IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

____________

NO. 91-2248

____________

FIRST SOUTH SAVINGS ASSOCIATION

and RESOLUTION TRUST CORPORATION,

as Conservator,

Plaintiffs-Appellees,

versus

FIRST SOUTHERN PARTNERS, II, LTD,

Defendants,

COFFEE R. CONNER and

THE ESTATE OF JACK GAULDING,

Deceased, Defendants-Appellants.

_______________________________________________________

Appeal from the United District Court

for the Southern District of Texas

________________________________________________________

Before REAVLEY, HIGGINBOTHAM and DeMOSS, Circuit Judges.

DeMoss, Circuit Judge:

On March 31, 1983, Coffee R. Conner and Jack Gaulding,

("Guarantors"), each executed separate guaranty agreements of a

promissory note executed by First Southern Partners, II, Ltd., a

Texas limited partnership (of which Conner and Gaulding were the

general partners) payable to First Savings Association, Port

Neches, Texas, in the amount of $2,790,000, (the "Note"), which was

secured by a first mortgage lien on certain real property described

in the Note. The specific language of the Guaranty agreements

reads as follows:
2

"Guarantor absolutely and unconditionally

guarantees the prompt, complete, and full

payment of all amounts due on the Note from

the date hereof through the date a Certificate

of Occupancy is issued by the City of Lubbock,

Lubbock County, Texas, for all improvements to

be constructed on the property more

particularly described on Exhibit "B" attached

hereto and made a part hereof for all

purposes, from and after which date

Guarantor's liabilities and obligations

hereunder shall be limited to fifty per cent

(50%) of the principal balance of the Note

outstanding from time to time through the date

of maturity, howsoever such maturity may

occur,. . ." 

First South Savings Association ("First South"), succeeded to

all of the rights, title, and interest of the original payee of the

Note including the rights under the Guaranty agreements. The

development covered by the first lien Deed of Trust suffered the

fate of so many other real estate developments in Texas with the

result that First South foreclosed upon the property covered by the

first lien Deed of Trust in April 1988, bidding $987,000 for the

property which amount was credited against sums due and owing under

the Note. A year later, First South suffered the fate of so many

other lending institutions in Texas and the Federal Home Loan Bank

Board appointed the Federal Savings and Loan Insurance Corporation

("FSLIC") as Conservator; and in June 1989 the FSLIC, as

Conservator for First South, brought suit against the maker of the

Note and Guarantors for the outstanding balance of principal and

interest on the Note and another note which is not at issue in this

Appeal. 

After passage of the Financial Institution Reform Recovery and

Enforcement Act of 1989, the Resolution Trust Corporation ("RTC"),
3

succeeded FSLIC as Conservator of First South, appropriate

substitution of parties were made in the lawsuit and the assets of

First South were placed in a newly created Federal Savings

Association, which was simultaneously placed into conservatorship

controlled by the RTC.

Guarantors answered and counterclaimed that First South and

RTC had "charged usury" in certain letters and in the Original

Complaint filed in this lawsuit, by demanding that the Guarantors

each pay all of the principal and all of the interest on the Note

when each had only guaranteed one-half of the principal and none of

the interest. The dispute was submitted on summary judgment to the

trial judge, who granted judgment to First South and the RTC

against each of the Guarantors for fifty percent (50%) of the

principal balance then outstanding. In his Opinion, the trial

judge ruled, somewhat cryptically, against the Guarantors usury

defense with the following language:

"In Texas, the usury defense is available only

to a maker of a note. The RTC is suing on the

first note for collection from the guarantors.

The defendants, as guarantors, may not raise

usury as a defense."

We affirm the judgment of the trial court for the following

reasons:

A. NO CHARGING OF INTEREST 

The principle theory upon which Guarantors rely for their

claim of usury is that certain language in the demand letters sent

out by the Note holder, and in the Original Complaint, constituted

the "charging of interest which is greater than the amount
4

authorized by this Sub-title" in violation of the provisions of

Article 5069-1.06 (1) and (2) of the Texas Revised Civil Statutes.

Specifically the demand letter of March 9, 1989,

contained the following language: "Coffee R. Conner and Jack

Gaulding are guarantors of payment on the Notes and are jointly and

severally liable for all amounts due thereon." Likewise, the

Prayer for Relief in the Original Complaint, stated that plaintiffs

were demanding judgment against "Defendants" (which included Coffee

R. Conner and the Estate of Jack Gaulding, deceased) "jointly and

severally" for the full amount of the principal balance of the Note

and for pre-judgment interest on the Note at the highest rate

allowed by law from the date of default to the date of judgment. 

The two Guaranty agreements are clearly and unambiguously

separate Guaranty agreements with no joint liability imposed on the

two Guarantors. Likewise, under the clear language of each

Guaranty, the liability of each guarantor was limited to "fifty

percent (50%) of the outstanding balance of principal" after the

Certificate of Occupancy had been delivered; and both parties to

this proceeding have treated that condition as having occurred.

Consequently the referenced statements in the demand letter of

March 9, 1989, and in the Prayer For Relief in the Original

Complaint were erroneous. 

Although the note holder attempted to remedy these erroneous

statements in a subsequent demand letter, and in an amended

complaint, the Guarantors take the position that, once uttered,

these erroneous statements were not retractable and constituted the
5

"charging of interest greater than the amount authorized" by

Article 5069-1.01 et seq., entitling Guarantors to recover the

penalties and offsets contemplated by Article 5069-1.06. 

However, the recent case of George A. Fuller Company of Texas,

Inc. v. Carpet Services, Inc., No. D-0791 S.W.2d 

decided by the Texas Supreme Court on January 29, 1992, clearly

disposes of Guarantors' contention that "charging of usurious

interest" can occur in pleadings. In Fuller, the Texas Supreme

Court held:

a demand for prejudgment interest contained in a pleading

does not make a pleader liable for statutory usury

penalties if the pleading seeks the recovery of unlawful

prejudgment interest.

Likewise, the Guarantors have not made a convincing case as to the

"charging of usurious interest" by the language used in the demand

letters in this case. "Interest" is defined by Texas statute as

"compensation allowed by law for the use or forbearance or

detention of money . . . ." Tex. Civ. Code Art. 5069-1.01(a). A

guarantor of a promissory note, however, does not receive such use,

forbearance, or detention of money under a promissory note. A

demand made to the guarantor only for sums owed by the notemaker

under the guaranteed note is, therefore, not a demand for interest.

It is simply a demand for the undifferentiated sum of money defined

in the guaranty agreement.

In this case, the noteholder clearly characterized the

allegedly usurious amounts in the demand letters as amounts owed

under the promissory notes. These amounts were not compensation
6

for the guarantors' use, forbearance, or detention of money.

Therefore, they could not be usurious interest under Texas law.

The principle case relied upon by Guarantors for their

conclusion is Houston Sash & Door Co., Inc. v. Heaner, 577 S.W.2d

217 (Tex. 1979). In that case Heaner had executed a letter

agreement guaranteeing payment of all sums owed by Bedford

Corporation (of which he was chairman of the board) to Houston Sash

& Door, Inc. In the same letter agreement Heaner also agreed to

pay, "interest from the due date of any [Bedford] account to the

date of payment at the rate of 12% per annum." The Texas Supreme

Court held that the interest rate "contracted for" in the letter

guarantee agreement was "greater than the amount authorized by this

Subtitle"; and accordingly, Houston Sash was liable for the penalty

prescribed in Article 5069-1.06(1). It was the "contracting for"

language not the "charging" language of Article 5069-1.06 that was

involved.

The critical distinction between the Houston Sash case and the

case before this Court is that here the Guaranty agreement contains

no separate interest agreement; and the obligation of the guarantor

is simply to pay the sum of money defined in the Guaranty

agreement. "It is a fundamental principle governing the law of

usury that it must be founded on a loan or forbearance of money; if

neither of these elements exist, there can be no usury." Crow v.

Home Savings Association of Dallas County, 522 S.W.2d 457, 459

(Tex. 1975). Furthermore, while a guaranty agreement may 
7

frequently be collateral to a loan or credit transaction, it is not

the same thing as a loan or credit transaction; and absent a

separate interest provision in the guaranty agreement, as in

Houston Sash, an erroneous claim as to the amount of money owed

under a guaranty agreement is simply that, and not a "charging of

interest greater than the amount authorized by this Subtitle"

within the contemplation of Article 5069-1.06.

B. SAVINGS CLAUSE

Both the first lien Note and the Guaranty agreements contain

usury savings clauses. The pertinent language from the Gu aranty

agreements is:

"...and if, from any circumstances whatsoever,

fulfillment of any provision of this Guaranty

at the time performance of such provision

shall be due shall involve transcending the

maximum amount of interest prescribed by law

then, ipso facto, the obligation to be

fulfilled by the Guarantor shall be reduced to

the maximum limit of interest authorized by

law,. . ."

The original loan transaction of which the Guaranty agreement

was a part involved $2,790,000, and was secured by a Deed of Trust

on real property being used for residential purposes, and by

assignments of lease rentals to be generated from the apartment

project on the property. All parties involved were sophisticated

businessmen and lenders. The inclusion of the savings clause

evidenced an express intent to structure the entire transaction so

as to avoid usurious interest.

Under these circumstances, we treat the erroneous statements

in the demand letters and in the Original Complaint as being
8

automatically remedied by virtue of the savings clauses in the

underlying documents. See, Federal Deposit Insurance Corp. v.

Claycomb, 945 F.2d 853, 860-61 (5th Cir. 1991) and Woodcrest

Associates, Ltd. v. Commonwealth Mortgage Corp., 775 S.W.2d 434,

437-39 (Tex. App.--Dallas 1989, writ denied).

C. USURY PENALTY AND THE RTC 

Finally, the defensive remedies asserted by Guarantors are

punitive in nature under Texas law. Steves Sash & Door Co. v. Ceco

Corp., 751 S.W.2d 473, 476 (Tex. 1988). In Federal Deposit

Insurance Corp. v. Claycomb, supra., this Court has previously held

that claims against the FDIC for usury under the Texas law cannot

be asserted because, "such application could have no deterrent

affect and would only serve to punish innocent creditors of the

failed institution by diminishing available assets." Id. at 861.

The RTC is the successor agency to the FDIC and we here extend the

holding in Claycomb as applicable to the RTC in this case.

CONCLUSION

For all of the above and foregoing reasons, the judgment of

the district court is AFFIRMED.

Reavley, Circuit Judge, concurs in parts B and C only.