C.C. Port, Ltd., a Texas Limited Partnership, and Weil Properties, Inc. v. Davis-Penn Mortgage Company, Federal National Mortgage Association and Fannie Mae
Docket: 94-60831
Court: Court of Appeals for the Fifth Circuit; June 1, 1995; Federal Appellate Court
C.C. Port, Ltd. and Weil Properties, Inc. (the Borrower) filed a lawsuit against Davis-Penn Mortgage Company and Fannie Mae regarding a prepayment penalty they claimed was usurious. The Borrower had executed a Multi-Family Note for $3,288,500 with a 10.875% interest rate, secured by a Deed of Trust on the Kingston Port Apartments. The Note allowed for prepayment with a premium, which the Borrower sought to avoid when they requested to prepay the principal but refused to pay the calculated premium of $1,174,538.09. The lawsuit was initially filed in Texas state court but was removed to federal district court, where the motion to dismiss was granted.
The key issue on appeal was whether the prepayment premium constituted interest under Texas law, which defines interest as compensation for the use or detention of money. The court confirmed that the Borrower's usury claim relied solely on this assertion. The court upheld the district court's dismissal, emphasizing that the essential elements of a usury claim were not met, as the Borrower did not prove any entitlement to relief based on the provided facts.
Under Texas law, borrowers lack the right to prepay loans unless expressly permitted by their contract. When prepayment is allowed, any associated premium is considered a charge for the privilege of prepayment, not for the use of the borrowed funds. Borrowers can avoid the prepayment premium by adhering to the original payment terms.
The Borrower claims the prepayment premium constitutes usurious interest based on two arguments: first, the assertion that the Lender's right to modify payment terms makes the contract illusory, and second, that the premium is involuntarily incurred due to the Lender's actions. Both arguments are deemed meritless.
The Borrower's argument hinges on a specific clause in the Note that allows the Lender to modify payment terms without notice or consent. The Borrower interprets this as granting the Lender excessive control, equating the Note to a demand note and arguing that this undermines the obligation for perfect tender, thus rendering the prepayment premium as merely interest rather than valid consideration.
The Borrower's claims regarding the usurious nature of a prepayment premium lack foundation in federal or Texas law relevant to similar cases. The interpretation of the Note follows standard contract principles, where the entire agreement is considered rather than isolated clauses. Texas law presumes against a finding of usury, suggesting parties are assumed to intend compliance with the law unless explicitly stated otherwise.
The Lender cannot demand early payment, as the Note stipulates a definite payment schedule, designed to provide flexibility for the Borrower in case of financial difficulties. Removing the relevant clause would prevent the Lender from extending payment terms, potentially leading to default and foreclosure. The Note's terms, including a fifteen-year duration and acceleration only upon default, support the Lender's interpretation.
The Borrower's assertion that a prepayment premium due to an "act of Lender" constitutes interest is dismissed, as no such action has occurred. The lower court's decision is affirmed, maintaining that the Borrower's arguments are unsubstantiated and misinterpret the contractual intentions of both parties.
