United States Court of Appeals,
Fifth Circuit.
No. 93-1838.
In the Matter of William COXSON and Dorothy Coxson, Debtors.
William COXSON and Dorothy Coxson, Appellants, Cross-Appellees,
v.
COMMONWEALTH MORTGAGE COMPANY OF AMERICA, L.P. and First
Nationwide Bank, Appellees, Cross-Appellants.
Jan. 26, 1995.
Appeal from the United States District Court for the Northern
District of Texas.
Before POLITZ, Chief Judge, GOLDBERG and DUHÉ, Circuit Judges.
GOLDBERG, Circuit Judge:
William and Dorothy Coxson, the appellants, purchased a house
and lot in Dallas, Texas in March, 1974. To finance their home,
the Coxson's executed a promissory note and a deed of trust
granting a purchase money lien on the house and lot to secure the
note. After experiencing financial difficulties, the Coxsons filed
for bankruptcy protection under Chapter 13 in February, 1987. The
Coxsons defaulted on their payments on the note after the
bankruptcy petition was filed, and on May 11, 1988, the loan
servicing agent and the holder of the note, First Nationwide Bank
and Commonwealth Mortgage Company of America (hereinafter
collectively referred to as "Commonwealth")1 moved for relief from
the automatic stay provisions of the Bankruptcy Code. The
1
The Coxsons executed the note with the Exchange Mortgage
Company. However, Commonwealth Mortgage Company obtained the
note sometime prior to this suit.
1
bankruptcy court, in July, 1988, issued an order restructuring the
Coxsons' payments and establishing procedural requirements for
foreclosure. The order was styled "Agreed Order Conditionally
Modifying Stay" ("Agreed Order"). Two months later, Commonwealth
served notice on the Coxsons, stating that they were in default
according to the terms of the Agreed Order. Commonwealth attempted
to foreclose on the Coxsons' home in April of 1989, but it failed
to follow the requirements for foreclosure set forth in the Agreed
Order. The Coxsons filed a state court action and obtained a
restraining order temporarily enjoining the foreclosure. However,
the state court action was soon dismissed. The Coxsons did not
keep current on the note, and Commonwealth attempted to foreclose
on the property again.
In response to the Commonwealth's latest foreclosure effort,
the Coxsons filed this adversary proceeding against Commonwealth in
the bankruptcy court. The Coxsons claimed that the note violated
Texas usury law, that the loan documents violated the Federal Truth
in Lending Act, 15 U.S.C. § 1601, et seq., ("TILA"), and that
Commonwealth violated the automatic stay provision of the
bankruptcy code, 11 U.S.C. § 362(h). The bankruptcy court enjoined
Commonwealth from foreclosing on the property and conducted a bench
trial. The bankruptcy court held that the applicable statutes of
limitations barred the usury and TILA claims, and that
Commonwealth's attempted foreclosure in April of 1989 violated the
automatic stay. The bankruptcy court awarded the Coxsons $2,850,
without prejudgment interest, for legal fees and costs incident to
2
the temporary restraining order against Commonwealth. The
bankruptcy court found that Commonwealth was 75% successful and the
Coxsons 25% successful in the proceedings, and awarded each party
a prorated amount of their legal fees pursuant to contractual
provisions in the note and the Declaratory Judgment Act. The
Coxsons appealed to the district court. The district court
determined that the statutes of limitations did not bar the usury
or TILA claims. The district court held, however, that the note
was not usurious under Texas law. The district court found that
the TILA claim had merit and awarded the Coxsons a $2,000 offset
against the debt held by Commonwealth. Both parties appealed to
this court.
The Coxsons make essentially three arguments on appeal.
First, they argue that the note was usurious under Texas law.
Second, they claim that the bankruptcy court erred in failing to
award prejudgment interest. Finally, they argue that the
bankruptcy court erred in judging the magnitude of their success
below and did not properly apportion attorneys' fees.
Commonwealth's sole argument on appeal is that the district court
erred in allowing the Coxsons to assert their TILA claim
defensively as recoupment against the note, thereby avoiding the
one-year statute of limitations for TILA actions.
I.
In Texas, the regulation of interest rates has produced
statutes and legal opinions over the past century. The Texas
Constitution, as amended in 1891, expressly delegated authority to
3
the legislature to regulate interest rates and money lending.
Article XVI, § 11.2 In 1961, the Constitution set the maximum rate
of interest at ten percent per year. Id. The provisions of
legislature's usury statute are not as clear-cut as the
Constitution. For example, the statutory definitions of key terms
like "interest" and "usury" are somewhat circular.3 Thus, the
courts have played a crucial role in interpreting the usury law.
The usury issue in the case at hand is whether a contract is
usurious if it has no express provision for the refund or credit of
unearned interest which would otherwise render the contract
usurious upon the occurrence of some contingency. In this case,
the contingency involves the application of an acceleration clause,
which, at the option of the holder of the note, would render the
entire debt, including principal and unearned interest, due upon
the default of the borrower. If the debt were accelerated very
early in the loan period in this case, the interest and fees which
are considered interest in Texas4 would have exceeded the legal
2
This Article marked a departure from the previous policy in
Texas. During Reconstruction, the state legislature abolished
limits on interest rates. In 1869, Article XII, § 44 of the
Texas Constitution eliminated the usury laws. However, credit
abuses arose in the absence of usury laws, and the Texas
Constitution was amended. See Allee v. Benser, 779 S.W.2d 61, 62
(Tex.1988).
3
The usury statute defines "interest" as "the compensation
allowed by law for the use or forbearance or detention of money."
Tex.Civ.Stat.Ann. art. 5069-1.01(a). Usury is defined as
"interest in excess of the amount allowed by law."
Tex.Civ.Stat.Ann. art. 5069-101(d).
4
See Tanner Development Co. v. Ferguson, 561 S.W.2d 777, 787
(Tex.1977).
4
interest rate and would render the contract usurious if the excess
interest were not refunded to the debtor or applied to the
principal amount of the loan.5 Texas jurisprudence provides a
framework for determining whether such a contract violates the
usury laws.
The progenitor of the Texas Supreme Court's modern usury
jurisprudence is the seminal case of Shropshire v. Commerce Farm
Credit Co., 120 Tex. 400, 30 S.W.2d 282 (1930), cert. denied, 284
U.S. 675, 52 S.Ct. 130, 76 L.Ed. 571 (1931). The contract in
Shropshire provided for interest charges which would exceed the
legal rate if the debtor had defaulted and if the debt had been
accelerated according to an acceleration clause in the note. Id.
30 S.W.2d at 282-83. In determining whether this contingency
poisoned the contract as usurious, the court stated:
[A] contract is usurious when there is any contingency by
which the lender may get more than the lawful rate of
interest, whether it is so apparent that it becomes the duty
of the court to so declare, or whether it is a case in which
it is necessary that the jury should find the facts. Usury,
it is considered, does not depend on the question whether the
lender actually gets more than the legal rate of interest or
not; but on whether there was a purpose in his mind to make
more than legal interest for the use of money, and whether, by
the terms of the transaction, and the means used to effect the
loan, he may by its enforcement be enabled to get more than
the legal rate.
Shropshire, 30 S.W.2d at 285-86 (quotation omitted). The Texas
Supreme Court revisited the principles enunciated in Shropshire in
5
It is worth noting that the time period in which this
contingency could have possibly rendered the contract usurious
passed well before the Coxsons defaulted on the note. Therefore,
the discussion of the occurrence of this contingency is entirely
hypothetical.
5
Smart v. Tower Land and Investment Co., 597 S.W.2d 333, 340-41
(Tex.1980). In Smart, the court stated that the actual language of
the contract should be reviewed when examining a contract for
usury. If the affirmative terms of the entire contract could yield
a usurious result, then the contract is "facially" usurious. Id.
at 341. However, the court also noted that
[U]nless the contract by its express and positive terms
evidences an intention which requires a construction that
unearned interest was to be collected in all events, the court
will give it the construction that the unearned interest
should not be collected.
Smart, 597 S.W.2d at 341 (quoting Walker v. Temple Trust Co., 124
Tex. 575, 80 S.W.2d 935, 937 (Tex.Comm.App.1935)). The Smart court
held that the contract in issue was usurious, because the contract
expressly provided for the collection and retention of unearned,
usurious interest. Smart, 597 S.W.2d at 341. However, the court
stated that the contract at issue was "not merely silent" as to
whether prepaid interest would be credited or refunded. Id. The
court emphasized that "[t]his is not a situation in which the
contract is silent on whether the lender will collect unearned
interest upon default and acceleration of maturity." Id. However,
today we are faced squarely with this situation—the contract here
is silent on the issue of whether such interest would be refunded
or credited to the principal of the debt in the event of
acceleration. Thus, this contract is distinguishable from the
Smart contract, and we are guided by the general rule that the
court should give the contract a construction that the parties
intended that the unearned interest would not be retained at
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foreclosure. In Walker, which was reaffirmed in Smart, the court
followed the "the equitable rule which requires a surrender of
unearned interest in order to obtain a foreclosure" to find that
the contract was not usurious based on a potentially usurious
contingency. Walker, 80 S.W.2d at 937. In applying the Texas
rules to a hypothetical situation where the contract at issue in
this case is accelerated early in the loan period, we find that
Commonwealth would have to surrender unearned interest to the
Coxsons in order to foreclose on the note. Therefore, even if the
contingency transpired, Commonwealth would not "get more than the
lawful rate of interest" as proscribed by Shropsire. 30 S.W.2d at
285. Thus, the contract is not usurious.
II.
The Coxsons claim that they are entitled to prejudgment
interest on their recovery. The Coxsons argue that without an
award of prejudgment interest, they will not be compensated for the
loss of the use of their money from May of 1989 to the date of the
judgment. Aside from complaining about the "inequity" of the
bankruptcy court's and district court's decision to deny
prejudgment interest, the Coxsons fail to mention any factor
justifying such an award.
The Fifth Circuit has stated that "[t]he award of prejudgment
interest is generally discretionary with the trial court."
Whitfield v. Lindemann, 853 F.2d 1298, 1306 (5th Cir.1988);
Katsaros v. Cody, 744 F.2d 270, 281 (2nd Cir.1984) (stating that
standard of review for award of prejudgment interest is abuse of
7
discretion). The Supreme Court stated that prejudgment interest,
is not recovered according to a rigid theory of compensation
for money withheld, but is given in response to considerations
of fairness. It is denied when its exaction would be
inequitable.
Blau v. Lehman, 368 U.S. 403, 414, 82 S.Ct. 451, 457, 7 L.Ed.2d 403
(quoting Board of Commissioners of Jackson County v. United States,
308 U.S. 343, 352, 60 S.Ct. 285, 289, 84 L.Ed. 313 (1939)). The
Coxsons argue that the bankruptcy court's decision to deny
prejudgment interest should be reversed because the court failed to
express its reasons. The Coxsons rely on Whitfield. The Whitfield
court, however, did not hold that such a statement of reasons is
required when a court denies prejudgment interest.6 As was the
case in Blau, "both courts below denied interest here and we cannot
say that the denial was either so unfair or so inequitable as to
require us to upset it." Blau, 368 U.S. at 414, 82 S.Ct. at 457.
III.
The Coxsons argue that the district court erred in failing to
modify the amount of attorney's fees granted by the bankruptcy
court. A grant of attorney's fees is reviewed for an abuse of
6
The language in Whitfield that arguably supports the
Coxsons' argument is found in dicta which is tied to the facts of
that particular case.
If the instant case is appealed again to this Court
following the remand we now order, we will be greatly
assisted in reviewing the district court's
discretionary allowance of section 6621 prejudgment
interest if it is accompanied by a brief statement of
reasons.
Whitfield, 853 F.2d at 1307. This statement does not
constitute a mandatory rule applicable to every case where
prejudgment interest is requested.
8
discretion. Texstar North America, Inc. v. Ladd Petroleum Corp.,
809 S.W.2d 672, 679 (Tex.Civ.App.—Corpus Christi 1991); Hartford
Casualty Ins. Co. v. Budget Rent-A-Car Systems, Inc., 796 S.W.2d
763 (Tex.Civ.App.—Dallas 1990). The district court grounded its
decision in the facts it found and the parties' statutory and
contractual rights, and there is no evidence in the record to
support the conclusion that the court abused its discretion in this
case.
IV.
Commonwealth argues that the Coxsons' TILA claim is
time-barred. The limitations provision in TILA states,
Any action under this section may be brought ... within one
year from the date of the occurrence of the violation. This
subsection does not bar a person form asserting a violation of
this subchapter in an action to collect the debt which was
brought more than one year from the date of the occurrence of
the violation as a matter of defense by recoupment or set-off
in such action, except as otherwise provided by State law.
15 U.S.C. § 1640(e). Commonwealth argues that the TILA claim in
this case is not a defensive recoupment action, and that therefore
it is barred by the limitations period. Recoupment is defined as,
[t]he right of a defendant, in the same action, to cut down
the plaintiff's demand either because the plaintiff has not
complied with some cross obligation of the contract on which
he sues or because he has violated some duty which the law
imposes on him in the making or performance of that contract.
Ballantine's Law Dictionary 1070 (3d ed.1969) (quoted in In re
Smith, 737 F.2d 1549, 1552 n. 7 (11th Cir.1984)). The Supreme
Court, in Bull v. United States, held that
recoupment is in the nature of a defense arising out of some
feature of the transaction upon which the plaintiff's action
is grounded. Such a defense is never barred by the statute of
limitations so long as the main action itself is timely.
9
Bull, 295 U.S. 247, 262, 55 S.Ct. 695, 700, 79 L.Ed. 1421 (1935)
(footnote omitted). Judge Wisdom, sitting by designation with the
Eleventh Circuit, interpreted the language in Bull as establishing
a three-part test to determine whether a recoupment claim is raised
as a defense.
Thus, to maintain [a] claim ... for monetary damages under
Bull, [the claimant] must show that (1) the TILA violation and
the creditor's debt arose from the same transaction, (2) [the
claimant] is asserting her claim as a defense, and (3) the
"main action" is timely. All three requirements must be
satisfied.
In re Smith, 737 F.2d at 1553. The court in Smith observed that
there is diverging authority on the classification of TILA claims
as recoupment or setoff actions. In re Smith, 737 F.2d at 1552-53;
see also In re Jones, 122 B.R. 246, 249 (W.D.Pa.1990).
Commonwealth argues that the Coxsons' TILA claim fails the
second step of the test in Bull because the claim was not raised
defensively. Commonwealth argues that the Coxsons "hauled"
Commonwealth into court and initiated this lawsuit, and therefore
the TILA claim is used offensively, rather than defensively. The
district court disagreed, holding that the Coxsons filed this suit
in response to Commonwealth's filing of a proof of claim in the
bankruptcy court and its foreclosure actions. The district court
reasoned that filing a proof of claim is "an action to collect the
debt," and therefore the TILA claim was timely under 15 U.S.C. §
1640(e). We agree with the district court's analysis. In this
case, Commonwealth's and the Coxsons' claims arise from the same
underlying transaction, the contract for financing the Coxsons'
home. See Plant v. Blazer Financial Services, Inc., 598 F.2d 1357,
10
1361 (5th Cir.1979); Maddox v. Kentucky Finance Co., 736 F.2d 380,
383 (6th Cir.1984). The mere fact that the Coxsons were the
plaintiffs in the case below does not preclude the finding that
their TILA claim was raised defensively. See, e.g., In re Jones,
122 B.R. 246 (plaintiff permitted to raise TILA recoupment claim
defensively). Furthermore, Texas state courts have held that a
TILA claim may be asserted defensively as a recoupment action
against a lender attempting to enforce contractual obligations.
Garza v. Allied Finance Co., 566 S.W.2d 57, 62-63
(Tex.Civ.App.—Corpus Christi 1978); Cooper v. RepublicBank
Garland, 696 S.W.2d 629, 634 (Tex.Civ.App.—Dallas 1985) (holding
that recoupment claim was raised defensively in response to
creditor's foreclosure efforts). We find that the TILA claim was
not barred by the statute of limitations, and therefore remand the
issue for consideration of the merits of the claim.
V.
For the above reasons, the district court's judgment is
AFFIRMED.
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