Court: District Court, W.D. Louisiana; October 4, 1983; Federal District Court
The parties have stipulated that the loans in question are usurious under Arkansas law, leading the court to determine whether federal law, specifically 12 U.S.C. 86a, preempts state law. Key facts include:
1. Tommy and Jennetta Head executed a $10,010 promissory note on October 5, 1977, with a 10% interest rate, secured by a mortgage on specified real property in Pope County, Arkansas.
2. A second promissory note for $15,815 was executed on January 27, 1978, under the same interest rate and secured by the same property.
3. On January 1, 1981, Tommy Head executed a $5,073.03 note at a 20.5% interest rate to refinance the first note without a new mortgage.
4. On the same date, he executed another note for $15,642.33, also at 20.5%, refinancing the second note, again without a new mortgage.
5. Extensions of all four notes were granted by the Bank of Dover at varying rates and fees.
6. The Bank of Dover did not provide additional funds after the original loans, and the total principal owed never reached $25,000.
7. The agreements were governed by Arkansas law, subject to federal preemption.
8. The interest rates exceeded the 10% limit under Arkansas law from January 1, 1980, onward.
9. The original notes had fixed 10% interest rates, with no variable rates, until the renewal notes were executed in 1981.
Promissory notes executed by Tommy Head on January 1, 1981, serve as a renewal of earlier notes from 1977 and 1978, linked to two mortgages provided to the Bank of Dover. The original notes did not represent a series of advances totaling $25,000 or more. A table details the relevant Federal discount rates and surcharges from December 1980 to August 1982. Additionally, schedules of payments for the two notes (one from 1977 for $10,010 and another from 1978 for $15,815) outline the interest and principal payments made by the debtors, including restructured payments in 1981.
The court must adhere to the choice of law rules of Louisiana, where it is situated, which dictate that the laws of the location where contracts are executed govern their form and effect. The original loans were made at Dover Bank in Pope County, Arkansas, where the secured property is located, and all payments were made directly to the Bank there. The parties agreed that, absent federal preemption, Arkansas law governs the contracts and related transactions.
According to Arkansas law, contracts with an interest rate exceeding 10% per annum are void. The Bank of Dover acknowledges that the loans in question are usurious under Arkansas law but argues that these transactions are exempt due to federal preemption under 12 U.S.C. Section 86a.
The central issue in this case is whether Arkansas state law is preempted under 12 U.S.C. Section 86a, which was enacted and amended by specific public laws. Section 511 of Pub. L. 96-221, as amended, allows lenders to charge interest rates on business or agricultural loans of $1,000 or more that exceed state-imposed limits by up to 5% over the Federal Reserve's discount rate. The terms relevant to this section define "loan" broadly to include all forms of credit for business or agricultural purposes, and "interest" to encompass any compensation for such loans.
Section 512 establishes the applicability of these provisions to loans made from April 1, 1980, until either April 1, 1983, or until the state adopts a law rejecting these provisions. It specifies that a loan is considered made during this period if it is funded in whole or in part during that time, includes certain conditions regarding renewals, and requires an original principal amount of at least $25,000 or $1,000 for loans after the enactment of the Housing and Community Development Act of 1980.
In this case, it is noted that no principal was advanced after 1978, and the loans in question are renewals of prior indebtedness, which impacts their governance under 12 U.S.C. Section 86a.
The Bank of Dover acknowledged that the notes in question were renewals of existing loans from prior years, with the last executed in January 1981, and no new money was loaned at that time. The original loans were made in 1977 and 1978, totaling less than $25,000, which is a prerequisite for the application of 12 U.S.C. Section 86a. As the stipulated principal balance due was $24,963.19, the Bank of Dover did not meet the threshold for the federal statute's applicability, leading to the conclusion that Arkansas state law governs the transactions.
The stipulation indicates that the interest charged exceeded 10% annually, rendering the loans usurious under Arkansas law. Consequently, the contracts to repay the loans are voided due to this violation of usury law, as per Arkansas Constitution Article 19 Section 13 and relevant case law. The mortgages securing these loans must also be voided. The Court ruled in favor of Tommy and Jennetta Head, disallowing the Bank of Dover's claim in the Chapter 11 proceedings and declaring them no longer indebted to the Bank. The Bank and the Clerk of Court are ordered to remove any related mortgage inscriptions from public records.
