. 549, 554; 108 S Ct 1965; 100 L Ed 2d 549 (1988). This immunity extends to the imposition of penalties. Missouri Pacific R Co v Ault, 256 U.S. 554; 41 S Ct 593; 65 L Ed 1087 (1921). The sovereign immunity argument is closely related to the FDIC'S argument under § 1825(b)(3). In fact, § 1825(b)(3) has been viewed as simply a reaffirmation by Congress that it does not intend to waive the FDIC'S immunity from penalties. Southwest Motor Coach, supra at 423.
The immunity of the FDIC is reinforced by federal common law. In Federal Deposit Ins Corp v Garbutt, 142 Mich. App. 462, 473; 370 N.W.2d 387 (1985), this Court relied on federal common law to hold that the FDIC is not subject to the defense of usury. The rationale for this holding has been explained in federal cases. In Federal Deposit Ins Corp v Tito Castro Construction, Inc, 548 F. Supp. 1224, 1226 (D PR, 1982), aff'd 741 F.2d 475 (CA 1, 1984), Puerto Rico's usury statute was held inapplicable to the FDIC in its corporate capacity because the usury penalty "clearly frustrate[d] the congressional purpose in creating the Federal Deposit Insurance Corporation: to promote stability of, and confidence in, the nation's banking system." Similarly, in Federal Deposit Ins Corp v Claycomb, 945 F.2d 853, 861 (CA 5, 1991), a Texas usury statute was held inapplicable to the FDIC as receiver because the usury penalty "could have no deterrent effect, and would only serve to punish innocent creditors of the failed institution by diminishing available assets." In Anderson v Hershey, 127 F.2d 884, 887 (CA 6, 1942), the United States Court of Appeals for the Sixth Circuit held that a penalty imposed under a state usury statute should not be applied to bring about the anomalous result that the penalty is paid by the persons for whose benefit the receivership was imposed instead of the persons or institutions against whom the penalty is directed. See also Federal Deposit Ins Corp v Aroneck, 509 F. Supp. 553, 557 (D SC, 1979), aff'd in pertinent part and vacated in part, 643 F.2d 164 (CA 4, 1981).
This rationale applies whether the FDIC is acting in a receivership capacity or in its corporate capacity. See Claycomb, supra (FDIC as receiver); Campbell Leasing, Inc v Federal Deposit Ins Corp, 901 F.2d 1244, 1249 (CA 5, 1990); Professional Asset Management, Inc v Penn Square Bank, NA, 566 F. Supp. 134, 136 (WD Okla, 1983). It also applies to the FSLIC. See Federal Deposit Ins Corp v Texas Country Living, Inc, 756 F. Supp. 984, 987 (ED Tex, 1990); Federal Savings Loan Ins Corp v TF Stone-Liberty Land Associates, 787 S.W.2d 475, 492 (Tex App, 1990). Federal law applies in an action involving the FDIC or the FSLIC. Federal Deposit Ins Corp v Stone, 578 F. Supp. 144, 146 (ED Mich, 1983).
There is no question that the forfeiture provision of Michigan's usury statute, MCL 438.32; MSA 19.15(2), is generally penal in nature. See Allan v M S Mortgage Co, 138 Mich. App. 28, 41; 359 N.W.2d 238 (1984); Michigan Mobile Homeowners Ass'n v Bank of Commonwealth, 56 Mich. App. 206, 213; 223 N.W.2d 725 (1974). The FDIC is immune from bearing the brunt of this penalty. See Garbutt, supra at 473.
However, the issue here is whether the FDIC is permitted to collect back interest when the vast majority of the interest due accrued before the FSLIC was appointed receiver. This appears to be an issue of first impression.
We do not believe that the forfeiture of pre-receivership interest constitutes a penalty against the FDIC; rather, it was punishment already visited on Regency. Although the FDIC asserts that forfeiture of interest payments would no longer be of use as punishment for a bank in receivership, see Claycomb, supra at 861, defendant's nonpayment of interest before receivership did serve to penalize the bank while it was still operating independently and able to sustain the penalty without directly compromising the interests of its creditors, see Aroneck, supra at 557. Further, Regency's creditors were still in a position of negotiation with the bank. In dealing with Regency, these creditors would not have been justified in expecting the value of the land contract to include usurious interest that was forfeited and properly withheld under state law.
We need not decide whether the FDIC as receiver would be required to return usurious interest payments made before receivership if defendant actually had made such payments. It probably would not.
If the usuriousness of the interest rate were still an issue and if the FDIC established that the usury statute did not apply, then defendant would have had no right to withhold interest payments and the FDIC, as successor to Regency Bank's interest, could initiate an action to recover such unpaid interest or demand forfeiture. In this case, however, the FDIC failed to take issue with the applicability of the usury statute on its own terms. See supra, note 1.
However, "[t]he world changes when a bank goes into receivership." Federal Deposit Ins Corp v Shain, Schaffer Rafanello, 944 F.2d 129, 134 (CA 3, 1991). The interests and expectations of creditors change correspondingly. Continuing to impose usury penalties after the date of receivership would compromise directly the position of Regency's creditors. Further, when the FSLIC assumed control of Regency's assets, the value of the land contract was not the full purchase price; a substantial portion of that amount had been paid already. Rather, its value reflected the unpaid portion of the purchase price. The FDIC is exempt from usury penalties only with respect to assets available at the time of receivership. Therefore, the FDIC may demand payment of interest due under the land contract after the date of receivership. To hold otherwise would create a windfall in the value of Regency's assets.
Affirmed in part, reversed in part, and remanded to the district court for a calculation of the interest due under the land contract after the date of federal receivership. The district court shall enter an order awarding defendant ownership of the FDIC'S interest in the underlying land contract if he pays the calculated amount of interest, plus any applicable judgment and prejudgment interest, within ninety days of the order. If defendant does not pay the back interest on time, the district court shall enforce the forfeiture provision of the land contract.